1 00:00:03,430 --> 00:00:06,470 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. 2 00:00:06,730 --> 00:00:09,209 Sean Aylmer: This time last year, we were being warned to brace 3 00:00:09,210 --> 00:00:12,890 Sean Aylmer: for a wave of insolvencies when government support was eventually 4 00:00:12,890 --> 00:00:16,630 Sean Aylmer: withdrawn from businesses. The combination of the end of JobKeeper 5 00:00:16,630 --> 00:00:19,850 Sean Aylmer: and the end of the insolvent trading moratorium for directors 6 00:00:20,150 --> 00:00:23,040 Sean Aylmer: was expected to see a significant increase in the number 7 00:00:23,040 --> 00:00:27,640 Sean Aylmer: of businesses in crisis. But it hasn't happened. With external 8 00:00:27,850 --> 00:00:33,729 Sean Aylmer: administrations still down significantly, KordaMentha and the Turnaround Management Association 9 00:00:33,729 --> 00:00:37,159 Sean Aylmer: of Australia have released their annual Turnaround survey looking at 10 00:00:37,159 --> 00:00:40,650 Sean Aylmer: the business environment in Australia and the outlook ahead. I spoke 11 00:00:40,650 --> 00:00:43,559 Sean Aylmer: to James Wagg, Executive Director at KordaMentha, when last year's 12 00:00:43,560 --> 00:00:46,560 Sean Aylmer: report was released. He joins me again this morning, James, 13 00:00:46,560 --> 00:00:47,710 Sean Aylmer: welcome back to Fear and Greed. 14 00:00:48,030 --> 00:00:49,110 James Wagg: Thanks for having me, Sean. 15 00:00:49,440 --> 00:00:52,339 Sean Aylmer: The big question, how accurate were last year's predictions? 16 00:00:52,740 --> 00:00:56,700 James Wagg: Mixed bag. So, there were two key predictions from the 17 00:00:56,980 --> 00:01:00,770 James Wagg: survey last year. The first was that the uncertainty of 18 00:01:00,800 --> 00:01:04,259 James Wagg: 2020 would continue on to this year and I think 19 00:01:04,260 --> 00:01:08,840 James Wagg: that's certainly been right. The less accurate prediction was that 20 00:01:08,900 --> 00:01:11,920 James Wagg: the market would actually bounce back and we'd see more 21 00:01:11,920 --> 00:01:15,420 James Wagg: distress in the market this financial year, and this bounce 22 00:01:15,420 --> 00:01:19,330 James Wagg: back was off the back of insolvencies in 2020 being 23 00:01:19,350 --> 00:01:23,140 James Wagg: 50% of what they were in 2019. And as you 24 00:01:23,140 --> 00:01:25,680 James Wagg: mentioned in your intro, the end of JobKeeper and the 25 00:01:25,680 --> 00:01:29,500 James Wagg: director's moratorium were main reasons that were pointed to in 26 00:01:29,500 --> 00:01:32,910 James Wagg: this bounce back. And in reality, as you mentioned, we've 27 00:01:32,910 --> 00:01:36,550 James Wagg: actually seen insolvencies remain historically low and in line with 28 00:01:36,569 --> 00:01:42,300 James Wagg: 2020. And actually the ongoing border closures and lockdowns have 29 00:01:42,690 --> 00:01:47,360 James Wagg: negatively impacted GDP, but businesses in light of this have 30 00:01:47,360 --> 00:01:52,070 James Wagg: remained incredibly resilient and government stimulus has been incredibly successful. 31 00:01:52,080 --> 00:01:55,380 Sean Aylmer: Okay. So, is that the main reason why insolvencies are 32 00:01:55,380 --> 00:01:57,100 Sean Aylmer: still so far below average? 33 00:01:57,530 --> 00:02:00,280 James Wagg: Yes, the success of government stimulus is certainly one of 34 00:02:00,280 --> 00:02:03,950 James Wagg: the main reasons that's created, I guess, what we're calling 35 00:02:03,950 --> 00:02:08,310 James Wagg: an artificial normal where funding is so easily accessible for businesses. 36 00:02:08,840 --> 00:02:12,329 James Wagg: But there are three other less known and less referenced reasons, 37 00:02:12,389 --> 00:02:16,860 James Wagg: the first being financier support and leniency. We've seen through 38 00:02:16,860 --> 00:02:22,269 James Wagg: the last 18 months, through either government pressure or reputational concern, 39 00:02:22,639 --> 00:02:26,059 James Wagg: but also cheap money, financiers have been incredibly lenient to 40 00:02:26,060 --> 00:02:30,919 James Wagg: their borrowers. Secondly, the market's seeing incredibly high liquidity and 41 00:02:30,919 --> 00:02:34,630 James Wagg: low interest rates, which is driving investors to pursue different 42 00:02:34,630 --> 00:02:38,019 James Wagg: markets for returns. One of the biggest beneficiaries of these 43 00:02:38,020 --> 00:02:43,110 James Wagg: trends have been private markets, which reportedly have around $27 44 00:02:43,110 --> 00:02:48,760 James Wagg: billion in undeployed capital. And with limited opportunities available in 45 00:02:48,760 --> 00:02:52,620 James Wagg: the market, these parties are actually beginning to take more 46 00:02:52,620 --> 00:02:56,680 James Wagg: risks to deploy that capital and pay higher prices. The 47 00:02:56,680 --> 00:03:01,580 James Wagg: third factor actually is government leniency and particularly that of the ATO (Australian Taxation Office). 48 00:03:01,840 --> 00:03:04,720 James Wagg: So in times of pressure, we often see businesses, the 49 00:03:04,720 --> 00:03:09,001 James Wagg: first creditor that is delayed or deferred is the ATO. By the way, 50 00:03:09,450 --> 00:03:12,919 James Wagg: liabilities to the ATO have actually been growing and now 51 00:03:12,919 --> 00:03:17,360 James Wagg: sitting at almost $45 billion, which is 80% higher than 52 00:03:17,360 --> 00:03:20,029 James Wagg: just a couple of years ago. So with the ATO 53 00:03:20,270 --> 00:03:24,560 James Wagg: stopping pursuing debts, when they start again, which presumably they 54 00:03:24,560 --> 00:03:27,820 James Wagg: will given that all this stimulus needs to be paid for, 55 00:03:28,330 --> 00:03:31,610 James Wagg: it will reduce liquidity in the market and give businesses 56 00:03:31,610 --> 00:03:32,530 James Wagg: less options. 57 00:03:33,380 --> 00:03:35,470 Sean Aylmer: Okay. I didn't know about the ATO. Is that a 58 00:03:35,470 --> 00:03:39,230 Sean Aylmer: course that the ATO or the government has been deliberate in, 59 00:03:39,230 --> 00:03:39,910 Sean Aylmer: to not chase debts? 60 00:03:41,010 --> 00:03:45,330 James Wagg: Yes, effectively, that's right. There's been a moratorium effectively on 61 00:03:45,570 --> 00:03:48,810 James Wagg: pursuing debts to give businesses relief in the last two 62 00:03:48,810 --> 00:03:52,490 James Wagg: years or 18 months. And actually, we've just seen last 63 00:03:52,490 --> 00:03:55,980 James Wagg: month at the ATO have just started issuing warning notices again 64 00:03:55,980 --> 00:04:01,520 James Wagg: to creditors with large balances that have over $100,000 65 00:04:01,800 --> 00:04:05,070 James Wagg: that have been outstanding for over 90 days. So it'll take a 66 00:04:05,070 --> 00:04:07,390 James Wagg: while for this to flush through the system, the impact 67 00:04:07,390 --> 00:04:10,920 James Wagg: to flush through the system, but it's certainly something interesting 68 00:04:10,920 --> 00:04:11,490 James Wagg: to watch. 69 00:04:12,820 --> 00:04:15,960 Sean Aylmer: The other one, the financier support and leniency, that'll turn around reasonably soon 70 00:04:17,650 --> 00:04:18,680 Sean Aylmer: as well, I would imagine. 71 00:04:19,279 --> 00:04:22,560 James Wagg: Yeah, I think you're right, Sean. However, I think off 72 00:04:22,560 --> 00:04:26,460 James Wagg: the back of the Banking Royal Commission, traditional banks and 73 00:04:26,680 --> 00:04:30,279 James Wagg: non-bank lenders have really had an attitude of doing everything 74 00:04:30,279 --> 00:04:33,810 James Wagg: possible to support borrowers and with the current cheap money, 75 00:04:33,870 --> 00:04:37,210 James Wagg: there's seems to be alternate lenders who are willing to 76 00:04:37,210 --> 00:04:41,720 James Wagg: take on distress debts if existing lenders want to cut ties. 77 00:04:41,970 --> 00:04:44,869 Sean Aylmer: Okay. So cash isn't a problem at the moment. We've 78 00:04:44,870 --> 00:04:48,539 Sean Aylmer: got low rates, we've got supportive financiers, we've got up 79 00:04:48,540 --> 00:04:53,010 Sean Aylmer: until now at least, the ATO being fairly calm about 80 00:04:53,230 --> 00:04:56,540 Sean Aylmer: chasing debts. The question then is what are the biggest issues 81 00:04:56,540 --> 00:04:57,950 Sean Aylmer: facing business right now? 82 00:04:58,430 --> 00:05:01,170 James Wagg: You're right, probably the really interesting fact that came out 83 00:05:01,170 --> 00:05:04,029 James Wagg: of the survey was the cash is not an issue 84 00:05:04,029 --> 00:05:07,050 James Wagg: for businesses. The three biggest pressures that were pointed to 85 00:05:07,540 --> 00:05:11,740 James Wagg: continue to be closed borders, which have a direct impact 86 00:05:11,740 --> 00:05:17,270 James Wagg: on the key industries such as tourism, transportation, hospitality, also 87 00:05:17,300 --> 00:05:22,130 James Wagg: higher education. But they also directly impact those industries, but 88 00:05:22,300 --> 00:05:25,679 James Wagg: that has a flow onto many other industries in the economy. 89 00:05:26,170 --> 00:05:29,310 James Wagg: The second factor is actually the knock on impact of 90 00:05:29,310 --> 00:05:33,089 James Wagg: labour forces on supply chains. There were two good examples 91 00:05:33,089 --> 00:05:35,880 James Wagg: of this last week, the first being the Port of Melbourne, 92 00:05:36,200 --> 00:05:40,690 James Wagg: which faced Union strikes, but at the same time, face 20% 93 00:05:40,690 --> 00:05:45,650 James Wagg: of their labour force being quarantined for COVID reasons. And 94 00:05:45,650 --> 00:05:48,359 James Wagg: these delays are quite isolated to the Port of Melbourne, 95 00:05:48,360 --> 00:05:51,410 James Wagg: but that you can see flows through the entire economy 96 00:05:51,410 --> 00:05:55,520 James Wagg: and will cause complexity through everyone's supply chains. The second 97 00:05:55,520 --> 00:05:59,730 James Wagg: example was actually the major supermarkets here in Victoria, which 98 00:05:59,730 --> 00:06:03,070 James Wagg: mentioned that they might have to close stores and limit 99 00:06:03,070 --> 00:06:06,910 James Wagg: trading hours because of large portions of their staff being 100 00:06:06,910 --> 00:06:11,510 James Wagg: forced to quarantine under the current requirements. Thirdly, which is 101 00:06:11,550 --> 00:06:15,560 James Wagg: really interesting is one of the biggest pressures facing businesses is the 102 00:06:15,560 --> 00:06:20,020 James Wagg: inability to recruit. And I guess the rapid digitisation of 103 00:06:20,020 --> 00:06:24,700 James Wagg: operating models has caused predictable shortages with programmers and the like, 104 00:06:24,700 --> 00:06:27,409 James Wagg: but we're actually seeing this and hearing this from businesses 105 00:06:27,660 --> 00:06:32,300 James Wagg: across the field, anywhere from the accounts payable clerks, to 106 00:06:32,300 --> 00:06:37,450 James Wagg: project managers to hospitality staff. It's really difficult to find 107 00:06:37,610 --> 00:06:40,940 James Wagg: employees in the current market, and I guess that's interesting 108 00:06:40,940 --> 00:06:45,469 James Wagg: given the current situation, but predictable given that the unemployment 109 00:06:45,470 --> 00:06:50,330 James Wagg: rate is 4.5% per cent, there's a declining participation rate, and 110 00:06:50,330 --> 00:06:53,450 James Wagg: there's no supplemental labour from overseas and very limited. 111 00:06:53,779 --> 00:06:55,720 Sean Aylmer: Stay it with me, James, we'll be back in a minute. 112 00:07:00,830 --> 00:07:05,180 Sean Aylmer: I'm speaking to James Wagg, Executive Director at KordaMentha. Okay, 113 00:07:05,180 --> 00:07:08,680 Sean Aylmer: so over the next few weeks, this week, New South 114 00:07:08,680 --> 00:07:12,740 Sean Aylmer: Wales has lifted restrictions and will continue. Victoria, theoretically, will 115 00:07:12,750 --> 00:07:15,640 Sean Aylmer: do the same in a fortnight's time. The ACT, we 116 00:07:15,640 --> 00:07:19,100 Sean Aylmer: don't know, but presumably, given their vaccination rates that will 117 00:07:19,100 --> 00:07:22,960 Sean Aylmer: happen fairly shortly too. That should open up borders to 118 00:07:22,960 --> 00:07:25,040 Sean Aylmer: some extent, though we don't know about Western Australia and 119 00:07:25,360 --> 00:07:28,370 Sean Aylmer: Queensland obviously. What I suppose I'm saying is the economy 120 00:07:28,370 --> 00:07:33,610 Sean Aylmer: is loosening up somewhat. With that, and the reduction in government support, do 121 00:07:33,610 --> 00:07:36,500 Sean Aylmer: you think we will see more insolvencies as we go 122 00:07:36,500 --> 00:07:38,370 Sean Aylmer: forward the next three, six, nine months? 123 00:07:39,080 --> 00:07:42,450 James Wagg: It's the big question and I think the results pointed 124 00:07:42,450 --> 00:07:46,210 James Wagg: to more uncertainty. I think some of the reasons that 125 00:07:46,210 --> 00:07:49,900 James Wagg: you've just pointed out ... When we were discussing this last year, 126 00:07:49,960 --> 00:07:53,460 James Wagg: we were pointing to the light on the horizon, similar 127 00:07:53,460 --> 00:07:56,150 James Wagg: to what you've just pointed out and in reality, we 128 00:07:56,150 --> 00:07:59,619 James Wagg: had another year very similar to 2020. So more uncertainty 129 00:07:59,620 --> 00:08:03,110 James Wagg: seems to be the theme for next year, and certainly 130 00:08:03,110 --> 00:08:06,250 James Wagg: not too many people predicted the first recession in 30 131 00:08:06,330 --> 00:08:09,500 James Wagg: years would lead to labour shortages and booming property and 132 00:08:09,500 --> 00:08:14,090 James Wagg: share markets. But the industry really predicts, I guess, markets 133 00:08:14,090 --> 00:08:18,610 James Wagg: staying similar, although insolvency should start to increase from their 134 00:08:18,910 --> 00:08:22,410 James Wagg: historically low levels. And we've actually seen a small trend 135 00:08:22,720 --> 00:08:27,230 James Wagg: over recent months of a small uptick, but really material changes 136 00:08:27,290 --> 00:08:30,230 James Wagg: to the economy will only come when borders re-open, as 137 00:08:30,230 --> 00:08:33,819 James Wagg: you pointed out, and when that happens is anyone's guess, and 138 00:08:34,160 --> 00:08:37,569 James Wagg: government stimulus reducing. But we're seeing this, and this is 139 00:08:37,570 --> 00:08:40,640 James Wagg: an international trend as well, the key risks of businesses will 140 00:08:40,640 --> 00:08:46,699 James Wagg: continue to be supply chains, employee retention and recruitment, and 141 00:08:46,700 --> 00:08:47,770 James Wagg: increasing costs. 142 00:08:48,200 --> 00:08:51,000 Sean Aylmer: Okay, so I appreciate that but at the moment, everyone's been 143 00:08:51,000 --> 00:08:53,449 Sean Aylmer: able to manage that because of government stimulus and low 144 00:08:53,450 --> 00:08:56,150 Sean Aylmer: interest rates and flexibility from banks and plenty of cash 145 00:08:56,150 --> 00:08:58,610 Sean Aylmer: in the system. Which of those do you think will 146 00:08:58,610 --> 00:09:01,710 Sean Aylmer: be the trigger to actually move things more back to 147 00:09:01,710 --> 00:09:04,790 Sean Aylmer: normal, which means higher levels of insolvencies, or do we 148 00:09:04,790 --> 00:09:05,500 Sean Aylmer: need a few of them? 149 00:09:05,900 --> 00:09:08,830 James Wagg: We're certainly keeping our eyes on a number of drivers 150 00:09:08,830 --> 00:09:11,670 James Wagg: and some of the obvious ones which we've discussed and 151 00:09:11,670 --> 00:09:15,250 James Wagg: you've mentioned government stimulus, and what happens with inflation? Is 152 00:09:15,250 --> 00:09:18,910 James Wagg: it transitory or is it permanent? There's another couple of 153 00:09:18,910 --> 00:09:21,260 James Wagg: factors that we need to keep an eye on as well. 154 00:09:21,260 --> 00:09:24,569 James Wagg: Just the sheer liquidity in the market, I think, means 155 00:09:24,570 --> 00:09:28,820 James Wagg: that we'll actually see the continuing mergers and acquisition trend, 156 00:09:28,820 --> 00:09:32,439 James Wagg: and boom that we've seen with transactions like Afterpay and 157 00:09:32,500 --> 00:09:35,340 James Wagg: Sydney Airport being far more prominent in the future just 158 00:09:35,480 --> 00:09:38,890 James Wagg: because there is so much cash in the economy. But 159 00:09:38,890 --> 00:09:41,470 James Wagg: I guess the other one, too, that we're looking at 160 00:09:41,470 --> 00:09:45,320 James Wagg: is the impact of international travel. So it's easy to 161 00:09:45,320 --> 00:09:50,679 James Wagg: forget that back in 2019, Sean, International travellers contributed about 162 00:09:50,690 --> 00:09:54,730 James Wagg: $40 billion to our GDP, but that was eclipsed by 163 00:09:54,929 --> 00:09:59,870 James Wagg: Australians travelling overseas, we spent $55 billion. So the impact 164 00:09:59,870 --> 00:10:02,920 James Wagg: of closed borders, internationally, has actually led to a net 165 00:10:02,920 --> 00:10:07,670 James Wagg: increase in funds for domestic consumption. So there's some pent-up 166 00:10:07,840 --> 00:10:12,620 James Wagg: demand for people to leave and travel again. And the 167 00:10:12,630 --> 00:10:17,170 James Wagg: final factor is just how quickly the CBDs rebound. So 168 00:10:17,429 --> 00:10:20,410 James Wagg: certainly here in Victoria, it has such a big impact 169 00:10:20,410 --> 00:10:25,309 James Wagg: to our events and hospitality industries, the CBD. And when 170 00:10:25,309 --> 00:10:28,820 James Wagg: you look at economies like London and New York, it's 171 00:10:28,820 --> 00:10:33,880 James Wagg: taken many months after restrictions have loosened for that demand 172 00:10:33,880 --> 00:10:37,140 James Wagg: and that people, traffic to actually return and still, it's not there. 173 00:10:37,570 --> 00:10:41,330 James Wagg: So just how quickly that returns is going to be a big indicator. 174 00:10:41,330 --> 00:10:45,680 Sean Aylmer: The International Monetary Fund talked about a day of reckoning for zombie companies 175 00:10:45,929 --> 00:10:49,420 Sean Aylmer: as support is withdrawn. They did mention Australia in that. 176 00:10:49,420 --> 00:10:51,839 Sean Aylmer: Do you think they're correct, that it will happen? 177 00:10:52,270 --> 00:10:56,460 James Wagg: Really not sure. I think the industry initially predicted a 178 00:10:56,460 --> 00:11:01,439 James Wagg: tsunami of insolvencies and boy, were we wrong. So, it's 179 00:11:01,440 --> 00:11:05,070 James Wagg: really uncertain what will happen. I think looking at the 180 00:11:05,070 --> 00:11:09,420 James Wagg: statistics though, we've now had two years of insolvency numbers 181 00:11:09,780 --> 00:11:15,400 James Wagg: at 50% of pre-COVID levels. So logic would probably say 182 00:11:15,400 --> 00:11:18,559 James Wagg: that there will be some flush through and there will 183 00:11:18,559 --> 00:11:21,610 James Wagg: be a return to the mean, however, how big that will 184 00:11:21,760 --> 00:11:23,160 James Wagg: be is really unknown. 185 00:11:23,429 --> 00:11:25,319 Sean Aylmer: James, thank you for talking to Fear and Greed again. 186 00:11:25,630 --> 00:11:26,619 James Wagg: Thanks very much, Sean. 187 00:11:27,220 --> 00:11:29,959 Sean Aylmer: James Wagg, Executive Director at KordaMentha. This is the Fear 188 00:11:30,570 --> 00:11:33,090 Sean Aylmer: and Greed Daily Interview. Join me every morning for the 189 00:11:33,090 --> 00:11:35,980 Sean Aylmer: full Fear and Greed podcast with all the business news 190 00:11:35,980 --> 00:11:38,489 Sean Aylmer: you need to know. I'm Sean Aylmer, enjoy your day.