The Covid-19 pandemic has forced the world to take a sharp turn into macabre territory. With economists these days issuing frequent warnings of shocks, scars and zombies, it sometimes feels as though we are unwitting actors in a horror movie.
On 13 April, the World Bank published an economic update on South Asia, with Hartwig Schafer, the bank’s vice president for the region, saying: ‘South Asia has faced multiple shocks in the past two years, including the scarring effects of the Covid-19 pandemic.’
‘Shock’ or ‘shocks’ also pops up more than 30 times in Standard Chartered’s latest global econonomic outlook report.
Meanwhile as part of the Budget 2022 unveiling in October 2021, the Malaysia Finance Ministry released its economic outlook, which identified the ‘scarring impact of Covid-19 on income’ as one of the immediate issues that may impede national development.
And now zombies have shuffled into the spotlight. Zombie businesses, that is.
Zombie companies will likely perish once easy access to capital is terminated
Rise of the zombies
The zombie label was first applied to businesses during Japan’s economic stagnation in the 1990s. An OECD economic policy paper that came out in December 2017 contains this precise definition of zombie businesses: companies aged 10 years or more whose profits cannot cover their interest payments for three consecutive years.
The ASEAN+3 Macroeconomic Research Office (AMRO) is a little more flexible: zombie businesses are simply those unable to cover their debt servicing costs from current profits over an extended period.
According to a July 2021 article by US Federal Reserve staffers, it is generally agreed that zombie businesses are economically unviable and manage to survive only by tapping banks and capital markets. Bank Negara Malaysia (BNM), the Fed’s counterpart in Malaysia, says zombies have insufficient revenue to cover loan interest costs and are dependent on cheap credit to survive.
The definitions may vary but they converge on one point: zombie companies will likely perish once their relatively easy access to capital is terminated.
This is highly relevant because government policy responses at the height of the pandemic (such as loan guarantees, subsidised lending, repayment moratoriums and regulatory forbearance) have helped many businesses to stay afloat, whether or not they deserve such support. But now that most economies are focused on recovery rather than mere survival, is it time for a thinning of the herd?
Productivity drag
BNM tackles this question in an article in its Economic and Monetary Review 2021, published on 30 March, although it does not zoom in on the situation in Malaysia.
It points out that many businesses, including zombies, increased their borrowing to sustain operations during the pandemic. The central bank warns that if the high debt levels of non-viable companies are left unaddressed, they could affect long-term productivity.
Resources get trapped in unproductive firms, leading to lower productivity overall
The BNM review concludes: ‘Policy lessons drawn from selected crises indicate that the key is to achieve a delicate balance between short- and long-term needs. As we move past the acute phase of the pandemic, longer term reforms to address economic vulnerabilities and ensure the health of the banking system are vital.’
AMRO, a regional macroeconomic surveillance organisation, also foresees that productivity in the long run will suffer if too many zombies are allowed to keep going.
A recent AMRO regional economic outlook report points out: ‘An excessive number of zombie firms could cause a persistent drag on growth by depressing the creation of new businesses. As banks roll over existing loans to protect zombie firms from going bust, resources get trapped in those unproductive firms instead of being reallocated to more productive firms, leading to lower productivity for the overall economy.’
Endless horror?
On paper, it does not take a lot to step aside and let nature take its course. However, we live in a world where populism secures votes, where some weak companies are shielded because they are deemed too big or too important to fail, and where low-hanging fruits are sweet distractions.
If these unfortunate elements persistently overshadow the big picture, we may have to endure the horror movie for far longer than imagined.
