Covid-19 clock is ticking for SMEs

AS countries wrestle with the still-unknown economic fallout from the coronavirus disease 2019 (Covid-19) pandemic, analyses done in the United

States in recent years have attracted new attention, as they strongly suggest there is only a narrow timeframe available in which to prevent a wholesale collapse of small and medium enterprises (SMEs).

The problem may not be immediately obvious, but it is easy enough to understand: SMEs generally do not have substantial cash reserves, if any at all. In fact, most of them are less financially prepared to weather a calamity than the average middle-class household.

Culling data from its own client records, USbased microlender Opportunity Fund concluded that on average, SMEs have cash reserves for a maximum of 45 days. That is a more optimistic conclusion than that of a broader study done by J.P. Morgan Chase in 2016, which found that the average reserves of SMEs are only

good for about 27 days. Once the cash is exhausted, unless it is replaced immediately in some form, the business dies.

The studies applied to businesses in the US, but there is no reason to assume that Philippine SMEs, which make up more than 99 percent of all business enterprises in this country, are any better prepared for the Covid-19 disaster than their American counterparts. A business failure does not only mean the loss of livelihood for the proprietor, but also the loss of tax revenue to the government, loss of income for the employees and revenue losses along the SME’s value chain.

The indication is, then, that the government has between four and six weeks from the beginning of the “enhanced community quarantine,” which halted most business activity, to prevent widespread business failures. Since the lockdown of Metro Manila began on March 16, those failures would begin to happen during the second half of April — the start of a second, less deadly but ultimately more destructive epidemic. What makes that conclusion even more alarming is that it is altogether unlikely the country would be anywhere near resolving the immediate problem — halting the spread of Covid-19 — by the scheduled end of the quarantine on April 12. By

the time the government can deploy relief measures for SMEs, there may not be any SME left to save.

That is no reason, however, for not developing and trying a useful strategy for salvaging a key part of the economy. The government has not done that yet to any consequential degree, and it should.

What has been rolled out so far as part of the P27.1-billion relief “package” announced a little more than a week ago are simply programs in the existing government budget that can be pushed more aggressively. These include about P6.2 billion from the Department of Labor and Employment, the Technical Education Skills and Development Authority, and the Social Security System (SSS) for financial and training support for displaced workers; P2.8 billion in direct financial assistance to the agricultural sector through the Agricultural Credit Policy Council’s Survival and Recovery Aid Program; and P1.0 billion for microfinance lending to SMEs through the Department of Trade and Industry.

For its part, the Bangko Sentral ng Pilipinas has done what it can, reducing benchmark interest rates and reserve ratio requirements to (hopefully) encourage bank lending, some of which would (hopefully) be directed to the SME sector.

The government has indicated that these are just the start of what it intends to do, and none of the above-mentioned programs are a bad idea. But as they are, they are woefully inadequate, particularly given the critically short timeframe in which the government has to act. However, what action the government should take exactly is open to some debate.

Though we are facing an unprecedented situation for which history offers no real guidance, two basic priorities have emerged. First, the government must in some way — whether through direct, bailout-type assistance or some other mechanisms — offer options for SMEs to stay afloat in the short term. One easy way to work toward this objective would be to mandate that a greater proportion of the bank credit that would presumably increase on the back of the BSP’s monetary easing be directed to SMEs, and to couch the mandate in terms that make compliance with it less costly than not lending.

Second, the government must find ways to encourage increased consumer demand. If consumers are able to spend money again, the viability of SMEs will solve itself, provided they can be kept in business for the relatively short period of time it would take for increased consumption to have a positive effect.

Sadly, though, while the government can and must be planning for recovery in the aftermath of the Covid-19 pandemic, we have to recognize that there is little that can be done until the war against the coronavirus is won. We can only hope that it is, and as soon as possible.