Economists use cliffs to describe situations where something happens suddenly and dramatically, often unexpectedly – like falling off an edge. Cliff effect is the notion that relatively little separates a household or business firm from being in a healthy financial condition to deteriorating rapidly.
In the new vocabulary that has emerged from 2020, ‘COVID cliff’ refers to patients who seem to be on the mend and then get sick very quickly and are rushed to intensive care. Banks too have their COVID cliff: it’s what comes once the repayment moratoria on their retail and commercial loans are lifted in 2021, by which time governments would have also started tapering out their various measures of social and fiscal relief.
A study just published by McKinsey suggests that, in the months and years to come, the pandemic may see banks the world over lose €3 trillion in foregone revenue and €2.3 trillion set aside for potential loan losses. That’s €5.3 trillion bank income at risk of loss until 2024 during a period when the post-COVID economic recovery is expected to be running its course.
Unlike 2008, the pandemic is a crisis of the real economy not of banks, which are stronger and more resilient today. Nevertheless, they are a good barometer of the weather ahead. While an effective vaccine may signal the start of a rebound in terms of human health, corporate recovery is still a long way off. As governments and banks continue to extend their assistance and loan moratoria into 2021, it is critical that this does not go to prop up badly managed businesses – so-called zombie firms that seem healthy when, in fact, they are on life-support – at the expense of worthy enterprises.
Economies everywhere are suffering and some industries are at greater risk than others. For Malta, tourism and anything connected with it, media, entertainment and certain retail and consumer activities face unprecedented existential concerns. As stated by the Central Bank of Malta in a recent policy note, the return of regular air connectivity is necessary not only for tourism but also for exports and trade, to step up business productivity and to influence company location, investment and employment decisions.
There are no straightforward solutions and, taking tourism for instance, no government puts people back on planes or kick-starts holiday travel. What’s crucial is that healthy firms in affected industries need to also adapt to ensure their long-term survival.
The pandemic may see banks the world over lose €5.3 trillion in income- Marcel Cassar
So, what tactics and adjustments to their operating models should such firms consider? The experience from past crises and what I hear on the ground are probably the best guide. At the strategic level, firms should determine which products and services are vital to maintain ongoing cash flow. They should focus on those that are most likely to be in demand, maximising volume and profitability. And while online sales solutions have become trendy, these require careful planning and should be part of an overall digital strategy, not just an enhancement of a website or social media channel.
Another piece of advice is that cooperation with competitors or ‘rivals’ should not be frowned upon; indeed, we have seen some smart thinking which generated mutual gains for business firms previously seen as unlikely partners. Firms should also consider which assets, such as property, are locking capital that is desperately needed in the business.
Financial decisions mean that firms should consider carefully taking on new debt, on the contrary, and where possible, it may be timely to reduce bank borrowings or buy back bonds. Ensuring punctual collections from debtors, more efficient cash management such as online payments, renegotiating contracts, seeing which commitments can be deferred and strict control over stock levels are also important.
Other good practices include determining assiduously how resources should be best allocated or redeployed in the business, keeping costs lean. These are precious times to be used improving much-needed financial management and accounting discipline in our firms.
Avoiding the drop off the COVID cliff is everyone’s responsibility and no government can be the saviour of every situation. It was once said to me that ‘the business of any business is to stay in business’ and sometimes this means that hard management decisions have to be taken.
The companies that will survive and emerge the fittest are not the largest and oldest but those that adapt to match the changes around us.
Marcel Cassar CEO of APS Bank and former chairman, Malta Bankers’ Association.