Credit in a cold coronavirus climate

The economy is in unknown territory as coronavirus hits businesses hard – and some entrepreneurs face losing their own homes. Banks will have to play their part, writes Tom Pullar-Strecker.

Business owners are ‘‘shell-shocked’’ and all asking the same questions as they struggle to deal with the impact of the coronavirus pandemic, says Auckland Chamber of Commerce chief executive Michael Barnett. ‘‘How long? How deep? How bad?’’

The trouble is, there are no answers, he says. ‘‘This is a first.’’

Barnett notes that many small business owners in the hardest-hit tourism, hospitality and entertainment industries have more than just their ‘‘jobs’’ on the line.

‘‘Many small and medium-sized businesses are funded by way of a mortgage on their owners’ houses.’’

They were confronted with ‘‘perhaps losing their home and investment because of something that is totally out of their control’’.

Yet while some business owners and their employees face dwindling cashflows and cuts to their income, that is by no means universal.

A government official notes that in terms of their economic prospects at least, farmers seem to be sitting pretty.

‘‘Meat and dairy prices are holding up well and our currency has just gone down massively, so our exporters will be in quite a strong position.

‘‘The kiwifruit growers are packing and sending at the moment and they will be going ‘wahoo’. The money will be rolling in.’’

In addition to that, many salary-earners who manage to retain their jobs will have more cash in their pockets as a result of falling mortgage rates.

Ironically, many will at the same time have less to spend their income on, as they are forced to cancel foreign holidays and cut back on entertainment.

So at the very same time that some businesses face having to shut up shop, ANZ chief economist Sharon Zollner expects to see savings rates increase.

It may not be a ‘‘zero sum game’’ between those with more cash and those with less.

Tourists spent $17 billion in New Zealand last year and Kiwis spent only about $9.5b when overseas and on international plane tickets.

Knock-on effects from restrictions on travel and large indoor events are cascading into other industries such as sports broadcasting, gambling, and the hospitality sector generally.

But arguably the gap that needs to be bridged between those positive and negative money-flows isn’t unmanageable.

The Government has allocated $12b to a fiscal support package, which includes wage subsidies, to assist struggling firms and displaced workers, with the promise of more help to come.

Encouragingly, ratings agency Moody’s says it doesn’t see the extra spending planned by either the New Zealand or Australian governments ‘‘as significantly threatening their fiscal strength’’.

‘‘Particularly for New Zealand, fiscal surpluses and debt levels . . . provide ample fiscal flexibility.’’

In other words, the country can afford the support that has been announced so far.

Eventually, the Government will need to ‘complete the triangle’ by raising the taxes from those who can pay them to pay back the deficit.

‘‘At some point increased government debt globally is going to have be addressed,’’ Zollner says.

But few analysts seem to believe that the option of raiding cash-rich consumers is a conversation to get into today.

The immediate risk is that a ‘‘credit crunch’’ will throw babies out with the bathwater as cash flows through the economy are disrupted and banks recoil from lending to businesses in the face of an inevitable rise in bad loans.

That is why Reserve Bank governor Adrian Orr called on banks to remember their ‘‘social licence’’ when slashing the official cash rate to 0.25 per cent on Monday.

Orr made it sound easy when he gave advice to cash-strapped businesses on how they might want to talk to their banks, customers and suppliers to keep them sweet.

‘‘Keep it calm, say ‘hey, it might not be here this week but don’t worry it will arrive’,’’ he suggested.

‘‘Or ‘do you mind, bank, if I just access the working capital now, or only pay the principal?’ ‘‘Just have sensible conversations.’’

The Reserve Bank has launched a raft of measures to improve liquidity in the financial system to ensure there is plenty of cash to loan out

‘‘At some point banks have a responsibility to be prudent to themselves.’’

ANZ chief economist Sharon Zollner

at low interest rates, with ‘‘quantitative easing’’ just one of the tools it is dusting off.

All of the central bank’s options ultimately involve spreading or transferring risks – rather than removing them – either by pushing credit risks out into the future or by transferring them from the banking system to the Crown.

By delaying a planned requirement for banks to increase the amount of capital on their books by about $3.6b over the coming year, the central bank also freed them up – in theory at least – to make an additional $47b of loans.

But that is at the risk of postponing the journey it embarked on last year towards ‘‘a safer banking system’’ that was less prone to fall over in a crisis.

And businesses will still need to have a credible story to tell to access their share of that credit today. Wellington Chamber of Commerce chief executive John Milford says the feedback he has been receiving is that banks are being as supportive as they can be ‘‘depending on the circumstances of the person who is talking to them’’.

‘‘If you have had a good relationship with your bank, I think you are going to get a very sympathetic hearing.’’

That will presumably be music to the Reserve Bank’s ears.

But there had to be a ‘‘degree of reality’’ in bank conversations, Milford also said.

‘‘Obviously if you are a business that relied on international tourism, what are you actually going to say to them?

‘‘Because you don’t have the answers that are going to be asked of you, such as ‘when do you see an upturn in your business’?’’

Nor is massaging the truth likely to be a good option.

‘‘The businesses that get the support will be the ones that banks trust and that are most open,’’ Zollner says.

‘‘If banks have any suspicions that someone is not being upfront with them, then they will put quite a lot of weight on that I’d have thought.’’

Tempting though it may become to paint the banks as the ogres, they have themselves been savaged by the coronavirus pandemic, with their share prices falling by about 40 per cent since late February.

Shares in BNZ-owner National Australia Bank, for example, at one point last week touched their lowest price since 1997.

Zollner says banks are ‘‘very willing and able to stand by their customers during a period of disruption’’.

‘‘However, the big unknown is, is this a temporary disruption, or is this an 18-month issue?

‘‘At some point banks have a responsibility to be prudent to themselves.’’

Sad and unfair though the future may be for some business owners, Barnett doesn’t believe it will threaten the future of entrepreneurship in New Zealand.

‘‘There are going to be business failures, we know that,’’ he says.

‘‘But at the first sign of recovery you will see another new batch of entrepreneurs put their hands up and come into the market.

‘‘It is what we do.’’