Corporate regulator Joe Longo has warned of the risk that rising interest rates and any sharp deterioration in the economy could cause some highly leveraged companies to collapse, while also squeezing consumers.
With interest rates expected to climb further, the Australian Securities and Investments Commission (ASIC) chair indicated on Friday that a key risk on the horizon was the potential for companies to face greater financial pressure.
ASIC chairman Joe Longo indicated the regulator was watching the impact of rising interest ratesCredit:Eamon Gallagher
At ASIC’s annual forum, Longo was asked about major risks looming, and he pointed to the uncertain outlook for inflation and interest rates. He said while the country was better placed than most to navigate the challenging economic conditions, there was a “real issue” for consumers and firms.
“For businesses, there’s pressure on them, too. The costs of doing business are going up, supply chain disruption,” he said.
“We have a very strong economy, but if things do go poorly in the short term, you know we could very well see businesses in distress, particularly those that are highly leveraged, and we have a number of larger entities that are highly leveraged.
“Their costs of servicing that debt are going to up, and if there’s pressure on their revenue or their business model, then that may very well lead to some failures and job losses, so that’s worth worrying about.”
The comments show how regulators are closely eyeing the financial risks associated with rising interest rates, which have jumped from 0.1 per cent to 2.85 per cent since May, as the Reserve Bank seeks to rein in the highest rate of inflation in more than three decades.
Australian Prudential Regulation Authority (APRA) chair John Lonsdale has noted the risk of rising bad debts among business borrowers, pointing to a “small uptick” in small business distress when he was appointed last month.
Lonsdale on Friday said APRA’s core business was to worry about risks, and some of the key risks on its radar were a weakening in the economy, global fragility, geopolitical risks, and changes in the climate and technology. At the same time, Lonsdale stressed that Australia’s financial system was “very strong”.
In separate remarks to ASIC’s conference last week, Longo also underlined the risk that rising interest rates were forcing some consumers into hardship, and causing some people to turn to “fringe sources of credit”.
Banks have reported low bad debts in recent results, though business bankers have pointed to the construction sector as a key weak spot.
The Reserve Bank’s Statement on Monetary Policy on Friday said businesses’ demand for labour remained strong and the outlook for business investment remained positive. But it also noted some weak spots, including a rise in insolvencies in the construction sector, because higher building material costs had reduced cashflows of some builders.
After the recent cyberattacks on Optus and Medibank, Longo also pointed to cyber risks as a key concern.
“I think this is a near-term, readily foreseeable present risk,” Longo said. “It’s really up to each entity and business to get a grip on this subject.”
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