In connection with the international conference „The Future Ain't What it Used to Be – 20 Years of Competition Law and the Challenges Ahead“The Competition Authority has today issued a report No. 3/2013, Is the lost decade ahead? – Strong competition cures stagnation. The report is a follow-up to the report of the Competition Authority. No. 3/2012, Corporate Restructuring 2012 – Zombies or Reanimated? and report No. 2/2011, Competition after the crash. All the reports are based on the Competition Authority's research into the financial position and financial restructuring of 120 large companies in selected markets, which account for almost half of the turnover of all Icelandic companies.
The return on investment for Icelandic companies is generally low, considering the high interest rate level in Iceland. Thus, the return on investment for around a third of large companies is below the Central Bank of Iceland's policy rate. If nothing changes, the equity of these companies will decrease, and there is a risk that they will need further financial restructuring in the future. Furthermore, this finding suggests that the balance sheets of Icelandic companies have not adjusted sufficiently well to the changed economic circumstances following the crash.
However, the return on capital is very uneven across sectors. Export-oriented industries perform much better than companies that generate their revenue solely in the domestic market (hereinafter referred to as the domestic services sector). Return on equity in export-driven companies was 12.21% in 2012, compared to just 4.61% for companies in the domestic service sector. It should be noted that the Central Bank's base rate is currently 6%.
Companies that have undergone financial restructuring are generally in a much worse position than those that did not need such a restructuring. Companies therefore generally emerge from financial restructuring heavily indebted, as the restructuring is based on expectations of increased economic growth and improved performance.
The vast majority of larger companies have undergone financial restructuring. Their debts have been significantly reduced due to write-downs, repayments and interest rate rulings. Despite this, the financial position of many of these companies is poor. The Competition Authority therefore estimates that just over 40% of larger companies that have undergone financial restructuring have negative equity. These companies are primarily found in the domestic services sector.
The share of pension funds in larger companies has grown rapidly since the crash and is now around 14%, compared to 2% in 2007. Direct ownership by banks and resolution bodies, however, has fallen from a combined 29% in 2011 to 14% in 2013. Despite this, banks still hold the reins of a large part of the domestic services sector due to how highly indebted this sector is.
It is foreseeable that the role of pension funds in corporate ownership will grow even further in the coming years, if only because pension funds need to invest and the economy is subject to capital controls. The competition authority is concerned about opaque ownership by pension funds, banks and individuals through funds, particularly joint ownership by professional investors of two or more competitors in the same market.
The Competition Authority believes that the current state of the business sector, i.e. low profitability and productivity, calls for special vigilance. There is a risk that this situation will lead to greater barriers to entry for new entrants, both domestic and foreign, under the pretext that companies already operating in the country need to be protected. Such a policy leads to less competition, which in turn leads to lower productivity and poorer living standards.
Stagnation prevails in the business sector, which can be partly attributed to the high level of corporate debt. This situation is reminiscent of the stagnation that prevailed in Japan after the 1990 crisis and has been referred to as the „lost decade“.
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