With the phased reopening of the economy scheduled to take place over the next few months, now is the time for businesses to invest to take advantage of the return of normal commerce.
ut according to new statistics published by the Central Bank yesterday, companies are instead paying back loans at the fastest rate in five years, with annual net repayments hitting €3bn in April, amounting to a 7.5pc drop in outstanding credit.
Not since February 2016 have firms been deleveraging this quickly. And even though there was a small €69m month-on-month increase in business borrowing in April, the overall trend is undeniable.
In fact, companies are saving far more than they are borrowing, stashing away €1.3bn during the month. Corporate deposits have ballooned by €12.2bn, or 19.4pc, over the pandemic yet that money has not gone back out the door as new lending.
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Logically, businesses should be seeking working capital to take advantage of the economic expansion that is already underway.
So why aren’t they? And could poor appetite for credit wind up hurting the recovery?
The first reason is obvious: there is still a lot of uncertainty out there, especially in sectors most exposed to the pandemic, like hospitality.
Business owners are trying to get a read on their own future cash flow and investment needs without knowing where, when and how customers will start spending again.
Neil McDonnell, chief executive of ISME, calls this the “phony war”.
“Businesses are trying to scope where the pent-up spend will be directed to see if they can capture any. But everyone - lenders and borrowers - remains extremely debt averse.”
There is also the question of whether businesses can trust each other to pay up, what bankers call “counterparty risk”.
Fear of insolvency is widespread among SMEs, according to Mr McDonnell.
It’s something the Government has already acted on, introducing legislation for the so-called small companies administrative restructuring process (Scarp) in anticipation of a predicted wave debt renegotiations.
But there is another, more positive, take on low credit demand.
“The reason companies are not applying for credit is because they have sufficient funds,” said Dermot O’Leary, chief economist with Goodbody.
Mr O’Leary cited the success of Government efforts to replace lost revenue with wage subsidies and other supports as a key factor beyond the tepid demand for new lending.
The Government has pumped more than €10bn into businesses either directly through payments and grants or indirectly through debt warehousing and loan guarantees.
So, if State support has been a success, loan demand should come back once lockdowns are over and Government backing gets reduced.
“Once you get a reopening there will be an element of businesses looking for working capital as they restock,” said Diarmaid Sheridan, financials analyst with Davy.
“Before the pandemic, there were better signs, but the pandemic has set us back probably 18 months.”