Thousands of SMEs on the verge of collapse

By Prof. Enrique Soriano

Family owned and managed enterprises in the Philippines, as in most countries around the world, are the engines of the economy. As of last count micro, small, medium enterprises (MSMEs) accounted for up to 99.6 percent of total businesses registered. The sector also contributes more than a third of the country’s gross domestic product (GDP) with 36 percent of the total GDP. Currently, there are 4,769 large enterprises, 106,175 small enterprises, 4,895 medium enterprises and a whopping 887,272 units of micro businesses representing mostly family owned enterprises. It is important to note that they account for up to 62% of employment across the regions.

In a recent interview, Labor Assistant Secretary Dominique Tutay shared an alarming trend. She said around 3.2 million workers, including overseas Filipino workers (OFWs) will stand to lose their jobs. The Department of Labor and Employment (DOLE) expects millions of employees displaced in the coming weeks as 78 percent or 79,550 of the 102,000 establishments affected by Covid-19 declared that they would be temporarily closed for six months while the remaining 22 percent or 22,440 companies are under flexible work arrangement. “What we fear is slowly becoming a reality. Those establishments that reported to us their flexible work arrangement or temporary work closure have already sent feelers that they might close permanently because of the huge effect of Covid-19 in their operations. That is what we don’t like to happen, that firms on temporary work closure will become permanent closure. We are talking here of 1.9 million workers from the formal sector,” According to Trade Secretary Ramon Lopez, over half of the 998,342 (MSMEs) had to temporarily close due to the coronavirus pandemic. More than 525,000 or 52.66% had to shut down when the government imposed a strict ECQ over most parts of the country in a bid to mitigate the spread of COVID-19. Around 124,000 or 12.5% had limited operations while 350,000 or 35% were able to continue running their business amidst the lockdown.

With the numbers unfolding, the MSME sector is expected to suffer the brunt of this economic disruption. A recent study of 200 SMEs conducted in March by my consulting firm, W+B Group showed that 60 percent of the companies have seen their income drop by more than 50 percent; another 25 percent reported a 30 percent to 40 percent drop. More than half of the companies surveyed reported that they could only stay open for another month with their current cash flow, 30 percent of these owners shared that they can still make it up to three months, and less than 10 percent can still continue operations for more than six months. The study also asked the owners to rank the major causes of financial pressure and 70% pointed to employee salaries and benefits. Rent and loan payments ranked second and third as the other causes for stress.

With all these grim figures being reported both from the government agencies and our own research, there is no doubt that the hardest hit sector belongs to the MSME sector.  The severity clearly points to the damaging impact to these businesses since large firms are scalable and generally more resilient in times of crisis. From all indications, the lockdown proved one thing, that the cure is worse than the disease. Figuratively, restricting movements and halting economic activity produced a worse net result over virus containment. The two and half month lockdown was meant to flatten the curve. As a matter of fact, it was one of Asia’s most aggressive COVID-19 responses that affected more than 60 million people across most regions. But it resulted in huge economic losses, a plunge in consumption, slide in factory output, spike in unemployment and the slowdown of most pillars of growth.