Small businesses under significant financial strain, says Central Bank’s Ed Sibley

The Covid-19 pandemic has put small businesses under considerable financial strain relative to larger companies, with the shock to their turnover creating significant cash-flow challenges in some sectors, Central Bank deputy governor Ed Sibley said at a Small Firms Association webinar on Wednesday.

Small and medium-sized enterprises (SMEs) are operating in a very difficult and uncertain environment, despite interventions to cushion the effects of the crisis, Mr Sibley said. Uncertainties relating to the end of the Brexit transition period on December 31st pose an added risk, he warned.

An analysis by the Central Bank published last month estimated that gross operating losses in the SME sector for the nine months from April to the end of the year would be between €10.3 billion and €11.7 billion.

Mr Sibley noted that while most SMEs have continued to access finance, new lending has declined and SMEs that do not have an existing banking relationship or have greater indebtedness face particular challenges.

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“Some of the sectors with the largest amount of outstanding bank debt or greater default rates are more exposed to the shock from Covid-19,” he said.

More than 11,000 SME borrowers – or 21 per cent of outstanding Irish SME loans – were still on an active payment break in early October, but this system-wide approach is now coming to an end and being replaced by different solutions for individual customers.

“The Central Bank expects lenders to work with borrowers to help assess the impacts of the pandemic on current and future cash flows, and to provide interim supports where those impacts are considered temporary and more permanent solutions where the debt servicing capacity has been materially reduced,” Mr Sibley said.

Brexit factor

The Central Bank governor said the interaction of the Brexit and Covid-19 shocks would be different across sectors.

“With some vulnerable sectors, including tourism, accommodation and food services, already experiencing large demand shortfalls, it is possible that losses that would have been triggered by Brexit have been brought forward due to the impact of Covid-19. This may not be the case in other areas, with sectors such as agri-food more exposed to the larger negative shocks from Brexit.”

The impact of shifts in consumer behaviour remains difficult to quantify, however.

“We do not know what the immediate and longer-lasting effects will be on consumer behaviour and economic activity, the damage to the productive capacity of the economy and the pace at which economic activity normalises,” he said.

"What we do know is that economic recovery will come when the health emergency abates through the containment of the virus. And that SMEs will be central to that economic recovery in Ireland. "