According to economists, in the current situation, the COVID 19 crisis could lead to a 7-10% recession of the 2020 world’s GDP and, a period of depression will likely follow. To fight these risks, central banks facilitate access to liquidity, and government budget policies should be very generous to compensate for and revive the sharp decline.
But with restaurants and most of the shops closed, does it need to be an economist to find out that workers from the service trades (hairdressers, waiters, etc.) whose daily tips compensate for low wages, professionals, and entrepreneurs live a tragic situation and suffer without compensation? This situation should kick off a domino effect on the rest of the economy. As dreaming is still a right, we can hope that medical staff will receive premiums, be well paid and appreciated, that education will be a priority and that corruption will decrease. Dreaming costs nothing but does not fill in the plate either.
When economic activity resumes, companies need to ensure that customers can pay and suppliers can provide. Of course, the companies risk levels (i.e., their ratings) will deteriorate, financially reliable companies will emerge weakened, and companies in difficulty before the crisis will likely be unable to continue their activity.
This deterioration will differ depending on the industry. Activities related to the movement of people (travel, gyms, retail non-food, etc.) will suffer the most.
Public aid, the previous financial strength and the ability to adapt will help companies to survive the crisis. But significant investments and purchases will be deferred, affecting even more vehicles and appliance producers and the real estate market. Very likely, consumers will adopt precautionary behavior and thus contribute to deflation and depression.
Sectors such as digital should feel less the consequences of the crisis if the number of their potential customers do not decrease too much.
In this period of confinement home deliveries, games including online casinos, home fitness producers, and certainly food producers (i.e., Danone, Nestlé) should have a growth of their business.
Medical equipment producers and pharmaceutical companies should also register sales growth.
The company’s risk evolution will be different according to their sector of activity and only prepared companies will be resilient. From the perspective of business information and debt collection, we recommend three actions to mitigate the consequences of this crisis:
1. Assess the clients to classify them into 5 levels of risk (from “very high risk” to “very low risk”) based on the 2019 financial data and assume a deterioration of these levels. Similarly, evaluate suppliers to identify those that will not be able to deliver their usual services, especially if these providers are critical to the company’s business.
2: During a crisis, cash is king, and the company must find out how much money it can rely on in the coming weeks. From now on, companies must assess their debtors and their ability to pay entirely or partially their debts. In many cases, it is essential to obtain the promise of deferred payment and to keep contacts with the debtor. When the situation improves, the debtor will pay in priority the ones with whom he had regular communications.
3: New commercial credit rules as the old models do not apply to the current situation. Companies must use a new methodology to assess their business partners and to collect unpaid invoices. As an example, as most companies’ financial data will deteriorate, companies that trade only with “very low risk” clients may not find any on the market. On the other hand, companies have to take enough guaranties to continue their activity with clients that have a very deteriorated financial situation.
Article republished from Operandi – https://operandi.ro/when-the-economic/