The scale of the economic shock caused by the Covid-19 pandemic will lead to as much as €11.7 billion of revenue shortfalls across Irish small- and medium-sized businesses (SMEs), which many will not be able to survive, according to a new Central Bank report.
The bank estimates that the gap between companies’ sales and running costs will range between €10.3 billion and €11.7 billion, led by firms in the food and accommodation sector, even after companies have been helped by Government wage subsidy schemes and widespread cost-cutting.
Supports
The Government wage supports for SMEs hit by the crisis will add up to about €5 billion by next March, a year after coronavirus ground the economy to a halt.
The authors of the report said that much of the revenue gap will be met by companies dipping into cash reserves, drawing down existing debt facilities, availing of grants and by tapping lenders for fresh loans, including under the new €2 billion State-backed credit guarantee scheme.
“There are many firms with financial difficulties currently that are potentially viable over the medium term,” the report concluded. “Ensuring system-wide capacity to restructure the liabilities of such potentially-viable firms, while also preparing for the inevitability that some SMEs will fail as a result of the pandemic, is an important ingredient of the overall policy mix for the rest of 2020 and into 2021.”
The Central Bank's attempt to estimate the size of the revenue shock comes as coronavirus cases are on the rise again, resulting in tighter restrictions in Dublin and Donegal than the rest of the State, and as the Government prepares to present Budget 2021 in less than less than two weeks on the basis that there will be no widely available vaccine programme, and no post-Brexit trade deal between the EU and the UK.
Surge
The State’s five retail banks are expected to set aside up to €3.6 billion this year to deal with an expected surge in bad loans as industry-wide payment breaks of as long as six months to SMEs and households begin to roll off in the coming weeks.
Banks have signalled that they are will offer further extensions on a case-by-basis as they seek to find longer-term forbearance and restructuring solutions for borrowers that will not be able to return to regular payments once the period of relief comes to an end.
The Central Bank report warned that debt-based supports, such as those under the credit guarantee scheme, may attract weak demand as companies are wary of taking on additional debt.
“Direct fiscal supports, such as grants or tax or rate waivers, provide liquidity and support the economy but raise issues regarding costs, targeting and moral hazard. Relative to a guaranteed loan, where costs only arise as defaults occur, grant funding is far more expensive up-front for the taxpayer,” the bank said.
One potential option for the State is to provide equity-like or “conditional grant” injections to SMEs which involve an element of clawback or potential return for taxpayers, lowering the cost of intervention relative to a direct grant, the authors of the report said.
“Given the difficulties in distinguishing viable from unviable firms currently, policy measures may need to prioritise the protection and survival of firms in the short-run, to a greater degree than in normal times,” the bank said. “Further, the aggregate importance of firms through their creditor, employee, supplier and customer relationships means that widespread liquidation at a time when typical market signals are functioning poorly is undesirable.”
