Melbourne lockdown: Business left stumbling in the dark

A cyclist passes a group of police and soldiers patrolling the Docklands area of Melbourne on August 2, 2020, after the announcement of new restrictions to curb the spread of the COVID-19 coronavirus. Picture: AFP

The massive Victorian economic shutdown could not have come at a worse time for a vast number of Australian companies and our stockmarket.

In coming days auditors will stamp “true and fair” on accounting profits with a high Victorian content but, in many situations, neither the auditors nor the directors will have confidence in the recent past or future numbers.

Directors will then have to decide on an appropriate level of dividend to be paid out — an incredibly difficult task. And nowhere will that task be tougher than in bank boards, so shareholders should be prepared for shocks.

Most listed public companies with significant direct or indirect trading with Victoria, including the big banks, have no idea whether the amounts they are owed by customers will in fact be paid.

And many of those with significant Victorian operations will to need estimate the cost of a six week shut down. And, as I will explain below, that shut down could be a lot longer.

The Victorian government did not spell out which non-food/health activities would be shut, and which would be curtailed.

But homeware/appliance and home improvement retailing has been booming. Now, unless Premier Andrews recants, consumers going to a Bunnings, JB Hi-Fi, Good Guys or Harvey Norman store is not an allowed activity, so people entering those stores could be fined. Trade purchases may be different.

The same applies to other retailers. They will probably be able to sell online but there may be delivery restrictions. The Victorian home boom is over and will be replaced by a severe downturn.

We do not yet know how building construction will be affected but it will almost certainly be curtailed.

Shipping containers will probably get exemptions.

Behind all those activities is a vast army of suppliers that are in danger of being be minced and not being able to pay debts. That mincing will be alleviated by some form of aid.

But the next JobKeeper program was designed for recovery and not a set of blows that are far more serious than we have seen in Australia previously.

Enterprises operating outside Victoria with customers that have no link to the state will, of course, be able to ride through this crisis relatively unscathed. But the southern mainland state is the second largest in the land and a vast number of Australian enterprises have close trading links with Victoria.

And then there is the workforce that will have their income reduced.

Victorian Premier Daniel Andrews arrives at a press conference to announces stronger restrictions in Victoria. Picture: NCA NewsWire: David Geraghty

When New Zealand undertook such a lockdown it started with enterprises and people that were not encountering stress. Victorian enterprises are now already under severe stress. The extent of that stress is shown in some of the statistics, albeit they are Australia-wide. The Victorian blows will multiply the impact of the stress and extend its reach.

● Currently, deferred bank loans cover around 750,000 mortgagees and businesses — $165bn in mortgages and $101bn in business loans. The total equity capital of the big four banks is only $251bn.

The solvency of the Victorian segment of those massive deferred bank loans is going to get a lot worse. Every bank director will need to undertake deep soul searching as they decide on dividends.

● Impaired loan write-offs of the big four in the latest financial year totalled a minuscule $3.7bn compared to the above figures. The latest write-offs will be higher but not nearly as high as the Victorian disaster is likely to create.

● My colleague Alan Kohler reported in The Weekend Australian that CreditorWatch discovered that the average invoice payment delay in June was out to 49 days, more than triple what it was a year ago. Some industries are more than 60 days overdue and “financial and insurance services” is out to 75 days.

The fact that invoice payment delays are more than three times what they were a year ago is evidence that, despite all the government support, the nation’s biggest employers, small and medium-sized businesses, are running out of cash — and that was before Victoria.

● Morgan Stanley commissioned a survey of mortgagors as part of research on the impact of the coronavirus and found that 55 per cent of them have received some form of income support from the government. Victorian houses prices have started to fall and will now fall further.

● As I pointed out last month, in 2017 APRA did a stress test of 13 banks and deposit-taking institutions, using what then seemed to be ridiculous assumptions — a 4 per cent decline in GDP, a rise in unemployment to 10 per cent, and a decline in national house prices over three years of around 35 per cent. Only the house price forecast is in doubt.

That stress test showed losses for the 13 institutions surveyed of around $144bn. Directors of banks will Zoom in on this survey at their next meeting.

Australians outside Victoria need to understand why the southern state is in such a mess. When they listen to the Victorian Premier Daniel Andrews, he seems impressive and in control of the situation. A perfect politician. The truth is that he is a great communicator but way out of his depth in the administration of a crisis.

The state has an inflated bureaucracy with complex reporting lines making decisions hard and administration slow and cumbersome. This prevented survey test results from being communicated quickly which fanned infecting rates. It stopped testing of factories where infection took pace.

Human rights legislation and in some areas union involvement made the whole exercise an even greater quagmire. The lack of prosecutions in the black lives matter protests convinced many in population that Victoria was not serious.

“Why should I stay home in a quarantine? Why should I not go to work while infected?”

It was only the dedication of majority of the population that saved the state from a far greater infection rate.

It’s possible the new rules will be administered correctly but if they’re not — and past evidence says they won’t be — then six weeks could become six months.

The nation must hope that the Australian defence force will add some discipline to the undisciplined state.