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RBA warns of insolvencies following extended lockdown

James Mitchell
12 October 2021 1 minute readShare
RBA warns of insolvencies following extended lockdown

The Reserve Bank of Australia believes a number of businesses will struggle to survive after extended lockdowns.

In its latest Financial Stability Review, the central bank noted that businesses in pandemic-affected industries or located in regions that have experienced prolonged lockdowns are more likely to be running down their buffers and some could face debt repayment difficulties.

“Despite the significant policy support, it is likely that not all businesses will recover and insolvencies will rise, although this will be from a low level,” the bank said.

“Overall, there is only a small share of households and businesses that are both vulnerable to cash flow reductions and are heavily indebted. Lenders’ non-performing loan ratios are therefore expected to rise only modestly from currently very low levels.”

In aggregate, business profits increased in the first half of 2021. The Financial Stability Review noted that as a result of improved trading conditions, many businesses were well placed to absorb higher labour expenses when the JobKeeper subsidy ended in March.

“Aggregate cash holdings remained considerably higher than before the pandemic, with low interest rates providing support to indebted firms,” the review said.

“Across nearly all industries, aggregate revenue had recovered to be around or above its pre-COVID-19 level in the first half of this year.”

However, the RBA observed that outcomes have been mixed across firms, reflecting the uneven impact of the pandemic. In particular, firm-level data shows that one-fifth of all businesses reported March quarter revenues this year that were less than 60% of their averages between 2014 and 2018.

Although only around half of firms reported revenues that met or exceeded their 2014–18 averages in the March quarter of 2021, this share had increased from around 40% since the middle of last year, reflecting improved trading conditions and the broader economic recovery.

Around 10% of businesses were receiving JobKeeper payments when the program ended in March 2021. Many were located in Sydney and Melbourne and, based on the most recent available data (for end of June 2019), in areas with relatively lower median liquidity ratios (the ratio of current assets to current liabilities).

The Reserve Bank highlighted that the prolonged lockdowns in Sydney and Melbourne in recent months mean that some vulnerable businesses will be depleting their cash buffers.

“Some may find it difficult to service their debts, particularly if their trading conditions do not improve when restrictions are eased and targeted policy support measures are withdrawn,” the bank said.

“Vulnerable firms may also find it difficult to maintain their current levels of employment given cash flow challenges. In turn, this could diminish the ability of affected households to service their own debts.”

RBA warns of insolvencies following extended lockdown
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James Mitchell

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