PIC laments 'painful realism' of Covid-19 fallout & local economy.
By Lehlohonolo Lehana.
The impact of the COVID-19 pandemic, as well as other prevailing circumstances, has prolonged the negative impact of the Public Investment Corporation’s (PIC) future financial results.
The warning has been fired by the PIC’s board of directors in the corporation’s 2020/21 Integrated Annual Report released last week.
The PIC, which is a state-owned entity, is the continent’s largest asset manager, with R2.339 trillion under management.
"The impact of the COVID-19 pandemic has caused a significant deterioration in economic conditions and an increase in economic uncertainty. The pandemic is also affecting financial markets said the board.
The board said while the South African and world economy were slowly returning to normal with the availability of vaccines against the COVID-19 virus, it says many businesses have been affected by the pandemic and some will not reopen after the majority of the population is vaccinated.
"They will not be able to absorb the cost of the halt in economic activity. As the pandemic increases in both magnitude and duration, South Africa and the world are learning to live and operate with the probably permanent existence of the COVID-19 virus.
"Some entities are experiencing conditions often associated with a general economic downturn. This includes financial market volatility and erosion, deterioration in credit, liquidity concerns, further increases in government intervention, increasing unemployment, broad declines in consumer discretionary spending, reduction in production because of decreased demand and other restructuring activities, "read the PIC report.
The continuation of these circumstances, said the board, “could result in an even broader economic downturn, which could have a prolonged negative impact on the PIC's financial results in the future.”
The board said the company had in the annual financial statement considered the impact of operating with the existence of COVID-19 by assessing various elements.
These include the:
- Impairment of non-financial assets due to idle and underutilised assets due to government restrictions;
- Impairment of non-financial assets i.e. associates due to general economic downturn;
- Financial impact on financial assets due to general economic downturn and financial market volatility;
- Impairment of financial assets, such as direct impact to the calculation of expected credit loss allowance;
- Impairment of right-of-use assets due to business closure;
- Any possible disruption associated with COVID-19 that may prevent entering into any customer agreement and its impact on the company’s revenue.
- Decline in the company’s revenue as a result of the reduced economic activities, as fees are based on assets under management market values;
- Possible onerous contracts due to unavoidable costs of meeting obligations under the contract during the pandemic outbreak, which may exceed the benefits expected to be received;
- Consider any 'force majeure' clauses, that can be enacted by the COVID-19 pandemic;
- Assumptions used in the preparation of the annual financial statements. For example, going concern assessment;
- Consideration of how profitability, liquidity and impairments triggered by the COVID-19 impact could affect income tax;
- Consideration of how the effect of the COVID-19 pandemic on the Annual Financial Statements may affect the ability of the company to declare dividends;
- New business way involving: workplace flexibility; protecting staff; reinforcing supply chain; restoring “business as usual”; containing cost pressure; and reassessing impact on performance.
The PIC board said although the COVID-19 impact assessment was an ongoing exercise, management has concluded that there are no material uncertainties that might cast significant doubt upon the company's ability to continue as a going concern.
The impact of COVID-19 on the company is an assessment that is conducted continuously throughout the year.