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12.07.20

The Impact of the Coronavirus Crisis on the Economy A Special Analysis

Dun & Bradstreet
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The Impact of the Coronavirus Crisis – The Impact on the Israeli Economy

The coronavirus pandemic affects numerous economic sectors, which has been experiencing material disruptions in the business operations. The industries that experienced the worst disruptions are the airlines and tourism industries and industries which are dependent on gatherings for their operations such as the events industry (function halls and various service providers in this industry) and the entertainment industry (theaters, cinemas, cultural events etc.). In fact, these industries are expected to suffer from significant further disruptions, to the level of operation stoppages, until a proper treatment for the pandemic would be found.

Other industries, which resumed operations under restrictions, also experience material disruptions in their operations. Such industries include restaurants, the transportation industry and more. In addition, some industries are directly affected by the economic situation and has been recording the corresponding decline in operations, for example, the real estate, automotive and retail industries, and others. A decline in activity was also recorded in the Hi-Tech industry, which is exposed to the decline in global trade, and several large companies from this industry reported their intention to reduce their headcount significantly. As of July 2020, the number of jobseekers in the economy is about 850,000 (including independent businessowners who didn’t resume operations, this number reaches about 1 million) and the unemployment rate is around 21% (at the peak of the crisis, during the lockdown, the unemployment rate was about 27.5%).

In previous estimates of the impact of the coronavirus crisis on the economy, we predicted that the number of financial defaults in the economy would rise, in continuance with the first wave when businesses postponed these payments with the hope of improving cashflows by the repayment date, and as a result of the expiry of the reliefs that the Bank of Israel provided concerning limited accounts[1] . In accordance with our estimates, we indeed witness a worsening of the situation of businesses from a variety of economic industries.

In early July 2020, the government announced that the economy would once again be subjected to restrictions – at this stage, the closure of banquet halls, clubs, bars, gyms and swimming pools, reducing the number of passengers in public transportation (up to 20 persons per bus), reducing the number of diners in restaurants (20 persons per inner space, 30 persons in spaced-out outdoor tables) and more. These restrictions were imposed pending an earlier-than-expected “second wave”. Alongside with the numerous industries that suffered, some segments show an increase in activity during the coronavirus crisis, including the retail chains, which recorded a YOY increase of about 10% in sales in 01-05/2020. The increased demand for food products and toiletries resulted from stockpiling during the lockdown period and afterwards from an increased presence of consumers in Israel, as no travel abroad was possible. Another segment which has been experiencing increased demand is teleworking services and technologies – companies that provide communication infrastructures and virtual management enable business continuity for businesses also outside of the offices, in order to enable them to continue and provides services and minimize the impact on the normal course of business also in times of restrictions or lockdowns. As the restricted are expanded, including the prohibition on gatherings of more than 20 persons, companies are expected to return workers to working from home, so this trend should continue. Despite the existence of industries that experienced increased activities, the aggregated business damage to the industries that suffered from the crisis is far greater than the benefit to industries that grow during the crisis, to the extent that the latest outlook of the Band of Israel (as of July 2020) expects a decline of 6% in the GDP in 2020 (in case the restrictions would not be expanded to another lockdown) and an even sharper decline of 9% in case of another lockdown.

 

Business Openings and Closures Data and Outlook for 2020

According to D&B’s data, over the past few years, about 55,000 businesses open annually in Israel while about 40,000-45,000 businesses close down annually. For example, in 2019, 56,500 businesses were opened while 45,500 were permanently closed (a net addition of about 11,000 businesses).

Since the crisis started there has been a significant decline in the rate of business openings. We estimate a decline of 35-40% in business openings in the full year 2020 compared to 2019.

The main cause for the expected decline in the opening of businesses in 2020 is the market uncertainty. Business owners find it very difficult to make business decision in uncertainty conditions, when there isn’t any certainty concerning the expected revenues and cash flow management difficulties are expected. Thus, in light of the unemployment rate in the economy, the public’s purchasing power declines and negatively impacts the current feasibility of opening a business (due to the aforementioned negative impact on the businesses’ revenues and cash flows).

Furthermore, for the purpose of opening the business, business owners use their savings and financial support. However, on the back of the crisis, the public savings have diminished and the access to finance recorded a decline.

Concerning business closures, D&B data indicates that in the first half of 2020, around 37,600 businesses were shut down. Industries that recorded a high level of closures since the beginning of the years include: Restaurants, Bars and Cafes (1,550 businesses), Construction and Renovation Contractors (more than 1,000 businesses), Transit and Transport Companies (about 600 businesses) Fashion and Apparel Stores (about 450 stores) and more. 

In our previous estimate, we expected 70,000 businesses and companies to close in 2020, an increase of some 50% compared to 2019, when about 45,000 businesses were closed.  The actual business closures for the first half match our estimate, but this estimate was based, inter alia, on the previous assumption that the economy would record a certain recovery starting from the fourth quarter of 2020, and this recovery would moderate the business closures rate. Our previous estimate was based on a continuous course of business, without reimposed restrictions, that would stop the business operations of certain industries and postpone the economic recovery.

We estimate that under prolonged restrictions, 80,000-85,000 businesses are expected to close in 2020, reflecting an increase of 80-85% in the number of business closures compared with 2019.  Correspondently, the probability for closing a business increased to over 13%, compared to about 7.5% in 2019. The increase in the number of businesses that are expected to close in case of renewed lockdown of the economy takes into account the fact that many businesses, particularly small businesses, that managed to survive the first lockdown, won’t be able to survive the renewed restrictions from the cash flow aspect.

In light of the data, 2020 is expected to be the first year in the past decade when the economy would shrink (i.e., there would be a negative net addition of business – the number of closed businesses would exceed the number of opened businesses). In total, the economy would shrink by 40,000-50,000 businesses, a decline of about 7-8% in the number of businesses in the economy.

 

Business Closures, Business Openings and the Probability of Business Closure

Source: D&B; The 2020 data are estimates under the assumption of prolonged restrictions in the economy

 

Industry Spotlight

The Impact of the Coronavirus Crisis on the Automotive Industry

The value chain of the automotive industry includes international automotive manufacturers, importers, leasing and car rental companies, financiers and end users: households, business firms and public entities.

The automotive industry in a hub of vast credit activities in Israel – commercial and consumer, and is a material component in the State’s tax revenues (in 2019, the State’s revenues from taxation of this industry were estimated to be some NIS 40 billion). In 2019, about 3.6 million motor vehicles were registered in Israel, of which about 3.1 million private vehicles, 240,000 vehicles that were owned by leasing companies and about 50,000 vehicles used for short-term rentals (most of which were also held by the leasing companies).

Before the coronavirus crisis, the industry experienced a moderate decline in operations in 2017-19, in comparison with the peak year of 2016. This resulted from tighter regulation by the Bank of Israel on banks and credit cards, when the latter extend credit to the automotive industry, and also from relatively satisfied demands (compared to previous years), increasing road congestion and other reasons. Currently, on the back of the economic situation as the coronavirus pandemic spreads, the industry is experiencing a significant decline in operations. Thus, according to the new vehicles deliveries data, 119,000 new vehicles were delivered in the first half of 2020, a decline of about 25% compared with the first half of 2019, when about 159,000 new vehicles were delivered. According to estimates of major industry players, in the full year of 2020, about 200,000 vehicles would be delivered, an expected decline of some 20% compared with 2019.

 

Deliveries of New Vehicles in Israel

Source: The Automotive Importers Association, 2020 data is estimated.

 

The coronavirus crisis also strongly impacted the leasing companies, which are large clients of the importers and serve as a distributor of sorts in the industry. According to their business model, the leasing companies direct demands to the car importers and lease the vehicles that they bought to the fleets of business companies and government institutes through leasing transactions. After a 3-year lease period, they sell these vehicles in the free market against a new leasing transaction for a new vehicle. Leasing companies regularly buy new vehicles for the fleet, to replace older vehicles. Other operations of the leasing companies: Private leasing to private clients (in lieu of buying new cars by the private clients), short term car rentals (mainly for the local tourism industry), selling 0 km cars (new cars that were bought from the importer and are offered at a discount in consideration for the loss of a “hand” (another registered past owner)), extension of credit to consumers (as a complementary solution through captive subsidiaries or partnerships with non-bank credit companies, in response to the tighter regulation of banks and credit card companies concerning this industry) and more.

The deterioration in the economy has led to a decline in the activity of leasing companies, corresponding to the increase in the number of unemployed in the economy and the risk of the industry’s customers. We witness downsizing in a variety of industries – Hi-Tech, Industry, public sector and more. As a result, major players in the industry say that there is a slowdown in new leasing transactions. As an ideal solution for both parties in the spirit of the times, a trend of extending the lease to more than 3 years has developed recently – leasing companies have been reporting more existing transactions that are being prolonged, as the customers don’t replace their vehicles to new vehicles, and instead receive a contractual discount for leasing a 3-years old vehicles for several additional months, until the market situation would clear. From the leasing companies’ perspective, they retain their business relationships with their customers and temporally reduce the need to acquire new vehicles for the fleet. From the customers perspective, they are spared from making a long-term commitment (3 years) in the current economic uncertainty.

In addition, there has been a decline in complementary operations – the industry’s companies have been reporting double-digit declines in the private leasing operations, which are sensitive to the economic situation. The declining demands are supported by the employment uncertainty and the lower disposable income of the public, as some of the jobseekers have no certainty concerning the timing of their return to the job market. Similarly, the companies also report a significant decline in the sales of 0 km cars to the public. The car rental operations, which are dependent on the existence of internal tourism, stopped completely during the crisis, as did the operations of vouchers for car rentals abroad. In accordance with the worsening economic situation, companies are reporting that customers switch to mass-market (cheaper) cars and an increase in used cars transactions at the expense of new cars transactions (in other words, the Israeli consumer who preferred a new car is now forced to choose a cheaper model or compromise on a second-hand vehicle).

In addition to decline in volumes, leasing companies have recently had less access to the bonds markets, a material channel for renewing their fleets. In this context, the Bank of Israel recently announced a new bond purchasing program, in the sum of about NIS 15 billion, as a support measure. Until the move would take effect, the companies in the industry overcome the finance gap through extending existing transactions, as aforementioned, and another solution that they offer, which also reduces the need for restocking, is operational leasing transactions that utilize the rental vehicles (2019 models with very low mileage).

In light of the industry trends, we estimate that there has been an increase of 15-20% in the risk level of the industry in the past quarter.

 

Macro-Economic Outlook

The Growth Outlook for the Israeli Economy at the Shadow of the Coronavirus

The Bank of Israel 2020 Outlook (07/2020), following the coronavirus crisis, expects a decline of 6% in the GDP in the current year in case the restrictions would not be expanded to a renewed lockdown, and even worse, with a decline of about 9%, in case the lockdown would resume.

Before the coronavirus crises and taking its affects into account, the BOI Outlook was for a GDP growth of 2.9%, following growth of 3.3% in 2019.

According to D&B’s estimates – due to the impact of the coronavirus on most of the businesses in the economy, about 80,000-85,000 businesses and companies are expected to close permanently in 2020 in case of renewed lockdown (and about 70,000 businesses and companies if the lockdown would not be resumed), an increase of 80-85% in busines closures compared with 2019, when about 45,000 businesses were closed.

The survivability of businesses in the coronavirus crisis would depend on their financial resilience (with a variability between different businesses) and the financial strength of their respective industries (including the risk level and the level of exposure to the crisis). Businesses that lack financial resilience or operate in high-risk industries would find it difficult to manage their cash flows, up to potential stoppage of operations. Around 37,600 businesses were already closed during the first half of 2020. Some businesses survived the first lockdown, but we estimate that they would not be able to bear another cashflow disruption as a result of a renewed lockdown.

The Global Growth Outlook

According to BOI’s estimates (07/2020), the GDP of the developed economies would shrink by about 8% in the current year, and is expected to grow by 4.8% in 2021. In addition, the imports of developed economies would shrink by 13% in 2020, but would return to a growth trajectory in 2021 with an expansion of about 8%.

This means that international trade is expected to decline by about 13% in 2020 compared to the previous year, which would increase the risk levels of Israeli exporters.

 

[1] A cheque that was dishonored in the period between 4/3/2020 and 22/6/20 wasn’t included in the list of dishonored cheques. In the case where a bank account was limited due to dishonored cheques during this period – the limitation was lifted.

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