The Key Role of Liquidity and Possible Policy Interventions to Ensure It Amid COVID-19 Crisis
I cannot imagine any event in recent times that has impacted the corporate sector so intensely on a worldwide scale as has the corona virus (COVID-19) crisis in terms of macroeconomic supply and demand side shock. So what has been the blow on Indian small and medium enterprises (SMEs) and other firms?
 
Worldwide, many SMEs and larger corporations are now confronting unparalleled and phenomenal falls in revenues as country-wide lockdowns (that are indeed necessary) have been instituted to prevent or contain the spread of COVID-19 and safeguard the health of the general population. Many countries are yet to fully open up (as is India). 
 
The key question here is whether these companies, including the SMEs, have the ability to wade through and overcome these truly extraordinary circumstances and survive the long-drawn and uncertain impact of COVID-19. If not, then what policy measures could possibly salvage them out of the COVID-19 crisis? 
 
In the short-term, the COVID-19 crisis impacts corporate liquidity by denting corporate cash-flows significantly. Cash-flows have already become profoundly negative for many companies, and especially for those that have not been able to reduce costs commensurately, especially in the context of the huge fall in revenues. It is set to worsen, if there is no strong and immediate policy intervention.
 
A number of issues further compound this aspect. As a result of restrictions against commercial activity, many companies have not even been able to borrow against the existing inventories, let alone sell them. Trade credit has also stalled as companies have started deferring the making of due payments—this has further exacerbated the woes of the corporate sector and deprived it of an important lubricant, which is very necessary for smoothing functioning. 
 
Third, while it is normal to expect existing (institutional) credit lines to provide companies with the much required additional resources—often to meet short-run liquidity aspects—increasingly, banks and financial institutions (FIs) are reluctant to lend further to these companies as they do not find it worthwhile to put good money out in the current very uncertain and stressed environments. 
 
It is here that policy interventions could make a substantial difference.
 
First and foremost, it would be very appropriate for the respective central banks to intervene and ensure that 'bridge loans' are provided to all companies so that there is no further breakage in corporate cash-flows. This will help ensure that companies do not default on operating expenses, wages, salaries and short-term obligations. This is very, very critical to keep the engine of the economy running in good and lubricated condition. 
 
That said, let us not forget that such (exceptional) credit will unduly enhance corporate leverage, which, in turn, could possibly create solvency problems later on. But, let us leave that aside for the moment as companies have to survive to fight another day. 
 
Bridge loans, with sunset clauses can be guaranteed in part or full by the central banks (say from 60% – 90% as appropriate) through special purpose vehicles (SPVs) that can be capitalised in eclectic ways. These bridge loans can be made available through banks, non-banking finance companies (NBFCs) and alternative finance institutions including FINTECH companies, which are new kids on the block.  
 
Second, governments must provide subsidies for firms in the hardest hit sectors like aviation, hospitality, tourism, travel and the like. This must be conditional on these companies maintaining or reinstating employment, which, in turn, will ensure stable income for wage earners and prevent sudden lay-offs. It should also help prevent corporate bankruptcies. 
 
Of course, much of this will depend on how long the lockdowns last. Indeed, recovery of these subsidies is very much possible as in the case of the global financial crisis of 2008, when many large banks that owed their existence to bailouts by governments using tax payers’ money, eventually turned the corner and paid back the subsidies in good measure.
 
Alternatively, the subsidies could also be treated as quasi-equity and sold off at a later date, when these companies have turned the corner and become profitable. Remember, there is huge cost to recreating institutions with the right set of people and that is why governments must do all that they can to help companies) survive. 
 
The existing corporate infrastructure is far too valuable to discard as the trickle-down effects will be huge. And make no mistake, it cannot be rebuilt that easily again. This is a key lesson from the Great Depression of the 1930s as well as the 2008 global financial crisis. 
 
Third, we also would need ways to prevent the stalling of trade credit. For example, special schemes that can help corporates and SMEs dispose of their receivables or at least receive specialised credit against them, would be helpful and required here. Here again, there is ample scope for central banks to intervene. 
 
This would entail central banks, offering through an SPV, a specialized facility where certain short-run claims collateralised with certain types of assets can be rediscounted. This again could come with a specific sunset clause on when this scheme would come to an end as also other conditions to prevent free riding in common economic parlance. 
 
Without a doubt, corporate liquidity is more important than ever before as COVID-19 has caused brutal corporate distress for many companies and SMEs the world over. Before the spillover impact becomes huge and percolates to the entire global economy, it is imperative for central banks and governments to be bold, unconventional and take a key lesson from the 2008 global financial crisis—where many firms were brought back from the brink of disaster to succeed—and the same lesson is very relevant today. 
 
If institutions and people don’t survive, nothing will, and we will have to rebuild from scratch after the holocaust caused by COVID-19 is over.
 
(Ramesh S Arunachalam is author of 12 critically acclaimed books. His latest release in January 2020 is titled, “Powering India to Double Digit Growth: Five Key Steps To A Robust Economy”. Apart from being an author, Ramesh provides strategic advice on a wide variety of financial sector/economic development issues. He has worked on over 311 assignments with multi-laterals, governments, private sector, banks, NBFCs, regulators, supervisors, MFIs and other stakeholders in 31 countries globally in five continents and 640 districts of India during the last 31 years.)
 
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    Discretionary consumption will change in 2020 due to COVID-19: Morgan Stanley
    Discretionary consumption will change in 2020 due to COVID-19 as food, health, clothing, and shelter will take over high-end consumption in terms of lifestyle and adornment, Morgan Stanley said in a note.
     
    The COVID-19 outbreak, the current lockdown, and social distancing measures for the next few months will hurt pockets of discretionary consumption.
     
    "In our view, the COVID-19 outbreak will bring in a shift in behaviour of not just the consumer but also the businesses, and the lower-end discretionary consumption products could do better than the higher-end. One of the fallouts of COVID-19 is social distancing and, thus, indulgences will need to be more digital-driven than non-digital", it added.
     
    The report said that the COVID-19outbreak is going to change consumer behaviour – health, social distancing, and saving will be a priority. "Simply put, food, health, clothing, and shelter will take over high-end consumption in terms of lifestyle and adornment", the report said.
     
    Separately, the outbreak will make companies across the spectrum re-think their business strategy. Essential activities (e.g., travel) may become non-essential activity. Companies may re-think costs that are fixed in nature and convert them to more variable.
     
    In the last decade, discretionary stocks (such as Jubilant and Titan) have outperformed the Sensex by over 6 times given upgrades in the Indian household lifestyle.
     
    There is a consensus view that this story will continue to unfold over the longer term with rising per capita income. Nevertheless, over the next 12M, we think the ongoing Covid-19 outbreak will bring in a shift in behaviour of not just the consumer but also the businesses, and lower-end discretionary consumption products could do better than higher-end.
     
    "While Titan will likely find it challenging to weather the downturn, we think Jubilant is better positioned, underscoring the benefits of a modified business strategy and higher delivery sales mix", it said.
     
    QSRs will be among the first beneficiaries of the recovery in discretionary consumption after the sharp slowdown due to the nationwide lockdown.
     
    "We think the ongoing outbreak-related slowdown does not corroborate completely with any of the previous slowdown periods. While this is as global as the global financial crisis (GFC) of 2008-09, it is also as local as the Demonetisation in November 2016", Morgan Stanley said.
     
    In the current environment, job losses and an income slowdown (in an already tepid macro environment) will make high-end discretionary spend less likely. "We think Titan's business will slow given the macro headwinds, and the nationwide lockdown and social distancing will hurt its business even more sharply. Weddings that were originally scheduled from 1QF21 have now likely been postponed due to the lockdown, and social distancing measures will create uncertainty around re-planning, which usually starts one or two quarters before the event", the report said.
     
    It added that social distancing also works against Jubilant's business, but food is part of essential businesses and has not been shut completely. Further, QSRs are at the lower end of the discretionary consumption pyramid, enabling a quicker recovery cycle for Jubilant's business.
     
    "Our India economist expects GDP growth to slow to 0.5% in F21, a 40-year low in growth. Consumption growth is likely to follow this trend, particularly discretionary consumption due to income and job losses and consumer downtrading. While QSR demand and retail sales have slowed due to the lockdown, we expect recovery to pickup once the lockdown measures are eased but shopping mall visits may not see a pickup. Meanwhile, jewellery demand could be deferred for some time, in our view, due to social distancing", it said.
     
    "Chinese consumers are back on the streets, but they are still showing a propensity to avoid social and discretionary shopping activities. It has now been six weeks since the lockdown was eased in China", Morgan Stanley said.
     
    Discretionary and retail-based consumer categories were hit the most during the country's lockdown. Most of these categories have recovered to 60-70% by March (four weeks post the lockdown). In terms of offline channels such as restaurants, 90-95% of the stores have opened but traffic is lagging at 40-50%. Among restaurant categories, QSRs have seen faster recovery.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COVID-19: Indian States Resorting to Market Borrowings to Fund Increasing Expenditure, Says Report
    State government across India are at the forefront of the fight against the coronavirus (COVID-19) pandemic. They have the onerous task of effectively implementing the lock-down to contain the spread of the pandemic while also ensuring the proper functioning of the state machinery to meet the essential requirements of its citizens. With revenues witnessing a sharp drop due to the lock-down, states have been resorting to market borrowings to fund their expenditure, says a research note.
     
    In the report, CARE Ratings says, "The relief measures entail higher expenditure to be incurred by the state governments even as they are faced with a significant loss of income or revenues from the halting of economic activity. State governments have cumulatively borrowed Rs59,255 crores during April 2020, double that raised in the same month of year ago. There has been a rise in the cost of market borrowings for states in the month. The yields for the majority of states in April 2020 also rose from a month ago period."
     
    States have been resorting to market borrowings at a higher cost to meet their financing needs. State governments have cumulatively borrowed Rs59,255 crore during April this year, double that raised in the same month of year ago. In the past four fiscal years (FY16-17 to FY19-20), the state government market borrowings in April has ranged between Rs14,080 crore to Rs31,728 crore. Many states have already raised a sizeable portion of their permissible market borrowing, based on consent of Union government, for nine months of the fiscal year in the first month itself. 
     
    Kerala and Manipur have raised 44% of their permissible market borrowings for nine months of 2020-21 while Haryana, Odisha and Andhra Pradesh have raised between 33%-39%. Similarly, Tamil Nadu, Telangana, Mizoram and Uttarakhand in April 2020 availed 24%-28% of their nine-month borrowing limit. 
     
    "The increase in market borrowings of states was accompanied by a rise in the cost of funds in April 2020. Concerns of higher government borrowings, both by central and state governments, over and above the budgeted borrowings has led to an increase in the cost of borrowings for states despite the cut in interest rates by the Reserve Bank of India (RBI) and sizeable liquidity in the banking system. The yields for the majority of states in April 2020 rose from month ago," CARE Ratings says. 
     
    According to the report, Kerala has seen the highest increase in the cost of market borrowing. The weighted average yield for the state’s borrowing across tenures (10-15 years tenure) in April 2020 was 133 basis points (bps) higher than month ago. The yield of the 10-year securities was 93bps higher. About 11 states saw their yields increase by more than 50bps on a month-on-month basis in April 2020. The state-wise yield range and movement (Table 3) is reflective of financial stress being faced by the states. 
     
    The first auction of state government securities held on 7 April 2020 saw a sharp increase in the yields across states. There has been a moderation in the yields since then.
     
    To meet financial exigencies during the lock-down, the states could also be availing funds from the RBI ways and means advances (WMA) facility, given that the limit for the same has been raised (by 60%). In the past it has been seen that not all states and UTs have been seeking financial accommodation from RBI under this facility. During April 2019-Febraury 2020, 15 states and one UT did not avail WMA. Even some fiscally pressured states which have sizeable revenue deficits like Tamil Nadu, Rajasthan, and Maharashtra did not seek WMA from the RBI, CARE Ratings says.
     
     
    According to the ratings agency, even before the national shutdown since 25 March 2020, states across the country have been in various stages of lock-down. State governments have since announced various measures to mitigate the impact of shutdowns on various sections of society. These have predominantly been in the nature of relief measures to ensure subsistence for the most affected segments.
     
    With loss of revenues due to the shutdown of business and commercial activities being accompanied by an increase in expenditure towards relief measures, states are under considerable fiscal stress, CARE Ratings says, adding state governments have been reported to be delaying or cutting down its expenditure, in some cases even committed expenditure such as salaries and wages, reflective of the fiscal pain being endured.
     
    "This will no doubt have a sharp bearing on the finances of the states, many of whom were experiencing fiscal pressures even before the advent of the pandemic. The quantum of fiscal costs for the states is difficult to estimate given the evolving nature of the pandemic, the various stages of easing of the lock-down and the measures undertaken," it added.
     
    Till date, 27 states and three union territories (UTs) have announced relief measures in light of the lock-down. The relief measures have mainly been in the area of food relief and financial aid to the weakest sections of society. Assistance to migrants, benefits to front line workers, pension relief and relaxation or cut in tariffs and fees are among the prominent measures announced by the states. Most states and UTs are yet to announce economic relief or stimulus for affected sectors or measures for the revival of the local economy.
     
    States with pre-existing fiscal stress such as Andhra Pradesh, Rajasthan, Maharashtra Kerala and Tamil Nadu that have budgeted for sizeable revenue deficits in 2020-21 even before the lock-down have announced delays or cuts in salaries and benefits for government employees. Even states that have budgeted healthy revenue surplus for 2020-21 such as Odisha (Rs9,509 crore) and Telangana (Rs4,482 crore) have cut salaries for government employees. This, the ratings agency says, highlights the pressure on finances across states.
     
    CARE Ratings says, "With limited avenues available to shore up their revenues, state governments have been raising taxes on transport fuels. The fall in global crude oil prices enable governments to hike the taxes on these fuels without raising the prices paid by consumers, thereby limiting the gains of lower prices to consumers. Assam, Meghalaya, Nagaland and Haryana have hiked fuel tax in recent days. In the first nine months of 2019-20, the taxes and duties on petroleum products contributed Rs1,59,144 crore to the exchequer of states." 
     
    "States have been seeking a central government relief package and an amendment to the Fiscal Responsibility and Budget Management (FRBM) Act to enable them to undertake increased market borrowings. The states are to undertake Covid-19 related relief measure for a certain duration of time even as with revenue shortfalls. This would increasingly strain their financial position and this would inevitably result in a cut in their capital outlays, which in turn have implication for future growth," the ratings agency concludes.
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    COMMENTS

    Ramesh Popat

    7 months ago

    Steep rise in petro prices just now
    by
    10-13 rs

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