Daily Update: August 28, 2020

The coronavirus continues to weigh on the global economy months after the worst of the lockdowns have eased. The pain has been particularly acute for small businesses, which often depend on community support to generate a profit and are challenged in terms of maintaining cash reserves or accessing credit. While programs like the PPP (Paycheck Protection Program) loans in the U.S. helped some of these businesses to weather the storm, they continue to fail at a higher rate than larger enterprises.

In a July 15 paper by the Organisation for Economic Co-operation and Development (OECD) looking at policies dedicated to supporting small and midsize enterprises (SMEs) around the world, the authors emphasized that small businesses are particularly at risk due to both supply- and demand-side exposures. On the supply side, “companies experience a reduction in the supply of labour, as workers are unwell or need to look after children or other dependents while schools are closed and movements of people are restricted.” The paper also looked at the demand effects, including “a dramatic and sudden loss of demand and revenue for SMEs severely affects their ability to function, and/or causes severe liquidity shortages. Furthermore, consumers experience loss of income, fear of contagion and heightened uncertainty, which in turn reduces spending and consumption.”

According to S&P Global Market Intelligence, small business is big business for the global economy. In 2017, SMEs accounted for, “approximately 90% of global businesses and more than 50% of worldwide employment. SMEs played an even more significant role in the U.S. around this time, accounting for 99.7% of the 5.6 million employer firms in existence.”

While definitions vary on what constitutes SMEs, in the U.S. it refers to privately held firms that employ fewer than 500 employees. Many banks hesitate to extend credit to SMEs because they lack financial information to benchmark past performance and future cash flows.

In a recent survey of SMEs in the Middle East and Turkey commissioned by the RAND Corporation, 79% of businesses indicated the COVID crisis had a negative impact and 85% indicated that they were unlikely to survive the next year.

A similar survey performed in Uganda by the Economic Policy Research Centre revealed that 69% of small and medium businesses surveyed reported a decline in access to credit. In an article reporting on this survey, the Brookings Institute wrote, “this trend may be because lending institutions already consider them highly risky, and those businesses are more likely to become insolvent if COVID-19 persists and restrictions are maintained.”

McKinsey & Co., in a white paper that looked at the impact of COVID-19 in small businesses, pointed out that the sectoral exposure was quite broad. “It isn’t only the kinds of small businesses with well-known challenges, such as restaurants and hotels, that are greatly affected. So are other small businesses, in educational services, healthcare, and social assistance. Many private-sector educational services, childhood-education centers, sports classes, and art schools, where physical distancing would be a challenge, could become vulnerable.”

The McKinsey paper also indicated that, as with so many outcomes of the crisis, minority-owned businesses were disproportionately vulnerable.

A study published on July 28 in the Proceeding of the National Academy of Sciences entitled “The impact of COVID-19 on small business outcomes and expectations” based on a survey conducted by academics from a range of U.S. and U.K. institutions indicated that crisis duration is also crucial to understanding outcomes for SMEs. “For a crisis lasting 4 months instead of 1 month, only 47% of businesses expected to be open in December compared to 72% under the shorter duration.”

Both the PNAS study and the OECD paper that focus on policy prescriptions agree that absent further financial support, a sizable minority of the world’s SMEs won’t be in business at the start of next year. Well-designed and sustained public health policy measures are also required to solve both the supply and demand challenges unique to SMEs.

In the U.S., the Paycheck Protection Program expired with the stimulus program on Aug. 8. Discussions about a second round of stimulus, including a renewal of the PPP, remain deadlocked.

Today is Friday, August 28, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

The Essential Podcast, Episode 20: Getting Dirty to Get Clean — Rare Earth Mining and the Energy Transition

Moving away from hydrocarbons isn't all lush forests and clean rivers. Mining for rare earth elements can be a dirty business. Terence Kooyker of Valent Asset Management and Taylor Kuykendall of S&P Global Market Intelligence explain how getting clean in the long term may require us to getting dirty right now.

—Listen and subscribe to The Essential Podcast, a podcast from S&P Global

Take Notes: Not-For-Profit Health Care SBPA-Backed VRDOs During COVID-19

Analysts Anne Cosgrove, Alex Gombach, and Santos Souffront join our host Tom to discuss U.S. public finance health care variable-rate demand obligations (VRDOs). We first introduce and detail what standby bond purchase agreement (SBPA)-backed VRDOs are and how we rate them. We then look at how not-for-profit health care providers can turn to this form of financing to help offset their significant operating losses and negative cash flow impacts due to COVID-19, as well as discuss our outlooks for both the health care sector and the SPBA market.

—Listen and subscribe to Take Notes, a podcast from S&P Global Ratings

Will Powell Power the Aristocrats?

As the recovery from the Global Financial Crisis edged forward in the early 2010s, inflation hawks warned about the “certainty” of an imminent spike in inflation following the aggressive stimulus measures taken by global central banks. Unfortunately for the U.S. Federal Reserve and some of its other monetary counterparts, that certainty never materialized, and it then spent the better part of the next decade attempting to stoke what was once thought to be a sure thing.

—Read the full article from S&P Dow Jones Indices

Bond market skeptical as Fed set to reveal major shift in inflation playbook

The bond market is preparing for what could be a monumental shift in the Federal Reserve's inflation strategy. Fed Chairman Jerome Powell's speech on Aug. 27 is expected to lay the groundwork for the Fed to explicitly tolerate inflation above its 2% target once the U.S. economic recovery is in full swing. Investors will likely need to wait until September for the full details, but the announcement would mark a major change from the Fed's decades-long approach to managing inflation.

—Read the full article from S&P Global Market Intelligence

European reinsurers' COVID-19 bill triples as biz, life claims start to emerge

Europe's four biggest reinsurers racked up an additional €3.46 billion of coronavirus claims and reserves between them in the second quarter, taking the total for the first half of the year to €4.91 billion. And more claims are likely amid the continued uncertainty about business interruption, credit and surety and life in particular. The bulk of the €1.45 billion of coronavirus claims and reserves Münchener Rückversicherungs-Gesellschaft AG, Swiss Re AG and Hannover Rück SE reported in the first quarter came from event cancellation. SCOR SE, which has little exposure to event cancellation, did not book any coronavirus claims in the first quarter. But in the second quarter the reinsurers, including Scor, started to add reserves for other business lines.

—Read the full article from S&P Global Market Intelligence

Future of Credit

Fridson on Finance: How high-yield managers are addressing ESG

As part of S&P Global Market Intelligence’s recent exploration of the impact of environmental, social, and governance principles on the high-yield market, we surveyed managers on their responses to clients' expressed interest in ESG-minded investing. We did not attempt to query the entire universe of U.S. high-yield managers. Not every manager that we queried replied and some responses were not for attribution. Nevertheless, comments from the handful of companies mentioned in this article should provide readers with a feel for the current state of play.

—Read the full article from S&P Global Market Intelligence

Banking Sector Under Pressure

Top Paycheck Protection Program lenders among banks, credit unions

The Paycheck Protection Program wound down on Aug. 8 with slightly over $525 billion in loans approved. National and regional banks constituted most of the top lenders, but a few smaller banks managed to stand out. The U.S.'s largest bank by assets, JPMorgan Chase & Co., racked up the most PPP loans with $29.35 billion of net approvals. In second place, Bank of America Corp. tallied $25.56 billion in net approvals.

—Read the full article from S&P Global Market Intelligence

Technology & Innovation

Netflix's new discovery features may not stem post-COVID churn – analysts

With competition rising and content production delayed by the coronavirus pandemic, Netflix Inc. is hoping new technology can help it retain its position as the No. 1 subscription video-on-demand platform. While the pandemic has led to a spike in subscribers and usage for the streaming media giant, consumers glued to their couches by shelter-at-home orders may be burning through Netflix's content faster than the company can make new shows. To help prevent user fatigue, Netflix recently began experimenting with a Shuffle Play button, where viewers can watch a randomized stream of programming based on their prior preferences. But analysts warn that these efforts may not be enough to retain subscribers amid mounting competition.

—Read the full article from S&P Global Market Intelligence

Information tech spending climbs as demand for cloud, advanced chips grows

Capital spending in the information technology sector has more than doubled during the past decade, primarily due to the cost of making semiconductors and building cloud-computing networks, according to an analysis by S&P Global Market Intelligence. The information technology companies with the highest capex for the 12 months ending March 30 were Intel Corp. at $16.16 billion; Microsoft Corp. at $14.75 billion; and Apple Inc. at $8.74 billion. Each represents a different business model with different spending drivers as the companies seek to stay competitive.

—Read the full article from S&P Global Market Intelligence

The Future of Energy & Commodities

Asian HSFO markets endure IMO 2020, coronavirus challenges

Light sulfur fuel oil has been the main marine fuel of choice worldwide, but high sulfur fuel oil has held its stead in Asia. S&P Global Platts senior oil experts Surabhi Sahu and Oceana Zhou join Platts Asia Head of News Mriganka Jaipuriyar in examining the demand for HSFO particularly in Singapore, which is the world's largest bunkering port. They also discuss China's fuel demand and outlook, as well as the impact of the coronavirus pandemic on the Asian fuel oil markets.

—Listen and subscribe to Oil Markets, a podcast from S&P Global Platts

Analysis: Vietnam's gas-fired power projects see flurry of interest from US LNG exporters

Vietnam's pipeline of LNG-fired power plants has seen a flurry of interest from US LNG exporters, with at least eight projects with preliminary agreements signed to date, which could turn the Southeast Asian country into a major destination for US natural gas if things go as planned. The recent rush is partly to make it into the country's National Power Development Plan VIII, which the energy ministry expects to submit to the prime minister by October for approval. There is also the realization that Southeast Asia is a growth opportunity for new LNG demand amid worsening US-China tensions that makes the China market hard to tap.

—Read the full article from S&P Global Platts

NY focused on power grid reliability in wake of California blackouts

Extreme heat and a confluence of other factors recently led the California Independent System Operator to institute rolling blackouts in order to prevent wider power system failure. With New York drastically remaking its power grid to run on 70% renewable electricity resources by 2030 and carbon-free power by 2040, experts weighed in on how reliability can be ensured while transitioning to a cleaner power system.

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.