The post-pandemic world will be full of zombies

Spread the love


Zombie companies are those that are unprofitable, unable to cover their interest costs and with low market valuations relative to the book values of their assets ( which implies poor growth prospects).

The BIS data is based on listed companies, although it does discuss the implications of its findings for what might be occurring among unlisted entities.

Loading

The data shows that from the late 1980s to 2017 the proportion of zombie companies in listed markets rose from 4 per cent to 15 per cent.

Perhaps surprisingly, the highest share of zombies were found in Australia, Canada and the US, with the proportion of the living dead in Australia peaking around 35 per cent early in this decade before trending down to about 25 per cent in 2017. (In Canada it kept climbing to be above 35 per cent in 2017 and in the US it was above 20 per cent).

It isn’t surprising that the study found a higher proportion of zombies in those markets, where the proportions of listed companies are high relative to economies like the eurozone or Japan.

It attributed the particularly high proportion in Australia and Canada to the prominence of resource companies in those markets and the end of the “super-cycle” in resources the middle of the decade. Commodity prices have since recovered, which might help explain the decline in the number of zombies in this market.

The new deluge of cheap liquidity and debt threatens to create zombie markets and economies, dependent on unprecedented levels of liquidity, negative real interest rates and massive fiscal stimulus to stay afloat.

Resources companies, healthcare, printing and publishing and coal were, also unsurprisingly, the sectors that dominated the ranks of the zombies. In a post-pandemic world retailers and retail and commercial property owners might be added to the list.

Zombie companies are smaller than non-zombie companies, they have lower capital expenditures an invest less in intangible assets – research and development and their processes and systems. They have negative cash flows, pay out lower dividends, are more leveraged and raise more equity while shrinking their assets and employment.

Yet they aren’t penalised by their banks or debt markets – the BIS says they are effectively subsidised – by paying the same interest rates as their stronger counterparts.

While they are twice as likely to “die” via takeover or bankruptcy the analysis found that only 25 per cent exit the markets and, surprisingly, about 60 per cent are able to lose their zombie status, albeit that they continue to underperform and face a high probability of relapsing.

Because the study’s focus was on listed companies it doesn’t cover unlisted small and medium-sized enterprises but it attributes, among the other factors, the high proportion of zombies in Australia and Canada and the US to a higher share of SMEs among their listed companies.

Resources companies, healthcare, printing and publishing and coal were the sectors that dominated the ranks of the zombies.

Resources companies, healthcare, printing and publishing and coal were the sectors that dominated the ranks of the zombies.Credit:Jessica Shapiro

That would suggest that the proportion of zombie firms globally is significantly higher the shares detailed in the report – particularly as the BIS finds a correlation between zombies and weak banking systems and therefore the scale of lost productivity and the detraction from global economic growth might be substantially larger than the available data might suggest.

The pandemic provides a larger lifeline for zombie companies that was in place in response to the GFC (and largely remained in place ever since).

The new deluge of cheap liquidity and debt threatens to create zombie markets and economies, dependent on unprecedented levels of liquidity, negative real interest rates and massive fiscal stimulus to stay afloat.

They are getting that in spades. Even the Reserve Bank, a central banking conservative, has resorted to quantitative easing and negative real rates to respond to the economic impacts of the virus and the lockdown of the economy. The federal Government injected nearly $50 billion of stimulus/safety net spending in the June quarter alone.

The US Federal Reserve has done more quantitative easing in less than six months than it did in response to the financial crisis. The US Government has already produced $US3 trillion or so of fiscal stimulus, with the prospect of another $US1 trillion to $US2 trillion to come shortly.

This financial year the US budget deficit is expected to be $US3.3 trillion, according to the Congressional Budget Office, and US government debt will be almost the same size as the US economy. The last time US federal debt held by the public was at those levels was in the immediate aftermath of World War II.

Even as digitisation of workplaces and households, and what might be fundamental changes in consumer behaviours, have been accelerated by the pandemic the normal processes of creative destruction – regarded as fundamental to the workings of market economies and to increasing the productivity essential to sustainable economic growth – the monetary and fiscal responses to the pandemic will anaesthetise those processes and the reduce the recycling of capital for more productive use.

Loading

The open-ended flood of near-costless credit provides a lifeline for zombie companies and economies, encourages borrowing even as global corporate debt levels ahead of the pandemic had already more than doubled from where they were before the GFC and global government debt is approaching 100 per cent of global GDP for the first time.

The central banks can’t raise rate or stop their bond and mortgage buying, governments can’t easily withdraw their stimulus without crashing their markets, companies and economies..

The “lower for longer” interest rate policy adopted by the Federal Reserve Board last week is likely just a foretaste of what’s to come – the greatly increased sensitivity of economies to monetary and fiscal policies restricting the flexibility of monetary and fiscal policy, and economic growth, for years, if not decades, to come, which might explain the relatively recent fascination with exotic new theories on how monetary policies might be reimagined.

Business Briefing

Start the day with major stories, exclusive coverage and expert opinion from our leading business journalists delivered to your inbox. Sign up for the Herald‘s here and The Age‘s here.

Market Recap

A concise wrap of the day on the markets, breaking business news and expert opinion delivered to your inbox each afternoon. Sign up for the Herald‘s here and The Age‘s here.

Most Viewed in Business

Loading

Comments are closed, but trackbacks and pingbacks are open.