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Again, TextileFuture’s Newsletter would like to present to you the latest data, figures and comments “Toward a More Resilient Europe” and the latest economic facts on “The Middle East and Central Asia (MCD)” by the experts of IMF, the International Monetary Fund.

The third feature is considering “How South African SMEs can survice and thrive post Covid-19” and is based upon the latest findings of McKinsey’s local team.

Here starts the first feature:

Toward a More Resilient Europe

Toward a More Resilient Europe

By guest author Poul M. Thomsen from IMF

Poul M. Thomsen, a Danish national, has been Director of the IMF’s European Department since November 2014, supervising the Fund’s bilateral surveillance work for 44 countries, the policy dialogue with EU institutions, including the ECB, and discussions for Fund-supported programs. Mr. Thomsen also has the responsibility for the Fund’s outreach activities in Europe and its interactions with European senior officials. Before taking up his current position, he had the primary responsibility for the Fund’s programs with European countries affected by the global financial crisis and the subsequent Euro Zone crisis. Earlier in his career, Mr. Thomsen gained extensive knowledge of countries in Central and Eastern Europe, having worked on the region continuously from 1987 to 2008, including as mission chief for multiple countries, head of the Fund’s Russia Division during the country’s 1998 financial crisis, and Director of the Moscow Office from 2001 to 2004.

Europe, like the rest of the world, faces an extended crisis. An element of social distancing—mandatory or voluntary—will be with us for as long as this pandemic persists. This, coupled with continued supply chain disruptions and other problems, is prolonging an already difficult situation. Based on updated IMF projectionsreleased last month, we now expect real GDP in the EU to contract by 9.3 % in 2020 and then grow by 5.7 % in 2021, returning to its 2019 level only in 2022. If an effective treatment or vaccine for COVID-19 is found, the recovery could be faster—but the opposite would hold true if there are large new waves of infection.

Some European countries will face a tougher recovery path than others. Several went into the crisis with entrenched product and labor market rigidities holding back their growth potential. Others depend on industries that are tightly integrated into cross-border supply chains, leaving them deeply vulnerable to disruptions of such links. In several large euro area countries, slow growth has coexisted with high public debt and limited fiscal space, constraining the ability to cushion shocks. Inescapably, sharply divergent initial conditions are likely to result in a highly uneven recovery across Europe.

Europe’s high-debt countries will bear the brunt of the social impact. For decades, several of these countries have seen their public debt burdens ratchet up in times of trouble and stabilize—but not fall—in good times. The stepwise pattern of rising debt speaks to a weak record of addressing structural deficiencies, whether due to institutional rigidity or insufficient political will. Results have included high unemployment and emigration, especially among the youth, and a trend toward less-progressive taxation—but pensions have largely been protected. COVID-19—a disease that calls for protection of the elderly but leaves the young shouldering much of the cost—complicates an already difficult demographic situation.

Fiscal policies for a transforming EuropeAgainst such backdrops, policies—especially national fiscal policies—need to start being repositioned for a longer crisis. At the outset of the pandemic, lockdowns were a vital tool to save lives. To help economic capacity survive a short but extreme disruption and allow activity to promptly bounce back afterwards, fiscal policies were eased sharply. Months later, fiscal support remains as vital as at the onset. But, as dislocations persist, resources will become stretched. Now is the time, therefore, to think ahead and reassess how best to use limited fiscal space without unduly burdening future taxpayers. The longer the slump, the greater will be the need to carefully target support for firms and households in the high-debt countries.

Policymakers must also recognize that the post-crisis economy may look very different from the economy of 2019. It is becoming clear that we are in the throes of—and that we need—permanent change. COVID-19 has reminded us that nature still reigns supreme, that environmental degradation must stop, and that investing in resilience is good policy. Moreover, prudence requires us to consider that this pandemic could last several years, and may well be followed by future pandemics. Europe must strive for a new, greener economy, one that can operate efficiently even with prolonged social distancing. It may take many years to complete, but transformation needs to be nurtured starting now. We cannot just return to the way things were before. Change is already underway, with winners and losers. Digitalization has emerged as a key bulwark of resilience, yet also as a divide. Across Europe and beyond, countless employees are adapting to remote work, students to remote learning, doctors and patients to telemedicine, and firms to internet-based sales and door-to-door delivery. Countless others, however, are shut out. Many contact-intensive activities—hospitality, travel, and more—could take years to recover. Some outputs—take coal-fired power or carbon-emitting vehicles—may slip into terminal decline. Again, some countries will be hit harder than others, and inequalities could grow both across and within national borders. We may not yet be able to fully envision the new normal, but the transition has begun.

Public funds must be used to steer the needed resource reallocation while protecting the most vulnerable. In labor and product markets, the focus should be on flexibility, including by ensuring that short-time work schemes that tie workers to their employers are kept temporary. In the corporate sector, support programs must embed incentives that encourage uptake by firms with strong business plans and discourage uptake by firms on a path to failure. As liquidity needs become solvency needs, state aid may need to include equity injections—various European initiatives are already moving this way. Clarity on carbon pricing will also be important to set the stage for a climate-friendly recovery of private investment. Finally, public investment can and should take the lead, focusing on greening, digitalization, and other aspects of resilience.

Given divergent national conditions, there is a strong case for joint EU fiscal action. Supporting the recovery will continue to require substantial fiscal resources. By focusing EU funds on countries hardest hit by the pandemic or with less fiscal space, lower income levels, and greater environmental damage, the “Next Generation EU” package stands to improve outcomes for the single market as a whole. To do so, however, it is vital that it serve as a catalyst and not a substitute for structural reforms and prudent fiscal policies. With fundamental limits to the size of any joint EU assistance, the responsibility for ensuring that debt burdens are sustainable will remain squarely at the national level. Even with low borrowing costs, all countries will need to partner upfront stimulus provision with credible medium-term policy plans.

Preserving financial stability and the supply of creditThrough the acute crisis phase and beyond, monetary policy will need to remain strongly accommodative. With crisis-related demand shortfalls further weakening the inflation outlook, central banks must continue to deliver substantial stimulus and ensure that financial markets remain liquid. In practice, this means policy rates must remain at extraordinarily low levels for now, supported by net asset purchases that implicitly look to bond spreads and issuance volumes. Once the period of stress has passed, however, there will be a need for introspection—reflecting on the many years of missed inflation objectives, on how to properly demarcate monetary policy from fiscal policy, on the global decline in equilibrium real interest rates as savings outpace investment, on the choice of monetary instruments, and more. The European Central Bank’s strategic review remains as essential as ever. Finally, another key priority in the coming period will be to ensure an uninterrupted supply of bank credit to the economy. History has taught us that, when efficient savings allocation breaks down, crises tend to last longer. For now, most European banks have the capital and liquidity they need to expand credit.  

But, as this crisis wears on, there will be many defaults, and these could erode bank buffers and lending capacity. Potentially, therefore, one feedback loop of this crisis may simply be time: the longer the pandemic, the greater the credit disruption, and the slower the post-pandemic recovery. It is vital that supervisors prepare banks for the coming test. Robust lending standards must be upheld, losses provisioned for fully and transparently, and restructurings of bad assets pursued actively to preserve value. In some cases, bank recapitalization may prove necessary.

But, as this crisis wears on, there will be many defaults, and these could erode bank buffers and lending capacity. Potentially, therefore, one feedback loop of this crisis may simply be time: the longer the pandemic, the greater the credit disruption, and the slower the post-pandemic recovery. It is vital that supervisors prepare banks for the coming test. Robust lending standards must be upheld, losses provisioned for fully and transparently, and restructurings of bad assets pursued actively to preserve value. In some cases, bank recapitalisation may prove necessary.

 A calibrated policy mix

With many difficult challenges lying in wait, managing this vast crisis will call for an increasingly calibrated approach going forward. The initial emphasis on opening the fiscal and monetary floodgates had its place. As time passes, however, policymakers must reflect also on longer-term considerations. Even as low borrowing costs soften some of the tradeoffs, responsible policymaking will still need to weigh immediate imperatives against future burdens on young taxpayers and new generations. Difficult reforms must be pursued with renewed determination.

The overarching policy goals are not one, but two: to save lives now, and to ensure that Europe emerges with a greener and safer economy for the long run, one where future generations can thrive equitably.

www.imf.org

Here starts the second feature:

The Middle East and Central Asia (MCD) region

The Middle East and Central Asia (MCD) region has reacted to the global COVID-19 pandemic with swift and stringent measures that have saved lives. However, these policies have also had a large impact on domestic economic activity. With several countries in the region beginning reopening in past weeks, and a recent uptick in activity, rising infection numbers may pose risks. A sharp decline in oil prices together with production cuts among oil exporters and disruptions in trade and tourism added further headwinds. As a result, growth in the region is now projected at –4.7 % in 2020, 2 percentage points lower than in April 2020. The unusually high level of uncertainty regarding the length of the pandemic and its impact on firm closures, the resulting downside risks (including social unrest and political instability), and potential renewed volatility in global oil markets dominate the outlook. The pandemic will continue to test countries’ health capacity and economic resilience. While ensuring strong health systems remains the immediate priority, governments should also focus on supporting the recovery and setting up resilient and well-targeted social safety nets. As the pandemic wanes, countries should facilitate recovery by easing the reallocation of workers and resources, as needed, while resuming gradual fiscal adjustment and rebuilding policy buffers. Multilateral support can play a key role in helping countries surmount these shocks.

Impact of the Pandemic

The COVID-19 pandemic continues to spread across the MCD region (Box 1, Figure 1), though some countries are gradually relaxing restrictions (Figure 2). The region reacted swiftly, with relatively stringent containment measures, though less so in fragile states. Related deaths have also been comparably contained in the region.

The necessary containment measures adopted have had a strong impact on economic activity. Mobility in the MCD region around workplaces— as measured by Google Mobility Trends—has declined by as much as in Europe and the Western Hemisphere, both with much higher case incidences. The sizable downturn was also evident in purchasing managers’ indices across several countries plummeting in April, though some tentative signs of recovery were observed in May (Figure 3).

Prepared by Joyce Wong, with assistance from Oluremi Akin-Olugbade. Middle East and Central Asia (MCD) countries comprise: Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Yemen (Middle East, North Africa, Afghanistan, and Pakistan Oil Exporters, MENAPOE); Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Somalia, Sudan, Syria, and Tunisia (Middle East, North Africa, Afghanistan, and Pakistan Oil Importers, MENAPOI); Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan (Caucasus and Central Asia Oil Exporters, CCAOI); and Armenia, Georgia, Kyrgyz Republic, and Tajikistan (Caucasus and Central Asia Oil Importers, CCAOI), that had imposed more stringent confinement policies earlier have also begun gradually relaxing restrictions (Algeria, Bahrain, Georgia, Iran, Jordan, Kazakhstan, Kyrgyz Republic, Lebanon, Pakistan, Saudi Arabia, Tunisia, UAE, Uzbekistan).

More recently, countries in the region that had imposed more stringent confinement policies earlierhave also begun gradually relaxing restrictions (Algeria, Bahrain, Georgia, Iran, Jordan, Kazakhstan, Kyrgyz Republic, Lebanon, Pakistan, Saudi Arabia, Tunisia, UAE, Uzbekista

The synchronised and global nature of the downturn has also led to a contraction in trade, disruptions to supply chains, and a collapse in tourism and remittances—with the latter accounting for about 14 % of GDP for fragile and conflict-affected countries in the region. While data are not yet available for the current period, changes in unemployment rates in the region during past crises (such as during the global financial crisis) were usually minimal, partly due to the predominance of relatively secure public-sector jobs.

The region has also been hit hard by the oil shock (Figure 4). The Organization of Petroleum Exporting Countries and other major oil producers (OPEC+) agreements from March and April (and subsequent expansion), together with a reduction in US shale oil production and the recent improvement in market expectations as economies reopen, succeeded in stabilising oil prices, which have recovered half of the losses since the end of 2019 but remain far below pre- COVID-19 levels. Nonetheless, the larger-than- expected production cuts implied by the OPEC+ agreements together with lower oil prices will have a negative impact on exports. These factors have March saw sudden reversals of capital flows from emerging markets generally, with the region experiencing an estimated USD 6 billion to USD 8 billion in portfolio outflows. Nonetheless, the actual size of outflows could have been larger, as official data are not yet available. Market sentiment has since improved, reflecting, in large part swift and extensive actions by monetary and fiscal authorities in advanced economies. Higher-credit- rated countries in the region (Saudi Arabia, Qatar, UAE) have managed to maintain market access, with large placements in international capital markets in recent months, while lower-rated issuers, such as Bahrain and more recently Egypt, have also issued in primary markets, albeit at a higher cost. Indeed, MCD countries’ sovereign issuances made up the majority of emerging market sovereign issuances since the end of March (more than 60 %). Secondary dollar spreads have narrowed across the region, although they remain elevated, while market pressures on regional currencies appear to have abated. Growth in credit to the private sector and deposits up to April remained broadly stable, though the former had been declining since the middle of last year.

Nonetheless, although the region’s banking systems appear resilient and well capitalised, pockets of existing vulnerabilities may yield rising nonperforming loans should the crisis be prolonged with lasting economic scarring.

Immediate Policy Responses

The authorities’ immediate policy responses have focused on allocating resources to health care, supporting vulnerable households and the most- affected economic sectors, and ensuring liquidity provision.

Fiscal packages announced since the onset of the pandemic have averaged more than 2 % of GDP (Figure 5), with about 0.7 % of GDP directly funding health measures. The latter included spending on health supplies and workers’ wages and supported nonpharmaceutical interventions such as quarantines for travelers and suspected infected people, as well as the development of contact tracing methods (Jordan, Mauritania).

The average size of the package in MCD was actually smaller than any other region in the world, which reflects constrained policy space among oil importers and existing sizable government  support in the economy among most oil exporters. In about half of the countries, packages were financed through expenditure reallocation or revenue measures. Since the end of April, most of the additional policy responses have focused on enlarging fiscal support packages, in particular through support to small and medium enterprises with time-bound tax deferrals, delayed tax deadlines, and utility holidays (Djibouti, Iran, Pakistan), with few changes to monetary policy.

Social protection measures in the region, which were the main instrument for increased nonhealth spending, comprised cash and in-kind transfer schemes (used by more than two-thirds of countries), paid leave, unemployment benefits, and wage subsidies. Utility support, temporary tax exemptions on essential goods, and tax holidays have also been widely deployed (Azerbaijan, Bahrain, Egypt, Georgia, Iran, Morocco, Pakistan, Saudi Arabia, Tajikistan), as have credit lines to small and medium enterprises (Djibouti, Iran, Saudi Arabia, UAE, Uzbekistan). Many of the transfers were one-offs or time bound and were put in place at the onset of the pandemic.

Given the high levels of informality in some countries, mobile technologies have been deployed for cash-support delivery and the identification of beneficiaries. Morocco introduced a mobile payment mechanism to distribute compensation for informal sector workers with online registration, while Tunisia implemented a digital wallet to allow beneficiaries to receive and use transfers via mobile phones.

Pakistan and Jordan are both employing online beneficiary registration and eligibility verification, while facilitating e-money payments.

Following sizable policy rate cuts in March and April (Figure 6), most countries have maintained an accommodative monetary stance, while exchange rate flexibility has helped absorb part of the shock in some countries. Policy rates were cut in 16 countries (about half of which maintain pegs) by about 150 basis points (bps) on average (in line with the Federal Reserve); Pakistan and Egypt stand out with cuts of 525 bps and 300 bps, respectively, with Pakistan reducing its rate by a further 100 bps in late June. Nine central banks in the region (Armenia, Georgia, Jordan, Morocco, Saudi Arabia, Tajikistan, Tunisia, UAE, Uzbekistan) have injected more than USD 40 billion into their financial systems to support liquidity.

Several countries have allowed the exchange rate to work as a shock absorber (Armenia, Georgia, Kyrgyz Republic, Morocco, Pakistan), in some cases combined with interventions (Georgia, Pakistan). In addition, another nine countries in the region resorted to foreign-exchange interventions, which is more than in any other region, likely reflecting the prevalence of exchange rate pegs.

A Weaker Outlook

Given these domestic and external headwinds, and in spite of policy measures, real GDP in the MCD region is projected to fall by 4.7 % in 2020, which is 2 %age points lower than in the April 2020 Regional Economic Outlook (REO), in line with revisions to global growth over this period (Figure 7). These changes are mostly driven by the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region, where growth in 2020 is expected to be 2 %age points weaker than in April, reflecting subdued activity in oil exporters. In contrast, growth in the Caucasus and Central Asia (CCA) region was revised down by only 0.5 %age point, reflecting stronger policy response in some countries and lower oil production cuts than in MENAP.

Despite supportive policies, growth revisions appear to be linked to lockdowns and mobility. Countries with the highest lockdown stringency or lower workplace mobility (as measured by the Google index) also showed bigger real GDP revisions since the April 2020 REO (Kuwait, Kyrgyz Republic, Oman, Saudi Arabia, UAE). For oil exporters, this decline is also seen in non-oil GDP. However, there is unusually high uncertainty around these forecasts as well as around the speed of recovery thereafter.

With output projected to shrink by 13 %, on average, for 2020 (compared to an average growth of 2.6 % in 2019), countries that are fragile and in conflict situations are expected to witness a significant decline in GDP per capita—from USD 2,900 in 2018–19 to about USD 2,000 in 2020. This is a dramatic downturn that will aggravate existing economic and humanitarian challenges and raise already-high poverty levels.

In terms of various subregions:

•             Growth in MENAP oil exporters (MENAPOE) is projected at –7.3 % in 2020, rebounding to 3.9 % in 2021. The large downward revisions for this group for both 2020 and 2021 (3.1 and 0.8 percentage points, respectively, compared to the April 2020 REO) reflect the “double whammy” from oil price fluctuations (and supply cuts) and the pandemic-linked lockdowns.

Downward revisions in oil GDP reflect a sharper-than-anticipated drop in crude production; oil export receipts are now projected to decline by more than USD 270 billion in 2020 relative to 2019. Non-oil GDP in these economies has also been marked down as stay-at-home rules and other COVID-19 containment measures are causing larger-than-expected disruptions to the tourism, hospitality, transportation, and retail sectors.

•             For MENAP oil importers (MENAPOI), the benefits from lower oil prices are mostly being offset by hampered trade, tourism, and remittances and tighter global financial conditions and spillovers on domestic credit conditions, which, along with confinement measures, continue to depress growth. While, as a group, growth in 2020 is projected to be nearly unchanged from April (–1.1 %), there are substantial differences across countries. Growth in 2020 has been revised down for several economies (Afghanistan, Djibouti, Jordan, Morocco, Sudan) as sluggish growth in trade partners is expected to have a stronger-than-previously-projected impact on manufacturing and tourism exports. Markdowns in growth during the second half of 2020 are also reflected for Egypt and Pakistan, both of which lowered their fiscal year 2020/21 (which starts July 2020) projections by about 1 %age point, driven by weaknesses in the second half of 2020. Economic conditions continue to worsen in Lebanon, amid a generalized economic and financial crisis, with a double- digit contraction projected for 2020.

•             In the CCA region projections point to a moderately sharper contraction in 2020 (–1.5 vs. –1 %) and a shallower recovery in 2021 (4.4 vs. 4.7 %), compared to April forecasts. This is driven largely by downward revisions among CCA oil importers (CCAOI), whose change in real GDP in 2020 is projected to be –4.6 %, reflecting the combination of a worse-than- expected economic impact from pandemic- related lockdowns, weak trade, a collapse in tourism activity (Georgia), and a sharp drop in remittances (Kyrgyz Republic), especially from Russia. The region’s oil exporters (CCAOE) are also projected to experience a slightly deeper downturn (–1.1 % vs. –0.8 %) in 2020, but much less pronounced than the revisions for MENAP oil exporters. This is driven by the region’s rapid and strong crisis response (Azerbaijan, Kazakhstan), smaller oil production cuts under the OPEC+ agreements, and more diversified economies. In addition, non-oil commodity producers benefitted from the increase in gold prices (Kazakhstan, Uzbekistan), and favorable weather and price liberalization boosted agricultural output in Uzbekistan.

In an environment of weaker demand, inflation is projected to remain low in the region, except for Lebanon where year-over-year inflation increased to 56 % in May, as the currency has lost nearly two-thirds of its value despite the imposition of informal capital controls. Amid the erosion of tourism and remittances receipts and oil supply cuts, current account balances are projected to deteriorate further in 2020, especially for MENAPOE(–5.4 % of GDP in 2020 vs. 3.2 % of GDP in 2019) and the CCA region (– 6.4 % of GDP in 2020 vs. –1.5 % of GDP in 2019).

Among oil importers in the region, the fiscal balance is expected to worsen in 2020 relative to 2019. While fiscal balances in MENAPOI are projected to decline by about 1.4 %age points of GDP over this period (due to smaller fiscal packages and some reallocation), the deterioration among CCA importers is much higher, at nearly 6 %age points of GDP (worsening on average from –1.4 % of GDP in 2019 to –7.3 % of GDP in 2020) reflecting stronger policy responses to COVID-19 in Georgia, Kyrgyz Republic, and Tajikistan.

These large and growing deficits elevate debt sustainability concerns as debt-to-GDP levels are now projected to reach, on average, 95 % of GDP by the end of 2020 for MENAPOI and 61 % of GDP for CCAOI (Figure 8).

For oil exporters, the fiscal picture is mixed: in about half of the countries, policy packages were accompanied by adjustments in nonpriority expenditures and revenue measures, leading to improved non-oil fiscal balances in 2020, compared to 2019 (Algeria, Bahrain, Oman, Qatar, and Saudi Arabia, the last of which tripled its

value-added tax). Among the rest, non-oil fiscal balances in 2020 worsened on average by 4 percentage points of non-oil GDP over the same period with large deteriorations in Azerbaijan, Kuwait, and UAE. Fiscal balances are projected to worsen across the board in 2020, compared to 2019.

High Uncertainty Around the Outlook

Going forward, the economic outlook and balance of risks will be subjected to elevated uncertainty around the evolution and persistence of the pandemic. The downturn could be less severe than forecast if, for example, there is an earlier-than-expected availability of a vaccine or if country authorities find a way to maintain activity (and health systems) without stringent lockdowns in the face of any subsequent waves.

Nonetheless, downside risks are expected to dominate.

•             With regard to the direct impact of the pandemic, while several countries in the region have begun lifting stringent measures and there has been a recent uptick in activity, newly rising infection numbers could halt these trends. Although the region has thus far suffered relatively limited casualties, subsequent waves could test the capacity of health systems.

•             A prolonged decline in activity from a re- imposition of containment measures due to a recurrence of the pandemic or from cross- border spillovers or given weaker external demand could pose risks for firm bankruptcies and closures. This, in turn, may further dampen the recovery, worsen poverty and inequality, and lead to important economic scarring.

•             Lasting labour market scars, together with worsening poverty and inequality, could create stability challenges for governments in the region, particularly considering the high level of unemployment in some countries. In addition, social unrest could be rekindled as lockdown measures are lifted. As a result, these risks could make it more difficult for countries to unwind some of the support provided during the crisis amid limited policy space and rising vulnerabilities. This scenario could also trigger a reinforcing spiral of economic hardship and conflict in fragile states.

Beyond pandemic risks, continued declines in oil prices or production could further erode oil exporters’ policy space and potentially affect these countries’ banking systems. Any tightening of financial conditions could complicate debt rollovers for firms and sovereigns in the region financial conditions could complicate debt rollovers for firms and sovereigns in the region financial conditions could complicate debt rollovers for firms and sovereigns in the region.

Near-term Supportive Policies Needed

Governments need to continue ensuring that health systems are adequately resourced, strong, and resilient, regardless of where the country is in the progression of the pandemic (Figure 9). As countries in the region continue to reopen, policymakers should also focus on facilitating recovery. This will require progressively unwinding some of the emergency support and aiding the reallocation of workers away from contact-intensive sectors such as tourism—if needed, through hiring subsidies, retraining, and easing labor market rigidities and entry barriers— while tackling rising poverty and inequality. The exit from emergency support should be gradual to avoid sudden income losses and bankruptcies just as the economy is recovering. Easing reallocation will also require strong insolvency frameworks and mechanisms for restructuring and disposing of distressed debt so that weak private balance sheets do not stall the recovery. Such reforms will take sustained effort and time to put in place, though in Lebanon, which faces deep challenges, prompt and decisive reform implementation is needed across the board to restore macroeconomic stability. In addition, any further measures to support the economy in the short term should be designed to avoid excessively inhibiting reallocation. For instance, the focus should be placed on re-skilling workers and ensuring that credit goes toward viable sectors.

 For countries still in lockdown as well as those carefully reopening, liquidity provision will remain essential to supporting market functioning and preventing impairments to funding conditions.

Bank capital and liquidity buffers, if adequately high, should be used to absorb losses and liquidity strains. In particular, countercyclical capital buffers could be relaxed to maintain bank credit. In cases where banks face sizable and long-lasting shocks (for example, if the pandemic continues and lockdowns resume), and where bank capital adequacy is affected, supervisors should take targeted actions, including asking banks to submit credible capital restoration plans. Throughout the process, transparent risk disclosure and clear guidance from supervisors will be important. In the face of market pressures, and where appropriate, flexible exchange rates should be deployed as a first line of defense. Exchange rate interventions can play a role in muting excessive volatility. In crisis or near-crisis situations, capital outflow management measures could be considered, as long as they are part of a broader policy package and temporary. In general, authorities should explore contingency plans in case of a more protracted pandemic.

Global Support and Rebuilding Buffers

Multilateral, regional, and bilateral assistance through the global financial safety net can help cushion the impact of funding shocks. The IMF is actively supporting the region and has already approved nearly USD 17 billion to MCD countries since the beginning of 2020. Egypt, Jordan, the Kyrgyz Republic, Pakistan, and Tunisia have received emergency assistance under the Rapid Financing Instrument, while Afghanistan, Djibouti, the Kyrgyz Republic, Mauritania, Tajikistan, and Uzbekistan have accessed its concessional counterpart, the Rapid Credit Facility. These emergency financing instruments require no ex-post conditionality, and the Rapid Credit Facility is offered at zero interest. Morocco has opted to draw on its Precautionary Liquidity Line to boost reserve buffers and help manage needs arising from the shock. The ongoing IMF- supported programs in Armenia, Georgia, and Jordan have been adapted and, in Armenia and Georgia, augmented, to accommodate COVID- 19-related spending. In addition, a new 12-month Stand-By Arrangement was recently approved for Egypt, while programs for Jordan and Egypt have helped catalyze USD 5 billion in additional funding from other official creditors. The recent USD 1.8 billion in donor pledges to aid Sudan in the context of an IMF Staff-Monitored Program marks another strong example of multilateral assistance. Furthermore, the IMF’s Catastrophe Containment and Relief Trust (CCRT) has provided debt service relief to Afghanistan, Djibouti, Tajikistan, and Yemen, while Somalia became eligible to receive debt relief in March 2020 under the Heavily Indebted Poor Countries Initiative, once completion point criteria are met. Going forward, the Group of Twenty Debt Service Suspension Initiative could be an

important resource for several of the region’s financially constrained countries to preserve international liquidity and channel resources to combat the health crisis. Thus far, six countries from the region have requested relief: Afghanistan, Djibouti, Kyrgyz Republic, Mauritania, Pakistan, and Tajikistan.

The pandemic has highlighted the importance of strong and wide-reaching social safety nets. For all countries in the region, regardless of whether they remain locked down or are carefully reopening, these should be broadened and better targeted going forward. In addition, the pandemic has weighed heavily on informal and migrant workers not covered by traditional social safety net delivery methods. Given the high levels of informality in the region, establishing digital payment systems and building social protection databases to ensure the timely identification and support of targeted beneficiaries should be key priorities once the immediate crisis abates.

Beyond the pandemic and immediate recovery,  the focus should shift toward rebuilding buffers, in particular by lowering public debt and increasing reserves, and promoting a resilient and equitable economy. Many countries in the region will come out of the crisis with little policy space, large public debts, and rising financing pressures. In addition, contingent liabilities, particularly related to state-owned enterprises (SOE), could materialize in the event of a prolonged pandemic. To mitigate these risks, resuming gradual fiscal consolidation anchored by medium-term fiscal frameworks will be key, together with governance reforms and strengthened SOE oversight. The pandemic will likely accelerate global climate mitigation efforts and digitalization as some changes put in place during the crisis (for example, telecommuting and less travel) remain permanently. In this regard, redoubling diversification efforts will be essential to move the region away from its dependence on oil (both by exporters and through remittances) and toward building resilient economies that promote job creation.

www.imf.org

Here starts the third feature:

How South African SMEs can survive and thrive post COVID-19

By  guest authors Shakeel Kalidas, Nomfanelo Magwentshu, and Agesan Rajagopaul from McKinsey.

Shakeel Kalidas is a consultant in McKinsey’s Johannesburg office, where Nomfanelo Magwentshu and Agesan Rajagopaul are partners.

The authors wish to thank Karabo Mannya for her contributions to this article.

Here’s how the public and private sector can provide the right support to enable SME growth in South Africa, now and beyond the crisis.

The ongoing COVID-19 pandemic is causing untold human suffering across Africa and is likely to leave an indelible impact on the continent’s small and medium-sized enterprises (SMEs). We define SMEs as “a separate and distinct business entity, together with its branches or subsidiaries, if any, including cooperative enterprises, managed by one owner or more predominantly carried on in any sector or subsector.” Specifically, our focus is on businesses with a turnover of more than R15m and less than R500m. 1 These businesses play an outsized role in economies and employ an estimated 80 % of the continent’s workforce in both the formal and informal sectors, but during times of crisis they are often the least resilient. This is because typically they have limited cash reserves, smaller client bases, and less capacity to manage commercial pressures than do larger companies.

For South African SMEs, already having to contend with a contracting economy, additional shocks from COVID-19 are putting further pressure on their operations. Lockdown measures have caused revenues in many SMEs to fall precipitously and the majority report that they are being forced to cut back on business spending to survive.

For some, this may not be enough; analysts are predicting that around 60 % of SMEs may close before the crisis is over.

In this report, we draw on our experience working directly with SMEs in South Africa to provide insights into the headwinds that they are facing at this time, along with best practice examples and recommendations for how to address some of these challenges. We also offer a view on what the public and private sector can do to support this important business segment.

Because of their critical role in job creation and growth, protecting and enabling SMEs during this period of economic turbulence is important not least because their survival and recovery is likely to be a bellwether for the economy as a whole.

SMEs are the lifeblood of South Africa’s economy—and also the most at risk

SMEs across South Africa represent more than 98 % of businesses, employ between 50 and 60 % of the country’s workforce across all sectors, and are responsible for a quarter of job growth in the private sector. And while the GDP contributions from South Africa’s SMEs lag other regions—39 % compared to 57 % in the EU—there is no doubt that this sector is a critical engine of the economy (Exhibit 1).

Coming into the COVID-19 crisis, small enterprises in the country were already facing significant headwinds. A sluggish economy coupled with several ratings downgrades have negatively affected SMEs year on year and the economic impact of the coronavirus is likely to exacerbate these trends. ⁶ During the global financial crisis of 2008, SMEs bore the brunt of job losses and revenue declines globally and analysts expect this to be the case in this crisis too.

Many SMEs have already experienced a dramatic drop in demand. A McKinsey Consumer Pulse Survey carried out at the end of March 2020 found that more than 80 % of respondents were looking to decrease spending across all retail categories and more than 70 % were looking to cut back on transport and travel-related costs. ⁸ Sectors worst affected include the services sector (for example, private accounting and legal firms), tourism, hospitality, and retail. While these are some the fastest growing SME sectors in the country, the majority of businesses in them were not able to operate during the 35-day lockdown and their activities continue to be curtailed under level 3 and 4 restrictions.

Not surprisingly, business disruptions are signalling a strong decline in revenue and profitability of SMEs. Business confidence has fallen, too. In a flash survey we conducted in April 2020, just over a third of businesses surveyed expressed that they are pessimistic about the economy and economic outlook and more than 30 % indicated that they expected revenues to fall by between 5 and 50 % over the next six to 12 months leading to negative profits in excess of –5 %.

SMEs in South Africa face distinct challenges in navigating the crisis

McKinsey & Company has worked with a number of SMEs across 12 industries within South Africa over the past two years. In this time we have observed several common challenges across these businesses which include the following:

Limited access to low- and medium-cost funding is constraining business growth

A recent report highlighted that only 6 % of SMEs surveyed received government funding and only 9 % had sourced funding from private sources. 10 Additionally, the majority of private equity funding has largely been focused on mature businesses with around 90 % of funding going to businesses that are more than five years old. 11 We have seen firsthand, how this lack of access to funds is hindering business growth. For example, a local high-end furniture manufacturer, which had successfully grown the business to generate more than R10 million in revenue p.a., was unable to secure an additional R4 million in capital funding to sustain this growth. This was largely due to a lack of knowledge of available funding options as well as challenges in managing cashflows and earnings before interest, taxes, depreciation, and amortization (EBITDA) to deliver sufficient results to secure funding.

Even when funding is available, low awareness of opportunities and a lack of financial knowledge remain major barriers to SMEs accessing the required support.

In a recent survey we conducted on the impact of COVID-19 on SMEs, 36 % of respondents said that they were not receiving government loans or support and a quarter were not making use of payment reliefs such as UIF and PAYE. The top two reasons for not accessing such support, other than not qualifying, included that entrepreneurs were not aware of the opportunities or did not know where to find the information needed to apply (Exhibit 2).

This was also evident prior to the crisis. For example, an SME within the agricultural sector that had created a plan to significantly expand the capacity of its operations by modernizing facilities and creating additional storage facilities, was hampered by a lack of experience in developing a minimum viable plan. The expansion plan required funding, which was around 50 % higher than annual revenue. However, only a few sources had been explored to secure this because the business owners did not know where to look or how to make the pitch to investors.

Slowing demand has led to SMEs having to limit expansion plans and identify alternative channels to sell products

Between 40 to 60 % of small business respondents to our survey reported that they expect to make a loss of more than 5 % for the current financial year as a result of the crisis (Exhibit 3). Even before COVID-19 struck, many SMEs were having to scale back and look for new ways to get their product to market. Some examples include a coffee roasting business, that, due to lack of local demand from the private sector, was exploring opportunities to expand internationally and partner with large corporates in these markets. And an SME in the recycling industry that generated 50 % of its revenue from processed recycling resale was reviewing its business plans and outlooks in the medium term. The business it derived from corporates was expected to decline as a result of the contracting economy, and this will likely be accelerated as corporates operate limited office capacity during the crisis.

Accessing the right markets in order to sell products is a challenge

Several SMEs highlighted an ongoing struggle to connect with potential buyers. Very often, SMEs are overly dependent on a small number of clients; in some cases an entire business can be concentrated in a single local redistributor. The emergence of online marketplaces and micro sales platforms that allow manufacturers to access new markets is one way of helping to overcome this challenge. For example, Thola Africa, an online platform we developed in partnership with ICT-works, offers African artisans and designers—who mostly have a limited or regional customer base—access to a global market looking for products of this nature. The platform now has 17 suppliers and more than 225 products listed to date.

Owners and founders struggle to empower staff to lead and drive the business

Many SMEs are struggling to break free from a restrictive owner mindset and assume a more strategic role largely because small enterprises often lack sufficient performance management systems, clear day-to-day operating models, and management structures with well-defined roles and responsibilities, key performance indicators (KPIs), and designated decision-making. For example, one business process outsourcing (BPO) provider was delivering coaching on customer management but not driving strong performance management on key client service level agreements (SLAs). Another manufacturing SME owner struggled to extract himself from production and manufacturing and hire in key skills to take over these roles, even though he was scaling the business.

Liquidity and cashflow management are limited

Many low maturity and new SME businesses lack the financial, operational, and strategic structures that are common in larger businesses. This hinders them from making the best use of available capital to scale their operations. This may be because they have limited cashflow and are highly dependent on clients paying their invoices on time or because they have little knowledge and insight into how to effectively set up and run the business, and the associated key metrics to be tracked. For example, an agricultural client that had an ambitious growth plan to expand their facilities in core and non-core areas struggled to obtain the required funding because the business was not in a financial position to meet stringent funding requirements.

A lack of prioritization and financial planning that would have allowed them to focus on core areas to finance and build out meant that, rather than growing sustainably, the scale of their ambitions and poor internal management combined to ensure that they did not grow at all.

Liquidity and cashflow management are likely to come under even further pressure during the crisis. Our recent survey highlights that SMEs are taking drastic actions to hedge against future risk with 70 % saying they have reduced business spending already. The largest area of impact is likely to be on employment (Exhibit 4).

Four areas where SMEs can take action to mitigate these challenges during the crisis

In working directly with SMEs we have encountered a number of innovative responses to overcome these challenges and grow during the COVID-19 crisis and beyond. Broadly speaking, SMEs are pursuing several common strategies to support their success at this time in the following domains: financial stability; access to new markets and customers; a stable supply chain; strong customer engagement; a healthy workforce; and a robust post-crisis strategy. Most of the examples cited here relate to one or more of these domains.

1. Leverage technology to reach new customers or provide a distinctive value proposition

Digital and new technologies create an opportunity for SMEs to enhance their reach and efficiency at lower costs, overcoming the scale disadvantage they have relative to larger players. SMEs can focus on key areas of competitiveness in their value chain, product, and/or operations and identify the best technology levers to enhance competitiveness.

For example, a local BPO SME leveraged widely available technology—a virtual private network (VPN)—to transfer their systems onto a custom-made platform, which could be quickly modified as their needs shifted. This allowed them to rapidly move their call centers to remote working in the wake of a nationwide lockdown in South Africa. In less than five days, they moved more than 80 % of their operations to a remote working model. The remaining capacity was not needed due to scaled-back customer demand during the crisis. The company was subsequently able to employ this unused capacity to generate additional business by supporting state initiatives aimed at reducing the spread of the coronavirus. A strong technology position helped this BPO player be more agile in the face of significant market uncertainty and disruption to their operations.

Digital and new technologies create an opportunity for SMEs to enhance their reach and efficiency at lower costs, overcoming the scale disadvantage they have relative to larger players.

2. Develop clearer market access strategies

SMEs can be more structured and holistic in developing their go-to-market strategies to increase their market share and also reduce the risk inherent in concentrating their sales with one to three large customers. For example, one agricultural processing player rapidly assessed the market conditions to identify areas that would drive demand for their product.

A better understanding of, for example, shifting demand, potential new client bases, and local substitutes for their product enabled them to shift their focus to new target markets to sustain demand. Access strategies allow SMEs to focus on their core value proposition that can be leveraged to clearly position themselves in a new market. For example, a BPO provider developed a discrete niche offering to take to new markets instead of adapting the business to any new demand as they had done in the past. This allowed them to more effectively prioritize scarce business development opportunities as well as investment resources.

3. Drive efficiency as well as sales

Most SMEs we have worked with focus on increasing sales and managing cash as priorities. SMEs that also focus on operational efficiencies can drive further competitiveness to support sales, while also potentially creating increased capacity in the business. For example, a manufacturing SME used basic visualization tools such as management boards to optimize operations. By tracking tasks in progress and KPI dashboards, they managed to achieve a 25 % improvement in scrap reduction, which had a resultant EBITDA impact of roughly 100 %. This was primarily driven by improved visibility into areas of leakage as well as a better ability to focus team efforts on solving problems.

SMEs that focus on operational efficiencies can drive further competitiveness to support sales, while also potentially creating increased capacity in the business.

4. Develop team skills and capabilities and empower leadership

SMEs on a fast growth track can struggle to scale up growth, particularly when founders are still actively involved in the business. By investing in capability building, particularly at a leadership level, SMEs can create more capacity for senior leaders to focus on growth and strategy to ensure sustainability. For example, a BPO player formed a shadow management committee with delegated roles and responsibilities supported by the existing, experienced management committee team. This allowed the leadership team to distribute the workload during the COVID-19 crisis more effectively as they transitioned to remote working and freed them up so that they could focus on sourcing new business and developing continuity plans. The company also supported their team with training on adopting a leadership mindset. Additionally, they empowered their top team by making more financial data available to them so that they could better understand and take ownership of the results of the business.

All hands on deck: The right support to enable SME growth

Our SME Financial Pulse Survey carried out in April 2020 revealed the concerning reality that 52 % of SMEs are considering having to close down parts of their business and reduce capacity as a result of the COVID-19 crisis (Exhibit 5). More than 40 % of all SMEs have already reduced capacity, laid off employees, or may need to lay off employees, including larger businesses with revenues in excess of R100 million. Compared to 51 % pre-crisis, only 21 % of respondents are optimistic that the South African economy will recover quickly.

In addition to taking steps to innovate and pivot their businesses in response to this new reality, the vast majority of SMEs are going to need broader support if they are to emerge stronger from the crisis. Many may lack the in-house skills and business advisory services they need to get the right advice on structural business changes and to help them reimagine their business at this time.

More than 50 % of SMEs are currently receiving support from financial institutions for payments and more than 60 % are taking advantage of relief being offered by government despite low awareness regarding what relief is available at this time. 13 But to prevent a widespread contraction of the sector, more will need to be done. Both government and the private sector have a special role to play here.

Government support is key to galvanizing SMEs post COVID-19

Government is undoubtedly a key player in the SME ecosystem, and post COVID-19 there will be new pressures, forcing them to be even more careful about ensuring that scarce funds are effectively deployed and utilized. Their role can be viewed through two lenses: as an enabler of SME growth, and through the delivery of targeted support, especially to high-growth businesses. We have identified four key areas where government support could be critical.

1. Boost the national entrepreneurship ecosystem

Governments can enhance the national entrepreneurial culture by promoting programs that prioritize SMEs as preferred suppliers. They can also work to identify and bridge gaps in business enablement that could hinder SME growth. In addition, they could provide outsourcing support for back office services, something that small SMEs typically struggle with. Government could also focus on raising awareness among SMEs as to what support—financial or otherwise—is available to them.

2. Invest in the skills and capabilities that SMEs need at this time

Government can continue to ensure that entrepreneurs are supported with the skills and capabilities they need to rebuild and grow their business after the crisis. Most would benefit from additional training, for example, in business scenario planning or managing scarce financial resources. This would be particularly relevant where relief funding is provided. Government could also work with industries and sectors that are most under threat from COVID-19 to develop resilience strategies and to help them reimagine their business models going forward.

3. Drive innovation, research, and development

Research and development are key requisites for innovation and growth and successful entrepreneurship ecosystems recognise this.

For example, Malaysia’s national commercialisation platform—PlaTCOM Ventures—helps entrepreneurs turn their ideas into successful products and services. In South Africa, more will need to be done to identify and fund high-growth businesses and support innovation even where current financials do not support this.

4. Provide targeted and sector-specific support for SMEs now and post crisis

There is a significant opportunity for government to work with entities such as the Small Enterprise Development Agency (SEDA) and the Small Enterprise Finance Agency (SEFA) to provide nuanced, sector-specific interventions to help SMEs get back on their feet post-crisis. Some sectors, for example, will need initial financing, while others may need more sustained support. As far as is possible, given that this support will impact the government’s financial position, this could extend to continuing initiatives such as PAYE deferments and tax breaks instigated during the crisis. All these support mechanisms need to be clearly and rapidly accessible to ensure that SME leadership is not having to spend too much time managing financing processes while also managing the crises in their business.

Government can also drive specific support to unlock growth. For example, government could support export-focused companies in agriculture and BPO by setting up an export office for all SMEs to help reduce bottlenecks. In addition, they could support manufacturing and consumer goods businesses that have the potential to compete with larger players and offer alternatives to imported goods. This might include creating cooperatives.

Private sector support can boost the viability and sustainability of SME partners

The private sector has several levers it could pull on to support SME growth—especially those with high potential—post the COVID-19 crisis, depending on the business area.

Banks and financial institutions have already driven a significant number of initiatives globally and in South Africa to support SMEs, including through the suspension of loan repayments or the reworking of principal repayments; the provision of resources and communication tools to clients; interest and fee waivers; relief loans; and pre-approved or expedited loan approvals. For example, a leading South African bank is providing instant short-term deferral on credit products for up to three months and another is offering a similar program for SMEs with a turnover of less than R20 million.

Financial institutions can also play a significant role in driving uptake and capability-building in new channels and payment methods. The recent consumer survey conducted by McKinsey highlighted that post the COVID-19 crisis more than 65 % of payments will be done using cards or means requiring POS devices; a significant drive from financial institutions can help drive uptake and readiness in businesses.

Corporates more generally could enable SMEs by focusing their supplier development for longer-term scale and competitiveness. We recommend five elements for private sector players to consider as part of their supplier development processes to both serve their needs and ensure the viability and sustainability of their SME partners as a business imperative, and not just for social responsibility purposes.

• Develop a clear selection criteria for suppliers up-front. For example, by defining the categories in which to develop suppliers. This could be based on ownership structures, business performance, or other criteria.
• Assess the capability gaps that exist within suppliers up-front and develop plans to help them close these.
• Build funding and capability requirements into the contract to create sustainabilitySimplify contractual terms and conditions and required paperwork for SMEs that often do not have large/dedicated commercial teams.
• Establish regular check-ins and course correction sessions throughout the lifecycle of the suppliers.
• Corporates more generally could enable SMEs by focusing their supplier development for longer-term scale and competitiveness.

SMEs are a vital engine in the South African economy. They drive growth, create employment—especially among youth—and spearhead innovation. SMEs are also customers to larger companies across the supply chain and supply vital goods and services to companies and households, helping to keep the wheels of the economy in motion. Furthermore, they can leverage their agility to design and incubate new technologies and business models to build a better future. Many of South Africa’s SMEs have the potential to become tomorrow’s large corporations, the African unicorns that this continent needs to continue on its path to growth and prosperity.

When the pandemic will peak in South Africa is uncertain. It is imperative therefore that efforts to protect SMEs move with speed and decisiveness not only to cushion the worst of the impacts of the crisis on livelihoods but to help ensure a swifter recovery for the broader economy.

www.mckinsey.com

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