So-called zombie companies have been on the rise since the Global Financial Crisis and there are fears that the pandemic will only aggravate the problem. There are concerns that these firms – neither dead nor fully alive – will drain resources from the economy, slowing the recovery and dampening already sluggish productivity growth across most OECD countries, including New Zealand.
Virtually non-existent 30 years ago, by 2019 the number of zombie companies in advanced economies accounted for 13 percent of the total, according to the Bank of America Merrill Lynch. These companies have enough resources to continue to operate but are not generating sufficient profit to service their debts over an extended period. As CNN describes them “Zombie companies are usually heavily indebted, cannot pay down the principal on their debt, depend on low interest rates to meet loan interest payments, and are unable to restructure to become more profitable because their debt is dragging them down.”
What is behind the rise of the zombies?
Research from the Bank of International Settlements identifies two reasons for the increase in zombie firms over the last two decades.
The first is that banks, struggling with their own balance sheets following the GFC, had been less likely to allow firms go bankrupt. Just-profitable zombie firms contributed to Japan’s “lost-decade” in the 1990s when Japanese banks rolled over loans to otherwise insolvent borrowers, with large costs to their productivity.
Secondly, and more importantly, historically low interest rates have enabled firms to continue to pile on more debt and just manage to afford the financing costs. Not only are there more zombie firms today, but zombies are surviving for longer than in the past with less pressure to reduce debt and cut back activity.
Source: Bank of International Settlements
COVID19 suspends natural firm turnover
The pandemic has extended the cycle of low interest rates for the foreseeable. This plus relaxed credit policies, debt hibernation and wage subsidies are likely to support zombie firms much longer than might otherwise have been the case. While the pandemic is an unusual situation, recessions are not and are often viewed as necessary to clean out firms that don’t have a viable future and to allow new, vibrant firms to emerge.
In New Zealand liquidations have been declining for the last 5 years but reached an all-time low last year. Corporate insolvencies declined -23% in the second quarter of 2020 which suggests there may be struggling companies out there who are being artificially propped up by benign lending practices and government support.
*Alison Brook is from the Knowledge Exchange Hub at the Massey University campus at Albany, Auckland. She is on the GDPLive team. This article is a post from the GDPLive blog, and is here with permission. The New Zealand GDPLive resource can also be accessed here.
22 Comments
The Cannibalization Is Complete: Only Inedible Zombies Remain.
Every organic source of prosperity and productivity has been captured and consumed, hidden behind the convenient curtains of central bank intervention, "market forces" financialization and fiscal stimulus. All that's left now are zombies feeding off the offal of stimulus.
Sigh.
1. There is no recovery, while it takes more debt than there is return. That inflection-point was reached unarguably by '08, arguably much earlier.
2. Repeat after me: Productivity is really energy-efficiencies. They are subject to the Laws of Thermodynamics. They therefore are subject to Limits. As they approach said Limits, the returns on the effort to improve them, plateau.
Talking about thermodynamics, 'entropy' is the name given to energy-inefficiencies in physics.
If possible, every company should be rated on their entropy. The higher the entropy score then the more inefficient the company.
Again, delving into physics to find a suitable analogy, we need 'chaos theory' to score some businesses or large organizations like the Auckand City Council who are not really held accountable for their spending; that's when large businesses and organizations like councils are not susceptible of rational analysis. So, for example, if the Government set up a review of the efficiency of the Auckland City Council it would never succeed in reaching any conclusion and would thus be a complete waste of money. The efficacy and efficiency of our legal system for ordinary citizens is another area that has evolved into an organisation that runs on chaos theory; it is too complex and expensive for ordinary folk to make use of, so only wealthy politicians and businessmen use it. So, yes, I would call the Auckland City Council and our civil court system zombie organisations. This is just a different slant on the meaning of zombie.
That Hertz rental in the US is the prime example, NZ has well truly morphing into Zombie territory, worldwide countries in the world, under develop, developing are buzzling to trade/deal with each other in reciprocal bartered type of productivity level. Very sadly, NZ moving fast into phantom valuation, less credible in term of productivity to deal with, lied back, amassing wealth numbers, getting large, slow, not agile.. baby wrapped protected,.. no resilience and endurance what so ever.
`........... who cannot pay down the principal on their debt will drain resources from the economy, will slow the recovery and dampen our already sluggish productivity growth`
Only growth in NZ is in House Price and most businesses too have realized that it is best to flip house and make heaps on weekly basis rather than investing in business and working 60 to 80 hours per week and also Housing is risk free as supported and promoted by RBNZ as well Government.
So entire money borrowed and invested is and should be on housing market, even if one has to pay tax as tax has to be paid on business also but more money and fast in flipping houses.
Also many traders / shops / businesses have realized and not only open zombie companies but have also hired on paper family members to get wage subsidy and other benefits which government is throwing instead of using that money to support regions and industry badly hit by closure of borders like west coast ( Fox Glacier), Te Anau.....hospitality, tourism...........
Correct as know a friend who owns few business but now has diversified ringo housing business - all money/resources from other business diverted to buy and sell house as good money and fast that too without much hassle on top of it RISK FREE AS JACINDA ARDEN HAS MADE IT CLEAR THAT COME WHAT MAY, SHE UNDER HER RULE ( Correct rule as she is now not the PM but Ruler) will never allow house market to fall - economy to takes its own course.
Current inexperienced (as last term was run by Winston Peter with support from Greens) and ignorant government is reponsible for framing policy and giving money without thinking and tempting people to follow the path of manipulation to benefit from the system.
Nothing wrong if people are manipulating the system to get benifit for is government not too manipulate for tgeir benifit and people are just following their corrupt (Mentally) leaders - sorry politicians.
For a minute there I thought we were talking about farming in NZ.
Perfect description of a Zombie business.
Heavily indebted.
Increasing indebtness.
Lack of profitability.
Interest only borrowing.
Lack of investment.
Described as a sunset industry by a previous Prime Minister.
And yet we continue to carry the rest of the country.
Unemployment rates and prices stability are Reserve Bank targets, while productivity and quality of life are not targets:
“What gets measured gets managed — even when it’s pointless to measure and manage it, and even if it harms the purpose of the organisation to do so”.
For example we have CPI targets and those target are met even if it's at the detriment of our economy and society.
Zombie companies have mainly arisen IMO because governments and their central banks have worked in cahoots to deny capitalism of it's bust periods. They collectively think they can just have boom after boom after boom.
In their infinite stupidity, they have decided this is possible. See Labours demand on the RBNZ by GR to maintain full employment. However capitalism NEEDs busts! To function properly markets need to have bust periods, during which capital and resources are reallocated after periods of pain and higher unemployment. During the bust periods, people re-evaluate the capital allocations decisions, start new companies and become inventive out of necessity. Labour forces decide retraining is required and people begin getting better and higher skills. Not only that even profitable companies "trim the fat", leading to leaner businesses, with the expelled Labour force also reskilling or moving to other higher value roles. This leads to long term productivity gains.
Without the busts, the opposite happens. Companies that should have fallen are propped up, but this also means the people and Labour forces in those companies are propped up. You have people doing crap, unproductive work continuing to do that work because they keep getting paid for it. You severely limit innovation as companies who aren't innovating are rewarded for their lack of innovation (where before they would be destroyed and have to rebuild into something else). Even profitable companies no longer have to innovate to compete with these "up and comer" new companies created out of the ashes of old ones.
It should surprise nobody that productivity is dead under such a regime. Visionaries don't get funding unless they do it themselves (see Musk). We are also significantly lacking our potential as a species to come up with new and important technological innovations, probably in a time when we need them the most. Think about it, what is the last real invention that has been created? Smartphones and the internet is the last real technological breakthrough I can think of, yet this is well over a decade ago.
Mis-pricing of risk, mis-allocation of resources to parasitic housing speculation and other similar asset bubbles, and a zombification of the economy, are just some of the long-term effects of an irresponsibly ultra-loose monetary policy.
Current settings are only justified in extreme circumstances, and as a temporary emergency measure. It is high time now for the RBNZ to revert to a more balanced and sane monetary policy, simply accept the reality of current international financial market trends, stop the QE BS and gradually raise interest rates now, rather than being forced by the markets to cause bigger and more sudden increases down the line.
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