Insolvencies

A QUEZON CITY MALL on the second day of the implementation of the Modified Enhanced Community Quarantine in the National Capital Region in May 2020. — PHILIPPINE STAR/ MICHAEL VARCAS

Every time there is a “lockdown” or strict community quarantine, when many businesses temporarily close shop, smaller enterprises and their workers tend to hurt the most. Single proprietorships depend heavily on daily revenues. Also, they employ many daily wage earners. But many of them, by government’s definition, are not considered “essential.”

Luckily for some businesses, they have gained access to electronic trading platforms like Shopee, Lazada, Metro Mart, or Grab. But albeit the volume they do online is small compared to what they could normally make from walk-in customers and those that deliberately or intentionally visit their shops during regular business hours. Estimates put at roughly 250,000 the number of jobs lost because of the two-week lockdown at NCR Plus (National Capital Region + Laguna, Cavite, Bulacan, and Rizal) from March 29 to April 11. The National Economic and Development Authority (NEDA) also estimates income lost during the period for NCR Plus at around P30 billion. No estimates yet for the period April 12-30.

Other than business closures due to lockdowns, survivor-businesses are also contending with changing consumer preferences, also brought about by changes in shopping habits as a result of the pandemic. So, they get hit both on the operation side as well as the customer side. As such, even if the government considers them essential, customers may not.

As the SM Group noted in a recent presentation, the pandemic and “quarantine life” have made people reassess what are “essential purchases.” And, in this line, people are now categorizing and prioritizing their purchases starting with “obvious essentials,” then moving to “new essentials,” and then to “next essentials.”

Goods or products that get priority fall under the categories of domestic hobbies; productivity at home; health and well-being; functional fashion; take home experiences; and, comfort food. If what you produce or sell does not fall under any of these categories, then you might not be a priority. And SM notes the “reassessment of what is essential is a trend that will likely endure.”

That smaller businesses are the most impacted by lockdowns and changing consumer preferences is a global and not just a local concern. After all, anywhere in the world, smaller businesses have less resources and access to technology compared to their big counterparts. Thus, any prolonged disruption in business and cash flow is enough to put many of them under.

A rise in business closures and insolvencies is thus anticipated, and this will have serious implications. In an April 2 blog by staffers of the International Monetary Fund (IMF), they said that “even with public support measures, small and medium enterprise insolvencies are likely to rise. Therefore, a comprehensive set of insolvency and debt restructuring tools will be needed for the insolvency proceedings system to cope with the added strain.”

These tools, they noted, include “dedicated out-of-court restructuring mechanisms, hybrid restructuring, and strengthened insolvency procedures. Since liquidations may be excessive even under well-functioning insolvency procedures, governments could provide financial incentives to tilt the balance towards restructuring.”

The April 2 blog, “Taming the Wave of Small and Medium Enterprise Insolvencies,” was authored by IMF staffers Federico J. Diez, Romain Duval, Chiara Maggi, and Nicola Pierri. Diez is an Economist at the Structural Reforms Unit of the IMF’s Research Department. Duval is an Assistant Director in the IMF’s Research Department. Maggi is an Economist in the IMF’s Middle East and Central Asia Department. And Pierri is an Economist at the Macro-Financial Division of the IMF Research Department.

“The pandemic has hit small and medium enterprises particularly hard, partly because they are predominant in some contact-intensive sectors like hotels, restaurants, and entertainment. As a result, many advanced economies risk experiencing a wave of liquidations that could destroy millions of jobs, damage the financial system, and weaken an already fragile economic recovery,” the authors wrote.

They also noted that loans, credit guarantees, and moratoria on debt payments can protect small and medium enterprises (SMEs) from the “immediate risk of bankruptcy,” but such “liquidity support cannot address solvency problems. As firms accumulate losses and borrow to keep carrying on, they risk becoming insolvent — saddled with debt well over their ability to repay.”

Their research shows the COVID-19 pandemic will raise the number of insolvencies among small and medium enterprises from 10% to 16% in 2021, across 20 mostly advanced economies in Europe and the Asia-Pacific region. The increase, they said, would be on a magnitude similar to the rise in liquidations in the five years after the 2008 global financial crisis, but it would take place over a much shorter period of time.

“Projected insolvencies put about 20 million jobs at risk (i.e., over 10% of workers employed by small and medium enterprises), roughly the same as the total number of currently unemployed workers, in the countries covered by the analysis. Further, 18% of small and medium enterprises may also become illiquid (they may not have enough cash to meet their immediate financial obligations), underscoring the need for continued liquidity support,” the blog authors wrote.

The implication for banks is a “concern,” they said, noting that more SME “insolvencies could trigger defaults and cause significant write-offs, depleting banks’ capital.” Smaller banks, they added, would be hit even harder, as they often specialize in lending to smaller businesses. “Compared to past crises, this time around there is a clearer case for solvency support by governments,” they added.

With SMEs comprising most of the businesses in the country, and given the adverse impact of COVID-19 on them since early 2020, there is urgent need to consider additional “modes” to ensure “solvency support” for them. Bayanihan I and II may not be enough, especially given the possibility of prolonged lockdowns in the future.

Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council

matort@yahoo.com

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