Apr 6, 2020
In this shock, the businesses that will be most hard hit are the Small and Medium Enterprises
“A million people lost their jobs on Friday, 27th March.” That is the guesstimate of one well-informed academic of the impact of the shut-down on the South African labour market. It is based on the number of casual workers in the services industry who were likely paid on Thursday, 26th March and told that there would be no further paycheck until the relevant business reopened.
It does not take into account the roughly half a million more people who have employment contracts but are also employed in the hospitality or discretionary retail industries, which are currently shut. Most already face diminished hours and many could be retrenched in the coming weeks as employers get to grips with the implications of a three-week shut down. Especially as any improvement in these sectors is likely to be slow.
We estimate that around 52% of South Africa’s productive capacity is currently shut, leaving around 48% operational. Remove the government sector and the private businesses currently operational drop to 32% of GDP.
All closed businesses are facing the problem of zero revenues while expenses remain largely unchanged. Workers need to be paid, rentals are still due, as are insurance payments. Therefore, it is no surprise that every business with the ability is working to cut costs dramatically. This has resulted in companies cancelling orders or supply contracts, declaring that they will be unable to make rental payments and putting workers on short time. Many will be seeking to extend payment terms from suppliers as well.
The risk is that the banks and large companies move into cash conservation mode. They can see distress, so they hoard cash. For example, a number of companies with established credit lines with banks drew down on these in the past two weeks.
The Foschini Group has already informed landlords that it won’t be able to make rental payments during the coronavirus lockdown. Another retailer with a large food component unilaterally sent a blanket email to all their suppliers increasing payables from 30 to 90 days. Yet another has cancelled the bulk of the orders they had previously placed worldwide. Hotel groups have put workers on short hours and cancelled outside contracts, like cleaning.
In this shock, the businesses that will be most hard hit are the Small and Medium Enterprises (SMEs). They have far less negotiating power than larger businesses. Their ability to demand big rental discounts is much smaller. At the same time, many SMEs are suppliers to larger businesses who are now cancelling orders. If the SME has already incurred the expenditure to produce the product, they are now left with a product they cannot sell and a cash flow shortage. These businesses often have small cash buffers – and therefore limited ability to survive a prolonged period with no revenues.
The SME sector is most critical as an employer. While it only pays about 6% of corporate taxes and accounts for 20% of GDP, Small and Medium Enterprises employ around 47% of South Africa’s workforce.
Given the impact on employment, South Africa needs to make every effort to support its SMEs. Those enterprises with business loans or mortgages from their banks will likely get working capital support during this period. Those without current borrowing are going to struggle to get financing.
Even businesses with access to liquidity in this period, will need funding solutions over the medium term.
My concern is what happens over the medium term. For many industries, notably the retail and hospitality sectors, the pick-up in activity is likely to be slow. Even if the lock-down is lifted after three weeks, and South Africa keeps the infected count under control, it will still take most of the year for internal travel volumes to return to pre-COVID19 levels. Foreign tourist numbers will likely take several years to recover.
This means that even businesses with access to liquidity in this period, will need funding solutions over the medium term.
To limit the longer-term negative impact on employment, South Africa needs a cohesive plan to support SMEs. I would start with the following:
Expedite claims made by SMEs from the Temporary Employee Relief Scheme (Ters). Historically, individuals have found it notoriously difficult to obtain payments from the Unemployment Insurance Fund after they have lost employment. If there is similar difficulty now, many businesses will either not survive or they will be forced to retrench workers. Government should publish a daily dashboard of claims received for Ters and claims processed.
The large commercial banks should make bridge funding to larger corporates conditional upon two things: They retain as many workers as possible, and they expedite payment to their SME suppliers.
The SA Reserve Bank should encourage the commercial banks to support SMEs through this period. One solution that other countries have devised is for the government to supply a first loss tranche to commercial banks to fund smaller businesses during this period.
Longer term, the South African government needs to make it easier for smaller businesses to operate. According to a survey conducted by the World Bank on the ease of starting a business, it takes 45 days for a local entrepreneur to meet the regulatory requirements to get a business up and running. In contrast, it takes less than 20 days in 130 other countries. The many government employees currently being paid to not do very much should be working on resolving this regulatory burden so that a South African entrepreneur can start a business and begin employing people in ten days. That is the best solution to getting all those who lost their jobs last week back to work as soon as possible.