Protecting value & rebuilding
resilience in South Africa
KEY THEMES REINFORCED BY COVID-19 IN SOUTH AFRICA INCLUDE:
CYBERSECURITY, FRAUD AND FINANCIAL CRIME RISKS
Ongoing digitisation of business means cyber-attacks can inflict damage right across commercial ecosystems. Of companies experiencing cyber-attacks, 27% lose revenue and similar proportions lose assets or customer information. Reputational harm is another danger. FTI research indicates that on average, a company receives five times more media coverage and eight times more social media coverage in the month after a cyber breach than in normal conditions.
COVID-19 has increased remote working, stretched resources and further encouraged electronic payment methods over physical cash. As society and economies increasingly move online, there is greater risk of inadvertent errors, more vulnerability to cyber-attacks and increased attractiveness to cybercriminals. Leaks of confidential data, cybercrime and errors are likely to increase. Criminal groups will make even more use of cyber laundromats.
In response, governments and regulators are increasing efforts to bolster security. Firstly, focusing on increasing resilience at national level and, secondly, applying more scrutiny on businesses themselves (such as POPI act designed to aligned with emerging global best practices like GDPR). Both private and public companies are increasingly conducting proactive fraud and financial crime risk
assessments; enterprise-wide risk assessments are likely to follow. Increasing attention is being paid to security around remote working and the industrial operational technology that underpins much of the region’s economy. With greater sophistication around risk transfer mechanisms, cyber insurance, capital reserves and stronger liabilities for third-party providers will increase.
CORRUPTION, DEBT AND INSOLVENCY
The COVID-19 pandemic has exposed a multitude of governance failures around the world and led to increased calls for fundamental changes to our global political, economic and social systems.
Against the backdrop of a looming global recession, addressing corruption and the misappropriation of state resources remains more important than ever. Despite the widespread negative economic impacts wrought by the pandemic, the current political climate provides a unique opportunity to reinvigorate the country’s fight against corruption.
With numerous sectors experiencing financial distress and companies and individuals facing the increased likelihood of insolvency as a result of the economic disruption caused by COVID-19, forensic practitioners will play a key role in supporting South Africa’s economic recovery.
CASH MANAGEMENT AND BUSINESS TRANSFORMATION
Cash management and cash resources are needed to ensure short-term viability, however this should be coupled with a focus on core operations and long-term stability.
Many companies will need to focus on business transformation, reviewing business plans and forecasts as well as succession and contingency planning.
It is critical that the ‘business response journey’ is well planned and coordinated, including the following phases: assessing liquidity and solvency; strengthening the balance sheet and lowering the break-even point.
ENERGY AND ESG
Galvanised by the economic shocks caused by COVID-19, 2020 has seen action being taken to accelerate developments in South Africa’s power sector, driven by the need to improve energy security, create jobs, attract investment and transition to a lower carbon energy mix. The focus now needs to be on starting competitive and transparent tender processes that get projects “shovel-ready” as soon as possible to support job creation and economic recovery.
ESG considerations continue to grow as a strategic business imperative for investors and policy makers alike. South Africa’s renewable industry and Eskom’s willingness to purchase power from IPPs (Independent Power Providers) will improve the attractiveness of renewable energy projects for international and domestic investors alike.
South African energy sector has taken important steps on its transition journey in 2020. Rapid expansion of generation capacity will support the country’s economic development goals and climate change commitments. The focus must now turn to implementation to enact the changes required for a just energy transition in the country.
M&A AND CORPORATE ACTIVITY
M&A activity remains high, particularly around distressed assets and business transformation. Many pre-COVID deals now need to be closed and bank mergers will almost certainly continue.
Distressed assets at a low valuation are an attractive proposition for many buyers and will lead to more acquisitions – though investors will tread carefully. The widespread disruption caused by the pandemic has led to ‘business unusual’ for many companies in South Africa as they respond to new challenges in an unpredictable and rapidly changing operating environment.
Private equity investors and portfolio companies must take this new reality into account, not only for their day-to-day operations, but in their strategic plans for the future. Companies are placing increased scrutiny on transactions, with M&A investigative due diligence now in high demand.
Banks and buyers do not trust self-disclosed materials – interrogation of transactions is needed, as well as pre-acquisition forensic audits of target companies.
FTI Consulting’s Resilience Barometer™ data reveals how, for too many organisations in South Africa, the pandemic has exposed a lack of resilience across critical areas: from business models, to supply chains, and from crisis management, to regulatory changes in an increasingly fragmented world. imperative for preparedness and risk-management.
Download the report to read more.