Companies fight for survival as pandemic ravages income

16th April 2020

By Martín Trombetta

Companies fight for survival as pandemic ravages income

The paralysis stemming from the coronavirus pandemic put self-employed and unregistered workers at serious economic risk from the start, as they were left with little to no income from their usual jobs. But the scope of the problem could be much bigger than that, as registered workers are now also facing the problem of their employers getting into financial trouble, potentially lacking the cash to continue paying their wages as the lockdown continues.

There is little doubt now that 2020 will be the hardest year for the Argentine economy since the 2001-2002 crisis. The government is working with estimates of an 8 percent economic recession this year, but the crisis will strike even more strongly in sectors directly affected by the lockdown including several industries, tourism, commerce and restaurants.

This week, the Argentine Medium Enterprise Confederation (CAME) reported that sales in Small and Medium Enterprises (SMEs) fell by a brutal 48 percent in March, with sectors such as clothing, furniture, auto parts and toys suffering the greatest losses, as they can barely make any sales at all, in a country where e-commerce is still far from massive. The Argentine Industrial Union, while agreeing with the lockdown, has also said that only 20 percent of the sector is currently functioning.

The payment chain

For SMEs in particular, this situation is nothing short of dramatic, as their operating margins are very small. Facing payments to providers, taxes and monthly payrolls is next to impossible for companies that are only selling a small fraction of their regular production, let alone for those that cannot even open their shops. Most SMEs cannot make it beyond 60 days without revenues, while the quarantine is already planned to last for 35, and likely to last for longer.

In a normal context, an income drop of this magnitude would quickly trigger bankruptcy procedures. But the pandemic is certainly far from normality. Many businesses are probably talking over their payment schedules with providers (they do not need many new supplies at the moment anyway), while the AFIP tax bureau is known for tolerating some delays in times of crisis. The taxman is also charging interests below inflation on tax debts, at 2.5 percent per month, making it the market’s most generous lender. Labor costs might be the toughest challenge, which is why a great deal of companies are negotiating wage reductions and suspensions.

In this context, SMEs might not formally go bankrupt, as debtors are unlikely to push for the procedure in a crisis that is likely engulfing them as well. But companies might simply stop paying and start accumulating debts. In other words, the payment chain will be broken, eating into firms’ working capital and making the recovery even harder once the lockdown is lifted (or softened). It is no wonder that almost half of Argentina’s SMEs are not able to cover outstanding checks, as stated in CAME’s report. Some companies have sadly made it to the Central Bank’s register of debtors for the first time, after decades of flawless financial behavior.

Surviving the lockdown

Techint, one of the largest companies in the country, has made the headlines after firing almost 1500 employees. It has also agreed a 30% wage reduction with the steelworkers union in exchange for job stability, an idea that is being discussed in other sectors such as the auto industry. If things are that hard for big multinationals, how can small businesses be expected to get by?

For some sectors, 2020 can already be considered a lost year. The entertainment industry, including cinemas, theaters and cultural and sport events, will most likely be closed for months. The same is true for tourism, restaurants and long distance transport. All these sectors are already implementing strong personnel reductions as well as wage cuts, especially for executives and management. “No inflation adjustments, no performance bonus, take a wage cut and be thankful you can keep your job” is the general policy, sources in the sector told The Essential.

Industrial manufacturers are somewhat more hopeful. Those that have been listed as exempted from lockdown are getting by and those that have not are trying to get there. Some businessmen point out, however, that regulations are ambiguous and implementation has been quite sloppy. Take the furniture industry, which was not exempted in the original decree, was later included, but is still not authorized to deliver its goods, so they can produce and even sell them, but not actually bring them to their customers. The fact that some industrial products are in high demand (such as alcohol, face masks and respirators) has created incentives for productive transformation. Some firms in the textile or chemical sector are changing the goods they produce from suspended activities to exempted ones—but, of course, that is often not possible and, even when possible, it is not without cost.

Finally, there is commerce. Some retailers are doing better than ever, as the fear of shortages has spurred demand for food, personal hygiene items and the like. There is not much else to spend consumers’ money on, anyway. But those that cannot make it to the exempted list by any means are in big trouble. Some are going for creativity, like the family-owned bookshop that offers free delivery or the healthy meal venue that is selling gift certificates to be redeemed after the quarantine. But it’s unlikely to be enough for those that are not already habituated to selling their products online or through the phone, so unions are already open to the idea of wage cuts for jobs to survive.

Emergency policies

The government is aware it will need strong economic help to go hand in hand with the lockdown to make it sustainable. On the labor side, the double severance decree was already in force since before the pandemic, while layoffs have also been made illegal for two months, which means companies will not be firing registered workers. But none of this addressed the financial crisis of the firms, so a series of new policy lines has been added over the last few weeks.

The AFIP tax bureau and the ANSES social security agency will be delaying payroll taxes for two months for more than half of the country’s companies, and many will even see them condoned up to 95 percent. Subsidies to pay a portion of wages will also be provided through the Productive Recuperation Program (REPRO).

Several cheap credit lines are also being offered to companies, at rates that range from 19 to 24%, well below yearly inflation, although this particular program is moving quite slowly so far as banks are skeptical of loaning to firms at risk and owners are also often doubtful of being able to repay when their income is close to zero.

Despite these efforts, industrial experts agree that some firm destruction is inevitable in this context and that it will be greater the longer the lockdown needs to be in place. It is evident no economy is prepared to deal with this kind of shock and walk unharmed, let alone one with high informality and costly regulations such as Argentina’s.

President Fernández said so himself in a recent interview, speaking about the false choice between public health and the economy. “I’d rather have 10 percent more poverty than 100,000 coronavirus deaths. This is a false dilemma. I know I have to protect SMEs and big companies too.” With all of Argentina’s economic limitations, there is no doubt that the management of the lockdown will be an extremely complex one.

Martín Trombetta

Martin Trombetta holds a PhD in Economics from Universidad Nacional de La Plata, a research grant at the CONICET institute, and teaches at the Universidad Argentina de la Empresa (UADE). His publications have focused on labor markets, income mobility, gender gaps and other topics.