Coronavirus: Central Bank warns of ‘amplified shock’ to SMEs

Small- and medium-sized businesses (SMEs) in the State may need up to €5.7 billion in emergency liquidity to help them through the Covid-19 crisis, a new Central Bank study has estimated.

This is nearly six times the amount currently available under the Government’s Covid-19 rescue package for the Irish economy.

A separate Central Bank study, meanwhile, found that up to €40 billion of suppliers’ annual sales are to companies affected by the restrictions and that a lack of liquidity among these firms “risks cascading through the supply chain” and amplifying the shock.

The first study on SME liquidity needs said the lockdown had placed “a temporary block” between the consumption demands of households and the supply capacity of firms in some sectors, which had potential to create serious liquidity problems for SMEs. Companies in this category employ more than one million workers in the Republic.

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With the Government’s wage subsidy scheme in place, a key determinant of overall demand for liquidity would be the ability of firms to reduce non-payroll costs such as rent, rates, tax, insurance, trade credit, debt repayments and utilities, the study said.

Using a combination of sector and bank-level data for SMEs in the most vulnerable sectors – wholesale, retail, accommodation and food – it estimated their liquidity needs over a three-month period.

It found that if 50 per cent of vulnerable SMEs require external liquidity finance and can reduce their personnel expenses to zero and their non-personnel expenses by 70 per cent, the total quantity of funding required would be around €2.4 billion.

If 70 per cent of vulnerable SMEs demand external liquidity and their non-personnel expenses can only be cut by 50 per cent, this amount increases to €5.7 billion.

Internal resources

The study said there was evidence to suggest that not all firms will be in a position to meet this liquidity need “from internal resources, existing credit lines and new bank lending without additional support”.

“Firms with weaker balance sheets due to Covid-19, SMEs who currently have no lender relationship with a bank, and those who have limited collateral to support their application may struggle to access finance, especially if there were to be a reduction in banks’ risk appetite,” it said.

In these circumstances, the research identifies three possible policy interventions – credit guarantee schemes, direct lending programmes and direct fiscal supports.

The Government has put in place about €1 billion in liquidity supports via the Strategic Banking Corporation of Ireland (SBCI) and MicroFinance Ireland, repurposing some of the schemes which had been put in place for Brexit.

A lack of liquidity among firms directly affected by current restrictions risks cascading through the supply chain

A second Central Bank study found that linkages through the supply chain represented “an important potential transmission mechanism” for the economic shock from Covid-19.

It estimated that up to €40 billion of annual sales of suppliers are to companies that are either highly or moderately affected by the restrictions.

“Given that trade credit is used heavily in Ireland relative to other European countries, a lack of liquidity among firms directly affected by current restrictions risks cascading through the supply chain, in the form of missed payments for goods and services already provided,” it said.

“ This could lead to knock-on effects on firms further up the chain, as, if the liquidity dry-up continues, it could amplify the economic downturn domestically beyond those firms currently unable to meet customer demand,” it added.