e Voice of Credit - January 2012

Greetings from us all at the National Office in Johannesburg. We would like to take this opportunity to wish you all a happy, healthy, safe and successful 2012. We trust that you all had a good festive season, and for those who were able to get away from work for a well-earned rest, we hope that you thoroughly enjoyed yourselves.

The ICM began 2012 with our financial year end and followed that up with our Annual General Meeting on the 18th of January. Congratulations to Heather Lawlor and Richard Mackenzie for being appointed to the Board of Directors. We are now looking forward to our National Executive on the 17th of February followed by our Business Rescue Breakfast on the 9th of March, so we have hit this year running at full speed.

2011 was, for many, a difficult year. Slow growth and consolidation was experienced in many areas of industry and some showed negative growth. This was compounded by the financial woes evident in the European Union as well as in the United States. 2012 will be another testing year, with a lot of uncertainty ahead.

South Africa's economic growth is "certainly going to be below three percent" this year due to the impact of a slowdown in the eurozone economies, Finance Minister Pravin Gordhan has stated. "Europe is a factor. Europe as a whole is a major trading partner for South Africa and for the last 12 to 15 months has had a major impact on our manufacturing industry and other export sectors as well," he added. The government's current official growth forecast is 3.1%. Gordhan will release updated forecasts at his February 22 Budget.

In November 2011, the United Nations released its global economic outlook for 2012, and it is indeed sobering. The report states that following two years of anaemic and uneven recovery from the global financial crisis, the world economy is teetering on the brink of another major downturn. Output growth has already slowed considerably during 2011, especially in the developed countries. The baseline forecast foresees continued anaemic growth during 2012 and 2013. Such growth is far from sufficient to deal with the continued jobs crises in most developed economies and will drag income growth in developing countries.

Even this sombre outlook may be too optimistic. A serious, renewed global downturn is looming because of persistent weaknesses in the major developed economies related to problems left unresolved in the aftermath of the Great Recession of 2008-2009.

The problems stalking the global economy are multiple and interconnected.

The most pressing challenges are the continued jobs crisis and the declining prospects for economic growth, especially in the developed countries. The same can be said for South Africa. As unemployment remains high and incomes stagnate, the recovery is stalling in the short run because of the lack of aggregate demand. But, as more and more workers are out of a job for a long period, especially young workers, medium-term growth prospects also suffer because of the detrimental effect on workers’ skills and experience.

The sovereign debt crises in a number of European countries worsened in the second half of 2011 and aggravated the weaknesses in the balance sheets of banks sitting on related assets. Even bold steps by the Governments of the euro area countries to reach an orderly sovereign debt workout for Greece were met with continued financial market turbulence and heightened concerns of debt default in some of the larger economies in the euro zone, in Italy in particular. The fiscal austerity measures taken in response are further weakening growth and employment prospects, making fiscal adjustment and the repair of financial sector balance sheets all the more challenging. The United States economy is also facing persistent high unemployment, shaken consumer and business confidence, and financial sector fragility.

The European Union (EU) and the United States of America form the two largest economies in the world and they are deeply intertwined. Their problems could easily feed into each other and spread to another global recession. Developing countries, which had rebounded strongly from the global recession of 2009, would be hit through trade and financial channels.

The financial turmoil following the August 2011 political wrangling in the United States regarding the debt ceiling and the deepening of the euro zone debt crisis also caused a contagious sell-off in equity markets in several major developing countries, leading to sudden withdrawals of capital and pressure on their currencies.

Political divides over how to tackle these problems are impeding and needed, much stronger policy action, further eroding the already shattered confidence of business and consumers. Such divides have also complicated international policy coordination.

A bleak picture indeed, but we need to be aware of this situation in order to plan and prepare for the year ahead. More and more, the global situation points to the massive importance that the credit industry has to play in the sustainability and profitability of businesses. To this end, the ICM and its accredited colleges will continue to ensure that there are on-going opportunities for individuals and companies within the industry, to enhance their skills in credit and risk management.
For more information, visit our website at www.icmorg.co.za.
 

A case of chicken that was too spicy Nandos shops in Johannesburg. Photo:Nonhlanhla Kambule-Makgati. In a recent decision of the Supreme Court of Appeal (SCA) the court decided that a supplier of goods cannot rely on a clause excluding liability for defects in the goods supplied, where the goods delivered were entirely different to the goods bargained for. In dealing with the element of wrongfulness, the SCA held that policy considerations may dictate that a manufacturer that caused pure economic loss by supplying a defective product to be held liable for such loss. In the matter reported as Freddy Hirsch Group (Pty) Ltd v Chickenland (Pty) Ltd, Hirsch a manufacturer and supplier of spices, concluded a supply agreement containing a liability exemption clause in its favour. It was subsequently discovered by health inspectors that Chickenland’s peri-peri hot sauce contained a banned substance. This was found to be in the spice that Hirsch supplied to Chickenland. Chickenland was obliged to recall these sauces and as a result suffered a substantial loss. In the court of first instance, Chickenland alleged that the contractually agreed upon terms of the contract were that each of the spice racks would be fit for human consumption and that they would be free of any banned substance. The court upheld the counter-claim of Chickenland against a claim by Hirsch for amounts owing on account and Hirsch appealed the judgement to the SCA. As far as the exemption clause is concerned, the SCA held that where it purported to exclude all terms, warranties or representations as to the quality or the fitness of the foodstuff, such a clause was contrary to public policy and therefore unenforceable. The court held that where the supplier supplied a foodstuff containing a banned contaminant which rendered it unfit for human consumption, the supplier failed to perform in terms of the contract and to deliver what was agreed upon, namely a substance fit for human consumption or free of any banned substances. This case places an obligation on suppliers to ensure that goods they supply comply with what would have been tacitly been agreed upon by both parties, namely that the goods are fit for the purchase for which they are purchased. It is not possible for a supplier to contract out of this (tacit) obligation by way of an exemption of the liability clause in the agreement. Written by Leander Opperman Partner, Commercial property & Litigation Department Adams & Adams Contact: 012 432 6000

European crisis could cause ripples Washington - A recession in Europe will slow the global economy this year, the International Monetary Fund predicted on Tuesday, while urging world leaders to focus on growth more than budget cuts. The IMF forecasts global growth of 3.25 percent this year, slower than the four-percent pace it projected in September. The 17 nations that share the euro will shrink 0.5 percent this year. In September, the IMF had predicted 1.1 percent growth for the region. Europe's recession should have only a modest impact on the United States. The IMF projects 1.8 percent growth for the year, unchanged from its September estimate. Steep budget cuts will slow growth further and undermine market confidence, the IMF said. The global lending organisation's message runs counter to the push for budget cuts advocated by German Chancellor Angela Merkel. “The world recovery, which was weak in the first place, is in danger of stalling,” Olivier Blanchard, the fund's chief economist, said at a news conference. “The epicentre of the danger is Europe.” European governments should avoid extreme austerity measures - spending cuts and tax increases - in weaker economies, such as Italy and Spain, the IMF said in its World Economic Outlook. And healthier European countries whose governments are facing lower interest rates “should reconsider the pace” of their short-term budget cuts. “The good news,” Blanchard said, is that “with the right set of measures, the worst can be avoided, and the world can be set back on track.” IMF managing director Christine Lagarde made a similar argument Monday during a speech in Berlin. Many European governments do need to cut deficits, Blanchard said, “but at an appropriate pace”. Blanchard cautions that it may take two decades or longer to pay off the debts accumulated during the 2008 financial crisis and global recession. He notes that it took that long to pay off the debts Europe ran up during World War 2. European governments should also build up its permanent bailout fund, Blanchard said. Last week, the IMF said it is seeking $500-billion to boost its own resources in the event more lending is needed in Europe or elsewhere. European banks, meanwhile, are cutting back on lending in order to boost their capital reserves, the fund said. That's likely to hammer Central and Eastern European economies this year, which depend heavily on European bank loans. The IMF warns against steep budget cuts, which it says will slow growth further and undermine market confidence. The global lending organisation's message runs counter to the push for budget cuts advocated by German Chancellor Angela Merkel. Still, the hit to China will be relatively modest: It is forecast to grow 8.2 percent this year, down from the fund's earlier projection of 9 percent. The IMF said US policymakers should take steps to rein in the long-term costs of government health programs and Social Security, the federal public pension system. But those cuts should be phased in over the long-term. Immediate cuts could slow the economy further. One reason the IMF expects the US economy to remain sluggish is because governments at all levels will likely cut back on spending. The IMF assumes the Social Security payroll tax and extended unemployment benefits will extended for the full year. Last month, Congress agreed to extend them only through February. Without a full extension of both measures, the US economy will fare much worse, the IMF said.

Snippets:

Africa upbeat despite economic crisis

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