After Eloise Windebank and her husband Alex opened Farro in Illovo, Joburg, in March 2018, it soon became a highly rated boutique restaurant lauded by, in one reviewer’s words, "every bloggy-hipster-type in town".

But last week, with the number of customers down to a trickle as South Africans bolted inside to fend off the Covid-19 pandemic, Windebank took the hard decision to shut Farro’s doors — at least for now.

"This month was our second birthday, so it’s devastating," says Windebank. "But if our business had to stay open, and pay our full overheads for next month, getting just 20% of the income we normally get, we’d be bankrupt."

She says, at this point, it’s just about trying to curb expenses and "not get into irrecoverable debt", so that when the epidemic ends, Farro can open again.

Farro wasn’t untypical of the 2.3-million small businesses operating in SA (by some estimates; figures vary widely depending on data source and definition): it had less than a month of cash-on-hand, a small group of staff who relied on it, and it had already taken a battering from the moribund economy.

But the coronavirus, which led President Cyril Ramaphosa to announce a full China-style national lockdown this week, has taken a sledgehammer to companies across the board. Small businesses, which make up 98% of the companies in SA, are most vulnerable.

In Farro’s case, it has just 10 staff. Shutting its doors temporarily now enables them to claim from the Unemployment Insurance Fund (UIF) under a new special Covid-19 exemption.

Windebank says while her landlord has been slow to come back to her about the payment holiday she asked for, others have been very helpful. "Mercantile Bank, for example, which provided the financing for our leases on the coffee machines, has halted our repayments for three months. We hope three months is all it takes. If it’s longer, everyone’s in another realm," she says.

This week, Standard Bank became the first SA bank to provide a 90-day payment holiday "to shield small enterprise customers" from the economic meltdown, occasioned by the virus. (It didn’t suspend interest, however.)

Nedbank soon followed. CEO Mike Brown, who also chairs the Banking Association, tells the FM it’s actually the job of a bank to help customers when they need it.

"Banks should be able to distinguish a solvency issue from a liquidity issue," he says. "If it’s a good business that is temporarily suffering a cash shortfall because of corona, and is likely to return to being a good business, the banks will do everything in their power to help them through a difficult time."

He says Nedbank will consider whatever options it can to help customers cope: finding additional cash, or providing loan holidays.

Critically, on Tuesday the Competition Commission approved an exemption that will allow banks to speak about a united approach to providing debt repayment holidays. So you can expect the other banks to follow Nedbank.

Ramaphosa spoke of other measures to help small business too. They’ll be desperately needed, as a lockdown means "all shops and businesses will be closed", except for "critical services", like grocers, pharmacies and doctors. These included:

• A R2bn fund, endowed by donations from the Oppenheimer and Rupert families;

• A "special dispensation" for companies "in distress because of Covid-19", in which their staff would be paid through a "temporary employee relief scheme", presumably backed by the government. Ramaphosa suggested the UIF would be used to help top-up lost pay;

• Companies with revenue of less than R50m could delay 20% of their pay-as-you-earn tax payments over the next four months and part of their corporate income tax over the next six months — an intervention that, he said, "is expected to assist over 75,000 small and medium-sized enterprises"; and

• There’s R200m available to help tourism companies, which are the hardest hit.

These are commendable steps. But are they enough?

‘Everything is on the table’

In an interview with the FM this week, small business development minister Khumbudzo Ntshavheni says: "There’s nothing that’s not on the table right now — every measure imaginable, we’re discussing it."

Ntshavheni isn’t the usual bureaucrat. At 42 years old, she knows about the stress of running a company. When she was a child, her mother ran a taxi business, and she has an MBA that she put to use running a farming business and a wholesale company.

But the past week has been her biggest test yet. Hundreds of e-mails from distressed small businesses have flooded her inbox.

"Look, the government couldn’t have planned for this," she says. "We were already in a tough economic situation before this. But when a small business contacts you and asks how they can continue to exist, we can’t just say: ‘Well look, we couldn’t have planned for it.’ We have to find a way."

It’s complicated by the fact that the government can’t dictate to banks, or landlords, what measures they must take. But, says Ntshavheni: "We’ve told institutions we control — like development finance institutions — to reschedule loan repayments for small businesses. And we’re looking at what we can do for payrolls using the UIF. If someone earns R3,500 a month, and the employer cannot afford to pay, government must see how to make up the shortfall."

While it’s great to see banks postponing payments, you’d also want municipalities to give people a rates holiday. But most muni- cipalities are economic basket-cases run by people who’d botch their household budgets, so they can’t afford to do so.

Asked about this, Ntshavheni says: "Municipalities have to still provide services and they will need a level of income to be able to do that."

It’s one example of how, where the rest of the world can afford to implement generous concessions, SA just doesn’t have the fiscal room to do so.

John Dludlu, CEO of the Small Business Institute, says while banks and lenders must act in a co-ordinated way, they shouldn’t just agree to a blanket loan-repayment holiday. Rather, he says, they should make concessions depending on individual cases.

"Everyone has different needs, and is in different degrees of trouble. We must address this in a flexible way," he says.

Another critical intervention, Dludlu argues, is that large businesses and government must stop paying small businesses late — as they’ve done for years.

"If you’re waiting 90 days to pay a small company in this environment, that’s not on. They may not survive. We believe large companies should settle all invoices within a week," he says.

This would be a vital commitment. Many small businesses, contacted by the FM this week, stressed how they’re gasping for air.

The good news for tenants is that, legally, they might be excused from paying rent, depending on the terms of their lease and their circumstances.

Ben Groot of law firm GVS, who acts for a number of landlords, says the government’s decision under the Disaster Management Act to prohibit trading for 21 days might allow affected tenants to get rebates. "This is not a blanket excuse not to pay rent, but a very specific possible exclusion that may arise in certain circumstances."

Tenants will still be liable to pay their utility bills, unless municipalities come to the party by way of a cost concession.

Moratorium on leases

Mike Clark, CEO of charter flight company Swift Flite, says small companies need tangible measures today — a moratorium on lease payments and mortgages being at the head of the list.

"Luckily for us, we don’t owe money on our aircraft, but other smaller airlines need a three-or four-month break from their obligations, just so they can keep their staff employed," he says.

Swift’s trajectory over the past month tells an all-too-common story.

Click to enlarge.
Click to enlarge.

Based at Lanseria Airport, it runs a fleet of 14 aircraft, which mainly ferry staff of mining companies to mines in the Northern Cape, including Kumba Iron Ore’s Sishen, and foreign tourists to game lodges.

"In just over a week, we’ve had more than 80% of our bookings cancel. Many of our clients came from Europe, the US or the East, and they can’t get into the country. The demand for aircraft has just dried up."

Airlines were already precarious before the coronavirus-inspired economic collapse. So how long can they survive, even if they’re given a payment holiday?

Clark says it depends on how long the downturn lasts. "If it lasts just three or four months, we’re resilient South Africans — we can make a contingency plan. But if it lasts till October or November, I don’t think anyone can survive that long."

Swift seems stronger than most — certainly stronger than national airline SAA, which may have finally taken to the skies for the last time.

But don’t let this fool you. A 2016 JPMorgan study of 600,000 small businesses in the US reveals just how fragile SMEs are.

"Half of small businesses have a cash buffer of less than one month," JPMorgan said. "Moreover, 25% of small businesses hold fewer than 13 cash buffer days in reserve."

Given these numbers, is the government doing enough, quickly enough?

Bernard Swanepoel, a director of the Small Business Institute, says plenty of detail was missing from Ramaphosa’s announcement. "Will all businesses struggling to stay afloat receive help? Or just those the minister identifies as worthy?" he asks.

Dludlu also believes Ntshavheni should have gone further, earlier.

"Right from the beginning," he says, "we needed a far more comprehensive announcement, setting out what amount is being dedicated where, and how long those support measures would be in place so that people can plan around that."

He says there is still scope for the Reserve Bank to do more — even after it slashed interest rates by 100 basis points last week.

"In the US, the Fed held an emergency meeting and slashed rates on a Sunday, as did Egypt. But here, the Reserve Bank acted as if this was just business as usual. We need to overreact, not underreact. We can’t afford to wait and see how it pans out," he says.

Ntshavheni responds: "We certainly haven’t underestimated the impact. SMEs employ the majority of our people, so we’re looking at measures to alleviate the pressure on their payrolls."

She says her team is working around the clock: "I’ve got people looking at me right now who have hardly slept in the past four days — they’re leaving the office at 2am and coming back at 7am. As the economics cluster, we’re meeting every morning, and feeding in to the national crisis command."

The problem is that, perhaps unlike the US or other developed countries, SA has to walk a tightrope in how it apportions bailout funds — it can’t just throw the kitchen sink at the problem, as US President Donald Trump is doing.

Ntshavheni admits as much, saying there will never be enough money in reserve for the government to shield everyone. "We’re not just shielding small business, we’re also shielding society in terms of the spread of the virus. Because we know that if the virus gets into a particular segment of our society, the numbers will quadruple."

‘Never seen anything like it’

Central to the efforts to save small business is the Industrial Development Corp (IDC) — the state-owned institution that has a loan book of R3.7bn, which it has lent to about 800 small companies.

TP Nchocho, CEO of the IDC, has worked in finance for 30 years. In other words, he’s lived through numerous crashes.

"I’ve never seen anything like this," he tells the FM. "In 2008, I was at the Development Bank, and we saw a huge impact as companies lost access to credit. But I’m telling you, that 2008 crisis is a fraction of what we’re going to be in for now."

Many of the companies funded by the IDC, Nchocho says, are now in dire straits. "There’s a lot of supply chain disruptions — clothing and textile companies are battling to get raw materials. And we’ve also seen agricultural exporters, like [for] the fruit which goes to Europe, not getting access to ports or being lost at sea. And we’ve seen cash-flow problems, as invoices aren’t being paid."

As Ramaphosa mentioned, the IDC is central to rescue efforts. As part of the emergency measures, it’s setting aside an extra R700m for "working capital" for struggling companies; R500m to help pharmaceutical companies buy "essential medical products"; an extra R3bn in the next three months to "support businesses through this crisis"; and it’s giving grants of up to R5m to "support the vulnerable, including basic sanitary products and food parcels".

The IDC is also deferring loan repayments on a case-by-case basis. And some of those cases are likely to be quite gruesome.

"In the tourism sector, it’s likely to be a bloodbath," says Nchocho. "We finance a lot of hotels and lodges, and they’ve seen substantial losses in customers and revenue. We need to look at how we can help, whether it’s deferring repayments or whatever."

But the reality is, many of these companies will still fail. Nchocho knows this too.

"About 10% of our portfolio is distressed companies. Some of them will fall over, I’m afraid. They were in trouble before the virus — the economy has been on its stomach for the past few years, so it’s unavoidable."

Click to enlarge.
Click to enlarge.

In the end, he says more than a fifth of these distressed companies might fail. It’s a bitter pill for the IDC, which has a wider mandate than the normal commercial banks. "We try to keep companies operating for as long as we can," he says. "But we can only carry it up to a point. Honestly, where a company is not viable anymore, we’ll have to cut our losses and move away."

Any more failures, however, will be hard to stomach for a sector that has been shedding jobs like mad since 2008.

Doomed to repeat

The last time SA was hit with an economic crisis of this magnitude — the 2008 global financial crisis — it caused a jobs bloodbath in the SME sector that lasted for years. In the five years following the crisis, between the second quarter of 2008 and the second quarter of 2013, absolute employment in small firms in SA’s formal nonagricultural sector dropped by 1.12-million people.

Even more alarming: about 60% of these small-firm job losses affected people aged 18 to 29, and many of those jobs paid less than R4,000 a month (in 2012 prices). These are precisely the type of entry-level jobs SA needs to reduce youth unemployment.

By 2013 the economy had regained most of the jobs lost during the global financial crisis — but this was driven by job creation in companies employing 50 or more people.

Economists say small firms were particularly hard hit because of the rigidity of SA’s labour market institutions — especially central bargaining arrangements in which deals struck between big firms and unions are typically extended to smaller firms in the same sector.

So, to ward off a repeat of the carnage, the government should also give small businesses a temporary holiday from central bargaining agreements, including UIF payments, as it is considering to do.

At all costs, the government needs to avoid the tactical blunders it made during the 2008 crisis. At the time SA, like most other countries, put in place an aggressive fiscal stimulus. Despite that, SA’s economy still shed 750,000 jobs — equal to about 5% of total employment in 2009/2010.

This was the highest loss, as a percentage of total employment, by any emerging-market country at the time.

One of the explanations for this outsize impact is that SA allowed real wage growth to run away over this period, well ahead of labour productivity growth. Firms responded with retrenchments when they were denied the option of cutting wages by inflexible central bargaining agreements.

Part of the problem was that in 2009/ 2010, public service & administration minister Richard Baloyi ended a three-week public sector strike by offering a wage hike of 7.5% — more than double consumer inflation of 3.3% at the time. This dominoed through the economy as private-sector trade unions sought to catch up with the generous public sector settlement.

Research by International Monetary Fund (IMF) economist Nir Klein concludes that excess wage growth was responsible for roughly 25% of the jobs lost in SA between 2008 and 2010.

Now SA can do things differently. Before the Covid-19 outbreak, the government had called a halt to its three-year wage deal with unions and was trying to negotiate below-inflation increases for the 2020 fiscal year.

This outbreak has plunged SA into an economic crisis that will strip the fiscal cupboard bare. But at least it may force the unions to capitulate early — an improbable silver lining.

In 2008, SA entered the crisis with a fiscal surplus; this time it is deep in the red. Conversely, in 2008, the banks were the weak point, but today they’re far healthier.

As Nedbank’s Brown says: "Structurally, the banks are in way better shape than during the 2008 financial crisis. Back then, SA banks had capital levels of between 7% and 8%. Now we keep 10.5% as a buffer, so we have strong capital levels, and we have no problem with liquidity."

However, no-one knows how long it will last. Ramaphosa’s lockdown should, fingers crossed, curb the spread of the virus for the next 21 days at least. But every day has brought (largely unwelcome) surprises.

Ntshavheni, for one, says she hasn’t been surprised by the spread of the disease necessarily, but rather by the ability of the country to simply close down.

"After this disease has gone, it’ll be interesting to see what format of the world economy emerges. As a student of economics, I’m keenly watching how it happens, because globalisation is being redefined. Borders are coming up, thick and fast, including [between] once very open airspaces," she says.

And small companies, facing an existential threat, are at the frontline.

Farro’s Windebank says she doesn’t have even the meagre 27-day cash buffer that JPMorgan speaks of. "I used to, but 2019 was brutal. The economy shrank, and load-shedding ripped everything out from under me. My buffer is long gone. Now all I’m talking about is keeping my serviceable debt to the banks under control."

Covid-19 has reshaped the economic landscape and while Farro has a better chance than most, many other small businesses won’t be around in a year’s time.

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