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Recession management

Sunday, December 13, 2015
Sajjad Hamid

Now that it’s official that we are in recession (four quarters of decline is hard to deny), what is your strategy for dealing with the changed environment? 

Since many entrepreneurs and owners of SMEs are future thinkers and proactive, you may have already started to right size your organisation. 

The signals were clear. Over the past 20 years we have been over spending, both at the public and private level. Our debt to GDP ratio was 41 per cent last year, perilously close to the 50 per cent threshold. RBC’s Economic Report for October 2015 estimates the ratio to be 60 per cent, which puts us close to the slippery slope. Your payments become so burdensome that you sink deeper into more debt. Consumer debt is also high and many citizens are not aware what the huge decline in oil and gas revenues means. 

The problem is we have done little to move the economy from a fossil one to one that is diversified. We can build highways, hospitals, schools, give money to the poor and senior citizens, but we cannot do the difficult things like producing enough food and transforming the energy sector into one that produces less carbon. 

There is little leadership by the politicians to confront the issues and rally the nation into another more prosperous economic space. 

New normal

The Government and the big picture aside, entrepreneurs like yourself always face some uncertainty, a fact of entrepreneurship life. This new development should not scare you into making rash decisions. Panic is absolutely the wrong way to go and this recession is not the end, but the beginning of possibly a new way of doing business and conducting our lives. 

Looking back, not all recessions are the same or driven by the same factors. Some are long and deep (like the 1980s recession in T&T due to structural issues with the economy), some can be triggered by external events like the 2008 financial crisis, this one is still having an impact on many Caribbean nations. 

Looking ahead, what are some of issues that may have an impact on your business over the next five years. I am not an economist, but here’s what I think is ahead for us. We have a history of kicking the tin can down the road; we put off harsh measures and hope things will get better. 

My first prediction is this is what we will continue to do and it will lead to higher budget deficits, very likely interest rates will rise and this will make capital more expensive. Look at our neighbouring countries—Jamaica and Barbados—they took on debt by keeping their spending too high for too long until it was too late. Late means the IMF. 

The trigger for all of this was the fall in energy prices. 

Oil and natural gas may not rebound soon. The International Energy Agency’s (IEA) World Energy Outlook 2015, predicts in one scenario that oil prices would average US$50 per barrel until 2020 and rise to US$85 in 2040. The IEA report predicts a big increase in natural gas demand, however, given that we may not be able to increase production for at least three years. It seems this price increase may not help much. 

Since we get about 75 per cent of our energy taxes from gas, this would hit government revenues hard. 

In the longer energy horizon, the 21st meeting of the UN’s Conference of Parties (COP21) in Paris is tackling the issue of global warming and the need keep the planet from warming beyond 2C degrees from pre-industrial levels. The impact of this is to reduce the consumption of coal, oil and natural gas, which are the main culprit adding carbon dioxide in the atmosphere. 

This means that sometime in the future the world has to stop burning fossil fuels or else face melting ice, a very warm world and severe weather. Since the world has to change, it means alternate fuels—wind, solar, etc—will have to power our cars, cool our homes, and fuel our factories. This is not good news for us in the long term. While the price of oil has fallen, it may increase in time but this is not certain. 

Fiscal responsibility will set in and the Government will be forced to cut spending and unemployment will rise. We could see a rise in crime as those on the edge will seek out the easy life. Cuts in government spending will mean less for the security forces further compounding the problem. But this will be a boom for the security companies. 

Recession management

In a recession, things change and this means the environment will change and so, too, should organisations. We can assume that the recession could last longer. So what can you do to realign your company?

1. The lean organisation: there is always fat in any company. Fat is anything that does not generate profit directly or indirectly. If you spend $500 per month on stationery, then don’t be afraid to bargain with your supplier, remember they are doing the same too. To become lean is to become more efficient. Cutting waste often means looking for a better process. If you are planting seeds directly into the ground and the bugs eat 20 per cent of them, then you should treat the seeds with insecticide and this simple change can boost your yield significantly.

2. People power: you may not know that your workers have good ideas to improve the performance of their work. Ask them and if it works, support them, and if it fails, don’t punish them as it is part of the innovation process. You may know of Spencer Silver who came up with the adhesive that sticks paper, but not too strong so it can let go. He tried repeatedly to sell his employer 3M but they were interested until a colleague made some sticky notes. They noticed then. It is now a $100 million market. 

3. Innovate: if you wanted to offer extremely low-cost accommodation to the thrifty traveller, how do you do it? California based, Airbnb has found a way by linking people who have a spare room in their homes with potential travellers and the company would advertise it. This means you can get a room for as low as US$49 night. Airbnb has now expanded to serve the budget conscious business traveller who has to deal with a smaller expense account, but still need to attend conferences and make sales presentations.

4. Customer-driven: have you ever taken a taxi in a foreign country and had to pay a huge sum? Why pay more when you have Uber. In case you have not heard about this innovative taxi company, Uber uses temporary taxi drivers who use an app to sign up, the traveller pays online (no cash required) and the driver collects fees from the company after the trip. Customers love the low rates and the speedy service. 

Sajjad Hamid is an SME consultant. His contacts: [email protected]

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