The novel coronavirus has affected each and every of us. From the farmer to oil producer to politicians. The predictions for the upcoming crisis are scary as most predict to be the worse than 1930s and 2007-2008. While developed economies have already been hit hardly, the developings have been hit harder. What are the certain predictions no one knows. How long will pandemic be? What will be the degree of devaluation of markets? How will SME fund themselves to continue operating? And besides SMEs, are listed companies under the threat of illiquidity?
The Covid-19 has imposed severe consequences not only for the sake of the health of the citizens but as well the downward economic spiral. The prioritization of human life has led to full lockdowns of many cities, especially the ones who are the significant players in financial world such as New York. The complete lockdown led to closure of many businesses, people stopped earning money, and many more fear to lose job over the pandemic chaos. OECD researches propose that the characteristics of the global recessions have been seen. SME have much lower cash reserve compared to big or/and listed companies. However, even though big companies might have more cash they also have accumulated higher debts lately. To speed up the recovery after the pandemic, the debt-restructuring is inevitable. The government should also play very significant role in the aftermath. The government should save the companies from bankruptcy by different public programs. As for an example for Georgia, farmers could be subsidized by the government and their product can be sold at a lower price on market, which will help both farmers to earn income and citizens which will have more affordable products, and the demand might go up. This process will boost the economy which is necessary step to survive in turbulent times like these.
Let’s get back to big companies and their cash reserves. As most of them have long-term debts they will start to use the cash to cover their interest payable and to avoid trading of their assets, which will be sold at a lower price due to the current financial situation on markets. How can listed companies be saved? The problem mostly troubles the countries with very strong financial markets such as US and UK for example. US is planning to relaunch Commercial Paper Funding Facility which was used back in 1930s, which considers buying short-term and unsecured loans and commercial papers. The tax payment also will be extended for US firms, and the loans will be either prolonged or delayed. The similar process can be as well applied for Georgia, and partially it is. However, we should consider what happens after this three-month mercy period ends. The business operations are still frozen for a month minimum and there are no sources to earn interest payable for June. Moreover, the interest accumulated during this period will be added to monthly payment. So, finally how effective is this structure? Does this help individuals and business or is it just an illusion? The same problem of cash crunch occurs in Georgian markets as well, if the companies will start to pay out interest payable in June, when they will have very low business activity.
The main determinant of the situation will be how the sales of the companies swill change both listed or unlisted companies. The bigger will be the decrease in the sales percentage the higher will be the risk of illiquidity. Also, the effectiveness of the governmental intervention will impact the scenario. The government can reduce severe consequences for the companies and help them to prevent corporate cash crunch. The economies which were weakened way before the pandemic such as Spain, Greece and Georgia, will have hard times to re-boost economic cycle.
So, to summarize how can the government help listed or/and big companies which have a systemic effect on the financial market. One proposal is to defer tax for these companies or the second option is to provide lump sum money to inject in the business operations to avoid liquidity crises. The choice between these two should be made by weighing the costs and benefits. The government should calculate which will be beneficial for companies and which will be less costly for them. However, making quick decisions only based on the low-cost offers is not the wisest step to make in the pandemic times. The companies are a vital part of the country and without them the economy will suffer. So, the only correct way out of this situation is reasonable cooperation between the government and the business sector.
Baldwin, R and B Weder di Mauro (2020), “Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes”, CEPR Press VoxEU.org, 18 March.
De Vito, A and Gomez, J (2020), “COVID-19: preventing a corporate crash crush among listed companies”, 29 March