INTERVIEW WITH MICHAEL GOLD, MANAGING DIRECTOR OF CRIMSON CAPITAL ON THE IMPACT OF COVID-19 ON SMES IN THE WESTERN BALKANS
Michael Gold is a finance, business, and technology expert with 44 years of experience, 29 years in the emerging markets of Central/Eastern Europe, Balkans, Africa, Asia, Latin America & former Soviet Union. He specializes in increasing access to finance and financial inclusion, innovation, entrepreneurship, competitiveness, privatization, foreign direct investment, Public Private Partnerships (PPPs), SME development & legal, policy & regulatory reform. His work has resulted in over $6 billion USD in debt and equity financing, foreign direct investments, privatizations and PPPs, and just in Southeast Europe, through the Crimson Finance Funds, direct financing of $70 million USD to over 1,400 micro, small and medium enterprises, including over 180 startups and early stage companies, resulting in over 10,500 new, direct jobs. He created and managed the Macedonia Business Resource Center which helped hundreds of SMEs become more competitive and generated over $95 million in new trade and investment. He helped found the ICT association of Kosovo (STIKK), helped found the Innovation Centre Kosovo (ICK), and helped design, structure and operationalize the Kosovo Credit Guarantee Fund (KCGF), which in its first four years has guaranteed over 180 million EUR in new loans to underserved populations and sectors, reduced collateral requirements and increased the average tenor of loans. He was the co-lead investment banker on the successful privatization of the Macedonia Electricity Distribution and Supply Company, securing a purchase price of 225 million EUR, firm investment commitment of 96 million EUR, and pre-privatization loan of 45 million EUR. He assisted with the Pristina Airport and Kosovo Route 7 Roadway PPPs and led the advisory team that managed the Czech Republic foreign investor privatization, resulting in the successful privatization and restructuring of over 200 major companies. Recently, he helped design and launch the new Business Accelerator UKIM (BAU) in Skopje, which is investing in innovative startups and early stage companies with strong market growth potential. Previously, Mr. Gold helped manage two major US university medical and technology research institutes.
Q. What impact is the COVID-19 pandemic having on SMEs in the Western Balkans? What problems is it creating for them? Which sectors have been hit the hardest?
A. The COVID-19 pandemic has had and will continue to have a huge negative impact on the Western Balkan economies, effecting all economic sectors, especially the SME sector. All six countries of the Western Balkans are forecasted to experience negative economic growth and enter a recession in 2020. According to the World Bank, GDP growth in the Western Balkan countries is forecast to be between -2.5% and -9%, investment between 1% and -29%, and exports between -0.1% and -30%. The severity of the impact will depend on the recovery scenario internationally, regionally and in each of the Western Balkan countries.
The “best” case scenarios assumed that all countries would be able to fully open with restored travel and regular border crossing procedures by the end of June 2020. Although land borders have started to open, and airports are starting to open as well, it will take some time for travel to return to anywhere near normal levels. Supply chains have been disrupted globally, and many materials and products have become harder to procure. As countries are re-opening, many are seeing spikes in infections and deaths, and some countries are responding by re-imposing restrictions. Unfortunately, we see spikes because many businesses and individuals are not observing physical distancing, face coverings, hand washing and other guidelines, and there is not adequate virus testing, contact tracing and isolation. There are predictions that there could be second waves of infections in Q3 and Q4 2020. At the same time, a number of the Western Balkan countries are experiencing political instability, technical governments, looming elections or uncertainties related to election processes, which exacerbate responses to the health and economic crises.
It is expected that there will be both long term and some permanent damage to the SME sector. On average, it is reported that turnover has already decreased by between 40% and 60%. We also expect that some businesses will not reopen at all. The sectors that are particularly hard hit include travel, tourism, hospitality, entertainment, education, recreation, and services that rely on person to person contact, and any businesses that rely on cross border sales and cross border procurement. In some cases, local agriculture is doing well, filling the gaps created by reduced imports. However, this could be short lived once the borders fully reopen unless agriculture is modernized, and capacities increased. Although the banks are liquid, businesses and households are facing difficulties. As reported by Balkan Insight unemployment in all Western Balkans countries has risen dramatically, and many households are facing the squeeze of lower incomes while at the same time having increased utility costs. Lack of disposable income mixed with shifted spending priorities have affected consumption and investment, and some SMEs may not be able to regain the workforce lost during the pandemic.
Due to the dramatic reduction in economic activity, tax revenues to the governments have also dropped. The Western Balkan economies are largely dependent on tourism, hospitality, visits of diaspora in the summer months and remittances (which are 10% of GDP). Even after countries fully reopen their borders, it is expected that incoming travel will be significantly lower than in previous summers, spending per visitor will be lower, and remittances will also be lower. All Western Balkans countries have developed relief programs that are providing some financial support for companies and employees who lost their jobs. The reduced tax revenues and increased relief expenditures have resulted in increased budget deficits and increased government debt.
To maximize the recovery, each country will have to enhance their health and economic response programs, and develop coordinated approaches with and between the governments, parliaments, businesses, financial institutions, international finance institutions and donors.
Q. What economic policy actions have countries in the Western Balkans taken to address this crisis? How effective have those policies been?
A. Governments in the Western Balkans have announced and implemented a number of economic measures to try to reduce the impact of the pandemic. These have included subsidies or payments for salary support, rent, etc., extensions for tax filings and payments, grants, loan guarantees, extension of loan repayments, credit lines. etc. According to the World Bank, up to April 22nd, these measures have been in the range of 1 to 6.7% of GDP, where the countries with larger fiscal buffers have introduced larger stimulus programs. Following is the breakdown per country:
Budget Support Measures Adopted by Western Balkan Countries (World Bank):
However, some of this assistance has not yet been distributed and it is important that the existing measures be actually implemented in full as soon as possible. Delays increase the level of damage and permanent damage. Although it is already clear that more will need to be done, it is too soon to fully evaluate the effectiveness of these policies including because it is not possible to fully estimate the length or severity of the pandemic, nor its potential second wave in the fall / winter season. As we can already see, this will depend on the behaviors of the governments, businesses and citizens in both the Western Balkans and internationally. Therefore, governments in the Western Balkans must create a balance within their announced measures in order to alleviate immediate problems, but also to have enough resources for future measures, in case the pandemic continues and/or returns.
One effect of the COVID-related government unemployment benefit is the increase in reported employment. Some companies have reported employees that they didn’t report previously to ensure that these individuals can benefit from the support schemes.
Q. What more can be done to assist SMEs and help them weather the crisis? What do you recommend that governments do?
A. This is extremely challenging. The governments will have to be continuously monitoring the course of the pandemic in their own countries, while the same time monitoring the course in the region and internationally. They must constantly re-evaluate their policies and support mechanisms in order to adapt to rapidly changing circumstances. It will continue to be a high wire act to balance the health and safety of the population from the pandemic with the negative effects of lockdowns and increasing non-compliance with preventive measures as fatigue grows with lockdowns and other restrictions. Some recommendations include the following:
· It is critically important for the governments to show that they are working to get the pandemic under control and to reduce uncertainty as much as possible. This includes widespread aggressive testing for the virus, robust contact tracing, and isolation of infected individuals and those that had close contact with them. This will allow low risk individuals to return to work and leisure activities. At the same time, governments need to include recommendations and guidelines for physical distancing, face masks, hand washing and other disinfection procedures. The governments must be consistent, transparent and communicate effectively with businesses and citizens. They must also establish clear policies and procedures for travel in and out of the country by land, air and sea. Greater certainty will foster increased business activity as well as investment, both domestic and foreign (e.g. less businesses having to be closed or restrict their activities).
· It is also important to assure cash flow and liquidity for SMEs. This can be done with loan guarantees, credit lines, grants, and subsidies for employment, as well as prompt payment to SME suppliers to the government and fast VAT returns. The governments should work with the financial and business sectors, as well as donors and international finance institutions to determine how to further support access to finance for SMEs. This includes trade finance, project finance, movable asset-based lending (factoring, purchase order finance, receivables and inventory finance, leasing, etc.), loan guarantees and credit/export insurance. The governments should also improve the performance, efficiency and quality of commercial contract enforcement and late loan collections.
· There should be close communication and coordination with the chambers of commerce and business associations in order to get the maximum input from the businesses.
· Enhance the use of insolvency procedures which allow for the restructuring of businesses for long term viability rather than liquidation.
· Accelerate the digitization of the economy and SMEs, and the use of e-commerce by SMEs. This is a global trend that the Western Balkans need to adopt.
· Encourage local production of quality, value added products.
· Specifically support the modernization of greenhouse agriculture including vertical farming, hydroponics, remote sensing and monitoring, ventilation and heating using renewable energy and energy efficient systems to extend the growing season, increase yields, reduce losses, achieve higher margins and attract youth to food production.
· Develop guidelines for the travel, tourism and hospitality sectors to restore confidence and increase safety. Focus on the unique eco and adventure tourism opportunities available in the Western Balkans and support the development of the necessary infrastructure, services and training in order to attract local, regional and international tourists.
· Support market-based innovation and entrepreneurship for new businesses to respond to identified market and customer needs and develop products and services to meet those needs.
· Minimize tariff and non-tariff barriers between the countries and facilitate efficient cross border flows of goods.
· Devise plans and actions to lower dependency on specific sectors or trading partners. With most countries depending on sector services and EU as a big trading partner, Western Balkans economies are far too much exposed to changes and shifts outside of their control.
· Continue to improve the business enabling environment so that it is easy to start, run, grow and close businesses, and for the businesses to attract financing, suppliers and customers.
· For investment, develop a pipeline of specific, concrete, investment ready businesses to market to potential strategic partners and investors.
The donors and international finance institutions can support or continue to support the above initiatives. In addition, they can encourage political and fiscal stability and inter-country cooperation and coordination, provide liquidity and guarantees to the governments, financial institutions and businesses, assist with monitoring, evaluation and modification of measures to combat the crisis and support the economy, assure that the countries have adequate healthcare materials, supplies and equipment, and facilitate trade and travel between the Western Balkans and outside.
Q. Do you foresee a long-term economic impact from the crisis?
A. The COVID-19 pandemic is unlike anything we have experienced in modern times and there is still a lot we don’t know about it. The health and economic damage have already far exceeded all initial expectations, and the projections get worse as time progresses. The UN is now forecasting that an additional 400 million people could descend into extreme poverty, putting the goal of poverty reduction back 20 to 30 years.
Of course, the magnitude of the damage and the time scale of the impact will depend on how we all manage the pandemic now and over the next year, how seriously governments, businesses and individuals comply with necessary guidelines, and whether effective treatments and vaccines are developed — and on what time frame. Despite some more optimistic missives, it now seems likely that the economic impact will last at the very least for another 2.5 years or more, and some are suggesting it could be 10+ years. Liquidity will be at an even greater premium, and many households will have additional informal and formal debt to repay. Consumption, as well as remittances, could be reduced for some time.
For some, the impact will be permanent, with swaths of businesses and jobs not recovering at all. For many that survive and recover, it will be because of changes in their business models. The pandemic will accelerate the digitization of the economies, e-commerce and fintech. It is likely to force the diversification of country economies and an increase in local production, including of food. There will be pressure to enhance epidemic monitoring and cooperation, as well as local health care systems and insurance coverage. There could be massive long-term disruptions in sectors like retail, construction and education.
The economies in the Western Balkan countries vary between them, and their speed of recovery will also vary. Much of the recent economic growth in the region has been due to increase in consumption, higher public spending, increase in remittance inflow, tourism, and increase in consumer and household lending. All of these factors have been affected by the crisis. And there is now a global decline in demand for both products and services, which will negatively impact the Western Balkans.
To minimize and shorten the impact, it is contingent on the countries and the international community to work together to tackle the pandemic as quickly as possible, provide support to SMEs, encourage innovation, reduce uncertainty and instill confidence, and take and implement the hard decisions that are necessary to bring the world as quickly as possible to what will surely be an entirely new “normal.”