Public Disclosure Authorized Public Disclosure Authorized Impacts of COVID-19 on Firms in the Philippines Public Disclosure Authorized Results from the Philippines COVID-19 Firms Survey conducted in July 2020 d Key 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 Key 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 • Objective: To better understand the impacts of COVID-19 on the private sector Philippines • Sponsors: The World Bank in collaboration with the Department of Finance (DOF) and the National Economic Development COVID-19 Firm Authority (NEDA) and support from the Australian Government Survey • 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) 4 How COVID-19 is affecting firms Lockdown effects Supply shocks Public health measures require Decline in labor and intermediate COVID-19 shocks operate through non-essential businesses to close inputs, global value chains many channels, but the disrupted Temporary shock, targeting non-essential E.g., firms that rely on imports are affected. magnitude and who is more businesses, mostly in retail, hotels/restaurants affected is hard to predict. (tourism) and personal services. Financial shocks Opportunities for finance The PH COVID-19 Firm Survey becoming further constrained measured the impact of shocks Demand shocks Deterioration in availability of credit while on firms’ sales and employment, Economic downturn drives down demand increases will affect access to finance demand domestically and abroad their operations, expectations, as well as their adjustment Broad-based shock. Will especially hit firms mechanisms and access to producing durables, apparel/textiles and those Uncertainty reliant on export (manufacturing & services – Uncertainty is driving down government support. e.g. tourism). investment and innovation Responses by firms Employment measures Digital Technology Government Support Firms can adjust by tightening their Firms can adjust by adopting new digital Governments can provide fiscal and government labor force and wage bill technology and business models support to firms facing negative shocks 5 Country Context The Government of the Philippines imposed strict community quarantine measures to minimize the spread of COVID-19 6 Impact on firms Lockdown and economic downturn can drive down demand domestically and abroad, disrupt input supply, and drive down liquidity. 7 Community quarantine had a significant effect on the operational status of firms Operating status of firms (% of firms) • 40 percent of firms were 15% closed temporarily, either by government Permanently mandate (20 percent) or 40% closed 77% voluntarily (20 percent) Closed • 15 percent of firms Partially Open stated that they were permanently closed 40% Open 21% 2% 5% April July 8 Operational status of firms by sector (% of firms) Temporarily Closed Permanently Closed 4 out of 5 firms in All sectors 40% 16% the arts, Arts & entertainment 61% 21% entertainment, and Tourism Transportation 56% 60% 16% 20% recreation and Education 51% 18% tourism and Food services Real estate and leasing 41% 43% 20% 14% accommodation ICT: BPO and others 40% 15% sectors were closed Manufacturing 39% 13% Professional services 38% 14% Construction 37% 13% Wholesale and retail trade 34% 13% Agriculture 33% 13% Financial activities 27% 19% Auto repair 34% 10% Health 31% 11% Utilities 29% 12% 9 Demand 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 Increased Remained the same Decreased 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 Utilities 0 10 20 30 40 50 60 70 80 90 100 10 Three 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% 28% 34% Agriculture 9% 8% 7% 15% 13% 24% 24% Manufacturing 6% 5% 4% 9% 13% 28% 35% Wholesale & retail 5% 6% 4% 11% 15% 29% 29% Accomodations & food 3% 4% 4% 7% 13% 30% 38% Other services 4% 5% 4% 11% 11% 27% 37% Increased by more than 50% Increased by 25% to 50% Increased by less than 25% Remained the same Decreased by less than 25% Decreased by 25% to 50% Decreased by more than 50% 11 Reasons 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 70 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% 22% 27% 23% Agriculture 5% 5% 4% 4% 23% 22% 21% Manufacturing 4% 4% 4% 4% 19% 27% 21% Wholesale & retail 2% 2% 3% 3% 18% 30% 23% Accomodations & food 2% 2% 2% 2% 23% 29% 20% Other services 2%2% 2% 2% 30% 23% 25% Increased by more than 50% Increased by 25% to 50% Increased by less than 25% Remained the same Decreased by less than 25% Decreased by 25% to 50% Decreased by more than 50% 13 Reasons 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 40 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% 27% 11% 11% 13% Manufacturing 5% 13% 24% 29% 7% 11% 10% Wholesale & retail 4% 15% 23% 30% 8% 10% 9% Accomodations & food 4% 16% 23% 30% 7% 10% 10% Other services 5% 10% 15% 39% 6% 10% 15% Increased by more than 50% Increased by 25% to 50% Increased by less than 25% Remained the same Decreased by less than 25% Decreased by 25% to 50% Decreased by more than 50% 15 Firms faced a deterioration of their cash flow … Impact on availability of cash flow All sectors 2%3% 3% 8% 13% 31% 42% Agriculture 2% 3% 3% 11% 18% 26% 36% Manufacturing 3% 4% 2% 8% 14% 28% 41% Wholesale & 2%3% 2% 8% 15% 34% 37% retail Accomodations 2%2% 3% 7% 11% 31% 45% & food Other services 1%2% 2% 7% 11% 29% 47% Increased by more than 50% Increased by 25% to 50% Increased by less than 25% Remained the same Decreased by less than 25% Decreased by 25% to 50% Decreased by more than 50% 16 … 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% 12% 23% 36% Agriculture 5% 3% 4% 19% 14% 17% 37% Manufacturing 7% 3% 3% 17% 13% 23% 34% Wholesale & retail 4% 4% 3% 19% 12% 25% 32% Accomodations & food 5% 3% 3% 16% 12% 23% 38% Other services 4% 4% 3% 19% 10% 22% 39% Increased by more than 50% Increased by 25% to 50% Increased by less than 25% Remained the same Decreased by less than 25% Decreased by 25% to 50% Decreased by more than 50% 17 Loans 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 Financial services or funding that firms applied but did received (% of firms) not receive (% of firms) Liquidation of assets Liquidation of assets Loans from government institution Loans from government institution Loans from digital financing platforms Loans from digital financing platforms Loans from non-bank financial Loans from non-bank financial institutions institutions Loans from informal lenders Loans from informal lenders Loans from banks Loans from banks Loans from friends and family Loans from friends and family Delayed payment terms of taxes and Delayed payment terms of taxes and debt debt Delayed payments from suppliers and Delayed payments from suppliers and providers providers Earlier payments from customers Earlier payments from customers 0% 10% 20% 30% 40% 0% 10% 20% 30% 40% 18 Responses by firms 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 52 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) 52% 48% 37% 1% Increased Remained the same Decreased Reduced payment to employees 20 … with firms from education, food services and construction cutting down manpower the most Impact on employment by sector (% of firms) All sectors 37% 48% Education 26% 65% Food services 27% 62% Construction 29% 62% Manufacturing 33% 56% Professional services 37% 54% Tourism and accomodation 36% 54% ICT: BPO and others 37% 52% Utilities 38% 50% Arts, entertainment, and recreation 37% 48% Agriculture, fishing, mining 44% 44% Automotive repairs 43% 44% Transportation and storage 43% 43% Health 52% 40% Real estate, rental and leasing services 42% 40% Wholesale and retail trade 38% 39% Financial activities 51% 37% Don't know Increased Remained the same Decreased 21 Many 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) Just started using Increased use Not using 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 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 22 Uptake 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% 60% 23 70% 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- • The most cited based work obstacle is that the Lack of equipment needed for nature of work was employees to work from home not suited to home- Unreliable or expensive internet based work connection in employees’ homes • Only 5 percent of Employees’ competing caregiving / firms noted that 90 family responsibilities percent or more of Infrastructure of employee’s homes their employees inadequate for homebased work worked from home 0% 10% 20% 30% 40% 50% 60% 24 Uncertainty 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 45 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% 12% 8% 9% 11% 9% 5% Less than 2 weeks Between 2 and 4 Between 1 and 3 Between 3 and 6 More than 6 Don't know weeks months months months 26 About 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 33% 32% 33% 28% 23% 24% 18% 10% Is expected to increase Is expected to remain the Is expected to decrease Don't know same 27 Policy support Governments can provide support to firms facing negative shocks 28 About 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) Government support received by firms (% of firms) All locations Cash transfer National Capital Region Region 1: Ilocos New loans with subsidized interest rates Region 2: Cagayan Valley Region 3: Central Luzon Deferral or reduction of rent, mortgage, or Region 4A: Calabarzon utilities Region 4B: MIMAROPA Deferral or loan payments Region 5: Bicol Region 6: Western Visayas Credit mediation and refinancing Region 7: Central Visayas Region 8: Eastern Visayas Regulatory relief Region 9: Zamboanga Peninsula Region 10: Northern Mindanao Wage subsidies Region 11: Davao Region 12: SOCCSKSARGEN Training: business skills Region 13: Caraga Region 15: CAR Others Region 16: BARMM (formerly ARMM) 0% 5% 10% 15% 20% 25% 30% 0% 10% 20% 30% 40% 50% 29 Firms 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 Liquidity improving measures are the most desired government support Government support desired by firms (% of firms) Cash transfer 46% New loans with subsidized interest rates 36% Tax exemptions or reductions 22% Deferral or reduction of rent, mortgage, or utilities 22% Deferral or loan payments 19% Credit mediation and refinancing 15% Regulatory relief 14% Wage subsidies 10% Training: business skills 9% Improved public transportation services 9% Training: digital skills 8% Tax deferral 4% Others 6% 31 Effort 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 Annexes 33 Weighted distribution of firms by size, location, and sector 34 Government 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 Acknowledgement 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 Iacovone (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 (spiza@worldbank.org) and Jin Lee (hlee13@worldbank.org). 36