- Despite unprecedented fiscal and monetary interventions to cushion the effects of the pandemic, SMEs are currently operating in a very difficult and uncertain environment.
- The Central Bank is focused on ensuring appropriate supports are available for SMEs and expects lenders to provide individually-tailored supports to SMEs, including interim supports where the impact is likely to be temporary and other more permanent solutions where appropriate.
- In addition to the impact of COVID-19, SMEs are facing risks and challenges associated with the ending of the Brexit transition period.
Speaking at a Small Firms Association Webinar today, Deputy Governor of the Central Bank, Ed Sibley highlighted the vital role played by small and medium-sized businesses in the Irish economy. He also set out the Central Bank’s observations as to the effects of the pandemic on these businesses, including:
- SMEs are facing considerable financial strain in the current pandemic relative to larger businesses and households
- The shock to SME turnover has been large and is creating significant cash-flow challenges in some sectors
- Most SMEs have continued to access finance but new lending has declined
- There are challenges for SMEs which do not have an existing banking relationship or have greater indebtedness
- System-wide payment breaks offered by lenders provided important relief for many SMEs and individually-tailored solutions are now required from lenders
- A significant issue for some SMEs has been the extent to which insurance policies cover the business disruption caused by COVID-19.
Despite the resilient financial position of Irish SMEs before the pandemic, Mr Sibley discussed the considerable strain currently being experienced by these businesses, “We have estimated gross operating losses in the SME sector for the nine month period to year-end at between €10.3 and €11.7 billion. Some of the sectors with the largest amount of outstanding bank debt or greater default rates are more exposed to the shock from COVID-19.”
System-wide payment breaks provided important, immediate relief to SMEs early in the pandemic with over 11,000 SME borrowers or 21% of outstanding Irish SME loans still on an active payment break in early October. As these payment breaks now come to an end, Mr Sibley said “Lender support for borrowers is moving from a system-wide approach of one-size fits all payment moratoria to an individual approach where the support should be tailored to the individual borrower’s needs. The Central Bank expects lenders to work with borrowers to help assess the impacts of the pandemic on current and future cash flows and to provide interim supports where those impacts are considered temporary and more permanent solutions where the debt servicing capacity has been materially reduced.”
In addition to the risks posed to SMEs by the pandemic, businesses also face risks and uncertainty from the ending of the Brexit transition period. Mr Sibley said, “It is likely that the interaction of Brexit and COVID-19 will be different across sectors. With some vulnerable sectors, including tourism, accommodation and food services, already experiencing large demand shortfalls, it is possible that losses that would have been triggered by Brexit have been brought forward due to the impact of COVID-19. This may not be the case in other areas, with sectors, such as agri-food, more exposed to the larger negative shocks from Brexit.
Reflecting on the potential longer-term effects of the pandemic, the Deputy Governor said “We do not know what the immediate and longer-lasting effects will be on consumer behaviour and economic activity; the damage to the productive capacity of the economy and the pace at which economic activity normalises. What we do know is that economic recovery will come when the health emergency abates through the containment of the virus. And that SMEs will be central to that economic recovery in Ireland.
- The Central Bank’s estimates for losses in the SME sector for the nine month period to the end of the year are based on the Central Statistic Office’s “Business Impact of COVID-19 Survey” (BICS) – https://www.cso.ie/en/methods/surveybackgroundnotes/businessimpactofCOVID-19/