Thirty years of relatively low economic growth, low productivity improvements and controlled wage growth have left their mark. Jaap Koelewijn, professor of Corporate Finance at Nyenrode Business University: “We have to increase spending.”
It is too simple a statement to say that the low interest rate is only caused by the European Central Bank (ECB), says Koelewijn at the start of the conversation. Interest rates have been falling since the 1980s. That is because inflation has fallen. And that is again because wages have grown extremely controlled in all those years. There is no or too little pressure to raise wages. Subsequently, productivity growth also leaves something to be desired. This lowers interest rates. All of this makes the ECB feel compelled to boost the economy in a monetary way, while in fact it simply requires more expenditure. In that regard, we pay the price for the EU standard of up to three percent that the budget deficit may be. Countries that went over it were roughly classified as failing states.
Hardly cost-effective to use
Now European countries are slowly releasing that principle. In the Netherlands and the US, the tap is again open to the authorities. The primary response, such as the 2008 financial crisis, is not to cut back. That is because public finances are now in better shape. The question is how quickly these expenditures have an effect in the now slowing economy. Germany, for example, has huge savings surpluses that are not spent. These savings can also hardly be used profitably. We are so enclosed by low spending, low growth and balanced budgets. If there is an unexpected drop in demand, you will see even more slowdown in growth.
Not a big shock, but several small shocks
This delay comes in the form of small shocks. It is no longer just one big shock, but rather small shocks as a result of the Brexit negotiations, the trade war between the United States and China, problems in Italy and the quarrel between Europe and the US. The small scoops of sand are always in the machine. All in all, they form a spicy risk factor. That does not alter the fact that Koelewijn also sees that the Netherlands is still doing relatively well economically. After all, there is still sufficient purchasing power among consumers and employment continues to develop positively. But in essence we have gone from green to orange, says the professor. There are a number of warning signals. We are slipping across the economy.
What are the priorities?
If Koelewijn were to be CFO, what were his priorities? “First, due to the low interest rates, naturally reconsider your existing financing. Which ones are suitable for refinancing? As a large company with a good repayment record, you can now take out a loan for 2.5 to 3 percent interest. But those loans are not just about the interest rate. No, financiers also and especially look at the risks they take on by doing business with you as CFO. The more risk they see, the higher the risk premium. Then you may only be able to borrow at an interest rate of 7 to 8 percent. Acquisitions are also becoming less attractive, says Koelewijn. “The acquisition market is a cyclical market and very sensitive to economic conditions. If the economy is weakening, you will still have to book revenue growth with the acquired party to pay back its financing. CFOs increasingly see this as risky.
Why do we not use the budget surplus?
Mario Draghi, now former President of the ECB, recently criticized his institution for criticism. The House of Representatives sent a letter to the ECB to complain about the consequences of the negative interest rate for Dutch savers and pensioners. The latter are in danger of being massively reduced as a result of the very low interest rates. According to the bank president, the negative interest rate has driven the economy in the euro zone. We agree here that the best for growth is if countries with a low government debt start stimulating the economy by spending more. That fiscal stimulus had made the ECB’s policy superfluous. But so far almost all the growth in the eurozone has come from our monetary policy. A lot needs to be done and there are also enough tasks in the infrastructure and in the energy transition. Why don’t we use the budget surplus for that?
Crises start in real estate
Investors are standing in front of the door to get a return somewhere, outlines Koelewijn. As a result, you see another bubble in the real estate. This was also the case with the financial crisis in 2008 with junk mortgages. Canal houses and office locations are now going back to hand. The high prices and therefore the low initial yields of real estate investors are worrying. If it goes wrong with financial crises, it often goes wrong that way. And always with real estate.
Better management on working capital
Companies, in turn, have to focus better on working capital. Make sure that you are paid on time and that you make good agreements about payments with both your suppliers and your customers. The better you do that, the less need you have for expensive working capital financing. You have to be completely careful if you continue to grow as a company. More debtors and more inventories also mean more need for working capital to be able to play that game. You have to budget for that, so that you will not be surprised by cash flow shortages. That you make a plan for that is also a requirement of the bank. In that sense, it pays to look at your company like a bank. Where are the financing risks? And: how can I remove this?
First the guy and the tent
Now that the economic climate is less bright, the banks are taking the increased risks into account when assessing credit applications. “You can already see that happening. In addition, the requirements of the Basel IV directive on the financial health of banks also play a role. They have to maintain a larger buffer against loans. As a result, they keep their hands on the cut. On the other hand, competition on the financing market has increased. That makes it all in all relatively cheap to borrow. ” But banks and also alternative financiers will always want to weigh the risks of the loan. First the guy and the tent, then a penny, summarizes Koelewijn. He tells more about it in e-learning at The Finance Academy. “They understandably want to keep things under control.”