Mortgage, Debt And Rent Holidays Will Help Businesses And Employees Survive.
Dr David Wilson 30/03/20
I’m reminded of a John Ralston Saul quote: “If economists were doctors, they’d be mired in malpractice suits.” Are you getting a little tired of commentators guessing, sorry “forecasting”, about how bad this is all going to turn out? I am. Solutions lie with our businesses and our innovators. A combined public, civic and private sector effort now will get us through. Dealing with complexity requires the best minds at the right time for the right task, working together. We need responsive institutions, a systems approach and adaptability. We need solutions.
So far Government has done all the right things in a Covid-19 health response. As Assoc Professor James Ussher has said here RNZ ‘NZ has a chance to eliminate Covid-19’ and Government may have set us on a path of emerging ahead of the pack.
Right now, though, its survival mode. Survival of viable businesses and employment relationships are critical. We need to throw our SMEs and innovators some lifelines. Government has said that it is talking to our large businesses, OK, hope that is more than Air NZ. That’s not fair, I know MPI and NZTE, for example, are working very hard to keep key exports moving in China and looking for other markets. Some of our larger businesses are retail groups, and I’m pleased MBIE has moved to widen the criteria for essential goods and services, this can lay the ground for further online commerce as we seek to recover.
So, here’s my starter for $300Bn (our GDP). I’m seeing the next year in terms of three phases for the economy; survival - recovery – rebound. Survival: well you can guess what that means in economic terms. Recovery, ideas flying around all over the place about that, it’s just that many have forgotten the first step. And, rebound, that’s about how we take this opportunity to diversify and strengthen our economy. These three phases do not have to be linear they will overlap and for some run in parallel.
Small business is big business. What I am hearing from businesses, and agencies on the ground is the outlook is dire and confidence low. Meanwhile the many ideas and policies being floated by the public sector are really recovery ideas; infrastructure spend, PGF re-allocation, fast-forwarding projects and government guaranteed business loans. Lockdown essentially nullifies many of these efforts and businesses must be ready to take up the opportunities when they can. Recovery planning can happen right now for those that know they can survive and can maybe take on more debt. But unless you have a strong balance sheet, and or market opportunities, taking on more debt is not going to be your first move. Survival is. We, therefore, need to ensure that viable businesses can survive and let the private sector know NZ Inc is behind them. Yes, many businesses will choose to exit, and they need to be supported through that, but many profitable businesses will also become collateral damage if we deliberate too long. That has extreme ramifications for society and the economy.
No cashflow with overdrafts and loans to service, suppliers, rent, tax and wages to pay is a recipe for disaster. International evidence suggests that most SMEs cannot last past three weeks with no income (high cashflow-dependent businesses like tourism, retail and restaurants even less), let alone a month. We need to act now.
Putting an economy on life support and expecting businesses to hibernate is expecting too much. And, it’s not a good strategy. You try it, spend normally and go without income for a month and see where that leads, that’s right you don’t just lose income you go backwards twice as fast. With a business that path is amplified because the stakes are higher; the domino effects to mental health, marriages, families, suppliers and employees can be catastrophic. Ask anyone who has been through liquidation or bankruptcy. Redundancy in the psychological literature is regarded as a ‘major life event’ right up there with marriage breakdown and deaths in the family, we should not take this lightly. I have heard some people, mainly those on public sector salaries, express a kind of Darwinian sentiment in that only the best will survive. Well, just like addressing Covid-19 through ‘herd immunity’, I don’t like the picture that paints in terms of collateral damage.
From an economy-wide perspective, it is way harder for new businesses to start up than for those with established relationships, clients and supply chains to recover. It just hurts less all round. So, how can we ensure that viable businesses survive on little or no revenue? Well, reducing their outgoings is a start. Incremental recovery tactics are others.
Usually the first to go are employees. This is a bad idea, as Sam Stubbs said here ‘now is the time for employers to keep faith with employees’. Businesses that will recover and rebound better will have kept their employees, their knowledge, their networks and relationships. Replacing them after the fact slows down and weakens recovery. After the Sars pandemic airlines took nine months to get back to pre-pandemic numbers and that reverberated throughout the tourism and hospitality industries. Covid-19 looks worse. The wage subsidy scheme is softening the blow for employers and employees in this respect, but it needs to form part of a wider business survival plan. Painful business closures, mass redundancies, high unemployment and a drawn-out recovery awaits inaction.
Many businesses, regardless of maturity, have debt to service, sometimes at quite high interest rates. Landlords will not be wanting to forgive rent as that’s their income, especially if they themselves have significant debt to service, and yet rent is one of the most significant costs for a business or those renting in the housing market.
Banks have a key role to play. Last week Government announced that they had negotiated mortgage holidays with Banks, to which my response was ‘great’, as it was one of the things I had called for earlier, ‘but the devil is in the detail’, and it was. What the banks have offered is not much more than what they would normally offer distressed clients; a mortgage holiday where interest accrues. This is a disgrace. A slogan with no substance. People are already distressed this just prolongs the pain and adds to it as interest will become principle at the end of the “holiday”. No, a mortgage holiday for distressed clients in these circumstances should be just that – a holiday, with no penalty.
The recent lowering of the OCR by 75 basis points to 0.25% had a similar response from retail banks, a small movement in floating rates. This is simply not good enough from our banking system in a global economic crisis. I seem to remember in 2009 the taxpayer underwrote banks in the fallout from the GFC; time to return the favour.
Demand is tanking as a result of Covid-19. This is far from normal; it is an unexpected exogenous shock. Yes, there are glimmers coming from a re-emerging China for our food exporters, and hopefully logs, but that will not stem the tide for much of the rest of the economy. Extraordinary times require extraordinary responses. That is why alongside the quick fiscal response that Government has put in place, the quantitative easing measures the Reserve Bank have announced, we need a business survival plan and our whole banking system to step up.
On several occasions, I have suggested that the Reserve Bank lower the OCR into negative territory. Economist Michael Reddell is suggesting negative 5%. This would not only allow banks to offer mortgages and business interest rates at, say, 0% it would give viable SMEs a debt holiday while they attend to a myriad of other commitments, and homeowners the chance to hunker down. If landlords get temporary reprieve in the cost of their debt, then rent holidays become viable.
Government needs to find ways to support business survival. The OCR, set by the Reserve Bank, is the main tool that addresses inflationary and recessionary pressures. It is not a panacea, but it is something we can do that will have an economy-wide effect quickly. Retail Banks will need to think about their social license to operate during this crisis and pass on any OCR drops to their customers, immediately. Businesses need to find ways to maintain employment and lockdown other costs.
We all know that in crisis there is opportunity, but this is not a normal recession or business cycle downturn. A debt breather for our businesses, landlords and homeowners may actually allow us to survive the storm. Let’s get survival sorted first, then we will have the breathing room to plan for recovery and beyond.
Dr David Wilson has been researching, teaching, consulting, advising and doing economic development for over 20 years. He is currently the founder of Cities and Regions Ltd an independent research consultancy, immediate past chair and director of Economic Development NZ, a member of the Independent Advisory Panel for the Provincial Growth Fund, chair of the Inclusive Growth Network Aotearoa and director of Be.Lab a passionate and successful social enterprise dedicated to moving people from disability to possibility. He was CEO of Northland Inc, Northland’s Regional Development Agency, from 2013 to 2019 and prior to that Director of the Institute of Public Policy at AUT where he designed and led the Graduate Diploma in Economic Development and was integral in the Metropolitan Auckland Project that led to Auckland’s amalgamation. He holds a BA in psychology and social policy, a Masters in Public Policy (with 1st class Hons) and a PhD in Regional Economic Development. He is a fellow of Economic Development NZ (EDNZ) and in 2018 received the EDNZ Distinguished Service Award.