The Big Read: Kept afloat by government lifelines, will ‘zombie companies’ haunt Singapore?
Several businesses have managed to hold on thus far due to various government help schemes, but may have to make the heart-wrenching decision to put up the shutters if business still remains sluggish after the support measures end.
SINGAPORE: More than a month has passed since Singapore entered the second phase of its circuit breaker exit, but business has barely picked up at Mr Wong Yuen Lik’s two retail stores at Capitol Singapore and Velocity@Novena Square.
For the month of June, he only raked in less than S$10,000 in combined sales, compared with S$80,000 in the same period last year. His shops mainly sell winter and outdoor adventure apparel, which has seen plummeting demand as international travel grinds to a near halt due to the COVID-19 pandemic.
Despite getting four months of mandated rental waiver and wage subsidies for his staff through the Job Support Scheme (JSS), Mr Wong said he is still losing money and has had to cut the salaries of his nine employees in July.
“If landlords start chasing for rent, we definitely cannot survive… I will see how much I bleed, if I need to shut, I have to shut,” said Mr Wong, who is the director of his two shops Icebreaker and X-Boundaries.
Mr Adam Esoof Piperdy, chief executive officer and founder of events company Unearthed Productions, is in a similar predicament.
With large-scale events cancelled since March to curb the coronavirus’ spread, the last physical event which he worked on was the Chingay Parade in February. Although he has pivoted his company’s business model to focus on holding virtual events, he said that it is a gamble as the industry is still finding its footing in this “uncharted territory”.
While he and his team — whose size has been cut from 25 to 20 — are working hard to make the transition, Mr Piperdy said that he will only know whether the new model is sustainable in five to six months, as that is when most of the government support measures will end.
Apart from getting wage subsidies through the JSS, he has about two months of rent waived. He has also been able to defer repayment of his bank loan, and receive traineeship and job redesign grants from the Government.
“When all (the support measures stop) at the end of the year, that’s when s*** will hit the fan and that’s when we need to decide (whether it is worth continuing to run the business) ... I think everybody is living on borrowed time right now,” he said.
His staff, Ms Jasmin Chen, 26, is fully aware of the possibility that she may be out of a job in the next few months if the firm’s transition proves unsuccessful. Meanwhile, having to learn new skills such as digital marketing is also a challenge for her, she said.
Despite the uncertainty, Ms Chen, who heads the projects team, has not started looking for another job as she enjoys being in the events industry, and believes that Mr Piperdy’s foray into virtual events is worth a shot.
Besides Mr Wong and Mr Piperdy, small and medium enterprise (SME) owners in other sectors spoken to also painted a similarly grim outlook for the future.
Several said they have managed to hold on thus far due to various government help schemes, but may have to make the heart-wrenching decision to put up the shutters if business still remains sluggish after the support measures end.
And that deadline is looming, with several of these lifelines set to expire some time in the next few months. The rental waiver, for example, ended in July and the JSS subsidies will cease this month, with companies receiving the payout in October.
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Keeping companies afloat through various support schemes has been the leitmotif of governments’ response to the coronavirus-induced economic distress globally, and Singapore is no exception.
However, such official assistance has also led experts around the world to caution against the danger of using taxpayers’ money to prop up struggling firms, especially “zombie companies” which were already heavily in debt and having problems staying afloat even before COVID-19 struck.
Since the coronavirus first surfaced in Singapore in late January, the Government has pumped in nearly S$100 billion, via four Budgets, to support the trade-reliant economy which has been battered by plunging overseas demand, disruption to the supply chains, and restrictions on international travel.
The measures to help businesses include:
- The JSS, where the Government will subsidise a portion of a Singaporean worker’s salary
- A mandated rental waiver of four months, with the costs to be shared equally between the Government and landlords
- An option to apply for relief from contractual obligations, such as rent
- Traineeship grants
While these support measures have been aimed at preventing mass business closures and a spike in retrenchments, there is one unintended side effect: Saving unviable businesses that would have folded in normal times.
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However, while the problem of zombie companies has plagued several countries, experts said it is unlikely to become prevalent in Singapore due to various factors. The number of such companies is unlikely to be high here, though there are no statistics available, they reiterated.
“The focus (of the support measures) is not to keep unviable companies alive. We don’t have a serious case of zombie companies. But of course this is a concern. It raises the concern of whether resources could be put to better use,” said Mr Irvin Seah, senior economist at DBS Bank.
THE WALKING DEAD
Globally, experts have warned against the rise of “zombie companies”, which may reach unhealthy levels due to the large swathes of cash that governments have injected into their pandemic-stricken economies.
Historically, the term was used to refer to failing Japanese companies kept alive by credit provided by the banks during the “lost decade”, which saw the country’s economy stagnating from 1991 to 2001.
While there is no official definition of what constitutes a zombie company, it is generally understood to refer to businesses that are unable to earn enough profits to cover their debt-servicing costs.
Although the problem started in Japan, the Eurozone economies and the United States have also seen a rise in the number of zombie companies, long before the Covid-19 outbreak.
Contributing to their proliferation is the low interest rate environment globally, which was meant to stimulate the economy after the 2008/2009 financial crisis.
The US Federal Reserve had been inching up the interest rate to 2008 levels over the last 10 years before the coronavirus pandemic saw the central bank slashing rates to almost zero again.
Low borrowing costs mean that tottering companies have been able to take out loans to finance their debts.
Deutsche Bank Securities has estimated that the proportion of zombie companies in the US has tripled to more than 18 per cent since the global financial crisis, the Financial Times reported in June.
As public funds are now being channeled to prevent business closures and job losses, the pandemic may have created new zombie firms by prolonging their existence beyond their natural expiration date.
Apart from wasting precious resources on them, zombie companies can also have a deleterious effect on a country’s economy.
According to the Financial Times article, these companies can be a drag on productivity growth and hinder the reallocation of labour and skills to more productive parts of the economy.
In Australia, the Treasury Department’s recent review of one of its Covid-19 support measures, known as the Jobkeeper wage subsidy, found that “perverse incentives” were created through the scheme and the problem would intensify when the economy recovers, reported the Sydney Morning Herald in July.
“It distorts wage relativities between lower and higher-paid jobs, it dampens incentives to work, it hampers labour mobility and the reallocation of workers to more productive roles, and it keeps businesses afloat that would not be viable without ongoing support," the Treasury found.
In Singapore, while there is cause for concern about zombie firms roaming in the business jungle, experts said they do not expect the “walking dead” problem to become widespread here.
Associate Professor Lawrence Loh, director of the Centre for Governance, Institutions and Organisations at the National University of Singapore (NUS) Business School, said there is a need to distinguish between good and bad zombies.
“Even if you are a zombie, you can be a temporary zombie, you can be resurrected when the situation improves. You are a viable company, you are just hit temporarily by Covid-19. When some normalcy returns, you can come back to life in a viable form,” he said.
“A non-viable zombie has no chance at all to survive whatever support you give.”
Assoc Prof Loh said government agencies are therefore in a moral bind, given that they are using public funds to prop up the ailing economy.
“The tension is how do we actually identify these problematic zombies,” he added.
Dr Chua Hak Bin, an economist from Maybank Kim Eng, said that keeping zombie companies alive will soak up financial resources, including Singapore’s fiscal reserves, and under-utilise the country’s manpower.
While resources should ideally be used as efficiently as possible, instituting too many requirements in a bid to prevent unviable companies from getting help would inevitably lead to some “good zombies” slipping through the cracks, said experts.
“It’s a fine balance between more efficient use of resources versus comprehensiveness of policy measures,” said Mr Seah.
Assoc Prof Loh said government agencies are in a difficult position when determining how help for businesses should be distributed across the economy.
“They need to give help fast, so they cannot have too much administrative, bureaucratic submissions … Otherwise, nobody will get help,” he added.
THE SINGAPORE SITUATION
In Singapore, experts said these factors help to prevent a proliferation of zombie companies:
- The relative ease in setting up and shutting down businesses here
- The Government’s prudent nature when doling out financial assistance
- The way the support measures have been designed
Assoc Prof Loh said that the structure of Singapore’s economy allows companies on the brink of collapse here to make an exit relatively quickly due to the absence of cumbersome obligations, unlike in Japan.
Cultural factors in Japan, such as the fear of “losing face” when shutting down a company, also makes its economy more susceptible to having a higher number of zombie companies than Singapore.
While the Singapore Government has thrown a lot of lifelines and has gone “much, much further” than it would have in the past, Ms Selina Ling, the head of treasury and research at OCBC Bank, noted how the authorities here generally still prefer to use market forces to direct resources to where they are needed most.
“Looking at the playbook of the Singapore Government, they have very few sacred cows that they ‘die die’ must protect,” she said. She cited the national carrier Singapore Airlines as possibly the rare exception.
The temporary nature of the various support measures would also help prevent unviable companies from languishing in the twilight zone, she added.
In past crises, governments around the world have supported zombie companies, such as inefficient airlines, automakers or financial institutions in the form of bailout packages, because they are deemed to be too big or too important to the state to fail.
Mr Seah also pointed to how the Singapore Government provides support only for salary and rental costs. But companies still have other cost components, such as raw materials, which they have to bear themselves.
In addition, the fact that the JSS only applies to Singaporeans and is designed to be tiered — whereby higher wage subsidies are given to sectors more badly hit by COVID-19 — shows that the focus of the scheme is not to keep unviable companies alive.
“Of course some companies stay alive because of the support. That’s an unintended outcome but I don’t think the number is very high,” he said.
According to the Department of Statistics, the number of business closures for the months since COVID-19 hit has not been significantly higher than the same period a year ago.
Logically, the numbers should have gone up considering that Singapore is going through its worst economic crisis since independence.
However, economists say data on business closures may not provide the complete picture.
Ms Ling said the whole process of a company choosing to wind up after a crisis could take months or even years, while Mr Seah said a better indicator would be to look at the net number of companies being set up.
The figure has historically hovered at around 1,600 a month, he noted, but that figure drastically dropped to 148 in April and 261 in May. The number improved to 1,200 in June but is still below the average, suggesting that numbers are starting to reflect the struggles on the ground.
With most of the government support set to expire by the end of this year, experts said the number of business closures and retrenchment will continue to go up through the year and into 2021, though it will be spread out over a few months.
Indeed, several business owners spoken to are considering the very real possibility of closing shop at the end of this year if things do not look up.
Mr Joshua Lin, founder of Cultures Specialty Coffee, a cafe in Marina Bay, said his sales have nosedived by at least 70 per cent. With remote working as the default arrangement now, the Central Business District (CBD) has become a ghost town, he added.
Though he has not paid rent for four months and receives wage subsidies from the Government, Mr Lin said that he is still making losses every day.
“If I were to fork out money from my own pocket to continue to pump into the business just to stay open and make losses every day, it doesn’t make business sense,” he said.
He is now in the midst of negotiating with his landlord for rent to be tabulated based on a percentage of his monthly sales. If that is not successful, he might close by the end of this year.
The chief executive officer of F&B chain Attap House, Mr Edmund Koh, said he might have to close three or four outlets - out of seven - in the CBD in two to three months if his landlords are not agreeable to offer more help.
The revenue earned from his CBD outlets are not enough to cover his workers’ salary, suppliers, and of course rent.
“If there’s no more help, I’m not sure what’s going to happen to be honest … For us, we are holding out as long as possible. We are still optimistic that the Government will still probably help us,” he said.
The owner of a fitness gym, who only wants to be known as Mr Goh as he is in the midst of negotiating a new rental space for his business, has a longer runway as he has taken out a bank loan that will tide him through the end of the JSS and rental waivers.
Even so, he has been losing S$20,000 to S$30,000 every month on average since the circuit breaker started, and the money can only last him till June next year if he continues bleeding at the same rate every month.
Though he has been allowed to resume business since the start of Phase Two, capacity limits due to safe distancing requirements as well as sluggish demand mean that he is only operating at 70 per cent of pre-Covid levels.
“If (business) is really tough, how to go on? I’m already so-called resigned to my fate. As a business owner, I think if it fails, it fails. Then I got to work my way through again … I’m already preparing myself mentally to be bankrupt,” he said.
WORKERS’ WELFARE A KEY CONSIDERATION: MOF
Responding to queries, a spokesperson from the Ministry of Finance said that the support measures introduced over the four Budgets are meant to protect workers against sudden disruption and loss of livelihood in this unprecedented crisis.
Besides help aimed at relieving manpower and rental costs, the Government has also calibrated its support to provide more help to harder-hit sectors, such as aviation and tourism.
Over the longer term, there are also measures to help firms build capabilities for the eventual recovery, such as the enhanced Enterprise Development Grant, SG United Jobs and Skills Package.
“Overall, our priority has been to roll out the support measures in a timely manner. The nature of the crisis continues to evolve globally and in Singapore. We will continue to monitor the situation closely and make adjustments to our schemes and programmes as necessary,” said the spokesperson.
A spokesperson from the Ministry of Trade and Industry said that the COVID-19 pandemic has affected all sectors, though more more than others. Hence, the Government has implemented “broad-based measures” to cushion the shock to businesses and workers.
In view of the need for businesses to adapt, the MTI spokesperson said it has enhanced support for companies to transform their business and retrain their workers.
“This will enable them to stay competitive and relevant, and be well-equipped to capitalise on the upswing when the global economy recovers,” the spokesperson added.
WHEN AND HOW SHOULD LIFELINES BE CUT?
Nevertheless, the Government cannot extend lifelines indefinitely, experts stressed.
However, they cautioned that the sudden withdrawal would give rise to a “cliff effect” where companies have to start bearing their full costs overnight. Policymakers need to prevent that in the way they design how support measures would be weaned off.
The key is timing, the experts noted.
Mr Seah said the Government should only begin to unwind the support when growth starts picking up.
One way forward is to extend support measures in a more targeted manner, the experts said. This will also help ensure that the life support for companies is gradually turned off.
For example, the amount of wage subsidies given through the JSS could be gradually reduced, or continued support could be provided only to industries worst hit by the crisis, while withdrawing help from sectors doing relatively well, such as manufacturing or information and communications technology.
In response to queries, the National Trades Union Congress (NTUC) has urged the Government to consider extending the JSS beyond August.
NTUC Assistant Secretary-General Desmond Choo said that companies suffering from the slowdown would likely fail and worsen the current unemployment situation if the support measures stop.
“Keeping some of these companies alive, especially the ones that are strategically important to the economy, will ensure that they can contribute to employment and productivity,” he said.
Assoc Prof Loh suggested that the Government should start distinguishing between “good” and “bad” zombies by looking at companies’ cash flow position and monetisation strategy to ensure more efficient use of public funds, yet still helping companies with growth capabilities.
He said that companies which fall into the grey area should submit a business plan for government agencies to assess.
Dr Chua from Maybank Kim Eng said that it will also be less costly for the Government if it were to provide unemployment benefits for three to six months for workers who have just been retrenched, as compared to a blanket wage subsidy scheme.
“A blanket wage subsidy scheme will cover nearly two million workers, while an unemployment support scheme for retrenched workers will cover about 50,000 to 100,000 workers. This is less than 5 per cent of the number covered under a wage subsidy scheme and will be more effective and targeted,” he said.
Senior Minister Tharman Shanmugartnam had said earlier that Singapore has managed to keep its unemployment rate low because it has been able to quickly coordinate a range of programmes that involve retraining workers, placing them on attachments and traineeships, and getting them back in jobs more quickly.
Unemployment benefits are only needed in countries with high structural unemployment over time and Singapore may have to consider instituting that if the current approach fails, he added.
ADVICE FOR WORKERS IN STRUGGLING FIRMS
In the meantime, Mr Choo and human resources experts said that workers in struggling companies should keep an open mind to reskill themselves and be on the lookout for available opportunities in the job market.
“Training and upskilling remain critical for workers who are in these hard-hit industries, so that they can tap into new opportunities if need be,” said Mr Choo.
Mr Paul Heng, founder of corporate coaching firm Next Career Consulting Group, said: “The workers must have seen the writing on the wall. They must be proactively looking around … (for) meaningful gigs.”
For companies that are trying to transit to a new business model, workers should also try to pick up the necessary skills required, they said.
Mr David Ang, director of corporate services at Human Capital Singapore, said that employers should be open with their staff about the difficulties they are facing, and share the thinking behind any decisions to cut staff, given how the uncertain economic situation has caused high levels of mental stress.
The anxiety over what lies ahead was palpable among the business owners spoken to.
Ms Elayne Neo, owner of beauty parlour Emerald Allure, said she has been worrying that her revenue will not be able to cover her rents every single day since her business reopened in Phase Two.
She and several others have started dipping into their savings just to sustain the business and keep as many workers as she can, although many have had to institute pay cuts.
However, the business owners also said they were trying their very best to hold on, with some starting to transform their business to cater to the needs arising from the pandemic.
Mr Wong, the winter and outdoor adventure apparel retailer, has started selling protective personal equipment to the healthcare sector. “I have a positive mind. It is tough but we’re going ahead,” he said.
Still, many are circumspect about the situation and braced for the worst: All their efforts in building up their business over the last few years may come to naught due to the unprecedented pandemic.
“This is something that all business owners need to be prepared for. Financially as well mentally. I think the mental part is the most difficult. Because you’re giving up your baby you have spent the last 15 years growing,” said Mr Piperdy.
Indeed, many SME owners are facing the fight of their lives to keep their business afloat.
And DBS’ Mr Seah noted: “The need to buffer the economy from the impact of the pandemic far outweighs the unintended outcome of keeping unviable companies afloat.”