SINGAPORE: The Government has been swift in its response to the COVID-19 virus, allocating S$4 billion in its 2020 budget to firms to help them weather its impact as well as the general economic slowdown carried over from the US-China trade war.
While the full impact of the virus has yet to run its course, it has shown the vulnerability of key nodes in global production networks to such cataclysmic and unforeseen events.
Businesses already dealing with precariously thin margins, particularly those in the services sector, could be pushed closer to the point of closing down as revenues are expected to shrink by as much as 80 per cent.
With the services sector making up more than two-thirds of the economy, a drop in demand will have ripple effects for the rest of the Singapore economy.
VULNERABILITY TO EXTERNAL SHOCKS
Singapore’s total exports in 2018 as a percentage of GDP was more than 176 per cent, valued at close to US$412 billion, according to the World Bank.
This means that a budget focusing on relieving business costs is likely to be a short-term stop- gap measure rather than a longer-term solution.
The fact is that as the world has become more inter-connected over the last decade, our vulnerabilities to external shocks have also increased, as flagged in a paper published by the UN Economic and Social Commission for Asia and the Pacific (UNESCAP), which has found that Non-Tariff Measures (NTMs) have increased in recent years.
NTMs or Non-Tariff Barriers, such as product-specific quotas or packaging and labelling conditions, are complex policy measures that increase costs for foreign exporters, particularly small and medium-sized enterprises (SMEs), whose thin margins and stretched resources make navigating changes in trade policy incredibly challenging.
It is a double whammy when it’s small enterprises that feel a larger brunt of the impact that COVID-19 has on the world’s economy.
Although Singapore Airlines and CapitaLand have turned to wage cuts and freezes, historically, it is these large companies that are most likely to survive an economic downturn.
SUPPORT FOR SMES DURING DOWNTURN
SMEs are a key part of Singapore’s economic landscape, contributing to nearly half of our GDP and employing about two-thirds of our workforce.
Therefore, collectively SMEs are “too-big-to-fail” for a country like Singapore so dependent on small businesses. SMEs and microenterprises in South Korea are similarly feeling the heat.
It is in this context that Singapore’s aggressive use of counter-cyclical economic tools to support this segment of the economy is notable. With an expected economic slowdown due to COVID-19, the Government announced the Stabilisation and Support Package (SSP) to support employment together with the Care and Support Package (CSP) to support households.
The SSP will continue to fund enhanced programmes such as the Jobs Support Scheme and offer improved support such as the Enhanced Wage Credit Scheme. These schemes may benefit employers directly by subsidising the cost of labour at this point in time but ultimately aids workers by helping them keep their jobs.
FEAR OF PROPPING UP ZOMBIE FIRMS
As our job and wage support schemes represent transfers to the firms, some may express concerns we are wasting precious limited resources to prop up unproductive firms, which would have seen some natural level of attrition during a down cycle.
However, in the context of the SSP, these concerns may be unfounded.
Firstly, unproductive firms require disproportionately more support than productive firms in a downturn. Discretionary support that provides unequal levels of financing and grants without considering a firm’s credit worthiness would be required to prop up these firms.
By contrast, key schemes in the SSP do not negate commercial discipline. The enhancement to the Enterprise Financing Scheme will require financial institutions to consider firms’ credit worthiness, even as the Government co-shares the risk of default.
The Corporate Income Tax rebates target firms earning a profit. Enhancements to the Wage Credit Scheme targets firms that have raised the salaries of workers in the last quarter.
The design of such schemes can reduce the mismatch between resource allocation and long-term profitability of a firm.
Second, should unproductive firms exit the market? As the level and volatility of productivity may vary over a firm’s life cycle, young companies often find themselves in the red.
In assessing the potential impact of these measures on unproductive companies, we must distinguish between high-growth but young companies that may be burning through cash and zombie firms.
Zombie firms are non-performing companies, with little business activity and value-add. The term refers to firms that struggle for years, earning low sales, generating low growth and little meaningful employment, with little hope of resurrection, where they copy old ideas instead of pursuing innovation.
Many of such low-growth firms may have high debt ratios, fuelled by cheap borrowing in recent years.
Temporary measures such as the Job Support Scheme and Wage Credit Schemes will not keep them going after the SSP runs its course.
SIMILAR CHALLENGES FACED BY YOUNG, HIGH-GROWTH START-UPS
Young high-potential firms on the other hand may face cash flow issues in their initial years, as they pursue breaking even on their initial start-up costs, establish a brand identity and grow their market share.
These are start-ups in rapidly growing sectors like deep tech and artificial intelligence where sunk costs in research and development may take some time to recuperate.
Younger companies also tend to experience greater volatility in income compared to older firms, as they seek to grow new revenue streams and pivot their product offerings towards stronger enterprise solutions.
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But if this higher volatility leads to higher financial costs, young and potentially high-growth firms could be wiped out along with zombie firms during a recession.
Fortunately, the most promising high-growth young start-ups have access to investors and government grants, through a plethora of schemes rolled out by the Government under Start-up SG.
The COVID-19 outbreak will pass. Ideally, we want to identify and support high- potential SMEs during these times, without skewing incentives to prop up zombie firms.
Our best alternative is to support the SMEs as a whole at the potential cost of stringing a few zombie firms along. For now, the Government’s move to shore up aid for SMEs to target cash flow challenges sufficiently differentiates support levels for firms.
Nicholas Sim is a Senior Lecturer in the Business Analytics Programme at the Singapore University of Social Sciences.