IMF: A Post-Coronavirus Recovery in Asia—Extending a “Whatever it Takes” Lifeline to Small Businesses

By Kenneth Kang and Changyong Rhee

Asia was hit hard by the first wave of the coronavirus, as the sudden stop in activity struck households and firms simultaneously—first in China, then elsewhere in Asia, and now globally. Policymakers responded swiftly with aggressive spending to support the medical response and vulnerable households and firms. And central banks took swift actions to expand liquidity.

While this helped support financial markets and sentiment, we may be on the cusp of a new, more dangerous phase of “economic deleveraging” as firms struggle to repay loans and pay workers in the face of a sudden collapse in cashflow and tighter credit.

 
Full stop

In Asia and elsewhere, small and mid-sized enterprises are at greater risk in this new deleveraging phase. They are also concentrated in services where the containment and social distancing measures have hit the hardest. Compared to large corporates, small firms have thin cash buffers, are more leveraged, and rely mainly on short-term loans and retained earnings. Against this “crisis like no other,”  small businesses face severe cashflow shortfalls with few financing alternatives.

Banks need to step forward in a major way to provide the working capital, but banks too are facing their own pressures, as large firms access credit lines to boost cash reserves. With banks looking to service first their largest customers, smaller firms will be left behind to fend for themselves.

The approach in Asia so far—to encourage loan rollovers through regulatory forbearance and guarantees and provide cheap lending to banks—will help but may not be enough to save small and mid-sized firms, given banks’ capacity and reluctance to take on this risk. Neither step addresses the massive need for new working capital to keep workers employed as cashflows dry up. Some private surveys suggest that small businesses, as the major employers in these economies, may have less than 3 months of cash left, raising the specter of a wave of defaults and a surge in unemployment.

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