What is the biggest industry at the moment
Which industries can best withstand the corona shock?
The Federal Council has made around CHF 40 billion available to ensure liquidity in the Swiss economy. How such liquidity aids affect the finances of companies in theory was explained in Part 1 of this blog series - in particular, it was shown that such bridging loans can only solve temporary payment difficulties, but not balance sheet solvency problems. This second part aims to answer the question of where liquidity bottlenecks or even solvency problems are most likely lurking in the Swiss economy at the moment.
In order to answer this question, it is first necessary to identify those industries that are particularly hard hit by the restrictions (e.g. forced closings) put in place to contain the pandemic. With this selection we limit ourselves to the first-round effects. For the time being, companies in the catering and entertainment industries are likely to be more affected than web design providers, who can largely switch to home office.
Based on the above assumptions, six industries are compared with one another. Statistical aggregation based on the FSO's Noga categories means that only a rough classification is possible. This means that there is always a number of companies in the industries identified below that are hardly affected by restrictions or even benefit from them. But despite this limited data situation, this categorization allows a considerable part of the companies that are badly affected to be analyzed on an aggregated level.
- Accommodation: This branch includes hotels and guest houses that offer short-term accommodation.
- Travel agencies, tour operators and the provision of other reservation services: In addition to travel agencies, this category also includes the activities of travel guides and tourism promotion.
- Gastronomy: In addition to restaurants and takeaways, this category also includes bars and discos.
- Provision of sports, entertainment and recreation services: This industry includes, for example, the organization of sports events or the operation of fitness centers and ski slopes.
- Retail trade (excluding trade in motor vehicles): This category includes not only stationary retail companies, but also mail order and internet retailers.
- Provision of other predominantly personal services: This category is very heterogeneous. It includes services for cosmetics and body care, hairdressing salons, laundries and funeral homes.
This selection is supported by current payment transaction data, which show, for example, a decrease of over 80% for restaurants, hotels and hairdressers compared to the same period in the previous year. One economic sector that is missing from our list is the aviation industry. Because of the worldwide travel restrictions, both air traffic and airport operations are severely restricted. However, the data on the aviation industry required for the analysis are not included in the value added statistics, and the statistics on the airports are only kept in one collective category: an analysis of the aviation industry is not possible on the basis of the existing data.
As part of the annual value added statistics, the FSO collects data on selected accounting parameters of companies in Switzerland. The most recent statistics are from 2019 and deal with the 2017 financial year. Because there are sometimes considerable fluctuations depending on the industry, the mean of the last three available years is used for the following analysis (2015-2017) . This shows the structural differences in terms of solvency and liquidity between the various industries.
The degree of self-financing (the equity ratio) of a company indicates how large the loss buffer is before a company gets into accounting over-indebtedness. This key figure is calculated using the share of equity in total capital. The sum of the equity and debt financing ratio always results in 100%. Figure 1 shows the key figure analogous to the balance sheet illustrations introduced in the first part of this blog series.
A high level of self-financing suggests more financial flexibility, higher creditworthiness and a lower solvency risk for the company. Guideline values for the degree of self-financing in Switzerland are between 25% and 50%. However, these values should be treated with caution. They are dependent on the industry and the reserves accumulated over time as well as the financial policy of a company; There are no generally applicable, industry-independent target values for equity and debt capital.  In principle, however, a higher entrepreneurial risk should be covered by a higher degree of self-financing.
There are various key figures for liquidity, which differ according to the type of liquid funds. The degree of liquidity 1 describes the relationship between the liquid assets (e.g. cash or bank account) of a company and its short-term debts. The liquidity level 2 shows the ability of a company to pay its short-term debts with liquid funds and outstanding receivables. It is considered an indicator of a company's ability to survive in the event of a sudden drop in sales - a situation that many companies are currently confronted with. The two degrees of liquidity are illustrated in Figure 2.
The guide values for a healthy degree of liquidity 1 are around 50% - 70%, those for degree of liquidity 2 over 100%.  These guide values can also vary from industry to industry. In practice, in normal times, the liquidity ratio 3 is also relevant, at which the total current assets  are set in relation to short-term borrowed capital. In the following, the liquidity level 3 is not shown, because in the current exceptional situation this key figure is of little informative value - it is particularly difficult or impossible to convert inventory levels in closed transactions into liquid funds.
What financial cushions have Swiss companies been equipped with in the recent past? Figure 3 compares the solvency and liquidity situation of the six industries that were particularly affected by the Covid regulations.
- The accommodation is heavily affected by travel restrictions. It is true that the operation of hotels is not prohibited, but if a majority of the guests are absent, sales still drop. The degrees of liquidity indicate that many companies should be able to cope with the liquidity bottlenecks with the bridging loans for the time being. However, solvency problems could arise more quickly in this sector in the event of a sharp drop in demand than in other economic sectors: between 2015 and 2017, accommodation had the lowest level of self-financing of the comparison group at 17.1%. (This could also be because this industry can take on more mortgage debt than other industries because of the hotel properties.)
- Nor do they have a large cushion of equity Travel agencies and reservation services on. Here, too, some companies could slip into financial insolvency over time. With regard to the liquidity situation, it is noticeable that the degree of liquidity 1 is relatively low. This could become a problem because this industry acts as an intermediary between end customers and service providers such as hotels and airlines. Because of this hinge function, this sector is likely to be hit particularly hard by the disruptions in payment flows. If there are many outstanding receivables, there is a risk of a bottleneck. In a first phase, the federal government's liquidity support can help. But if many receivables have to be written off later, the low equity ratios could quickly melt away.
- The gastronomy At 32.4%, it had a significantly higher level of self-financing than travel agencies or accommodation. This gives the industry a slightly higher equity buffer to compensate for the losses. As noted in an earlier analysis, the liquidity ratio 2 is the second lowest of all the industries analyzed. Therefore, restaurants in particular are currently likely to make heavy use of the bridging loans guaranteed by the federal government.
- The companies from the area Sport, entertainment and relaxation In contrast, they have a high degree of liquidity - the degree of liquidity 1 is around three times as high as that of travel agencies. However, it is difficult to make any further statements about the effects of the current crisis and the dependence on any aid, as this industry is very heterogeneous.
- At the Retail trade At first glance, the low liquidity buffer catches the eye: The liquidity levels are the lowest of all the sectors analyzed here. At second glance, this finding is hardly surprising, because retailers have relatively high inventories for business reasons, which they can easily convert in normal times. The liquidity ratio 3 (not shown in the graphic) is, at 134.6%, in the industry average between 2015 and 2017, a lot higher - however, compared to other sectors, this liquidity ratio is also rather low.  The current situation should therefore hit the stationary retailers the hardest in the initial phase; Federal liquidity support is essential for these companies. The general solvency situation looks better than in other sectors, but the retail trade is in the middle of a structural change, which is probably gaining further momentum due to the current surge in digitization.
- The classification of the key figures of the other predominantly personal services is most difficult in the selected industries. As already mentioned, there are very heterogeneous business models in this collective category, which makes general statements difficult. It is noticeable that this industry presents itself as financially relatively solid on a three-year average. However, this picture could be distorted by a low capital intensity, and both self-financing and liquidity levels show strong annual fluctuations.
Even if the interpretation of the key financial figures at the industry level is not always easy, one thing can be clearly seen from this analysis: Many companies cannot cope with the sudden drying up of liquidity with their own resources. Against this background, it is not surprising that the liquidity loans (COVID19 solidarity guarantees) have so far been heavily used. According to the Federal Department of Finance, over 100,000 loan agreements with an average guarantee of CHF 156,000 had been concluded by April 16, 2020. The total guarantee volume is estimated at around 16 billion Swiss francs, which means that the 40 billion Swiss francs made available by the federal government are relatively generous.
The liquidity aid provided by the Federal Council and the financial sector is necessary to re-stabilize the economy - recently the Swiss model was even seen as a role model in other European countries. The practical data shows that liquidity shortages are currently the biggest problem, and a macroeconomic collapse of payment flows would be devastating (see Part 1 of this blog series). Switzerland has done a lot of things right here - but the next challenges are already around the corner.
Companies will have to accept losses because of the Covid 19 pandemic and government enforcement measures, which will put some of them in a situation of over-indebtedness. It should be noted here that even in normal times, many companies get into difficulties and leave the market; In 2015 alone there were several thousand company closures in the industries we analyzed, and across Switzerland there were even more than 35,000.
In the next few months, the liquidity bottlenecks are likely to take a back seat, and the discussion will turn to possible solvency problems. Our analysis suggests that other industries will then be the focus than in the first phase. Individual companies in the tourism and aviation industries in particular could slip into over-indebtedness. On the one hand, the hotel industry, for example, already has comparatively low equity buffers in order to be able to bear any losses over a longer period of time. On the other hand, the decline in demand due to international travel restrictions will last longer here than in domestically oriented sectors, where, according to the gradual relaxation communicated by the Federal Council on April 16, selected companies will soon be able to serve customers again.
Because of foreseeable solvency problems, various politicians and economists have called for the liquidity loans to over-indebted companies to be taken over by the state as A-fund perdu contributions. This would mean the liquidity measures already discussed ex post converted into solvency measures. However, state solvency aid is of a completely different nature than the liquidity aid discussed so far and has a number of serious disadvantages. In an analysis that will be published in the next few days, Avenir Suisse will show how these look in detail and why simple bail-outs and A-fonds-perdu payments should therefore be avoided. Sectors such as “other predominantly personal services” are subject to greater annual fluctuations than, for example, the “accommodation” sector. This could indicate greater volatility within the industry or a different industry structure (e.g. company sizes).  Lütolf, Philipp; Rupp, Markus and Birrer, Thomas (2018): Handbuch Finanzmanagement. 1st edition. NZZ Libro.  Lütolf, Philipp; Rupp, Markus and Birrer, Thomas (2018): Handbuch Finanzmanagement. 1st edition. NZZ Libro.  The current assets denote those assets which, in contrast to fixed assets, are intended for short-term consumption, processing, sale or repayment (e.g. goods in the warehouse). The sum of the current assets and the fixed assets results in the total assets.  Own calculation based on data from the FSO (2019).
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