Covid-19 shock will impact €40bn Irish SME supply chain

SME businesses in Ireland may require between €2.4 bn and €5.7bn in liquidity to get them through a Covid-19 crisis that could have knock-on effects for a supply chain worth €40bn.

A new Central Bank Report entitled ‘SME liquidity needs during the COVID-19 shock’ indicates that the amount of liquidity required may be nearly six times the amount currently available under the Irish Government’s Covid-19 rescue package for the economy.

A second report entitled ‘COVID-19 and the transmission of shocks through domestic supply chains‘ – estimates that up to €40bn of suppliers’ annual sales are to companies affected by the restrictions and warns of a cascading effect that could amplify the shock.

“This could lead to knock-on effects on firms further up the chain, as if the liquidity dry-up continues, it could amplify the economic downturn domestically beyond those firms currently unable to meet customer demand,” the Central Bank stated.

Importance of Irish SMEs

The liquidity needs report highlights how SMEs are particularly important for job creation in Ireland. They account for over 1m employees, or 68.4pc of total employment in the Irish business economy.

Personnel costs make up a high proportion of total costs in many sectors, and the authors report that the significant supports announced by the Irish Government in March will have eased the wage burden of affected SMEs.

As the extent of the economic shock becomes apparent in Ireland, it is more likely that firms will need some form of external liquidity, with estimates ranging between €2.4bn and €5.7bn, depending on the scenario, if they are to continue to operate.

Noting the domestic banking system is an important source of liquidity for Irish firms, the authors report that for the latest sectoral data in June 2019, Irish SMEs had €2.7bn in undrawn credit available from Irish retail banks.

“Access to this varies across sectors, and is however likely to prove challenging for SMEs without collateral or an existing relationship with a lender.”

In the event that private sector liquidity is insufficient to meet demand, the authors outline three options available to policymakers. These include credit guarantee schemes, lending schemes, and direct fiscal supports.

Written by John Kennedy (john.kennedy3@boi.com)

Published: 24 April, 2020