Richard Ramsey, Chief Economist, NI, Ulster Bank
During the aftermath of the Global Financial Crisis, one of the legacies was over-indebtedness that created zombie companies which weighed on growth as the economy sought to recover. These businesses were mostly larger and within certain sectors. The excessive debt was largely linked directly or indirectly to property.
This time is different. It’s different because the banks are well-capitalised and stable. There is no credit crunch – where the cost of borrowing rises significantly and the availability of credit is severely restricted. Indeed, this time around, banks have opened the spigots to provide significant levels of emergency lending. According to British Business Bank figures in early August, over £1 billion has been lent by local banks in Northern Ireland since the onset of COVID-19, through a variety of government-backed schemes (e.g. Bounce Back Loans). But it’s also different in that the burden of debt this time is more widespread and concentrated on smaller firms.
Arguably, Northern Ireland already had a corporate debt issue before the pandemic. Clearly this has been exacerbated very significantly in recent months in the effort to support companies through the immediate crisis.
It’s probably not a surprise that a survey by the British Chambers of Commerce found one in 10 UK firms that took on debt during the pandemic say they may have to cease trading.
It’s perhaps also not surprising that more than a quarter (28 percent) of Northern Ireland small and medium-sized businesses surveyed recently by Ulster Bank said indebtedness was a problem of some degree for their company, with 10 percent of respondents saying that this issue was quite significant or very significant. Almost 38 percent of respondents said that measures from government to ease business debt would help boost their firm’s revival.
As we seek to navigate COVID-19 from an economic perspective whilst prioritising people’s health and wellbeing, it is clear that a number of things need to be achieved. Firstly, it is important to mitigate job losses to avoid mass unemployment. It’s also important to avoid having thousands of companies weighed down by their debt burden, making them unproductive. The economic implications of this could be significant and long-term.
Many local firms have been very dependent on support from the furlough scheme as well as support from government-backed lending initiatives.
Government has made clear that it won’t be continuing with the furlough scheme and has introduced the Job Support Scheme instead (after the end of October). The Chancellor also announced a number of measures on government lending schemes last week. More borrowing to invest and grow a business is a good thing. But it is clear that businesses cannot continue to take on debt long-term to make up for lower demand.
My view is that strategic solutions to corporate indebtedness will probably be required to help stop many firms falling into a spiral of unsustainable debt. It’s something Northern Ireland needs to talk more about.
This post is part of our #TheReset series in association with Ulster Bank
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