World capital markets reacted to the March 11 pandemic declaration by the World Health Organization with shock. Most eyes are on equity markets suffering the worst single-day declines in decades, but domestic and international credit markets are where the greatest economic danger is in the short term. If businesses cannot maintain liquidity, many companies won’t be ready to bounce back when this pandemic passes, or even survive the shortfalls they are currently experiencing.
The Canadian and global economies run on the ability to make and settle payments. With a state of emergency or similar measures across the country shuttering some businesses, a domino effect can occur where revenue isn’t generated, payments for goods and services or on loans are not made, and available cash dries up. Without intervention, this can lead to conditions where the economy seizes.
Mitigating the impacts that the virus is having on payments and cash flow is requiring governments to inject liquidity on an emergency basis into the economy. So, what is being done to do this in Canada, and what does this mean for your business?
Expanding Credit and Pumping Cash into the Credit Markets:
As has been well reported, the Bank of Canada cut its key interest rate by half a percentage point to 0.75% on Friday the 13th.
The intent with this move is to stimulate economic activity by encouraging individual Canadians and businesses to use credit to acquire new assets and keep cash moving through the economy. While cutting interest rates is a typical monetary response to an economic slowdown, central banks are limited in their ability to use this tool as we have been in an historically low interest period since the financial crisis of 2008.
Further cuts could happen but with rates currently at 0.75 per cent it is unlikely that there is much more room to cut with the Governor of the Bank of Canada repeatedly stressing he does not want to go into a negative rate situation. A negative rate situation could have the effect of creating inflationary pressures in the economy and reducing real purchasing power.
Recognizing that a rate cut is only part of the solution, the Bank of Canada and the federal government introduced additional monetary and fiscal measures, including:
- Increasing loans available to smaller and medium-sized businesses from the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) by $10 billion, including working capital facilities to bridge temporary cash crunches faced by businesses.
- Keeping cash flowing by injecting capital into banks and the credit markets:
- Resurrecting the Insured Mortgage Purchase Program from the 2008-09 financial crisis to purchase $50 billion in government insured mortgages through the Canadian Mortgage Housing Corporation.
- The Bank of Canada purchasing up to $500 million (per week) of pooled mortgage paper from banks to keep cash flowing.
- Making facilities available for the Bank of Canada to buy debt securities backed by business lines of credit and reducing restrictions on the percentage of non-mortgage backed securities that can be used as collateral to access the Bank of Canada’s short-term credit facilities.
In addition to these measures, The Office of the Superintendent of Financial Institutions reduced the reserve requirements on domestic banks to allow for more lending by lowering the domestic stability buffer for Canada’s key banks from 2.25% to 1% of risk-weighted assets.
What Does This All Mean?
With COVID-19, it is proving impossible to predict what happens next or if the virus can be properly contained. Last week, public health officials were speaking about flattening the curve in weeks, and now there is growing speculation that it may be months before the worst of the pandemic passes by in North America.
What does this mean for your business?
- Your bank has been given more room by government to provide new credit or extend existing credit to your business.
- BDC and EDC programs are available with new terms to help you get through any credit crunch.
- The federal and provincial governments will be announcing more measures to boost liquidity this week, and likely again in the weeks to come, including additional support measures for small and medium sized businesses.
Matched with prudent expense management, the flood of credit being pumped into the Canadian market should help your business maintain payments and help you prepare for the recovery that will happen after the pandemic has passed. There could be opportunity for a robust economic recovery in 2020 if government supports can match the needs of impacted businesses, and businesses can find the right solutions for them.
To stay on top of the full suite of government initiatives and programs to help small and medium-sized businesses through COVID-19, please contact:
Chris Loreto Mitchell Davidson Andrew Steele