The governor of the Central Bank of Ireland has warned that many Irish firms will not survive the pandemic, and will no longer be viable once State supports are removed.
"The viability and survival prospects of many affected firms remains highly uncertain, and is likely to depend on a range of future policy choices," Gabriel Makhlouf told a webinar event hosted by the University of Limerick. "These choices will be difficult, and will have profound implications for our economy."
Thousands of firms, particularly in the hard-hit sectors of hospitality and retail, have been kept afloat by Government support measures. However, the removal of these measures combined with the changed consumer environment is expected to see many go under in the coming months.
Mr Makhlouf warned that “while [Government] policy choices have led to an avoidance of widespread insolvency up to now, it is an unfortunate reality that the effects of the pandemic on SME balance sheets, combined with structural changes that have either been created or exacerbated by it, mean that some SMEs will be unviable” .
“It would be a mistake to continue with protection and forbearance in perpetuity, just as it would be wrong to allow all companies making losses currently to fail,” he said.
Measures
The governor said the shock to SME revenues from the pandemic was “severe” in 2020.
He highlighted research jointly published on Monday by the Central Bank and the Economic and Social Research Institute (ESRI) which shows that while the hospitality sector has experienced the most severe crisis, the revenue shock has also been significant across all other sectors.
The survey, carried out between July and September last year, found that over 70 per cent of firms experienced some fall in turnover during lockdown.
It identified two groups of SMEs, those that were loss-making in 2019 and those that were merely breaking even in 2019, which account for almost a quarter of SMEs, suggesting they could be vulnerable to liquidation when insolvency criteria begin to normalise.
The research also shed light on how effectively SMEs have cut their overheads in the face of a curtailed trading environment, noting that company expenditure fell by 8.5 per cent on average, with 40 per cent of companies cutting their spending.
Over 36 per cent of firms made a loss, while another 30 per cent “broke even” in 2020, it said.
“These figures suggest that while companies have indeed managed to adjust to the realities of the pandemic, this adjustment for many reasons has not been enough to avoid companies experiencing losses,”Mr Makhlouf said.
“Policymakers have acted to support vulnerable businesses and, thankfully, the pandemic has not yet been characterised by widespread company failures, owing to the unprecedented level of direct fiscal support and creditor forbearance that is in the system,” he said
Restrictions
Also speaking at the same event was Minister for Finance Paschal Donohoe, who said the Irish economy was less affected by the current restrictions this time around because consumers and businesses have adapted and adopted workarounds.
He said the relationship between economic activity and public health restrictions had weakened over “each successive wave of the virus”.
This was reflected in the positive VAT numbers for the first quarter of 2021, which showed receipts from the sales tax were up 8.5 per cent on the same period last year.
The Government’s Stability Programme Update, published last week, predicted a strong bounce in the economy as it reopens, with GDP growth of 4.5 per cent this year and 5 per cent next year, driven by a rebound in consumer spending.
“The adaptability and innovation shown by businesses and consumers is borne out by the high frequency real-time economic data published by my department, which shows that the impact of the current set of restrictions is around half that of the spring 2020 lockdown,” Mr Donohoe said.
Many cafés, restaurants and bars have switched to a take-away service, while there had been a huge shift towards online retailing, he said.
Since March last year the Government has moved rapidly, “using the public sector balance sheet to replace lost private sector demand, in order to ensure that firms, workers and incomes were supported and protected through wage subsidies, deferrals of liabilities and income supports,” he said.
Income
“Our overarching objective has been to support households and firms, as well as to limit the ‘scarring’, or permanent effects of the pandemic,” he said.
In his address he highlighted how quickly the economic climate has changed in the past year from one of potential overheating to have more than 900,000 people dependent on some form of State income support.
“With a value of almost €38 billion, or nearly a fifth of national income, the budgetary support provided by Government to tackle the economic impact of the pandemic has been extraordinary.”
Mr Donohoe said there would be no cliff-edge in the removal of these supports.
“We have not fought this pandemic and its economic fallout for over a year on a scale that is unprecedented in Irish economic history just to fall at the final hurdle.”
Nonetheless he hinted the Government would soon move to curb the budget deficit. “We are committed to restoring the public finances to a sustainable trajectory, and ensuring that Ireland does not become a fiscal outlier as we emerge from the pandemic period.”
