The role small businesses will play in the Philippines’ economic recovery

MANILA, Philippines — Big businesses may control the stock market, but it is the start-ups and small businesses, or what economists tout as important influencers for growth, that keep the economy moving. For one, small businesses pose competition to previously stale with their innovative concepts and products. And because they operate locally, they create job opportunities with preference for local individuals, driving new job growth in a local town or city. Small businesses also have more flexibility and can be started by almost anyone with grit and a cutting-edge idea, making them more sundry in form, function, culture, and potential.

The global health crisis has greatly impacted the economy, apparent in the tourism, airline, hospitality, and even in the retail industry’s operation slowdown. Supply chains trade have been disrupted and as some businesses came to a halt, over three million Filipino employees lost their jobs due to the relentless plague of the pandemic crisis, according to the Department of Labor and Employment.

The numbers have it

The Philippine Statistics Authority (PSA) reported that Gross Domestic Product (GDP) has contracted in the Philippines during the fourth quarter of 2020, yielding a -9.5% contraction across the entire year. This is a vast change from last year’s growth, which saw four successive quarters of 5% growth and above.

2020’s GDP plunge in the Philippines is the largest on record since 1946, even topping the mid-1980s crash. Economic Planning Secretary Karl Chua states, “without a doubt, the pandemic and its adverse economic impact are testing the economy.” Yet, Chua likewise claims the nation is already seeing early signs of recovery with the easing of health restrictions and social protocols.

With the new year, the government is eyeing an economic rebound as stocks are seeing growth again in Manila, suggesting that larger companies may be experiencing a better recovery than small companies because of their easy access to credit and capital. Given that small and medium-sized enterprises (SMEs) account for 99% of registered businesses in the Philippines, along with providing 60% of the nation’s jobs, most workers and business owners are heavily affected by the current economic turbulence caused by lockdown measures.

Will Covid stand in the way of growth in 2021?

Despite being one of the fastest-growing economies in the world, the Philippines is still struggling to recuperate from recession. Some analysts believe the first quarter of 2021 will see continuous GDP contraction and a slow rise from the slump. With the recent arrival of the Covid-19 vaccines in the country and once lockdown measures are further loosened up for increase economic activity, everything will be looking up.

It may be a struggle to convince the public to take advantage of the government’s vaccination program following the Dengvaxia debate in November 2017, when the Department of Health suspended the school-based vaccination program after the controversy that at least 600 people, mostly children, died after obtaining a single dose of the Dengue vaccine, although not necessarily caused by the vaccine itself. Soon after, the Philippines have fallen to 70th place in countries’ confidence levels in vaccines. In fact, a poll conducted by Pulse Asia saw less than one third of the population are willing recipients of the Covid-19 vaccine.

But whether we believe it or not, the economy will expect a lot of promise only after a more comprehensive vaccination program is put in place as the government aims to vaccinate 70% of the Filipino population by the end of 2021, providing for ample herd immunity to reverse the risks for the remaining 30% who may refuse to be vaccinated. With a minimum faith and slow roll-out of the vaccines, President Rodrigo Duterte has expressed intent on spending almost 4.67 trillion pesos this year in order to drive growth, which would be over 400 billion more than in 2020. The World Bank has forecasted a 5.9% GDP growth rate in 2021 for the Philippines, which would be below 2019 levels.

The role of quick financing

Covid-19 has been reported to strongly affect 68% of SMEs in the Philippines, with only 13.4% slightly affected or not affected at all, while larger firms are more able to adapt to lockdown laws. Bigger supermarkets and groceries, for instance, remained open (it being an essential both for the population and economy) while traders operating in a smaller scale have either temporarily closed or filed for bankruptcy. Furthermore, bigger firms with significant cash reserves and those with strong credit ratings were more able to adapt business models that enabled them to sustain their business despite the limitations and changing restrictions. This is a contributing factor to the contraction of the Philippine economy, which relies on the activity of sole proprietors.

Another factor in the contracting Philippine economy is the limited credit supply. Carmen Reinhart, World Bank’s Vice President, has warned that a credit crunch is looming in the horizon. It is inevitable that when credit is in short supply from banks, businesses turn to alternative loan sources. One successful and popular method in the US, Europe, and Australia is quick-financing business loans.

Quick financing (also billed as alternative lending) is an automated way of lending money to SMEs. With automated scanning and quick interpretation of data, results can be produced in a matter of days, making credit scores, business plans, and lengthy meetings unnecessary. The Philippines is yet to embrace this alternative type of loan source.

Oracle’s Digital Demand studied over 5,000 consumers from multiple countries and found over 40% believed that non-banks are better equipped to assist SMEs with their monetary requirements. Alternative lenders, like quick-financing business loans, are predicted to play an increasingly influential role in the Philippines due to SMEs’ lack of access to traditional forms of credit.

However, a recent study examining 480 SMEs in Manila and Calabarzon showed that 40% of companies were lacking access to finance informal credit markets, proving there isn’t even a plan B for many businesses. This fact does not only hinder small businesses’ ability to pay their employees, but also limits their capacity for technological adaptation and advancement.

A seamless balance of quick-financing business loans and a capacity to quickly adapt to technological solutions this 2021 will provide better access to credit for SMEs and other start-up businesses and will pave the way, economists believe, for the recovery of the country’s economy. By offering innovative solutions to non-IT firms and accruing foreign investment, SMEs will continue to steer the economy to better this year—despite a time of unprecedented uncertainty—something that all Filipinos truly deserve.

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