#1THE WORLD BANK IBRD IDA WORLD BANK GROUP DEPARTMENT O OF FINANCE REPUBLIC OF THE PHILIPPINES THESAUR PAMBANSANG PANGASIWAAN SA AKABUHAYAN AT REPUBLIKA NG PILIPINAS PAGPAPAUNLAD Australian Aid Impacts of COVID-19 on Firms in the Philippines Results from the Philippines COVID-19 Firms Survey conducted in July 2020#2Key Findings • These findings are based on the survey of 74,031 firms carried out between July 7 to 14, 2020, to assess the COVID-19 impact on firms' activities. • COVID-19 community quarantine measures had a significant temporary and permanent impact on firms' operations. In July 2020, 40 percent of firms reported the temporary suspension of their operations 20 percent by government mandate and 20 percent voluntarily. About 15 percent of firms reported to have closed permanently. • -- Despite the easing of the community quarantine in June 2020, firms reported a deep reduction in sales revenue. Reported sales revenue has gone down by 64 percent on average between April and July 2020, with 89 percent of firms reporting a continued reduction in sales. • The negative impact on employment is also extensive as 1 out of 2 firms reported having reduced payments to employees. Close to half (48 percent) of firms reported that they reduced the number of their employees, while the rest maintained the level of employment with only 1 percent reporting new employment. 2#3Key Findings • Almost two thirds of firms turned to digital solutions for sales, marketing, and payment methods to adapt to the new normal. A sizable share of firms also invested in digital solutions (23 percent) or repackaged their product mix (40 percent). Firms expressed a high degree of uncertainty and general pessimism about their operations, sales and employees for the next three months. Such lack of confidence will likely limit additional investment and employment, restraining firms' growth. These suggest that business activities are expected to stay subdued for an extended period. • Firms say the most useful form of government support are those that would improve their liquidity, such as cash transfers, subsidized interest rates, deferral of loan, rent, or utility payments, and tax exemptions or reductions. About 1 out of 5 firms received support from the national or local government, mainly in the form of cash transfers directly paid to employees. 3#4Philippines COVID-19 Firm Survey ● . Objective: To better understand the impacts of COVID-19 on the private sector Sponsors: The World Bank in collaboration with the Department of Finance (DOF) and the National Economic Development Authority (NEDA) and support from the Australian Government Survey round . July 7 - 14, 2020, following the April 2020 survey by the government • First of five rounds Data collection method: Self-administered online survey Sample and representativeness: • 74,031 responses • Sample was reweighed to follow the distribution of firms by region and firm size based on employment as reported by the Philippine Statistics Authority's 2018 Listing of Establishments Analysis of impacts on firms conducted by asset size (micro, small, medium, and large), location (17 regions), and sector (agriculture, manufacturing, and services)#5How COVID-19 is affecting firms COVID-19 shocks operate through many channels, but the magnitude and who is more affected is hard to predict. The PH COVID-19 Firm Survey measured the impact of shocks on firms' sales and employment, their operations, expectations, as well as their adjustment mechanisms and access to government support. Lockdown effects Public health measures require non-essential businesses to close Temporary shock, targeting non-essential businesses, mostly in retail, hotels/restaurants (tourism) and personal services. Demand shocks Economic downturn drives down demand domestically and abroad Broad-based shock. Will especially hit firms producing durables, apparel/textiles and those reliant on export (manufacturing & services- e.g. tourism). Supply shocks Decline in labor and intermediate inputs, global value chains disrupted E.g., firms that rely on imports are affected. Financial shocks Opportunities for finance becoming further constrained Deterioration in availability of credit while demand increases will affect access to finance Uncertainty ??? Uncertainty is driving down investment and innovation Responses by firms and government Employment measures Firms can adjust by tightening their labor force and wage bill Digital Technology in Firms can adjust by adopting new digital technology and business models Government Support Governments can provide fiscal support to firms facing negative shocks 5#6Country Context The Government of the Philippines imposed strict community quarantine measures to minimize the spread of COVID-19 Enhanced Community Quarantine (ECQ) areas General Community Quarantine (GCQ) areas Modified Enhance Community Quarantine (MECQ) areas Modified General Community Quarantine (MGCQ) areas April 2020 Early May 2020 July 2020 Source: Republic of the Philippines Inter-Agency Task Force (IATF) on the Management of Emerging Infectious Diseases 6#7Impact on firms Lockdown and economic downturn can drive down demand domestically and abroad, disrupt input supply, and drive down liquidity. 7#8Community quarantine had a significant effect on the operational status of firms . 40 percent of firms were closed temporarily, either by government mandate (20 percent) or voluntarily (20 percent) • 15 percent of firms stated that they were permanently closed Operating status of firms (% of firms) 15% Permanently closed 40% 77% ■Closed Partially Open 40% ■ Open 21% 2% 5% April July#96 16% 61% 60% 56% 51% Food services 41% 20% Real estate and leasing 43% 14% ICT: BPO and others 40% 15% Operational status of firms by sector (% of firms) All sectors Arts & entertainment Tourism Transportation Education Temporarily Closed 40% Permanently Closed 4 out of 5 firms in the arts, entertainment, and recreation and tourism and accommodation sectors were closed 21% 20% 16% 18% Manufacturing 39% 13% Professional services 38% 14% Construction Wholesale and retail trade Agriculture Financial activities 37% 13% 34% 13% 33% 13% 27% 19% Auto repair 34% 10% Health 31% 11% Utilities 29% 12%#10Demand shock continues despite the easing of the community quarantine: firms have reported a deep reduction in sales revenue Change in sales in July 2020 compared with April 2020 (% of firms) Don't know All sector Tourism and accomodation services Real estate, rental and leasing services Professional services and other servce activities Total Financial activities Transportation and storage Education Construction Increased Remained the same Decreased Utilities 0 10 20 30 40 50 60 70 80 90 10 100#11Three quarters of firms experienced a decrease in demand, with 1 in 3 firms reporting a decline by more than 50 percent. Impact on Demand for Products and Services All sectors 5% 5% 4% 10% 13% Agriculture 9% 8% 7% 15% 13% Manufacturing 6% 5% 4% 9% 13% Wholesale & retail 5% 6% 4% 11% 15% Accomodations & food 3% 4% 4% 7% 13% Other services 4% 5% 4% 11% 11% Increased by more than 50% Decreased by less than 25% 30% 28% 28% 27% 29% 24% 34% 35% 38% 37% 29% 24% Increased by 25% to 50% I Decreased by 25% to 50% Increased by less than 25% Decreased by more than 50% Remained the same 11#12Reasons for the decreased demand for products and services (% of firms) Customers cannot travel to the establishment to purchase products or services Quality of products or services has decreased Customers cannot purchase products or services using mobile phone or online platform Price of products or services has increased Customers are less aware of the products or services Quality and price remain the same, but customers show less interest 0% 20% 40% 60% 80% 12#1370 percent of firms reported having their operations affected by a decrease in the availability of inputs and raw materials Impact on availability of inputs, raw materials, or finished goods to resell All sectors 2% 2% 3% 3% Agriculture 5% 5% 4% 4% Manufacturing 4% 4% 4% 4% 22% Wholesale & retail 2% 2% 3% 3% 18% Accomodations & food 2% 2% 2% 2% 23% Other services 2% 2% 2% 2% 30% 19% 23% I Increased by more than 50% I Decreased by less than 25% Increased by 25% to 50% Decreased by 25% to 50% 30% 27% 27% 29% 23% 22% Increased by less than 25% Decreased by more than 50% 23% 21% 21% 23% 20% 25% Remained the same 13#14Reasons for the decreased availability of inputs and raw materials (% of firms) Local distributors have ceased or reduced operations (e.g. limited availability of trucks/drivers) Domestic suppliers have ceased or reduced operations Local distributors are experiencing delays due to checkpoints Don't know Slow customs clearance has reduced availability of inputs, raw materials, or finished goods to resell International suppliers have ceased or reduced operations 0% 10% 20% 30% 40% 50% 60% 14#1540 percent of firms reported that prices of inputs and raw materials increased Impact on price of inputs, raw materials, or finished goods to resell All sectors 5% 14% 21% 32% 8% 10% 11% Agriculture 5% 13% 20% Manufacturing 5% 13% 24% 27% 29% 11% 11% 13% 7% 11% 10% Wholesale & retail 4% 15% 23% 30% 8% 10% 9% Accomodations & food 4% 16% Other services 5% 10% 15% Increased by more than 50% Decreased by less than 25% 23% Increased by 25% to 50% Decreased by 25% to 50% 39% 30% 7% 10% 10% 6% 10% 15% Increased by less than 25% Decreased by more than 50% Remained the same 15#16Firms faced a deterioration of their cash flow ... Impact on availability of cash flow All sectors 2%3% 3% 8% 13% Agriculture 2% 3% 3% 11% Manufacturing 3% 4% 2% 8% 14% Wholesale & retail 2%3% 2% 8% 15% Accomodations 2%2% 3% 7% 11% & food Other services 1% %2% 7% 11% 18% 31% 29% 31% 28% 34% Increased by more than 50% Decreased by less than 25% Increased by 25% to 50% Decreased by 25% to 50% 26% Increased by less than 25% Decreased by more than 50% 42% 41% 45% 47% 36% 37% Remained the same 16#17... and decreased access (among those needing) to financial services for funding Impact on access to financial services for funding All sectors 5% 4% 3% 18% Agriculture 5% 3% 4% 19% 12% Manufacturing 7% 3% 3% 17% 13% Wholesale & retail 4% 4% 3% 19% Accomodations & food 5% 3% 3% 16% 12% Other services 4% 4% 3% 19% Increased by more than 50% Decreased by less than 25% 23% 14% 17% 12% 10% 23% 22% 23% 25% 36% 37% 34% 38% 39% 32% Increased by 25% to 50% Decreased by 25% to 50% Increased by less than 25% Decreased by more than 50% Remained the same 17#18Loans from friends and family were most accessible, while loans from government institution and banks were least accessible Financial services or funding that firms applied and received (% of firms) Liquidation of assets Loans from government institution Loans from digital financing platforms Loans from non-bank financial institutions Loans from informal lenders Loans from banks Loans from friends and family Delayed payment terms of taxes and debt Delayed payments from suppliers and providers Earlier payments from customers 0% 10% 20% 30% 40% Financial services or funding that firms applied but did not receive (% of firms) Liquidation of assets Loans from government institution Loans from digital financing platforms Loans from non-bank financial institutions Loans from informal lenders Loans from banks Loans from friends and family Delayed payment terms of taxes and debt Delayed payments from suppliers and providers Earlier payments from customers 0% 10% 20% 30% 40% 18#19Responses by firms Ù Firms have taken cost saving measures by reducing hours of operations, wages, and their employees, as well as adjusting business models to use digital solutions. 19#2052 percent of firms reduced payment to employees, and 48 percent of firms laid off workers Impact on employment and compensation in July 2020 compared to April 2020 (% of firms) 37% 48% 52% 1% Increased Remained the same Decreased Reduced payment to employees 20 20#21... with firms from education, food services and construction cutting down manpower the most Impact on employment by sector (% of firms) 37% All sectors Education Food services 48% 26% 65% 27% 62% Construction Manufacturing 29% 62% 33% 56% Professional services Tourism and accomodation ICT: BPO and others Utilities Arts, entertainment, and recreation Agriculture, fishing, mining Automotive repairs Transportation and storage Real estate, rental and leasing services Wholesale and retail trade 37% 54% 36% 54% 37% 52% 38% 50% 37% 48% 44% 44% 43% 44% 43% 43% Health 52% 40% 42% 40% 38% 39% Financial activities 51% 37% Don't know Increased Remained the same Decreased 21 21#22Many firms (58% of SMEs and large firms, 63% of micro firms) turned to digital solutions to adapt to the new normal Use of digital solutions in the new normal (% of firms) ICT Professional services Education Tourism Financial activities Arts & entertainment Rental and leasing Health Real estate Construction Manufacturing Utilities Other services Transportation Wholesale and retail trade Food services Agriculture Automotive repair Just started using Increased use Not using 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 22#23Uptake in digital solutions so far have focused on front-end functions such as sales, marketing, and payment methods. Business functions where digital solutions are being used (% of firms) Marketing Sales Service delivery Payment methods Business Administration Supply chain management Production planning Fabrication of goods 0% 10% 20% 30% 40% 50% 23 60%#2470% of firms noted that less than 2% of their employees worked from home Major obstacles faced by the firm in maximizing the number of employees to work from home (% of firms) Nature of work not suited to home- based work Lack of equipment needed for employees to work from home Unreliable or expensive internet connection in employees' homes Employees' competing caregiving/ family responsibilities Infrastructure of employee's homes inadequate for homebased work The most cited obstacle is that the nature of work was not suited to home- based work • Only 5 percent of firms noted that 90 percent or more of their employees worked from home 0% 10% 20% 30% 40% 50% 60% 24#25Uncertainty Uncertainty is an important additional channel affecting firms during the pandemic, and as the economy re-opens, this could result in a lower desire for risk-taking and additional investments. 25 25#2645 percent of the currently closed firms did not know when their businesses could resume Expected opening and closure (% of firms) When closed firms expect to open ■When operating firms expect to close 45% 39% 20% 15% 14% 13% 11% 12% 8% 9% 9% 5% Less than 2 weeks Between 2 and 4 Between 1 and 3 Between 3 and 6 weeks months months More than 6 months Don't know 26#27About one third of firms did not know how they sales and employment will change in the next 3 months Expected changes in sales and employment, July vs. September 2020 (% of firms) Sales Employment 23% 18% 10% 33% 32% 33% 28% 24% Is expected to increase Is expected to remain the Is expected to decrease Don't know same 27 27#28Policy support Governments can provide support to firms facing negative shocks 28#29About 1 out of 5 firms reported receiving some support from the national or local government. • Cash transfers provided to employees through the Pantawid Pamilyang Pilipino Program (4Ps) and Social Amelioration Program were the most cited government support received by these firms. Firms that received government support (% of firms) All locations National Capital Region Region 1: Ilocos Region 2: Cagayan Valley Region 3: Central Luzon Region 4A: Calabarzon Region 4B: MIMAROPA Region 5: Bicol Region 6: Western Visayas Region 7: Central Visayas Region 8: Eastern Visayas Region 9: Zamboanga Peninsula Region 10: Northern Mindanao Region 11: Davao Region 12: SOCCSKSARGEN Region 13: Caraga Region 15: CAR Region 16: BARMM (formerly ARMM) 0% 5% 10% 15% 20% 25% 30% Government support received by firms (% of firms) Cash transfer New loans with subsidized interest rates Deferral or reduction of rent, mortgage, or utilities Deferral or loan payments Credit mediation and refinancing Regulatory relief Wage subsidies Training: business skills Others 0% 10% 20% 30% 40% 29 50%#30Firms were split evenly across various reasons for not having received government support Reasons why firms did not receive government support (% of firms) 27% 26% 22% 21% Too difficult to apply I was not aware I have applied but not I am not eligible received it 30#31Liquidity improving measures are the most desired government support Government support desired by firms (% of firms) Cash transfer New loans with subsidized interest rates Tax exemptions or reductions Deferral or reduction of rent, mortgage, or utilities Deferral or loan payments Credit mediation and refinancing Regulatory relief 46% 36% 22% 22% 19% 15% 14% Wage subsidies 10% Training: business skills 9% Improved public transportation services Training: digital skills 9% 8% Tax deferral 4% Others 6% 31#32Effort should be concentrated on re-establishing demand, supply, and financial channels and helping firms adjust to the normal by improving firm capabilities. • The Government of the Philippines is currently considering additional measures to further support the Philippine firms through tax reductions and expanding access to new loans. • Future government support should also note that the new normal is characterized by high uncertainty, which can • make access to finance programs less effective as firms are less willing to borrow, and banks are hesitant to lend. Clear communications and consistent messaging about community quarantine measures on business operations in a timely manner will be crucial to reduce firms' uncertainties about the future. 32#33Annexes 33#34Weighted distribution of firms by size, location, and sector Firm size % Location % Sector % Micro 59.3 National Capital Region 22.7 Small 19.2 Region 1: Ilocos 3.4 Agriculture, fishing and mining Manufacturing 5.1 9.9 AAAAAA Medium 12.8 Region 2: Cagayan Valley 1.2 Construction 4.2 Large 8.7 Region 3: Central Luzon 11.8 Utilities 1.3 Region 4A: Calabarzon 17.7 Wholesale and retail trade 28.9 Region 4B: MIMAROPA 2.5 Auto repair 2.6 Region 5: Bicol 4.3 Transportation and storage 4.4 Region 6: Western Visayas 6.5 Tourism and accomodation 3.6 Region 7: Central Visayas 9.1 Food services 18.7 Region 8: Eastern Visayas 2.1 ICT: BPO and others 2.1 Region 9: Zamboanga Peninsula 1.7 Financial activities 2.0 Region 10: Northern Mindanao 2.6 Real estate and leasing 1.4 Region 11: Davao 6.3 Education 2.7 Region 12: SOCCSKSARGEN 3.1 Health 2.8 Region 13: Caraga 2.6 Arts, entertainment, and recreation 4.0 Region 15: CAR 2.4 Professional services 1.3 Region 16: BARMM (formerly Other services 5.3 ARMM) 0.2 34#35Government support measures that were available to firms as of July 2020 • Cash transfers: Pantawid Pamilyang Pilipino Program (4Ps) and Social Amelioration Program (SAP) • Deferral or reduction of rent, mortgage, or utilities: DTI's rent deferment grace period . Deferral of credit payments, suspension of interest payments, or rollover of debt: grace period for loans Access to loans with subsidized interest rates: DTI/SB Corp's P3-ERF / Covid-19 Assistance to Restart Enterprises (CARES) program, Landbank's I-RESCUE Lending, DA-ACPC's Plant Plant Plant under SURE Aid program, PhilGuarantee's loan guarantee • Credit mediation and refinancing: Landbank's I-RESCUE Lending • Wage subsidies: DOF's Small Business Wage Subsidy (SBWS) . • Support programs related to business advisory, education, and training for entrepreneurship and SMEs: DTI's Livelihood Seeding Program - Negosyo Sa Barangay Regulatory relief: suspended, reduced, or waived fees and payments for licensing, registration, permits and inspection, DOLE's labor regulation adjustments 35#36Acknowledgement The note was prepared by the World Bank team led by Sharon Piza (Economist, EEAPV), comprising of Jin Lee (Private Sector Specialist, ETIFE), Rong Qian (Senior Economist, EEAM2), and Yoonyoung Cho (Senior Economist, HEASP). The survey is a component of the Real Time Monitoring of COVID-19 Impacts in the Philippines Project supported by the Australian Government. Survey implementation and data processing was supported by the Department of Finance (DOF), National Economic Development Authority (NEDA), National Telecommunications Commission (NTC), along with Gio Santos and Rina Gonzalez (Consultants, EEAPV). The survey design, implementation, and results analysis received the guidance of Cecile Niang (Practice Manager, EEAF2) and Rinku Murgai (Practice Manager, EEAPV), with inputs from Asya Akhlaque (Lead Economist, EEAF2), Leonardo lacovone (Lead Economist, ETIFE), Shawn Tan (Senior Economist, EEAF1), Trang Tran (Senior Economist, ETIFE), Jaime Frias (Senior Economist, EEAF2), Clarissa C. David (Senior External Affairs Officer, ECREA) and David Llorito (External Affairs Officer, ECREA). For more information, please contact Sharon Piza ([email protected]) and Jin Lee ([email protected]). 36