The impact of COVID-19 on SMEs: Which measures have been adopted by governments?

di Mario Ghioldi - 31 Maggio 2020

 from Warsaw, Poland

The small and medium enterprises vulnerability

Beyond creating a severe public health emergency, the COVID-19 pandemic is causing a shock to the European and global economies. As a matter of fact, the coronavirus outbreak is bringing a negative impact to people’s livelihoods, on companies of all sizes and in general on economic growth (World Economic Forum,2020). Across the European Union, all kinds of businesses are in trouble. Shedding staff, cutting working hours or reducing worker incomes are only a few examples of the difficulties facing the majority of the European firms and enterprises (European Commission, 2020). In particular, the COVID-19 and its containment measures are strongly affecting the SMEs, more so than during the 2008 financial crisis.

The current situation has shown how small and medium enterprises are extremely vulnerable to  supply and demand shocks, with a particular regard to liquidity (Standard and Poor, 2020). Following the OECD data, there is the concrete risk that over 50% of SMEs will not survive the next months (OECD, 2020). Considering how the 60-70% of employers of the OECD areas are working in the SME, the present crisis could have a relevant impact on global growth prospects and on national economies. Moreover, in this situation, the financial sector can also be pressured by non performing portfolios (Standard and Poor, 2020) and the SME incapacity to repay their obbligations to banks. Consequently, a deterioration of the financial situation of SMEs threatens to have effects on the entire banking sector (European Parliament, 2020).

 

The supply and demand problems of SMEs

The impact of COVID on small and medium enterprises involves supply and demand economic sides. Regarding the former, customers have lost income and a general feeling of uncertainty is reducing consumption. Moreover, the sudden loss of revenue and demand for small and medium firms is causing  significant liquidity shortages. Considering how workers (potential consumers) are laid off and firms are not able to pay salaries, the mentioned effects are strongly interconnected. Following some research, the social distancing and containment measures are affecting small and medium enterprises more than bigger ones (Abello, 2020), thus the former are hit harder than the latter. In particular, some sectors like tourism or catering for local markets (where measures have been introduced) could be strongly impacted.

On the supply side, beyond the drops in capacity utilisations generated by quarantines, firms are facing a general decrease in  labour force (European Commission, 2020). As a matter of fact, workers usually need to take care of their dependants while movements of people are restricted. Secondly, supply chains are mostly interrupted, causing a general shortage of intermediate goods (OECD, 2020). Considering that a considerable number of SMEs rely on suppliers from countries with more COVID-19 cases, those firms are becoming more vulnerable to the current crises (OECD, 2020). In this context, the obstacles in trade routes could weaken small and medium firms. Another relevant issue concerns the disruption of supply chains and business networks with larger operators (Cordon, 2020). This could have a long term effect on SMEs which may have trouble to re-build connections with former networks once former partners have set up new partnerships with other entities.

 

The impact of COVID-19 on SMEs, an empirical approach

In the last weeks, various research projects have underlined the empirical evidence of the COVID-19 impact on small and medium enterprise businesses (OECD, 2020). Although those analyses are mainly descriptive, they show an initial overview about the current issues faced by SMEs. Taking into consideration the OECD data, the current crisis has affected the following sectors: real estate, professional services, and other personal services, wholesale and retail trade, air transport, accommodation and food services, transport manufacturing and construction (OECD, 2020). Considering the OECD data on these fields (OECD, 2020), the number of people working in SMEs is around 75%, and close to 90% in Greece and Italy. Moreover, in these two countries, the amount of small firms in the most affected sectors is nearly 60% (OECD, 2020).

Source: OECD 2019

Another analysis carried out by Brookings finds similar outcomes on the SMEs troubles (Parilla, Liu & Whitehead, 2020). Taking into consideration the risk of being affected by COVID-19, the study classifies industries in three different categories: immediate risk, near-term risk and long-term risk. Secondly, the analysis focuses on the presence of SMEs in each of these categories. According to the study, 26% of business firms with fewer than 250 employees (small business enterprises) are in the immediate risk category while 28% are in the near-term risk group. It is particularly relevant to underline how both categories include 54% of small enterprises, involving almost 48 million jobs. This shows how the impact on SMEs could strongly affect the economy of Western countries for the next few years.

 

The role of Central Banks in the crises

Considering the current situation, countries are launching various policies in order to mitigate the pressure faced by the SMEs. One of the most concrete examples is related to the actions of the Central Banks, which are supporting lending in different ways. Beyond attenuating monetary conditions, banks are enabling commercial banks to provide more loans to small and medium enterprises. The consistent measures adopted by the European Central Bank (ECB) and the US Federal Reserve (FED) are clear examples of the institutional commitment in order to alleviate the effects of COVID-19 outbreaks on all kinds of businesses. In particular, the institutional efforts are focusing on initiatives to sustain short-term liquidity in the  face of the cash shortages faced by the small and medium enterprises (European Commission, 2020).

 

Which policies could be adopted?

OECD classifies four different sectors where countries can launch policy responses in order to support the SME businesses: labour, deferral, financial and structural (OECD, 2020). Although this article is more focused on the third and the fourth ones, it seems necessary to mention the most relevant measures adopted on the labour and deferral sides. For the latter, various governments have implemented a moratorium on debt repayments or tax relief (such as Italy, France Spain or the UK). At the same time, countries have launched policies related to tax deferral (almost all the OECD countries), debt payments or social security payments (for example Belgium or Israel) (OECD, 2020).

In the labour sector, many western countries have adopted policies related to sick leave, temporary lay off or working time shortening. Some of those measures are targeted directly at small and medium enterprises (European Commission, 2020). Moreover, governments have introduced acts to support furloughed employees and the self employed.

Several governments have introduced measures related to reduced working hours, temporary lay-off and sick leave and some targeted directly at SMEs (ILO, 2020). Similarly, governments provide wage and income support for furloughed employees, or for companies to safeguard employment. In many cases, countries have introduced measures specifically focused on the self-employed (like Italy, Germany or France) (OECD, 2020).

 

The financial measures launched

In general, countries are handling the problem of SMEs through various financial tools. The most relevant are direct lending to SMEs and loan guarantees. The former have been implemented or set- up by many governments in the most developed countries, such as: the EU members, Switzerland, Hong Kong, the US, the UK, Australia or India (Financial Times, 2020). Beyond including the expansion of funding available for loans, governments are making efforts to improve the access to loan schemes, simplifying procedures to receive loans or offering more favourable terms, such as reduced interest rates.

At the same time, states have introduced or implemented measures incentivizing commercial banks to expand or extend the lending to SMEs. In order to reach this scope, different central banks have lifted reserve requirements for banks, allowing them to increase their lending (BNP Paribas, 2020). Furthermore, the same central banks (such as the FED and the ECB) have launched relevant monetary policies in order to boost lending and to buy packages of loans to SMEs.

 

Strengthening loan guarantees

In particular, measures have been adopted by different European and Asian governments in order to guarantee schemes to banks strengthening lending to SMEs. Beyond the EU countries, also China, Japan, Hong Kong, Korea and Switzerland have promoted the mentioned measures to strengthen loan guarantees (OECD, 2020). Those policies are related to the acceleration of guarantee and lending procedures, the enlargement of public funding available to support those guarantees and the raising of  the ceiling up to which the guarantee applies considering the percentage of the loan.

Such policies include support for finding alternative markets, for teleworking and digitalisation, for innovation and for (re) training of the workforce. These measures are of particular importance, since SMEs may be less able to adopt such new technologies and methods. At the same time, supporting adoption of new technologies and practices may enable them to strengthen their post-crisis competitiveness and ability to address the challenges posed by megatrends (Nielsen, 2020).

 

The structural reforms of the SMEs, a new opportunity for the future

In the end, governments spent relevant efforts to help SMEs in adopting new work processes, speeding up digitalisation, improving digilitalization and finding new markets (European Commission, 2020). Beyond responding to the current challenges, these measures should improve the SME structures by facilitating their growth.

In the past years, various small and medium enterprises had difficulty to reconcile their work with digital solutions. This aspect has become more relevant during the current crisis, where smart-working is the only way to carry out specific tasks. Considering that, many countries have launched policies to support SMEs adopting teleworking (such as: Argentina, France, Japan, Slovenia, Spain) (OECD, 2020). These measures could bring long-term assets for the SMEs, which will be able to get advantages in terms of adoption of technology and new practices.

In the same way, SMEs are supported in terms of innovations. Various countries (for example France, China, Japan and Singapore) have created specific measures assisting SMEs to find the best solutions to the COVID-19 outbreak. A relevant example is provided by the European Institute for Technology. This independent body of the EU launched a call to startups and SMEs with specific technologies related to the current health crisis to  apply for funding under the European Innovation Council Accelerator programme.

Moreover, governments are supporting SMEs to find new alternative markets. For instance, China is making significant  efforts to improve cooperation between large and small enterprises (OECD, 2020). In particular, the bigger firms are called to increase their support in the supply chain, in terms of loan recovery or on project outsourcing. Another clear example is Belgium, where Brussels has implemented financial instruments for SMEs to support small firms to find new markets.

 

COVID 19, the best chance to restart

The current crisis has highlighted the vulnerabilities and structural lackings (such as the liquidity shortages or the drop of labour capacities) of the small and medium enterprises in developed countries. Considering the importance of these challenges for the economic systems, governments are adopting peculiar measures to mitigate the outbreak impacts on the SMEs. In particular, those policies are related to SME’s labour system, tax deferral, financial support and structural changes. These measures can improve the small and medium enterpise long term competiveness jeopardized by the business of larger firms. Thus, the current challanges faced by private and public sectors could be also considered a relevant opportunity to revamp the SME activities strongly weakened in the last years.

 

Bibliography A-L

Abello, 2020, Cities Starting to Grapple with Small Business Declines Due to Virus Outbreak, The Next City [online], Available at: https://nextcity.org/daily/entry/cities-starting-grapple-with-small-business-declines-due-to-virus-outbreak?utm_source=Next+City+Newsletter&utm_campaign=5d645c1081-EMAIL_CAMPAIGN_2019_02_21_05_47_COPY_01&utm_medium=email&utm_term=0_fcee5bf7a0-5d645c1081-43981729

BNP Paribas, 2020, COVID-19: Key measures taken by governments and central  banks, BNP Paribas [online], Available at: https://economic-research.bnpparibas.com/html/en-US/COVID-19-measures-taken-governments-central-banks-4/1/2020,38805

Cordon, 2020, A post COVID-19 outlook: The future of the supply chain, IMD [online], Available at: https://www.imd.org/research-knowledge/articles/A-post-COVID-19-outlook-The-future-of-the-supply-chain/

European Commission, 2020, COVID-19: Commission sets out European coordinated response to counter the economic impact of the Coronavirus, EC, [online], Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_20_459

European Commission, 2020, Digital innovation hubs helping public sector and SMEs in dealing with COVID-19 pandemic, EC, [online], Available at: https://ec.europa.eu/digital-single-market/en/news/digital-innovation-hubs-helping-public-sector-and-smes-dealing-covid-19-pandemic

European Commission, 2020, State aid: Commission approves €450 million Polish scheme to support companies affected by coronavirus outbreak, EC, [online], Available at: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_853

European Parliament, 2020, EU/EA measures to mitigate the economic, financial and social effects of coronavirus, EP, [online], Available at: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwi_vOyct7bpAhXBlYsKHXRfA94QFjAAegQIBBAB&url=https%3A%2F%2Fwww.europarl.europa.eu%2FRegData%2Fetudes%2FIDAN%2F2020%2F645723%2FIPOL_IDA(2020)645723_EN.pdf&usg=AOvVaw3JB5dkU8l9ueE5MQMXM0uM

Financial Times, 2020, Coronavirus: Federal Reserve cuts rates to nearly zero — as it happened, FT,  [online], Available at: https://www.ft.com/content/22d8a8e9-aa6f-3740-9d61-a96816628dff

ILO, 2020, COVID-19 and the world of work: Impact and policy responses, ILO, [online], Available at: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=2ahUKEwiXudCzwrbpAhUcBhAIHSaeC4kQFjABegQIAhAB&url=https%3A%2F%2Fwww.ilo.org%2Fwcmsp5%2Fgroups%2Fpublic%2F—dgreports%2F—dcomm%2Fdocuments%2Fbriefingnote%2Fwcms_738753.pdf&usg=AOvVaw1mu8eHbfJZYwL7G_sWCrfV

Bibliography M-Z

Nielsen, 2020, COVID-19: The Unexpected Catalyst for Tech Adoption, Nielsen, [online], Available at: https://www.nielsen.com/eu/en/insights/article/2020/covid-19-the-unexpected-catalyst-for-tech-adoption/

OECD, 2020, COVID-19 crisis response in Central Asia, OECD, [online], Available at: http://www.oecd.org/coronavirus/policy-responses/covid-19-crisis-response-in-central-asia-5305f172/

OECD, 2020, Smal medium vulnerable, OECD, [online], Available at: http://www.oecd.org/sdd/business-stats/statistical-insights-small-medium-and-vulnerable.htm

OECD, 2020, SMEs policy responses, OECD, [online], Available at: https://read.oecd-ilibrary.org/view/?ref=119_119680-di6h3qgi4x&title=Covid-19_SME_Policy_Responses

OECD, 2020, Supporting people and companies to deal with the COVID-19 virus, OECD, [online], Available at: http://www.oecd.org/coronavirus/policy-responses/supporting-people-and-companies-to-deal-with-the-covid-19-virus-options-for-an-immediate-employment-and-social-policy-response-d33dffe6/

OECD, 2020, Tax administration responses to COVID-19: Measures taken to support taxpayers, OECD, [online], Available at: http://www.oecd.org/coronavirus/policy-responses/tax-administration-responses-to-covid-19-measures-taken-to-support-taxpayers-adc84188/

Parilla, Liu, Whitehead, 2020, How local leaders can stave off a small business collapse from COVID-19, [online], Available at: https://www.brookings.edu/research/how-local-leaders-can-stave-off-a-small-business-collapse-from-covid-19/

Standard & Poor, 2020, Covid-19 impact: key takeaways from our articles, S&P Global Ratings, [online], Available at: https://www.spglobal.com/ratings/en/research/articles/200204-coronavirus-impact-key-takeaways-from-our-articles-11337257

Standard & Poor, 2020, For Asia and Pacific, COVID-19 Crisis Could Add US$300 Billion To Credit Costs, S&P, [online], Available at: https://www.spglobal.com/ratings/en/research/articles/200406-for-asia-pacific-banks-covid-19-crisis-could-add-us-300-billion-to-credit-costs-11359063

World Economic Forum, 2020, How companies responging to the coronavirus crisis?, WEF, [online], Available at: https://www.weforum.org/agenda/2020/03/how-are-companies-responding-to-the-coronavirus-crisis-d15bed6137/

 

Autore dell’articolo *Mario Ghioldi, Dr. in International Studies and Diplomacy presso L’Università degli Studi di Siena; Master in Diritti Umani presso SIOI

* i contenuti e le valutazioni dell’intervento sono di esclusiva responsabilità dell’autore

Autore