Governance and public sector management, Health, Industry and trade

Rethinking the impact of the lockdown on micro, small, and medium-sized enterprises in the Philippines

Rethinking the impact of the lockdown on micro, small, and medium-sized enterprises in the Philippines

The National Capital Region (NCR) and four provinces in the Philippines have returned to enhanced community quarantine (ECQ) since 29 March 2021 due to surging cases of the coronavirus disease (COVID-19). The ECQ is the strictest measure for prohibiting the movement of people for nonessential purposes and strengthening curfews. The Philippine government moved to the ECQ, or lockdown, to contain the spread of COVID-19 quickly after the pandemic was identified in March 2020. It was implemented in the NCR and high-risk provinces from mid-March to end-May 2020, but general quarantine measures continued with different levels of stringency depending on the region. One year after the start of the pandemic, the prolonged quarantine measures, including the lockdown, have seriously affected the national economy and business operations. The Philippine Statistics Authority (PSA 2021) announced that the country’s gross domestic product contracted by 9.6% in 2020.

Two streams of business clusters created under the lockdown

While the lockdown has been an essential option for containing the pandemic, it has fatally damaged micro, small, and medium-sized enterprise (MSME) business, according to a survey conducted by the Asian Development Bank (ADB) in March–April 2020 (ADB 2020a). The survey found that more than 70% of the MSMEs surveyed (of a total of 1,804 valid samples) were forced to close their businesses relatively soon after the lockdown started. Most of the MSMEs that operated during the lockdown also faced a significant drop in sales and revenue (more than a 30% decrease from the previous month). However, regression analysis using weighted data from the survey (Shinozaki and Rao 2021) reveals that lockdown measures created two streams of business clusters: (i) contracting firms hurt badly by the lockdown and (ii) firm groups that benefitted from the lockdown. The first group includes manufacturing, transportation and storage, construction, accommodation and food services (including tourism), education, and human health and social works. The second group includes power and energy, information and communications technology (ICT), and real estate services.

As the ECQ included school closures, travel bans, and limited business operations, it immediately hit education and tourism-related sectors the hardest, slowed construction, and limited or shut down manufacturing production. These industries did not cut their workforces but quickly moved to internal cost controls (wage cuts) to survive during the pandemic. The financial services sector also cut costs by reducing wage payments. Transportation and storage, construction, accommodation and food services, and human health and social works also faced a lack of working capital immediately after the lockdown was implemented.

Meanwhile, the stay-at-home orders under the lockdown generated new demand for electricity and gas, Internet connections, and real estate services, creating a more favorable business environment in the power and energy, ICT, and real estate sectors than in other sectors. MSMEs operating in the power and energy sector were less likely to have no sales or revenue and also less likely to impose wage cuts. The stable demand for household energy use supported them. ICT-based MSMEs had relatively sufficient working capital during the first month of the lockdown, while MSMEs in the real estate sector largely benefited from the stay-at-home orders under the lockdown as their revenues were somewhat ensured.

Impacts of the lockdown on MSMEs differ by region, group, and firm size

The regression analysis (Shinozaki and Rao 2021) also indicated differing impacts of the lockdown measures on MSMEs by region, group, and firm size. MSMEs in the NCR were more likely to have no sales than those in the provinces. However, MSMEs with declining revenue were more evident outside the NCR, and provincial MSMEs were more likely to cut employees than those in the NCR. Trends in MSMEs’ wage payments and financial conditions also differed by region.

The lockdown immediately affected young firms (those operating for up to 5 years), resulting in zero sales and business closures. Longer-established MSMEs (those operating for over 31 years) maintained business during the lockdown but tended to lose revenue. Young start-ups faced a serious lack of funds for survival during the pandemic.

Women-led MSMEs faced more serious impacts from the lockdown in terms of sales and revenue than those led by men. They had more difficulty in raising sufficient working capital through formal financial services than men-led MSMEs, partly because of the lack of women owning immovable assets (land and buildings) as loan collateral (ADB 2020a). This serious lack of working capital contributed to greater losses in sales and revenue among women-led MSMEs.

Internationalized MSMEs were able to survive the first month after the lockdown more easily than domestically focused firms. MSMEs involved in global value chains had sufficient cash and savings to maintain operations and had better access to bank credit and funding support from their business partners (ADB 2020a). A relatively sufficient working capital helped internationalized MSMEs survive during the initial stage of the pandemic.

Overall, microenterprises had more temporary business closures, no sales, and no revenue compared with larger firms after the lockdown was imposed. This suggests differences in the ability of firms to cope with the impacts of the pandemic depending on firm size.

More targeted assistance yet fiscal sustainability required for government support measures

The Philippine government acted quickly to contain the spread of COVID-19, not only taking quick and responsive healthcare-related actions but also providing economic stimulus packages involving substantial government spending. The government’s large-scale socioeconomic strategy was launched in May 2020 and amounted to ₱1.74 trillion, or 9.1% of annual GDP. It covered emergency support for vulnerable groups and individuals, including wage subsidies, soft loans and credit guarantees for MSMEs, and cash assistance (ADB 2020b).

ADB also conducted a follow-up MSME survey in August–September 2020. At the time of the survey, Asian economies, including the Philippines, had gradually shifted to the recovery stage, but the devastated business environment had yet to recover, with continued sharp drops in demand and revenue. Employment conditions were mixed by firm size, but MSMEs started preparing for a new business environment under the new normal and began to adopt work-from-home arrangements. However, the working capital shortage in 3-6 months had risen at the time of the survey. This elevated the demand from MSMEs for further financial assistance from the government, especially for addressing loan repayments and tax payments.

In 2021, new coronavirus variants have been found globally. This has increased the uncertainty of containing COVID-19, requiring the further elaboration of a phased approach. Given the different abilities of MSMEs for coping with the pandemic and quarantine measures, the government should pay more attention to implementing policy measures that are differentiated by firm size, type, location, and sector and devising an optimal approach that neither impedes national revenues nor increases the budgetary burden post-COVID-19. Instead of subsidies, having more public–private sector coordination and a market-based approach would be worthy of consideration for business support programs. For example, the government could consider a business restructuring fund sourced by a special tax imposed on firm groups that benefitted from the lockdown and use it to rescue contracting firms that were hurt badly by the lockdown. The deterioration of banks’ balance sheets is another concern. Instead of capital injections to banks, the government could encourage banks to strengthen their self-funding such as through the issue of asset-backed securities based on MSME loan assets. Assistance for MSMEs to adapt their businesses to allow digital transactions is also a policy priority as traditional business models require physical and personal contact. Digital transformation is an inevitable action for MSMEs to survive given the potential third and fourth waves of the pandemic.

ADB is currently conducting a third MSME survey in the Philippines covering March–April 2021 to assess MSME business conditions 1 year after the pandemic. The findings from this survey will be incorporated in the forthcoming Asia Small and Medium-Sized Enterprise Monitor 2021.

Read the ADBI working paper related to this article here.
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References:

Asian Development Bank (ADB). 2020a. Asia Small and Medium-Sized Enterprise Monitor 2020 Volume II: COVID-19 Impact on Micro, Small, and Medium-Sized Enterprises in Developing Asia. Manila: ADB.
ADB. 2020b. The COVID-19 Impact on Philippine Business: Key Findings from the Enterprise Survey. Manila: ADB.
Philippine Statistics Authority (PSA). 2021.  PSA Releases Annual Revisions of the National Accounts of the Philippines.
Shinozaki, S., and L. N. Rao. 2021. COVID-19 Impact on Micro, Small, and Medium-Sized Enterprises under the Lockdown: Evidence from a Rapid Survey in the Philippines. ADBI Working Paper 1216. Tokyo: ADBI.

Shigehiro Shinozaki

About the Author

Shigehiro Shinozaki is a senior economist at the Economic Research and Regional Cooperation Department of the Asian Development Bank.

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