Assessing the impact of COVID-19 on businesses in Colombia Leonardo Iacovone Jonathan Timmis Preliminary Results Background This presents an ex-ante impact assessment of potential exposure to COVID-19 for Colombian firms using 2018 data. Derived from 2 main sources: • Firms >=10 employees - manufacturing, wholesale/retail and most services sectors - EAC, EAM, EAS firm data • All firms of all sizes & industries, but only employment info - GEIH household data • Builds on the framework of a recent World Bank note to assess impact of COVID-19 on firms • Classifies firms into those affected by: 1. Lockdown & quarantine measures to slow down contagion 2. Demand shocks 3. Import supply shocks 4. Financial shocks 5. Indirect impacts through supply chains 2 3 Summary – Employment 55% of overall Colombian employment is likely to be affected by COVID-19 crisis • Lockdown & quarantine measures account for half of this. The relative impact is somewhat lower for larger firms (and higher for smaller firms). • Lockdown & financial vulnerability impacts are lower for firms with > 10 employees, • But these firms more sensitive to demand shocks & stronger indirect spillovers to supply chains. 4 Summary – Wages and Rent Wages and rent expenses give an idea of the fixed costs that need to be covered. • Estimated monthly total wage bill of affect firms is nearly 4% of 2018 GDP • Estimated monthly rental (or leasing) expenses comprise nearly 0.8% of GDP. 5 Note: Firms >=10 employees, EAC, EAM, EAS industries Summary – Value Added The (annual) value added of affected firms comprise nearly 12% of GDP. • Demand shocks are much more prominent in terms of value added (e.g. vs employment) 6 Note: Firms >=10 employees, EAC, EAM, EAS industries Lockdown Shock Use “shutdown� sectors of Vavra (2020) & match to CIIU Rev4 A.C. codes. Include: • Hospitality, retail sector (excl. food & medical), professional services, some sensitive manufacturing. Over 5 million jobs relate to lockdown sectors. Colombian retail & hospitality will be strongly affected, accounting for > 3million jobs alone. • This is particularly true of smaller firms. Informal firms account for over 3.6million jobs - nearly 3/4 of total shutdown employment. Firms >10 employees are disproportionately impacted by manufacturing lockdowns. Wages and rent for these firms total 2.1% of GDP, and value added for 4.2% of GDP. All Firms Firms < 50 employees Firms >= 10 employees (excl agriculture) (excl agriculture) (EAC,EAM,EAS industries) Employment Employment Employment Total Share Total Share Total Value Annual Annual Annual Rent Annual Rent Lockdown sectors Share employment (firms <50 employment (firms >=10 employment Value Added Added affected Wages Wages affect affected affected (of all firms) affected ees) affected ees) affected (%GDP) (COL$ bn) (%GDP) ed (COL$ bn) (%GDP) (COL$ bn) Hotels, restaurants, bars 7.8% 1,452,803 10.2% 1,374,536 3.1% 106,810 0.3% 3,099 0.2% 2,126 0.1% 737 Travel (air travel, travel agencies) 1.9% 356,060 1.9% 252,431 3.0% 105,614 0.6% 5,404 0.2% 2,268 0.1% 496 Retail other than food and pharmacies 8.7% 1,634,488 10.8% 1,467,184 4.2% 145,968 0.8% 7,451 0.4% 3,450 0.1% 1,415 Entertainment 1.0% 183,800 1.1% 150,488 0.8% 28,842 0.5% 5,149 0.1% 981 0.0% 79 Personal services 3.4% 644,669 4.3% 587,481 1.1% 38,504 0.3% 2,936 0.1% 1,292 0.0% 146 Sensitive manufacturing 4.2% 793,815 4.5% 603,660 6.7% 232,918 1.8% 17,421 0.7% 6,416 0.1% 978 Total 27.0% 5,065,635 32.8% 4,435,780 18.9% 658,656 4.2% 41,460 1.7% 16,533 0.4% 3,852 Informal Firms 19.4% 3,632,577 26.8% 3,632,577 7 Demand Shock Exporting firms and durable goods producers vulnerable to demand shocks. Durable goods consumption often highly cyclical (e.g. Bils & Klenow 1998). • Define demand shock as durable goods manufacturing or exporting firms (exports >50% of sales) Demand shocks affect around 4% of total employment, almost entirely via durable goods manufacturing. • Larger firms relatively more affected by demand shocks - partly due to export propensity, but mainly because they produce durables. • The wage and rent cost of firms (>10ees) are about 1% of GDP NB role of exports is small, as few firms export & we don’t reflect firms that export indirectly. All Firms Firms < 50 employees Firms >= 10 employees (excl agriculture) (excl agriculture) (EAC,EAM,EAS industries) Employment Employment Demand Shock Employment Total Share Total Share Total Value Annual Annual Annual Rent Annual Rent sectors Share employment (firms <50 employment (firms >=10 employment Value Added Added affected Wages Wages affect affected affected (of all firms) affected ees) affected ees) affected (%GDP) (COL$ bn) (%GDP) ed (COL$ bn) (%GDP) (COL$ bn) Durable goods manufacturing 4.0% 742,226 3.7% 495,338 7.5% 261,427 3.5% 34,460 0.8% 8,014 0.1% 936 - Durable good exporters 0.2% 30,183 0.1% 12,169 0.5% 17,762 0.2% 2,195 0.1% 644 0.0% 52 Non-durable good manufacturing exporters 0.1% 27,065 0.1% 7,354 0.4% 15,081 0.4% 3,539 0.0% 451 0.0% 42 Total 4.1% 769,290 3.7% 502,692 7.9% 276,508 3.9% 37,999 0.9% 8,465 0.1% 979 8 Import Supply Shock Firms reliant on imported intermediates are vulnerable to import supply shocks. • Define exposure as importing firms (imports >50% of intermediates) The role of imports is small, only affecting 0.1% of overall employment. This is partly because most large importers also export (so have been counted under demand shock). Also we don’t reflect firms that import indirectly, e.g. via wholesalers or intermediaries. All Firms Firms < 50 employees Firms >= 10 employees (excl agriculture) (excl agriculture) (EAC,EAM,EAS industries) Employment Employment Import Demand Employment Total Share Total Share Total Value Annual Annual Annual Rent Annual Rent Shock sectors Share employment (firms <50 employment (firms >=10 employment Value Added Added affected Wages Wages affect affected affected (of all firms) affected ees) affected ees) affected (%GDP) (COL$ bn) (%GDP) ed (COL$ bn) (%GDP) (COL$ bn) Manufacturing Importers 0.1% 24,153 0.0% 6,126 0.4% 13,625 0.3% 2,780 0.0% 519 0.0% 54 Total 0.1% 24,153 0.0% 6,126 0.4% 13,625 0.3% 2,780 0.0% 519 0.0% 54 9 Financial Shock We define financial vulnerability at a sector level - those with limited cash availability (due to limited firm balance sheet data) • Defined as bottom quartile sectors in “cash-on-hand� • Cash-on-hand from US firms in Compustat, aggregated to NAICS 3 digit sectors • Since this encompasses all firms in these sectors, may overstate the impact 3million jobs are in financially vulnerable sectors. • This is particularly the case for smaller firms, where 19% of jobs in firms with less than 50 employees. • However, even larger firms (>10ees) have 7% employment in these vulnerable sectors. All Firms Firms < 50 employees Firms >= 10 employees (excl agriculture) (excl agriculture) (EAC,EAM,EAS industries) Employment Employment Financial Shock Employment Total Share Total Share Total Value Annual Annual Annual Rent Annual Rent sectors Share employment (firms <50 employment (firms >=10 employment Value Added Added affected Wages Wages affect affected affected (of all firms) affected ees) affected ees) affected (%GDP) (COL$ bn) (%GDP) ed (COL$ bn) (%GDP) (COL$ bn) Bottom quartile cash on hand 16.4% 3,069,882 19.0% 2,571,294 7.1% 247,491 0.8% 8,275 0.5% 4,489 0.2% 1,710 Total 16.4% 3,069,882 19.0% 2,571,294 7.1% 247,491 0.8% 8,275 0.5% 4,489 0.2% 1,710 10 Indirect Impact We estimate indirect upstream impact of lockdown & demand shocks. Consider outcomes employment, wages and rent: = ∗ ∗ • = technical (domestic) coefficients of 2015 IO table - CIIU Rev. 4 A.C. • = total sales in industry j of firms directly affected by lockdown / demand shock. • For firms>= 10 employees, industry affected sales are aggregated from firm data • For all firms, industry affected sales are estimated as industry total output (from IO data) * % industry employment affected (from GEIH) :;<=>?@A • BCD@EA = share at industry level for different variables (emp, wages, rent) with respect to sales • For firms>= 10 employees, taken directly taken from firm data • For all firms, we compute ratio of total industry employment (from GEIH) to industry sales (from IO data) – other outcomes not available in GEIH • Note this only reflects first order linkages on upstream sectors • It focuses on the drop in demand only from your clients and not from the clients of your clients 11 Indirect Impact Indirect impacts on upstream suppliers are large • The indirect impact of both shocks on all firms affects 1.5million employees, around a quarter of the direct impact (of 5.8million). For firms >= 10 employees, the indirect impacts are somewhat larger. • The indirect impact affects 10% of employment of these firms, compared to the earlier direct impact of 27%. • Similarly the indirect impact on value added is 2.5% of GDP, compared to 8.1% direct impact. All Firms Firms >= 10 employees (excl agriculture) (EAC,EAM,EAS industries) Employment Indirect Impact Employment Total Share Total Value Annual Annual Annual Rent Annual Rent Share employment (firms >=10 employment Value Added Added affected Wages Wages affect affected affected (of all firms) affected ees) affected (%GDP) (COL$ bn) (%GDP) ed (COL$ bn) (%GDP) (COL$ bn) Indirect Lockdown 5.3% 994,105 6.8% 237,182 1.7% 16,720 0.6% 6,345 0.1% 625 Indirect Demand 2.6% 488,517 3.3% 115,034 0.8% 7,429 0.3% 2,926 0.0% 303 Indirect Total 7.9% 1,482,622 10.1% 352,216 2.5% 24,149 0.9% 9,271 0.1% 927 12 Department-Level Using household location, decompose total employment affected into departments • Includes lockdown, demand, supply & financial shocks. Excludes indirect impacts. At a sub-national level, there is some variation in affected departments. However, this masks underlying differences: • Often larger departments have greater exposure to larger firms (that tend to produce durables / trade), e.g. Antioquia, Bogota, Valle del Cauca. • There is also variation in exposure to smaller firms (disproportionately in retail or hospitality), e.g. Bogota has the lowest exposure, but Atlántico is close to the mean Total Total Employment Share employment Employment Share employment (of department) affected (of department) affected Firms <= 10 Firms > 10 Firms <= 10 Firms > 10 Department employees employees All Firms Department employees employees All Firms (excl (excl (excl agriculture) (excl (excl (excl agriculture) agriculture) agriculture) agriculture) agriculture) Antioquia 32% 16% 48% 1,135,142 Huila 42% 6% 48% 165,532 Atlántico 39% 12% 51% 594,069 La Guajira 56% 3% 59% 213,931 Bogotá D.C. 28% 15% 43% 1,784,507 Magdalena 46% 5% 51% 211,776 Bolívar 42% 10% 51% 392,743 Meta 41% 7% 47% 158,761 Boyacá 39% 9% 48% 219,292 Nariño 44% 5% 49% 262,654 Caldas 35% 11% 46% 167,475 Norte de Santander 44% 5% 49% 250,337 Caquetá 48% 4% 52% 86,360 Quindío 40% 9% 50% 172,046 Cauca 39% 7% 45% 194,597 Risaralda 37% 13% 50% 218,627 Cesar 45% 5% 50% 179,403 Santander 39% 8% 47% 422,988 Córdoba 48% 4% 52% 270,906 Sucre 48% 4% 52% 164,877 Cundinamarca 34% 13% 47% 413,210 Tolima 41% 8% 48% 234,526 32% 2% 34% 56,223 13 Chocó Valle del Cauca 34% 15% 49% 958,980 Policy Scenario – Wage Subsidies Given the size of the shock, the risk is that profitable businesses may be forced to close-down as the liquidity crunch may become a solvency problem. One solution advocated & implemented in various countries is a short-term wage subsidy. This subsidy would be conditional on maintaining the workers on the payroll. The first scenario, where the Government subsidizes 50% of wages for 3 months, the cost is: • 3.8 trillion COL pesos to support directly affected sectors • 4.9 trillion COL pesos to support directly and indirectly affected sectors Note this will be a lower bound, since it includes only firms >=10 employees in sectors within EAC, EAM and EAS data Subsidies in terms of Wage Bill Firms >= 10 employees (EAC,EAM,EAS industries) 70% for three 50% for three months 100% for two months months %GDP COL$ bn %GDP COL$ bn %GDP COL$ bn Lockdown sectors 0.2% 2,067 0.3% 2,755 0.3% 2,893 Sectors with further suppressed demand 0.1% 1,058 0.1% 1,411 0.2% 1,481 Import Supply Shock 0.0% 65 0.0% 87 0.0% 91 Sectors with financial shock 0.1% 561 0.1% 748 0.1% 786 DIRECT TOTAL 0.4% 3,751 0.5% 5,001 0.5% 5,251 INDIRECT TOTAL 0.1% 1,159 0.2% 1,545 0.2% 1,622 GRAND TOTAL 0.5% 4,910 0.7% 6,546 0.7% 6,874 14 Systemic Firms Very large firms are likely to have systemic impact – with disproportionate impact on overall economic activity. We define systemic as the 100 largest firms in terms of sales, using EAC, EAM and EAS data. Note this data excludes financial services, mining, agriculture and transport services. These systemic firms are mainly large retailers/wholesalers, and food and natural resource processing manufacturers: 2 digit ISIC rev4 # systemic firms 10: Manufacture of food products 12 11: Manufacture of beverages 3 17: Manufacture of paper & paper product 2 19: Manufacture of coke & refined petrol 7 20: Manufacture of chemicals & chemical 5 22: Manufacture of rubber & plastics pro 1 23: Manufacture of other non-metallic mi 4 24: Manufacture of basic metals 2 32: Other manufacturing 8 45: Wholesale & retail trade & repair of 7 46: Wholesale trade, except of motor veh 18 47: Retail trade, except of motor vehicl 20 52: Warehousing & support activities for 3 15 61: Telecommunications 8 Systemic Firms Despite being a very small share of firms, systemic firms account for 4.8% of affected employment and 2.1% of value added as a share of GDP. • Systemic wholesalers & retailers are impacted by the retail lockdown and low cash-on- hand. Systemic manufacturers are impacted by demand for durables. EAS, EAM, EAC Data EAS, EAM, EAC Data EAS, EAM, EAC Data EAS, EAM, EAC Data Share of overall Total Annual Value Annual Value Annual Wage Annual Rent Annual Rent employment (of employment Added added Affected Annual Wage bill bill affected expense affected expenses affecte Lockdown sectors firms >=10 ees) (000s ) affected (%GDP) (COL$ bn) affected (%GDP) (COL$ bn) (%GDP) d (COL$ bn) Hotels, restaurants, bars 0.0% - 0.0% - 0.0% - 0.0% - Travel (air travel, travel agencies) 0.0% 700 0.1% 550 0.0% 38 0.0% 6 Retail other than food and pharmacies 0.7% 22,926 0.2% 1,467 0.1% 675 0.0% 251 Entertainment 0.1% 2,523 0.3% 2,576 0.0% 130 0.0% 11 Personal services 0.1% 2,970 0.1% 1,191 0.0% 193 0.0% 52 Sensitive manufacturing 0.2% 6,723 0.1% 1,291 0.0% 307 0.0% 50 Total 1.0% 35,841 0.7% 7,076 0.1% 1,343 0.0% 370 Sectors with suppressed demand Durable goods manufacturing 0.5% 17,841 0.9% 8,905 0.1% 839 0.0% 102 - Durable good exporters 0.0% 534 0.0% 270 0.0% 31 0.0% 1 Non-durable good manufacturing exporters 0.0% 1,268 0.1% 1,030 0.0% 102 0.0% 2 Total 0.5% 19,109 1.0% 9,935 0.1% 941 0.0% 105 Sectors with import supply shock 0.0% 444 0.0% 47 0.0% 15 0.0% 0 Sectors with financial shock 3.2% 110,767 0.3% 3,388 0.2% 2,116 0.1% 894 16 DIRECT TOTAL 4.8% 166,160 2.1% 20,447 0.5% 4,416 0.1% 1,368 Profit Simulation – 1 or 3 month Sales Shock A positive profit rate, is a rough indication of firms ability to stay afloat. We use the firm-level data to examine the resilience of annual profits to a 1month or 3 month sales shock. • Applies to firms >=10 employees in EAC,EAM&EAS industries In the main analysis we define profits before interest, tax & depreciation (EBITDA): • Profits = value added – labor costs In the Annex, we examine robustness to also deducting rental expenses. Note this will be a lower bound, since it doesn’t reflect firms’ immediate liquidity needs. • We measure whether firms are sufficiently profitable over the rest of the year to cover losses during the 1 - 3 months of sales shock. • However, this does not mean firms have sufficient liquid assets to meet the 1 - 3 months of costs (labor, rent etc.) with little income during those months. • Unfortunately, we do not have firm balance sheet data to assess this. 17 Profit Simulation – 1 or 3 month Sales Shock • Without any financial assistance, under a shock with 1 month zero sales up to 26% of firms may close down (depending on their cash flow) or accept to be making negative profits (assuming no cost changes) • Without any financial assistance, under a shock with 3 months zero sales up to 62% of firms may close down (depending on their cash flow) or accept to be making negative profits (assuming no cost changes) 62% of firms 26% of firms Source: Firms >=10 employees, EAC, EAM & EAC industries 18 Profit Simulation incorporating firms responses by reducing intermediate costs If firms can reduce intermediate inputs (proportional to sales shock), this significantly reduces the effect of the shock as firms can maintain their profitability and reduces the risk of bankruptcy of firms: • Without any financial assistance, under a shock with 1 month zero sales up to 4% of firms may close down (depending on their cash flow) or accept to be making negative profits • Without any financial assistance, under a shock with 3 month zero sales up to 15% of firms may close down (depending on their cash flow) or accept to be making negative profits 19 Source: Firms >=10 employees, EAC, EAM & EAC industries Characteristics of Firms that may close down The 15% of firms that become unprofitable under the 3month shock, are distinct from firms already unprofitable prior to the sales shock, and firms that stay profitable despite the sales shock. Firms that become unprofitable are more labor intensive than those that remain profitable. They have are larger in employment, but have smaller sales / value-added (from which to recover the short-term losses in future months). Firms that were already unprofitable (pre-COVID) are smaller than those that become unprofitable • Average wages are relatively similar across the groups. Median Annual Value Average 3 Month Sales Shock Annual Sales Employment Labor Share Added Annual Wages (COL$'000) (COL$'000) (COL$'000) Always Unprofitable 2,271,827 256,508 25 149% 19,793 Always Profitable 7,083,437 1,929,886 35 44% 20,473 Become Unprofitable 5,113,141 1,741,744 61 85% 20,239 20 Source: Firms >=10 employees, EAC, EAM & EAC industries Profit Simulation – Reduce Labor Costs • If firms want to stay open, and no financial assistance is provided, after reducing intermediates, we assume that firms may try to reduce labor costs. How much they need to reduce labor costs to avoid profits from dropping below zero under the different scenario? • Important to note here we are assuming firms don’t have to pay any severance cost • Alternatively, we could reframe this question by asking how much in terms of wage subsidies the firm need to receive to avoid becoming unprofitable and having to close down? • Under the 1 month shock, the 4% of firms that may close down need to cut labor costs on average by 5%. • Under the 3 month shock, the 15% of firms that may close down need to cut labor costs on average by 14%. 1 Month Sales Shock 3 Month Sales Shock 21 Source: Firms >=10 employees, EAC, EAM & EAC industries Annex 22 Annex - Baseline Results GEIH Data GEIH Data EAS, EAM, EAC Data EAS, EAM, EAC Data EAS, EAM, EAC Data EAS, EAM, EAC Data All Firms Firms < 50 ees Firms >= 10 ees Firms >= 10 ees Firms >= 10 ees Firms >= 10 ees Employment Total Employment Total Total Annual Value Annual Value Annual Wage Annual Rent Annual Rent Share (of all firms, employment Share (of firms <50 employment Employment Share employment Added added Affected Annual Wage bill bill affected (COL$ expense affected expenses affected Lockdown sectors excl agriculture) affected ees, excl agriculture) affected (of firms >=10 ees) affected affected (%GDP) (COL$ bn) affected (%GDP) bn) (%GDP) (COL$ bn) Hotels, restaurants, bars 7.8% 1,452,803 10.2% 1,374,536 3.1% 106,810 0.3% 3,099 0.2% 2,126 0.1% 737 Travel (air travel, travel agencies) 1.9% 356,060 1.9% 252,431 3.0% 105,614 0.6% 5,404 0.2% 2,268 0.1% 496 Retail other than food and pharmacies 8.7% 1,634,488 10.8% 1,467,184 4.2% 145,968 0.8% 7,451 0.4% 3,450 0.1% 1,415 Entertainment 1.0% 183,800 1.1% 150,488 0.8% 28,842 0.5% 5,149 0.1% 981 0.0% 79 Personal services 3.4% 644,669 4.3% 587,481 1.1% 38,504 0.3% 2,936 0.1% 1,292 0.0% 146 Sensitive manufacturing 4.2% 793,815 4.5% 603,660 6.7% 232,918 1.8% 17,421 0.7% 6,416 0.1% 978 Total 27.0% 5,065,635 32.8% 4,435,780 18.9% 658,656 4.2% 41,460 1.7% 16,533 0.4% 3,852 Informal Firms 19.4% 3,632,577 26.8% 3,632,577 Sectors with further suppressed demand Durable goods manufacturing 4.0% 742,226 3.7% 495,338 7.5% 261,427 3.5% 34,460 0.8% 8,014 0.1% 936 - Durable good exporters 0.2% 30,183 0.1% 12,169 0.5% 17,762 0.2% 2,195 0.1% 644 0.0% 52 Non-durable good manufacturing exporters 0.1% 27,065 0.1% 7,354 0.4% 15,081 0.4% 3,539 0.0% 451 0.0% 42 Total 4.1% 769,290 3.7% 502,692 7.9% 276,508 3.9% 37,999 0.9% 8,465 0.1% 979 Sectors with supply shock Manufacturing importers (excl exporters above) 0.1% 24,153 0.0% 6,126 0.4% 13,625 0.3% 2,780 0.1% 519 0.0% 54 Sectors with financial shock Bottom quartile cash on hand 16.4% 3,069,882 19.0% 2,571,294 7.1% 247,491 0.8% 8,275 0.5% 4,489 0.2% 1,710 DIRECT TOTAL 47.6% 8,928,960 55.5% 7,515,891 34.3% 1,196,280 9.3% 90,514 3.1% 30,006 0.7% 6,595 Indirect Impact Indirect Lockdown 5.3% 994,105 6.8% 237,182 1.7% 16,720 0.7% 6,345 0.1% 625 Indirect Suppressed Demand 2.6% 488,517 3.3% 115,034 0.8% 7,429 0.3% 2,926 0.0% 303 INDIRECT TOTAL 7.9% 1,482,622 10.1% 352,216 2.5% 24,149 1.0% 9,271 0.1% 927 GRAND TOTAL 55.5% 10,411,582 44.4% 1,548,496 11.7% 114,663 4.0% 39,277 0.8% 7,522 23 Annex – Robustness - Upper Bound Measure • Durable manufacturing & lockdown sectors defined in 4 digit NAICS. CIIU Rev4 not always match to a single NAICS sector. In baseline analysis, for each CIIU Rev4 use the share of durables/lockdown NAICS sectors. • Here we present a conservative upper bound, assuming durable/lockdown if any NAICS sector is durables/lockdown • For services firms where we only have 2 digit CIIU Rev 4 information, this is very conservative. • Upper bound measure increases direct impacts employment to 55% (from 34% baseline). 24 Annex – Robustness Profit Simulation – Include Rental Costs • For robustness, we now deduct rental costs from profits. Profits = value added – labor costs - rent • Compared to earlier profit measures excluding rent, now nearly 50% more firms need to reduce wage costs to break even. The mean reduction in wage bill (per firm) is similar. • Under the 1 month shock, 6% of firms that may close down on average need to save 5% of their annual wage bill. • Under the 1 month shock, 24% of firms that may close down on average need to save 16% of their annual wage bill. 1 Month Sales Shock 3 Month Sales Shock 25 Source: Firms >=10 employees, EAC, EAM & EAC industries