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Opinion – The aftermath of COVID-19 on SMEs and the local economy

[Opinion by Professor Jean Chen, University of Macau Faculty of Business Administration Dean and Chair Professor in Accounting and Finance]

The global coronavirus pandemic is exacting a terrible human toll and menacing the world economy. According to a very recent report by OECD in March, China has recorded the first ever contraction in quarterly GDP growth rate, and the GDP growth rate in the second quarter is also expected to see a negative growth at approximately 1 per cent.

Besides, the first-quarter GDP growth rate of the euro area experienced muted growth at around 0.1 per cent. As of March 2020, the euro area suffered ‘unprecedented’ collapse from the outbreak, and the second quarter growth rate is forecasted to see a negative growth at 0.3 per cent. Nevertheless, the outbreak has shaken financial markets.

Firms Shut Down and Unemployment Rate Raises

A coronavirus pandemic has presented major disruptions for global business, and the economic damage is mounting across industries, especially for SMEs. According to an OECD forecast on 27 March, 2020, the direct impact of the initial lockdown significantly reduce the optimal level of supply by 10 to 25 per cent, with the optimal level of demand dropping further by around 33 per cent. On the supply side, companies experience a reduction in the supply of labour.

Various countries implementing necessary quarantines and social distancing practices to prevent the spread of the outbreak have severely affected the capacity utilisation rate. On the demand side, the dramatic fall in demand has pressured the firm’s ability to collect revenues, and most SMEs have perceived unprecedented losses. As a result, it severely affects a firm’s daily operations, which could directly cause a liquidity shortage. In addition, some consumers experience loss of income, fear of contagion and heightened uncertainty, which in turn changes consumer behaviour.

Overall, the global pandemic has presented a severe impact on SMEs compared to large companies. The contraction of the economy has slowed down the cash flow velocity, which presumably has a direct impact on SMEs. The Great Lockdown and social distancing practices have resulted in a substantial fall in demand, and hence, many SMEs are insolvent. This pushes up the unemployment rate and further reduces willingness to spend.

The economy is said to enter a depressing loop. The OECD has conducted a survey of 54 countries, and results show that more than half of the SMEs have already faced severe losses in revenues, with many of them having only a few months of reserves to withstand the outbreak. The coronavirus pandemic has hit SMEs involved in the tourism and transportation sectors hardest, as well as those which are closely related to large firms in tourism, transportation and service sectors.

Some Sectors Outperform During the Outbreak

In terms of macroeconomic view, OECD conducted a survey of 54 countries in March to examine the measures that are implemented by the various governments during the outbreak.

In short, these policies include an increase in spending in the public health sector; tax relief, tax cuts, tax holidays, tax incentives, tax rebates and temporary universal income to households, cash grants to firms, cutting interest rates, launching the QE program and lending schemes, plus special measures to support the self employed, ranging from providing sick leave payments and unemployment benefits to lump-sum subsidies.

Obviously, these measures can help to mitigate the economic damage due to the global pandemic, and might be able to help the SMEs to a certain extent. However, we must reconsider what changes will be long lasting when the global pandemic ends.

As far as we are concerned, there are two upcoming challenges. Firstly, is it necessary to change the industry focus? Should we consider whether these changes are short-term or long-term in perspective? Secondly, we should find a way to diversify our economy by actively exploring new markets.

In other words, how can we take advantage from our existing major industries, such as gaming, services, restaurant, and tourism industries to further enhance business diversity? It is time to reflect upon the current situation and take actions to adjust government policies and business strategy, and operations from a long-term perspective. Those industries which have survived during this global outbreak are the most likely to continue expanding their business, and they might become the industry leaders over the next ten years.

Although the global pandemic is menacing the world economy, we still find some business sectors outperform during the outbreak, and they have succeeded in expanding their business rapidly. For example; the Chinese medicine healthcare product manufacturers in the pharmaceutical industry, supermarkets in the retail industry, Hi-tech and telecommunication industries (e.g., Zoom, Tencent, MS Team, Microsoft Office365), Internet publishing and broadcasts, E-commerce and digital banking, online teaching, learning, and meeting platforms.

Support Enterprises to Find Alternative Markets

How Macao’s SMEs can get rid of the economic damage? And how Macao’s SMEs position themselves to diversify their economy? Even though SMEs are able to switch into different industries given their size, it could be unrealistic and difficult to make such changes within a limited time.

Therefore, it would be feasible to support the SMEs to explore new markets and operation models to consolidate and enhance their competitiveness in times of unprecedented challenges. During the global pandemic, we find a surge increase in the use of the internet to take orders, which has presumably promoted the development of E-commerce. Moreover, the coronavirus outbreak has forced many people to work from home, the sudden change in working behaviour provides opportunities to promote digitalization, and remote offices are likely to be in the mainstream of development in the coming years.

The Chief Executive’s 2020 Policy Address shows that the government has formulated long-term policies with a more structural way to support SMEs adopting new technologies and practices.

These aim to enable them to strengthen their post-crisis competitiveness and ability to address the challenges posed by megatrends. There are at least three aspects which allow SMEs to sustain their developments.

Firstly, the policy supports SMEs to explore the new alternatives. Secondly, the policy supports the development of digitalization and remote office working. Thirdly, the policy supports innovation and training of the workforce. These policies are of particular importance since SMEs have limited abilities to adapt to new alternatives.

It is obvious that the global outbreak has brought significant challenges to societies, businesses, and people’s livelihood, while it also brings us opportunities. We hope that Macao’s SMEs can gauge the opportunity and actively search for new business models, explore new markets, keep pace with the times and achieve sustainable development in their further cooperation with the Greater Bay Area.