Monday, May 11, 2020

Over 8,500 business entities close shop in April; highest in recent years



A TOTAL of 8,663 business entities closed in April - more than double the number of cessations in March, as the novel coronavirus pandemic continues to bite.

In contrast, the number of business entities formed in April at 3,767 was the lowest since 2013. Figures for the first three months this year were in the range of 4,514 to 5,082.

Economists warn that more business entities will go under after the government cuts wage support for most sectors as the "circuit breaker" ends and the temporary freeze on loan repayments is lifted.

The spike in the April figure means that job losses will also swell in the second quarter.

Data from BizInsights, an authorised information service provider of the Accounting and Corporate Regulatory Authority of Singapore, shows that 4,008 companies, sole proprietorships, partnerships and public accounting firms ceased operations in March, and that number ballooned to 8,663 in April. This figure was the highest in recent years.

Maybank Kim Eng economist Chua Hak Bin thinks that the worst is yet to come. He said: "Cessations will likely jump after wage subsidies drop sharply in June for most firms from 75 per cent to 25 per cent, and the grace period of six months ends for loan moratoriums."

He added that the strikingly large cessation numbers in the early stages of this health crisis confirms that this recession will be far deeper and worse than the 2003 severe acute respiratory syndrome (Sars) outbreak and the 2008-2009 Great Recession.

CIMB private banking economist Song Seng Wun told The Business Times that cessation and bankruptcy numbers are lagging indicators and the dire economic situation is still unfolding, so such numbers would likely get worse till the end of the year.

Mr Song noted the pandemic has dealt an instantaneous shock to supply and demand, which explained the large cessation numbers. He also compared this to situations in 2003 and 2009. In 2003, during the Sars outbreak, the hit to the economy lasted for only a quarter and the impact was localised. The financial crisis in 2009 was a typical economic bust where there was no supply shock, and businesses failed over time.

DBS economist Irvin Seah commented that the implementation in early April of the circuit breaker and the subsequent four-week extension, though necessary to contain the outbreak, will be "a nail in the coffin" for many domestic companies.

According to Mr Seah, the cessation numbers in the next two months will look "utterly awful". When companies go belly up, they have no use for the Jobs Support Scheme. In a sombre tone, he added: "There's a lot of pain out there."

Also, he noted that while the hard-hit industries such as aviation and tourism get significant government support to tide them through this difficult period, their subcontractors have been overlooked and not been given the same level of state relief. Yet, their revenue is impacted as hard as their customers'.

Mr Song noted that weaker business entities might not survive, especially if they have already been hit in the past two years by trade war, or the relentless march of e-commerce or digitalisation. "The pandemic has obviously compounded the pressure on some, more than the others."

He said that government relief can only provide support to a certain extent. Business entities such as those in the retail and food and beverage (F&B) sectors that have seen their revenue all but decimated might not weather the pandemic if they lack sufficient financial reserves.

BizInsights data showed 403 business entities in the F&B sector shuttered in April, compared to the range of 160 to 226 in the first quarter. In the retail trade, 918 ceased operations in April, much higher than the 351 to 539 recorded in Q1.

Folding of business entities leads to layoffs. Dr Chua expects the spike in the cessation numbers in April would lead to many more job losses in that quarter. "The cessation trends suggest that job losses in the second quarter (60,000 to 80,000) could be three to four times larger than the first quarter (20,000). We are expecting job losses to reach 150,000 to 200,000 in 2020, far worse than past recessions."

More than half of these will be foreigners, who will not be accounted for in the unemployment rate as they would have to leave the country. The worsening trend will likely start easing when most lockdown measures have been relaxed, possibly near year-end or early next year, said Dr Chua.

As expected, there were fewer new businesses.

Mr Song said that there are pockets of business opportunities in the current crisis where healthcare, e-commerce, debt collection and corporate restructuring might thrive. But these economic activities might not be able to offset the big drag from the large number of failures.

Mr Seah doubts that the newly jobless would venture into business when economic prospects are "very bleak" and when the pandemic is unlikely to go away soon. He added: "A most daunting time to start a business unless you have a good business plan or service."

Dr Chua sees business formation numbers improving possibly by early next year when prospects of a vaccine in the middle of 2021 brighten the outlook.

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