If we live beyond our means, the chicken will come home to roost

I come from a fishing town called Apam, some 85 kilometres from here. And I have fond memories of time spent splashing in the sea with or without clothes on (skinny dipping I think they call it). I only mention this because as I reflected on a famous quote by Warren Buffet which sprung to mind. In it, he says, “Only when the tide goes out do you discover who's been swimming naked”.

The reason why this anecdote is relevant, is it gives us a pictorial depiction of what can, and often does, happen when we as individuals, as corporates, or as a nation do not live within our means.

Let’s start by being honest with ourselves.

Ranked according to our Gross Domestic Product per capita, we are not the wealthiest of nations.

Because of this, we must be acutely better at mechanising our trade-offs than those nations ranked as wealthier than ourselves.

The idea of trade-offs is one of the most basic principles in economics; that in order to have more of one thing, we must accept having less of something else.

The principle also implies that in order to circumvent what might sometimes be a difficult trade-off, we must explore alternative revenue sources. But is that what we do?

At an individual consumer level, our habits and behaviours today (especially where spending is concerned) will inform how we live tomorrow.

When we, as consumers, live beyond our means and the monies which fuel that lifestyle are not our own we can reasonably expect the chickens to come home to roost at some point, because that lifestyle isn’t really ours , it’s simply a mirage!

At a corporate level, while clients may have access to lending, part of our role is to protect them from developing an appetite which exceeds their financial capacity.

We do this by holding them to account against contractual covenants that are set to serve as guideposts within which debt sustainability is assured.

Those contractual covenants also help to ensure the build-up of appropriate buffers to cushion unexpected shocks.

Shocks

Shocks are an inevitable part of our existence. For us as individuals these shocks might come in the form of the sudden unexpected passing of a loved one.

At a corporate level, a business owner might be sideswiped by the premature replacement of his or her generator. And at a macro level or for the sovereign, catastrophic events such as the 2008 liquidity crisis or the 2000 dot com bubble or the 1997 Asian financial crisis, or indeed more recently warring European nations might be enough to level the proverbial house which was already built on shaky ground.

The reality according to what history almost guarantees is that a shock may well be looming. 

So how do we begin to create a consistently stable environment which can absorb these inevitable and sometimes cyclical shocks?

At an individual level, this might that mean holding back a small percentage of our income during the stable periods (a rainy day fund if you like)?

Corporate level

At a corporate level, would it require us to continue scenario planning, stress testing and prudent budgeting to ensure our debt equity ratios remain within reasonable parameters?

Is the answer in being able to consistently manage the trade-off between our desires today vs our needs tomorrow?

In doing so, can we organically build a buffer which prepares us for the unexpected?

For the sovereign, because the notion of easy money and the accessibility of borrowing is strong the temptation to fly close to the sun can be very high.

How can we at that uppermost level realistically expect to effectively self-govern and self-manage when we are dependent on our own awareness and disciplines to alert us to any financial distresses that might be on the horizon?

Is the answer in somehow mirroring the rigour and discipline offered through contractual covenants at the corporate level?

I don’t think it is controversial to say we should be mature enough and introspective enough to hold each other to account or to be a critical friend.

Is it not the very reason that boards and regulators exist?

There is nothing wrong with challenging what has evolved into the status quo, if that status quo has the potential to lead us down a thorny path.

It is our job today to be honest, to be authentic, to be introspective and to be critical in order that we might move the needle even just a little bit so that Ghana and her people can thrive sustainably.

We must encourage us to make shifts which benefit can benefit us all individually as well as collectively.

The writer is the Chief Executive of the Stanbic Bank Ghana