Central Bank research published on Thursday has estimated SME liquidity needs over a three-month period, under a range of scenarios.

The research notes that, as the extent of the economic shock becomes apparent in Ireland, firms will need some form of external liquidity, estimated at over €2.4 billion, if they are to continue to operate.

A key factor is the ability of firms to reduce non-personnel expenses such as rent, rates, tax, insurance, trade credit, debt repayments and utilities.

Noting that 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 €2.7 billion in undrawn credit available from Irish retail banks.

Collateral

Access to this varies across sectors, and is  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

•    direct fiscal supports

Complex trade-offs

The paper notes that each type of intervention incorporates very complex and delicate trade-offs in its optimal design and execution.

In Ireland, such supports include the pre-existing Irish Credit Guarantee Scheme, the SBCI, Enterprise Ireland and MicroFinance Ireland.

In ‘COVID-19 and the transmission of shocks through domestic supply chains’ the authors find that linkages through the supply chain represent an important potential transmission mechanism for the COVID-19 shock in Ireland due to the substantial economic activity that occurs between businesses across sectors in Ireland.

The research finds that up to €40 billion of annual sales of suppliers are to companies that are either highly or moderately affected by the restrictions placed on the economy as part of the public health response to COVID-19.

Given that trade credit is used heavily in Ireland relative to other European countries, a lack of liquidity among firms directly affected by current restrictions risks cascading through the supply chain, in the form of missed payments for goods and services already provided.

Knock-on effects

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 first Financial Stability Note, written by Niall McGeever, John McQuinn and Samantha Myers, is entitled ‘SME liquidity needs during the COVID-19 shock’.

The second FSN, written by Fergal McCann and Samantha Myers, is entitled ‘COVID-19 and the transmission of shocks through domestic supply chains’.

In ‘SME liquidity needs during the COVID-19 shock’ the authors note that SMEs are particularly important for job creation in Ireland.

Wage burden

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 if they are to re-open after the shock.

A loss of liquidity would amplify the economic downturn domestically due to close linkages in domestic supply chains.