Friday, February 20, 2009

Proactivity is necessary to cope with crisis

Recently a US resident relayed two stories to me to indicate the distinction between the United States and the Caribbean region in solving challenges. In the first case he told me of a friend who accidentally dialled 911, intending to dial a 919 area code, and communicated that to the person who answered the 911 call.

Thinking that this explanation had been accepted she hung uo and started to dial the right number but before she could complete the call there was a knock at the door, which turned out to be a policeman, who politely insisted that he be allowed to enter the house to ensure she was not insisting the 911 call was a mistake under duress. She also noticed that another policeman had gone to the back door to provide cover. After being satisfied it was a mistake they left.

In the other case he relayed to me that in Trinidad a historic building, used as a police station, had burnt to the ground. The irony was that the fire station was only a few yards away, but when they connected the hose to the hydrant and turned it on, the water pressure was not enough to supply the water needed to put out the fire so the firemen all watched this historic building burn to the ground.

This latter situation could almost as easily have happened in Jamaica, and in fact even if a deliberate call was made to 119 the police may not have answered the call and if answered may not have turned up until a few hours after the criminals had done their worst.

A difference of approach

This difference in approach may also be one of our downfalls as a country when it comes to coping with the global crisis. As I indicated last year when the stimulus package was announced by PM Golding, the bureaucracy and our culture is likely to work against us and by the time we get around to really addressing the challenges it would have been over.

If we look, for example, at the urgency with which the US sought to introduce the stimulus package it is indicative of the type of action needed. In our case, however, even though we have the advantage of a lag effect of what happens in the US, as a country we have failed to properly plan for the coming storm, and have only sought to take the debate seriously as a country only when we have started to feel the effects. So even when it was obvious what was coming we were still as a country prepared to continue the rhetoric of trying to score political points and engaging in public discourse that serves as a distraction from the main challenges.

So we have now started to feel the effects, as we start to see layoffs and reduced earnings, and we have now moved to the next stage of dealing with a challenge, as psychologists will tell you, that of panic (the first stage is denial). Because as a country we did not properly prepare for it we are now seeking to manage the crisis with irrational responses that will only make the situation worse. Take for example the suggestion of the JMA that a part of the reserves, held by the BOJ, be allocated to helping local manufacturers, or even the public outcry that the high interest rates were not necessary because the rest of the world is reducing interest rates. These arguments not only indicate that people do not understand the fundamentals of the problem but also that we are making arguments out of being reactive rather than thinking proactively.

Last year I also indicated that some businesses will fail, as there is going to be a forced restructuring of the economy, and also because many businesses will not take the appropriate steps to ensure their survival. The cry that is coming from the business sector is evidence of this. Naturally we would expect that people will try everything to save what they have, as they are also in their own three-step stage of dealing with a problem, but that is the wrong approach. Even in the US, while the Congress was busy providing the first-round bailout for the auto industry, I had indicated this was a wrong move, as they would come back for more and eventually there would be at least one bankruptcy arising. Well, today we see that these companies have gone to congress for a few billion dollars more. And in the end they will be unable to avoid the inevitable.

US stimulus will not help Jamaica
Another thing that Jamaica and the Caribbean need to understand is that the additional US$787-billion stimulus package signed in the US recently may help to stabilise the US economy but it will not help ours. The problem the world faces is more of a psychological crisis than economic, and as one US commentator said recently we must understand that the world will not for a very, very long time see the standard of living returned to the levels it had become used to. We must accept that there has been a significant loss of wealth that has created a massive psychological problem, and that many had relatively high debt based on the artificial wealth they had. Therefore, the first order of business for Americans benefiting from the stimulus package is going to be to realign that debt once again. The prolonged downturn was once again addressed by the Fed last Wednesday.

At home we also see that there are projections of a prolonged downturn in the economy, and as I expected the greatest opportunity for growth will be agriculture. I have been imploring Jamaicans to support the plans that the agriculture minister has as this is our area of opportunity. And this is really a logical argument, as this sector will not only allow us to create an active local economy but also substitute a lot of the food imports.

At the end of the day we can either be proactive and make the necessary decisions to help the economy or have them forced upon us by the economics of the market. Bear in mind that the latter is always more violent as it will not lead to a smooth transition from where we are now to where we want to be. This will have to take the form of fiscal policy initiatives as monetary policy cannot solve the challenges we are facing on any sustainable basis, and has been the cause of where we are today.

At the heart of it is simple economics, as any housewife can tell you: we spend more than we earn as a country, and it is to this that fiscal policies must be targeted.

So I will again repeat some immediate steps that need to be taken. First introduce a national economic task force that will include the best thinkers to tackle the strategies needed to address the economic challenges. And secondly, on a micro level, businesses need to engage professional help to determine the best course of action, as many companies in the US have been doing. Making suggestions that Government should provide bailout funds is not the first line of defence as (1) Government does not have the reserves like the US to do this; and (2) in a world of declining demand it won't help anyway.

The recent numbers coming out of Japan and the continued fall-off of equity markets is an indication of what is still yet to come. And even though the February US unemployment numbers are not out as yet, there will be continued increased unemployment. It is therefore going to be challenging but there are still some opportunities which can only be had with rational thinking and being proactive.

Friday, February 06, 2009

Coping with the crisis must be structured

The PIOJ this week indicated that the projection over the next two years is for the Jamaican economy to decline by approximately 2 percent in 2009 and slightly improve in 2010. They also indicated that this was a best case scenario. My own view is that more than likely the declines will be greater, as the global situation I expect will get much worse.

The Dow Jones Industrial index will more than likely fall below the support level of 7500 and may fall to 6700. This will result from further slowdown in economic activity in the US, and cause lower consumer confidence and greater losses of wealth from the falling value of investments and increasing job losses.

So the PIOJ is correct in saying that what we are feeling currently is just the outer bands of the economic storm, and we should brace ourselves for the real storm winds that will soon start to hit us. So while we continue to score political points and grapple with issues that have no relevance to immediate progress, let us understand that this thing is coming at us fast.

Structured decisions needed

But just as when a hurricane is about to hit, the ODPEM will tell us, it makes no sense to panic and whatever preparations we are doing as a country, irrespective of how late, we must approach it in a very rational and structured manner. This is advice I have had to give to some business people recently. The fact is that many businesses are starting to see very difficult times, and this is just the outer bands.

One friend called me, almost in tears, to ask me to sign off some financial projections he had done in a business plan in support of a loan. It was apparent from what he was saying that this was his last hope of continuing in operation and supporting himself, wife, and children. Irrespective of that I had to advice him that I could not sign a document which (i) I did not do the proper due diligence to ensure the assumptions had a proper basis; and (ii) I did not agree with some of the assumptions. If I were to do that I would be compromising my professionalism, which even though it was hard to listen to him plead that is not something I would ever do. I had no choice but to advise him on what to do but insist that I could not sign the projections, as this would compromise my own conscience and professional duty.

I hope the friendship has not been compromised but even in this time we must ensure that we always do the right thing. In any event I believe that he may thank me one day for not exacerbating his situation with temporary relief only to find out that he is suffering later from more problems caused by increased debt, as Jamaica finds itself today as a result of borrowing for mainly consumption over the years.

The point is that even as many businesses are facing difficult times, any decisions taken must be approached in a very structured and rational manner. The problem with many businesses is that they have for too long either not engaged or have disregarded the advice of their accountants, and have instead focused on the Income Statement, not understanding that businesses need to be managed from the Balance Sheet. Even some accountants when they sit on boards ignore the fundamental principle of managing from the Balance Sheet and instead focus on the short term signs of the Income Statement. Based on my own cursory glance at the accounts of CL Financials, it seems to me that this is the way the company may have managed its strategy.

As I always say, a company never goes out of business because it makes losses, but rather because it runs out of cash. If we look for example at what is happening globally, the problem is not that many companies do not have significant reserves but rather that they have no liquidity. So even though one may be showing profits like CL Financials, if that is not translated into cash all organs of the business will cease to function just as when blood leaves the body.

Engage professional help

So for a very long time I have been saying, both in writing and electronically, that businesses (and government) need to engage the services of professionals to advise them on the way forward. I guess between 2007 and 2008 when I was saying it some might not have believed that what I was projecting was realistic but today it is even more essential. As I have been saying, in the US even though unemployment is on the rise they are finding that demand for accountants, financial analysts, and technology personnel is on the increase as businesses demand these services to advise them on the best options and how they can improve their operations.

The fact is that spending money to be able to get a guided look into the crystal ball is often better than going full speed ahead without knowing where you are going. In other words the cost of an accident is usually much greater than the cost of servicing the car to ensure safety. One option may be that there is no hope for the business and the best bet is to close it down, and even though this may not be emotionally acceptable, it will cost a lot less to follow this unemotional advice. We need to face the reality that some of the businesses as we know them today will no longer exist in the near future. What we are seeing in large businesses is pro-activity in dealing with what is coming instead of waiting until the storm hits.

On a more macro level, the country as a whole needs to do a lot more to prepare for what is coming and it has to start with having rational discussions about coping strategies. My own feeling is that we need to establish a national committee that will have oversight for developing the much needed strategies. The members of the committee should be paid as professionals and should be solely responsible for determining the intricacies of the challenges facing the country and recommending policy options for coping. They should do nothing else but this. After all we have commissions of enquiry for everything else that we can eke out a political advantage from, even if the recommendations are never implemented. And finally the composition of the committee should be the people with the best analytical skills and not picked on any other basis.

Minimum wage issue

Briefly on the minimum wage issue, don’t we by now realize that it is nothing more than something pushed by politicians and trade unions for short term benefit. The minimum wage has been in place since the 1970s. Has it caused any improvement in the fortunes of the workers or has it only caused inflation, job losses, and greater uncompetitiveness of Jamaican companies. I have always felt that one cannot legislate successfully an increase in the real income of workers. All it does is to create a temporary reprieve in the suffering of the worker but eventually leads to inflation as businesses have to increase prices in order to be able to cope with the increased costs and keep their businesses viable. Today the situation is direr as because of slowing demand, prices cannot be increased, even though costs are increasing. This is a sure formula for a closure of businesses.

So while we are asking businesses to try to keep people employed by decreasing the number of days worked or reducing wages across the board, instead of laying off workers, at the same time we are trying to increase the minimum wage. Now tell me where the logic is in that argument. The only way to increase real income is the same as it was in the 1970s, when the minimum wage was introduced, which is increased productivity. No other way will have a lasting effect.