In this period marked by uncertainty in all markets, I keep myself up to date with everything happening at the macroeconomic level, both nationally and on external markets. This helps me remain balanced in judging economic realities, a quality that consultants need now more than ever.
I read with interest Iancu Guda’s new book, Economy in the Time of Coronavirus, and I noted his findings regarding the present and his proposals regarding the future, with applicability in our business environment and public policies.
As I will show below, I agree with most of the ideas and proposals, while regarding some I have comments or see certain additional nuances, and regarding a few of them, I have major doubts.
These doubts relate more to us as citizens. These are proposals that remain logically correct and desirable, but I don’t know if we will have the collective strength to push for their implementation.
It is encouraging that some of the examples above are in the process of being implemented as government measures for crisis recovery. Thus, the author’s endeavor is resonating where it needs to.
The analysis you are about to go through is quite long (but very interesting!), so we recommend using the table of contents below to navigate the material more easily.
Conținut
Specific Features of the Business Environment in Romania
In his book, Iancu Guda identifies 10 features showing that the Romanian business environment is not prepared for the long-term race. So, not for a specific crisis, but for the Marathon race. I mention a few:
Companies make few long-term investments
Often, organizations cite the lack of long-term maturity financing, and this aspect is partially true.
On the other hand, only in recent years have more businesses started to access other sources – such as bond issues or listing on the stock exchange – to have a good mix of financing for long-term growth.
The decrease of the dividend tax to 5%
The decrease of the dividend tax a few years ago was welcomed by most entrepreneurs. However, the flip side of the coin is that businesses generally remain undercapitalized, meaning they have equity far below the requirements of financial sustainability and bankability. Under these conditions, we cannot always point the finger at banks for not lending to and financing the private economy.
In support of the initial statement, namely that the private environment in Romania is not prepared for a marathon, the following market characteristics flow as arguments.
Commercial credit between companies has increased in the last decade
Specifically, the value of invoices issued between companies evolved from 163 billion RON in 2007 to 373 billion RON in 2018.
These figures show that many companies have limited access to bank loans or other sources. An illustration of the limited access to bank-type financing is the fact that, in the IMM Invest program, for example, almost a third (32.2%) of the applicant companies had a moderate or high risk, according to the ConfiRisk scoring, developed together with Confidas.
An indicator to evaluate the growth determined by the evolution of commercial credit is its average in the economy, which currently in Romania was almost 4 months (113 days) in 2018, compared to 77 days in 2007. These increases come mainly from contracts with the state, with a payment term of 6-12 months, or from Pharma – pharmacies receive the money from the Health Insurance House after approximately 9 months.
These increases in commercial credit indicate, in fact, two very important aspects about a market:
- Depending on the positioning of this indicator in a certain industry, it can provide information regarding the bargaining power of clients, important to be analyzed within Porter’s Five Forces Analysis, for an opportunity study on a new market.
- At a macro level, this represents a higher risk between companies in the market. Thus, the longer it takes for a client to pay a supplier, the more vulnerable that supplier remains from a cash-flow perspective. If this “rolls over” at the economy level, when a big player collapses, effects are produced on an extended level.
The growth rate of wages in the last 10 years has been above productivity
It is a common desire for businesses to pay their employees better, but they must also be able to keep up. There are businesses in retail and/or production that have had difficulties keeping up with this imposed pace of wage increases in recent years. With every rise in the salary scale, administrators calculated whether any profit remained for them.
Some might say that whoever cannot pay employees decently has no reason to stay in business. However, by this logic, it would mean maintaining, or even encouraging, the concentration of the workforce only among those who can pay well. If we consider that many economic sectors are dominated by large players, whether local or international, the hypothesis of workforce polarization represents the basis for a new type of crisis, in which small entrepreneurs (almost 90% of the total, according to INS) remain even more vulnerable.
And, since we remember from time to time that we want to support Romanian producers, perhaps the state should allow them the chance to capitalize over time and cope with (inherent) increases in salary costs. But this [should happen] over time, in successive, predictable waves (announced in advance), at intervals of at least 1-2 years.
As an additional comment, the idea recently emerging at the European level, according to which the minimum wage should represent at least 60% of the average, might be considered a good one, for someone who has never developed a business. In reality, however, it is not feasible on the scale of an economy like Romania’s.
Increasing business immunity was not on the entrepreneurs’ agenda
Running a business can be likened to driving a car. I sometimes use this parallel even at the level of public budget and national economy, not just when referring to business.
In recent years, when all macroeconomic deficits jumped over the limits, it was as if we were driving on the highway at 160 km/h, even though the regulations say the maximum speed is 130 km/h.
For about 3 years (2017-2019), several economists who were also politicians at the same time kept telling us “Look, see that it’s possible at 160 km/h too and nothing happens to us?”…
Returning to business, the equivalent of aggressive driving is to get heavily into debt during the period when things are going well for you and to “drive at 160 km/h”. Many businesses didn’t suffer anything dramatic until the end of 2019, only now they have to slam on the brakes.
Here I return to the comparisons used by Iancu in the book, regarding increasing immunity and driving the business preventively to prevent an accident or to survive, in case such an unfortunate event were to happen to a business:
Positive cash flow. The business must produce positive cash flow from operations. If the accounting result looks good, meaning the net profit is positive, this must be backed by the collection of revenues.
In other words, receivables and stocks must remain at a controllable level, and current payments to suppliers, state budgets, and others must remain on schedule.
And furthermore, the firm’s investments should be made as much as possible from internally generated cash flow and only partially from attracted sources.
Fluidization of receivables. The book describes the calculation formula you can use to estimate your business’s capacity to absorb a shock of a sharp drop in sales, a fact that many businesses have faced in recent months and which they can face in any type of recession, for that matter.
If you have a rapid reaction capacity as the manager of your business, making expenses flexible greatly increases the chances of diminishing the impact, and for the business to survive the shock, offering you a strategic advantage over your competitors.
Flexibility of receivables is obtained by eliminating the rigidity coming from fixed expenses, or from certain renegotiations with suppliers.
Public Policies That Have Complicated Our Future
Iancu Guda’s book analyzes a number of public policies that have structurally affected the economy, even before we reached this recession we are facing. We select a few below:
Pro-cyclical fiscal policy
In recent years, budget expenditures have been increased to boost the economy. The main vector was the increase in wages above productivity, that “wage led growth“, a controversial policy all over the world.
The sustainable growth option would have been “investment led growth”, i.e. growth based on investments, but I believe that our preference as citizens also matters here.
If someone were to ask us: “What would you prefer in the next 5 years: a) for your income to double and 100 km of highway to be built, or b) for your income to increase by 50% and 700 km of highway to be built?“, which of the two would we vote for?…
Of course, “highway” is a generic term, we could add hospitals, general infrastructure. But somehow, in the options above we find the answer to the question “why did politics propose that wage led growth which created the illusion of well-being for us?”.
Will we now pivot towards building infrastructure, which will then lead us to sustainable income increases for everyone, or will we continue to prefer immediate income?
Fiscal policy
It may seem to us that we have high taxes in Romania. Overall, however, the level of taxation is below the European average, only it is unbalanced: we have taxes that are too high on labor and taxes that are too low on other components (for example, on dividends, as I argued above).
So, a rearrangement of the budget structure from contributions, in the sense of decreasing some and increasing others, I also consider opportune in the coming years, as Iancu Guda also explains in his book. And the most important thing is for these taxes and duties to be collected.
Iancu refers in detail to the non-collection of a good part of the VAT, one of the great “pains” of the public budget. The example of Bulgaria is presented, just to compare ourselves with our neighbors: if VAT were collected at Bulgaria’s level, for us it could mean a few percentage points of GDP, billions of euros needed for highways, regional hospitals, education, the subway or whatever else we want to do.
If we digitize the public administration, including ANAF, which Estonia or Bulgaria have already done, we will diminish many of these shortcomings. But do we really want this? I didn’t see any revolt of ours when, in 2018, the Government at that time canceled an ANAF digitization initiative started with the World Bank.
The pension system
The consolidation of the pension system in Romania must be based on increasing public pensions only at the pace that the economy allows.
In the long term, the consolidation of privately administered pensions, namely Pillar II (mandatory), Pillar III (voluntary) and Pillar IV (occupational). To continue this kind of consolidation, we, the citizens, should also view these privately administered vehicles as our wealth accumulation over the coming decades.
Recommended Public Policies
To overcome the recession generated by the Coronavirus (or any other recession, in fact), Iancu Guda proposes a series of public policies which I analyze below. Some of these measures are already implemented, while others are already in the process of implementation.
Technical unemployment, corroborated with measures to stimulate the creation of new jobs
Iancu states these two components, on the one hand to maintain as many active employees as possible, and on the other hand, for hiring new workforce.
During the COVID-19 epidemic, after technical unemployment functioned for 2-3 months, the Government is about to implement the support component for new jobs as well, but the exact formula is still awaited.
Temporary support for administratively closed businesses
Alongside the two measures suggested by Iancu, I add another transitional component, namely, a temporary support for administratively closed businesses.
It can be a “grant” type sum or a sum linked to the number of employees recalled after technical unemployment. For example, if you had a restaurant, a hotel, a cafe, a shop with non-essential products, or a location in a mall that was closed to you by law or due to lack of customers, once those sectors reopen, I consider that you as an entrepreneur should be compensated.
The form of compensation can be a fixed sum per business (at one point there was talk of a maximum of 10,000 euros) or a sum linked to the number of employees for 2 or 3 months, until you manage to get back into a rhythm of activity.
It is possible that this transitional support will take the form of the state bearing 30 – 41.5% of the gross salary for a few months, as rumored in recent days. Regardless of the form in which the support is finalized, it must exist to reabsorb as many of the jobs of suspended businesses as possible, before thinking about new businesses.
Unblocking retroactive trade credit and preventing future blockage
It is a very interesting measure that Iancu proposes, unimplemented so far, but which appears in public discussions recently.
In short, given that the majority of credit in the business environment is between companies (we refer here to those invoices with an average maturity of 4 months mentioned above), a risk of a chain effect is created if many companies face financial difficulties.
However, if the state intervenes and guarantees as much of this trade credit between companies as possible, obviously also taking into account some business creditworthiness criteria, the risk of loss in the economic system and the risk of chain insolvencies would substantially diminish.
The book also details the estimated calculations regarding the guarantee requirement. It is true that some trade receivables will not be recoverable, resulting in financial losses for some companies, and ultimately, some insolvencies.
Access to working capital credit and investment credit. This measure is already implemented, referring to the much-discussed IMM Invest program, with a guarantee ceiling of 15 billion RON from the state, possibly to be raised to over 30 billion RON in the coming period.
What is not explicitly said, but is seen in practice, is the fact that the program is intended for at most 1 in 10 SMEs in Romania, because at most that many could really access loans that they can also repay. The program will be useful, but insufficient on its own, without the other measures listed above.
An important clarification related to the state guarantee mechanisms for working capital loans, investment loans, and trade credit respectively (if this last component is also implemented): the one who will ultimately be liable, in case of non-payment of the loan, will still be the business or the entrepreneur.
In other words, even if the state takes over the obligation to the creditor (bank, leasing, supplier, etc.), the state will still turn to the respective business to recover the damage.
That is why we encounter situations where banks ask for additional guarantees in the case of IMM Invest, even if that safety net from the state exists.
In no case should these mechanisms be understood as a relief of liability for the entrepreneur or the business.
Granting payment facilities (tax credit) and rewarding those who pay their taxes on time
These are other measures quantified as necessary budget.
Dacă aceste măsuri vor fi doar temporare, în această perioadă de incertitudine, atunci pot reprezenta un mic sprijin pentru afaceri. Însă ideea de a nu plăti taxele la timp nu ar trebui perpetuată dincolo de această perioadă.
Increasing health spending. This is certainly a desired measure and long discussed in the public space in recent months.
However, here again arise the questions that depend on us, the citizens: how will we control the fact that these expenses will be optimally made? Now the health system is almost absolved of control or criticism from us, until we see the pandemic we are facing pass. But what happens if, after the pandemic, we see those bad habits and practices of corruption, of waste of health funds again?
Restructuring public spending. Well, here is the crucial point! What type of public pressure are we, the citizens, willing to apply for the restructuring of these expenses?
Special pensions and the budgetary apparatus are in place, without bearing any cost of this recession. We were also told that possible adjustments in the public sector are no longer topical, that we should be satisfied that the economy has reopened, so it would be good to make it work.
I also encounter the opinion “let’s not cut anything from the public sector, to support aggregate demand”. Therefore, when is the optimization and restructuring of public spending opportune? In economic growth it is not opportune, so as not to slow down growth. In recession, it is not opportune, so as not to decrease more.
Personally, it is not clear to me when or if we will ever do it.
Future Recommendations for Entrepreneurs
The recommendations for the business environment constitute a true extract from corporate finance books, with applicability for entrepreneurs when they monitor their cash flow, establish their dividend policy, or budget their long-term investments.
“The Economy in the Time of Coronavirus” concludes with a synthesis of the best practices for the business environment, to cope well with the crisis. These recommendations are for any period, being valid both before the crisis and certainly after its passing.
However, sometimes a shock is needed to realize the utility of these benchmarks.
Maximum attention to cash flow, monitoring the business by cost centers, reducing commercial credit risk in the relationship with clients, unlocking “non-core” assets are just a few of the things that are part of a responsible and sustainable financial management of a business.
I do not believe in the pessimistic extreme (that we will have 10 years of deep recession), due to the unprecedented financial intervention programs in most economies. Also, I do not believe in the positive extreme of an accelerated “V” shaped economic recovery in just a few months. I believe we can return to the level of confidence and consumption only starting with the second semester of next year [2021], only if the vaccine is launched by then and we avoid new episodes of the state of emergency in the meantime.
The money sent by the diaspora will decrease by approximately 3 billion EUR, but we will receive 10 times more from the EU. In addition, we have the advantage of having almost 1 million repatriated Romanians, who can contribute to economic growth.
We have natural resources, people (which will lead to the easing of the labor force), and access to technology (digitalization and equipment / machinery) and infrastructure (road, health, education, and sport) can be facilitated through financial resources unprecedented in our history: 31 billion EUR from the EU, of which two-thirds are non-reimbursable funds!
No alibis! Relaunch & Reconstruction!
In conclusion…
And for public policies, the recommendations are an extension of the previous ones. At the time of reading them, the questions frequently reappeared to me: do we really want what is written there? And I give here one last example:
What social pressure should we exercise as citizens, so as not to bear the losses of inefficient state companies from our budget anymore? So as not to have losses at CFR SA, CFR Călători, and CFR Marfă anymore, which total almost a billion euros annually (losses compensated by subsidies from the public budget, so that the companies remain in the “zero” zone). So as not to have 12 consecutive years of net losses at Tarom? And the examples can continue.
I confess that I am not clear if we want their restructuring, because I frequently see the opinion that these companies must be maintained no matter what, even with oversized personnel schemes and high salaries (the book also contains comparative figures with similar companies in Poland, the Czech Republic, Hungary), even if it costs us money from our common pocket. And if that is what we want, that is what we have…
“The Economy in the Time of Coronavirus”, Iancu Guda’s book, is a good synthesis for any entrepreneur and for anyone concerned about the evolution of the business environment in Romania. In addition, you can go through the report of the study conducted by MKOR Consulting regarding the Impact of the COVID-19 Epidemic on the Business Environment.
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