Frontloading is painful but it created space for the new budget
It is scary to drive around Windhoek and see so many large construction projects stalled. A rough calculation indicates that about 2000 construction jobs were lost in Windhoek alone. If the whole country is included in this estimate, then it is not farfetched to say about 10,000 jobs were lost since last year September.
By now, I hope the powers that be have realised it is far more expensive to build stop start than to push through and finish a project. Unfortunately, when the money is gone, it is gone. This is exactly where we are now.
When the finance minister last year May for the first time grudgingly told us we need to tighten our belts, there were no reference to sanitising government expenditure. But when he confronted us again in November with the ugly truth, hiding the facts, or ignoring them, was no longer possible.
When he announced the expenditure cuts, he used an interesting term – frontloading.
This word can mean many things, but in construction projects, it usually means making the first half of a project more expensive, cashflow-wise, than the second half. What it entails is that the developer cum investor has to pay more upfront, or in the early phases of a project to get it going, than what would be required during the latter stages. It makes it heavier on the investor in the beginning but it also assures that a bigger portion of the second half can be realised as profit.
I do not know for sure whether the minister had something like this in mind but I do not that the expenditure cuts were rather drastic. I also know that the cessation of activity at so many construction sites was drastic and disruptive, but it helped instantly saving a couple a billion in public expenses.
Therefore I assume the minister intended to make the severe cuts immediately after the mid-year budget review, to recreate some fiscal space for the last few months of the fiscal year.
I have no idea if he was successful or not. As an outsider, I can only observe the negative impact these drastic spending cuts had on liquidity. So I have to assume a lot about the real agenda.
We are now entering the reporting period for listed and unlisted public companies. Of the seven companies that have to report this week and next, only five could present interim financials with a modicum of acceptable performance.
As I sat reading one company report after the other, it struck me that all of them are reporting steep declines in revenue with only two that managed to grow profits although this was also marginal.
If a major company announces results that are as much as 70% below market expectation, then you know it is serious. If operating profit shrinks by 45%, then a company is in serious trouble because the profit that is left, is not sufficient to ensure its sustainability. Also, new investment is stopped making these companies less competitive when the economy revives.
And when a company reports a loss, then it scares not only the bank but also all the shareholders that are invested in that company.
Back to frontloading. The companies’ weak financial performance is a direct result of the government aggressively cutting back on expenses from around September last year. That means that for four months of the semester, those companies that are aligned to government spending, have seen zero new business and were only battling to get ministries, agencies and parastatals to pay their outstanding accounts from the first semester. The practical reality of this scenario is that most-government dependent companies spent about one third of the year to chase money owed them from the operations of the first half of the year. In other words, no growth in the debtors’ book, meaning no cashflow further down the line.
What I hope for the new budget is that the frontloading was effective. In a sense I doubt this because if companies do not chase new business but spend their energy collecting outstanding money, it also implies that the taxes on the earlier profits have already been paid. This must have a serious effect on fiscal income too.
Still, I am hopeful that the frontloading has relieved so much of the immediate pressure that there is room to resume a more normal expenditure framework in the upcoming budget. At this stage there is no guarantee that all stalled projects will be revived immediately but if a large chunk of the government’s capital expenditure has been neutralised, then at least there will be available more funds to keep the massive current expenditure bill up and running.
Although the fiscal impact will be minimal, it should help to put some liquidity back into the system from the 120,000-strong civil service wagebill. Furthermore, if the finance ministry has by some trick managed to revitalise our image in the capital market, then just maybe, there will again be some investors who fancy us, or rather our government’s debt instruments.
All in all, I suspect frontloading, although painful when it started, was actually our saving grace and that it will provide the minister with an Ace he can play on budget day.