A Post-Coronavirus Recovery in Asia—Extending a “Whatever it Takes” Lifeline to Small Businesses
IMF Blog, April 23, 2020
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- Authors: Kenneth Kang
- Published: April 23, 2020
Overview of the shock and policy response
- Asia was hit hard by the first wave of the coronavirus: sudden stop in activity struck households and firms simultaneously—first in China, then elsewhere in Asia, and now globally.
- Policymakers responded swiftly with aggressive spending to support the medical response and vulnerable households and firms. Central banks took swift actions to expand liquidity.
- A new, more dangerous phase of “economic deleveraging” may follow as firms struggle to repay loans and pay workers amid a sudden collapse in cashflow and tighter credit.
Vulnerability of small and mid-sized enterprises (SMEs)
- SMEs are at greater risk in the deleveraging phase and are concentrated in services hardest hit by containment and social distancing measures.
- Compared to large corporates, small firms:
- have thin cash buffers;
- are more leveraged;
- rely mainly on short-term loans and retained earnings.
- Some private surveys suggest that small businesses, as the major employers, may have less than 3 months of cash left, raising the specter of a wave of defaults and a surge in unemployment.
- Banks face pressures as large firms access credit lines to boost cash reserves; banks may prioritize largest customers, leaving smaller firms underserved.
Assessment of current policy measures
- Approaches so far in Asia include encouraging loan rollovers through regulatory forbearance and guarantees, and providing cheap lending to banks.
- These measures will help but may not be sufficient given:
- banks’ capacity constraints and reluctance to take on additional risk;
- lack of new working capital to keep workers employed as cashflows dry up.
- Only the public sector has the means to extend a large-scale temporary lifeline in the face of this unprecedented shock.
Proposal: an economy-wide “working capital bridge loan” via a special purpose vehicle (SPV)
- Objective: provide a temporary lifeline that goes beyond current policies to maintain jobs and incomes and prevent a prolonged depression.
- Structure and eligibility:
- A government-created special purpose vehicle (temporary public entity) would facilitate new working capital loans to small and mid-sized firms.
- Eligibility limited to firms that can show they were sound borrowers last year but are now experiencing significant revenue declines from the virus.
- Firms would apply to banks for a new 3-year loan covering working capital needs and payments (interest and principal) falling due over the next 12 months.
- In exchange, firms would commit to maintain employment and avoid dividends or share buybacks.
- Funding and risk sharing:
- The central bank would provide funding to the SPV to purchase these new “working capital loans” from banks, freeing bank capacity to lend now.
- The central bank would be secured by SPV assets and receive some loss protection from the government’s initial equity investment.
- Banks would retain a remaining portion of the loan to keep “skin in the game.”
- The SPV would manage losses by maximizing recovery value and have banks collect on defaulted loans through foreclosure and bankruptcy.
- Adaptation to different financial systems:
- In bank-centered economies the SPV model applies directly.
- In economies with more-developed capital markets (e.g., Japan or Korea), loans could be securitized and tranches sold to institutional investors for broader risk sharing with the private sector.
Fiscal-monetary interactions and alternatives
- Direct government budgeting for widespread loan rollovers faces constraints: many emerging markets in Asia have limited fiscal space.
- Some countries are considering commercial banks or central bank direct financing of extra fiscal spending (direct monetization).
- A risk-sharing mechanism using central bank funding flexibility and fiscal loss protection can:
- achieve broad working capital support;
- preserve central bank independence and banking soundness;
- complement monetary policy and enhance economic benefits through greater lending.
- Advanced economy precedent: the U.S. Treasury and the Federal Reserve’s Main Street Lending Program used SPVs with public risk sharing to support distressed companies.
- Emerging markets in Asia could adapt this playbook to “do whatever it takes” to rescue their economies given the exceptional measures required.
Kenneth Kang, April 23, 2020
