How will small businesses survive in this crisis?

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If the community quarantine persists and economic activity remains stifled, it would be very challenging for small businesses without adequate access to financing. Photo by JL JAVIER

Editor’s note: John Paul Flaminiano is Associate Director and a Senior Economist at the Asian Institute of Management - Rizalino S. Navarro Policy Center for Competitiveness (AIM-RSN PCC). The views expressed in the article are the views of the author and do not necessarily reflect the views or policies of the Asian Institute of Management (AIM) or CNN Philippines.

Manila (CNN Philippines Life) — The COVID-19 pandemic has sent shockwaves throughout the globe, with the number of confirmed cases rapidly increasing as the epicenter shifts from east to west. Governments have taken different approaches to contain the spread of the virus, some acting more promptly and taking more drastic measures than others. While the primary concern is public health, a socio-economic crisis also looms on the horizon.

The International Labor Organization (ILO) estimates that almost 25 million jobs worldwide may be lost as a result of the COVID-19 pandemic, the majority of which could come from micro, small, and medium enterprises (MSMEs) that account for up to 70% of employment across regions. The impact of the pandemic will be more damaging to small businesses since large firms are more resilient than MSMEs in times of recession. The 2011 Workplace Employment Relations Study (WERS) in Britain revealed that smaller enterprises (5 to 249 employees) were more likely to be negatively affected by economic shocks, relative to large enterprises (250 and more employees).

Credit constraints and weak consumer demand were among the reasons why recessions have dealt a disproportionately more catastrophic blow to MSMEs relative to large businesses. During the 2008 to 2009 recession in the US, SMEs accounted for 62% of net job losses.

SMEs and their contribution to jobs and employment

In the Philippines, the enhanced community quarantine, done as a response to mitigate the spread of the COVID-19 pandemic has brought economic activity to a standstill. Although the immediate priority of policymakers is to resolve the public health crisis, it is essential to construct the right set of policies to pave the road to recovery and avert possible socio-economic turmoil.

SMEs play a vital role in the Philippine economy, accounting for over 99% of all firms and almost two-thirds of employment. In 2018, MSMEs generated over 5.7 million jobs.

If SMEs are unable to sustain their operations, their workers will not receive wages, or worse, lose their jobs. This puts the livelihoods of millions of Filipinos at risk, and their households could become highly vulnerable to hunger and poverty. As a consequence, this could also slow down recovery and potentially trigger more socio-economic problems.

The crisis exacerbates some challenges faced by SMEs

In the Philippines, SMEs face a plethora of challenges, such as credit constraints, especially during periods of economic downturn. A recent study that used data from 480 SMEs in Metro Manila and CALABARZON (Cavite, Laguna, Batangas, Rizal and Quezon) estimated that over 40% of SMEs might lack access to finance informal credit markets. Even when there is no crisis, a considerable percentage of SMEs may lack the necessary funds to pay their workers and respond to emergencies.

In 2018, the Rizalino S. Navarro Policy Center for Competitiveness of the Asian Institute of Management surveyed 114 SMEs to understand the purpose of loan for the respective groups. Results show that over 41% of SMEs applied for a loan to respond to emergencies. Additionally, over 83% applied for a loan to fund day-to-day operations, which includes wage payments. It must be noted that the survey was conducted pre-crisis. The financing needs of SMEs are even greater during an economic downturn. Without adequate access to finance, it may be challenging for SMEs to pay or keep their workers and maintain operations.

Source: 2018 AIM RSN PCC SME Survey

If the enhanced community quarantine in Luzon persists and economic activity remains stifled, it would be very challenging for some small businesses without adequate access to financing to stay afloat.

Innovative policies are essential to address the needs of SMEs

To survive the COVID-19 crisis, the ILO recommended that SMEs need better access to finance and working capital to help with their short-term cash flow. This could come in the form of grants, affordable loans, or temporary tax exemptions.

Many countries have focused on initiatives to sustain short-term liquidity, and several governments have responded by making credit more accessible and by providing tax relief. A large number of countries have enhanced direct lending to SMEs, and in some cases, new loan instruments have even been set-up.

To provide working capital for SMEs, Austria, Croatia, and the Czech Republic have introduced specific COVID-19 loan funds. At the same time, Canada launched a Business Credit Availability Program to provide CAD 10 billion to support businesses struggling with cash flow.

Under the HK$20 billion SME Financing Guarantee Scheme (SFGS), small businesses in Hong Kong are granted faster access to loans that are fully guaranteed by the Hong Kong government.

The Swiss government has launched a particular SME program where small businesses that are facing liquidity problems will be given access to credit swiftly. In this program provided by the Federal Council, loans of up to CHF 500,000 are fully secured by the Confederation with zero interest.

Singapore has also taken several measures to save jobs and support workers in small businesses. The Singaporean government is providing wage subsidies to help enterprises keep their workers and a three-month deferment of income tax payments for companies and self-employed persons.

South Korea has also granted value-added tax (VAT) breaks for small businesses earning 60 million KRW or less a year.

SMEs usually have lower cash reserves and are more susceptible to going out of business, especially during a crisis. If SMEs, which are typically unable to obtain loans from formal credit markets, are denied access to finance during an economic downturn, this may result in job losses on a massive scale.

The International Finance Corporation (IFC) has reiterated the importance of injecting liquidity to prevent capital in small businesses from drying-up. To alleviate the burden on SMEs, the Philippine government’s initial response was to extend a grace period for qualified SME loans. Subsequently, the government also unveiled a financial aid package worth ₱51 billion to subsidize wages and provide loan guarantees to MSMEs. The program, which covers registered MSMEs, is intended to tide over employees of small businesses during the crisis.

Even before the crisis, many of our SMEs already had problems obtaining credit as working capital and to pay their workers. It is crucial to have a quick response and to cast a wider net of coverage to reach more SMEs that are in dire need of capital, especially during this time of crisis. There is no one-size-fits-all solution to address how to make the government's response more comprehensive; although the timing and coverage of the response are crucial.

Different countries have taken various approaches to reduce the devastating impact of COVID-19 on SMEs and employment, some being more aggressive than others. For example, some countries unveiled their response package as early as March, while it took other countries up to April to come up with a response. Within this timeframe or period, some SMEs that are credit-constrained, to begin with, may see their working capital dry up and may not be able to continue operations. The timeliness and extent of response are critical in determining whether SMEs can stay afloat during the COVID-19 crisis.