Quarantine and business: results of three weeks
The duration of quarantine in Ukraine crossed the mark in three weeks. It would seem that restrictions are not so long, but the whole country felt a powerful blow inflicted by COVID-19 to the national economy. Let’s consider in this article the catastrophic figures of lost workplaces, decrease in profit by 50 -75%, precomatous state of small business and the taken measures of the government which should save a situation.
According to the results of the study of the European Business Association, 18% of small enterprises will not survive quarantine consequences and will be closed forever. In other words, every 5th small business will not be able to overcome quarantine. Beauty salons, hotels, travel companies, event agencies have been closed for three weeks, and according to the estimates of restaurateurs 30% of catering establishments will not open their doors to new visitors. Owners and managers predict that the resumption of cases will take at least six months, and a decrease in income during 2020 on average will be 50%. At the same time, 28% of companies surveyed expect a drop in revenues by more than 60% during the year.
All this means that many Ukrainians lost their jobs or were sent on unpaid leave. As reported by Hennadii Chyzhykov, the President of the Chamber of Commerce and Industry of Ukraine, according to official statistics, in Ukraine about 3,5 million people work in the informal sector, of which about 1 million are involved in the “quarantine” industries, and officially they employ about 2,9 million people. Having made these data, we receive figure of nearly 4 million of Ukrainians unemployed through quarantine.
Specialists of the Union of Ukrainian Entrepreneurs conducted their own study of the state of business in different regions of the country, the results of which were reflected in the following data:
- 51% of the surveyed companies are able to hold out in quarantine for another month maximum;
- every fourth company will withstand two or three months of work in such conditions;
- 6% have already closed their business (mostly small and medium-sized enterprises).
Only 3% of respondents indicated that their business can work for a long time, but for this it is necessary to implement a number of conditions, in particular, to introduce rental holidays and revise their own business models.
If we talk about a diagnosis that can be put to different categories of national business after three weeks of isolation, the picture looks like this.
As expected, microenterprises are quite bad things — the owners note the loss of profits at the level of 90 -100%, most of them will not be able to resume their activities. In small and medium-sized businesses, the head hurts due to loss of income at the level of 25 -50%, and this is with a staff reduction by 10 -25%. Big business feels better, its losses are kept at around 10 -25%, however, in case of continuing quarantine, this figure will have to be supported by a reduction in the number of employees by about a quarter until the end of restrictive measures.
The banks also felt the quarantine blow, but their troubles came, as they say, from where they were not expected — borrowers were strongly reassured by the law prohibiting creditors to charge penalties and fines on consumer loans to natural persons (Law No. 3220, adopted by the Verkhovna Rada on March 17, 2020). As a consequence, current payments on loans instantly fell by 50 -60%. The situation has improved slightly after the contact centers of banks began to call customers and communicate with them on the need for restructuring or credit vacation. Payments grew by about 15-20% after such a “maneuver” . However, banks and financial companies still have not received stable loan repayment at its pre-outbreak level.
It remains only to guess whether the banks have their own financial resources to withstand the fall of payments on loans and at the same time continue to paying off deposits in a timely manner and in full. However, sector experts say that, as banks’ capitals have increased greatly after the 2014-2016 crisis, the banking system of Ukraine is able to withstand such a shock. This is also confirmed by the results of stress testing of the NBU for 2019. But do not forget that no one in the country has an idea of how the coronavirus epidemic will evolve.
What has already been done?
In addition to a number of tax exemptions and benefits adopted by the government to save business and support the population, which we wrote about in another article, on April 13 at an extraordinary meeting, the government adopted a whole draft law “On Amendments to the Law of Ukraine” On the State Budget of Ukraine for 2020“ dated April 11, 2020, No. 3279-d”. Its key goal is to create the COVID-19 Coronavirus Response Fund and its consequences for the quarantine period and within 30 days from the date of its completion.
By means of the Fund the following will be sponsored:
- purchase of goods, works and services, including the purchase of medical services under the program of state guarantees of medical care of the population;
- additional payments to the salaries of medical and other employees directly involved in measures to eliminate COVID-19;
- additional payments to certain categories of workers providing livelihoods of the population for the period of struggle with the spread of the disease;
- provision of financial assistance to citizens, including elderly people, due to the negative consequences of the spread of COVID-19;
- one-time cash assistance to members of families of medical and other health care workers who died due to COVID-19;
- provision of a transfer to the Pension Fund of Ukraine;
- financial assistance of the Social Insurance Fund and the Social Insurance Fund of Ukraine in case of unemployment.
The economic forecast for 2020 announced by Prime Minister Shmyhal, already twice worsened by the politician himself, is still considered by banks to be too optimistic. Bank of America on April 2 said that Ukraine’s GDP decline is estimated to be 5,6%. Analysts of Ukrainian banks are also confident that we will feel the decline in GDP already in the first quarter. And although all forecasts differ from each other, they come to one point under the ‘pessimistic’ scenario — minus 10% in annual terms. According to the Ukraine COVID-19 Business Impact Survey conducted by the American Chamber of Commerce, 65% of Ukrainian companies will not be able to fulfill their annual business plans. Anyway, the minimal losses we had hoped for back in mid-March can be forgotten now.
We have now come to the point from which the authorities should treat the measures taken with increased caution and attention. Thus, exemption from land and real estate taxes is an advantage for entrepreneurs, but it can hit local budgets, depriving them of an important source of income amid problems associated with the coronavirus epidemic.
Attempts to make hryvnia borrowings can result in high inflation, that is, formally people will receive money, but in fact only become impoverished, because they will be able to buy much less.
If quarantine is extended until the end of May, most small businesses will have to self-liquidate. Catering establishments will feel it especially acutely.
However, this scenario is marked as “pessimistic”. The working scenario at the moment is a gradual exit from the lockdown in May. This was stated by the head of the government. He also noted that the plan for the country’s return to “normal” includes the completion of the 2019-2020 school year, the resumption of public transport, but under the new rules, free visits to recreation areas, etc. However, the face mask regime will continue.