The UAE is faced with a singular and systemic threat. The current crisis is completely dissimilar to that of 2008, which was one afflicting the financial system, with knock-on effects on economies. The corona crisis will be felt on the entire economy, as with every single country, with serious knock-on effects on the financial system. The already deleterious effects of low prices have elided with a serious health threat to produce a full-blown crisis to all nations, especially those heavily dependent on oil exports.
The 1st stage of the phased effects of the virus will be one of a severe liquidity crunch brought on by a crash in sales and collections, fear, a desire to hoard cash and so on. The 2nd more serious effect will be on the solvency of businesses and individuals, and this is where the true threat lies. The solvency or viability of businesses will be determined by their ability to weather the storm, the duration and ferocity of which is impossible to predict now; and on how quickly demand returns. It is therefore on the demand side that the real key to recovery lies, and it is the enormous difficulty of addressing this that is the real challenge to government.
Boosting demand across the board is the key to catalyzing recovery. This will necessitate depositing cash into the hands of individuals as well businesses, as only hand-outs (or subsidies) can compensate for the collapse of demand (and therefore of jobs, salaries etc.). The extension of loans to people or businesses will buy a bit of time, and not solve the real problem.
The time that is purchased by the extension of loans, liquidity etc., will be used by businesses to attempt to revive and haul themselves to the road to recovery. Again, loans can be given only to those that are credit-worthy and have adequate prospects of survival. However, who is to assess that? Deferrals of loan repayments to existing borrowers is fairly simple, but what about the thousands of SMEs that operate with no borrowings, purely dependent on equity and cash flow to manage their business?
Therefore it comes back to the ineluctable conclusion that the longer-term solution will be permanent grants to people and businesses, especially SMEs, to stave off a wave of bankruptcies. This option, however, is fraught with numerous difficulties for the UAE and the subject of another article.
The immediate need of the hour, therefore, is the immediate injection of liquidity into the system, and, of the removal of obstacles preventing the free flows of money in the system. It will therefore require a concerted effort on the part of government and not just the Central Bank and the banking system. The government must therefore call upon all systemically important stakeholders to join in the effort to ease liquidity.
First, all major stakeholders need to be identified – those that have will have maximum multiplier effects on the economy, such as government departments, government owned and related entities and large family owned groups with access to vast bank lines. These then can be asked to do several things, such as – release all overdue payments to vendors, shorten their creditor payment periods, agree to sign agreements to assign their payments to lenders (so banks can boost receivable financing) and so on. This last point is important – one is hard pressed to understand the inexcusable reluctance of large entities to have done this till now.
Second, the government should consider granting SMEs zero percent VAT for a period of 3 – 6 months depending on their business – a 6 month holiday will be most relevant to trades like travel, F&B, retail and so on.
Third, banks should be directed to start thinking beyond the immediate. A simple and fairly blanket approach to give all borrowers (across the affected industries) a 3 – 6 month breather on all obligations falling due to banks up to 30th June should be immediately executed. The CB should direct banks to then start working on what will unfold thereafter – what will happen or likely to happen once these extensions run out? Banks should get together with borrowers or trade associations and/or collectively, do a realistic forecast of business within each industry and be prepared. Instead, what is happening now is that banks are busying themselves dealing with extension requests as they pour in.
The reality is that banks are dealing with the situation on a bilateral basis, instead of coordinating a multi-bank approach for each client. The result – borrowers are being asked for varying degrees of information and have to answer panicky bankers at each institution, multiplying the effort in managing the situation. Multi-banked companies are facing a torrid time spending far too much time answering bank queries when they should be thinking of how to revive their flagging businesses.
This centralized approach should also involve the analysis and agreement on the industries that are most likely to be affected by the crisis and then further agreement on solutions in the longer run – which is the real issue that will hit the economy later this year. This will enable speedy assistance with minimal effort for all. There is an enormous amount of identical effort being put in at each bank – towards exactly the same end – this is useless replication of effort. The obvious answer is a coordinated and centralized approach – the UBF should step up to this.
Fourth, the UBF should engage with trade associations and proactively seek and obtain information and suggestions and channelize industry specific requests to lenders on a unified basis. This will vastly increase efficiencies in providing urgent respite to borrowers.
Fifth, government owned insurance companies like Etihad Credit Insurance should be asked to urgently extend both default and receivables insurance on a lenient basis, to SMEs and lenders to facilitate the easy flow of credit. Yes, this does mean the assumption of credit risk on the part of the government – there is little choice now.
Sixth, the delay of payments by every single business and entity has, over the past few years, become the norm. Non-payment of invoices goes completely unpunished and legal costs of suing a larger counterparty are prohibitive – especially for SMEs. The government should establish numerous small “fast track courts” to quickly rule and hand out immediate judgments against wrongful delays in settlement of legitimate dues. This in itself will release billions into the economy and prevent the selfish hoarding of cash.
Dearth of space prevents further suggestions being listed – there is no one universal solution, no heavenly panacea, this crisis will require hundreds of actions to be taken, some momentous some minor, to alleviate the pain of the economy, which is to see darker times in the months ahead.
