Reserve Bank ‘should set up cheap loans to save firms’

The Covid-19 crisis is not only causing business interruptions and putting many small and medium-sized enterprises at risk of imminent collapse, it will also result in an enormous liquidity crisis which, in turn, will cause large-scale job losses.

As a result, the government needed to ensure the SA Reserve Bank offered cheap loans to the banks, a finance expert said.

Professor Philippe Burger of Free State University said that in SA and elsewhere, some larger corporations might have the financial reserves to serve as a cushion for a while, but others did not.

“As a result, liquidity crises threaten to turn into solvency crises that could put many companies out of business, causing large-scale unemployment,” Burger said.

“While the health shock might be temporary [albeit massive] it could have long-lasting economic implications if company and individual balance sheets deteriorate severely [or worse, are destroyed due to bankruptcy].”

In an effort to remain solvent, businesses would start laying off employees, causing a large increase in the unemployment rate.

A three-week standstill in production would deprive many companies of almost a month’s income.

“If the measures announced in the US, EU and the UK [to assist firms in distress] are anything to go by, much more may be needed in SA. The R30 billion package put together by government represents about 0.6% of gross domestic product, falling far short of other countries’ efforts.

“SA’s fiscal position is in such a precarious state that it will not be able to provide a fiscal stimulus similar to the US and UK.”

President Cyril Ramaphosa recently announced R500 million of direct support for small and medium-sized enterprises (SMEs) and a further R200 million for SMEs in the tourism sector. A sum of R30 billion was reserved for unemployment insurance and the Temporary Employer and Employee Relief Scheme for companies unable to pay their employees as a result of the lockdown.

In addition to Finance Minister Tito Mboweni’s series of tax relief measures, the Bank reduced the repo rate by 100 basis points.

Burger said SA’s public health system was much weaker than health systems in Europe and the US [even when adding private health capacity] and the crisis was overwhelming the health systems in many of these countries.

This meant SA’s health budget would put more pressure on the fiscus soon [within days and weeks]. “Mboweni has even mooted the possibility of borrowing money from the World Bank and IMF,” Burger said.

Fitting existing buildings for hospital beds and buying respirators, medicines, test kits and other items would require urgent attention given the exponential rate at which the disease can spread.

Burger suggested the bulk of support would have to come from the monetary authorities in the form of quasi-fiscal measures.

He said the Sarb and banks should set up a cheap loan system, whereby the Reserve Bank provided low-interest loans to banks, which the banks could use to extend low-interest loans to distressed businesses.

– ericn@citizen.co.za

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