DIGI Comunications

FISCAL AMNESTY OR SUPPORTING PRODUCTION? Romanian companies, on the edge of insolvency

George Marinescu
English Section / 24 februarie

 Romanian companies, on the edge of insolvency

2021 will be the year in which many companies, especially SMEs, will have to find solutions for survival. Entrepreneurs are in a position where they have to pay off their outstanding debts, rolled over from last year, and that will be mission impossible for many companies that will go bankrupt, according to a study by Sierra Quadrant.

The financial situation of small and medium-sized enterprises is dramatic, even if last year's governments allocated funds to maintain working capital, to support technical unemployment, to finance part of the salary for employees who resumed their work, and for teleworking or kurzarbeit, says Florin Jianu, president of CNIPMMR.

Entrepreneurs in the textile, clothing and leather sector are facing major problems, as they ran out of orders at the end of last year, which led to the closure of 30% of companies in that sector.

At the same time, the suspension of international trade fairs has led to a considerable decrease in orders in some sectors.

The analysis by Sierra Quadrant shows: "Many companies, which were operating at a loss before the crisis, received unexpected help. They kept the business running because they benefited from state aid. Unfortunately, in 2021, state support will gradually diminish and focus on companies that have potential, so that many SMEs will disappear from the economy, especially in the area of services affected by the pandemic. Many companies will be with their back against the wall and will have to restructure their activity''.

Whereas in the area of service SMEs the situation is difficult, it seems that in the area of production, there are sectors that can weather the current year as well - construction, furniture -, but there are also sectors that have more serious problems than those of the companies analyzed by Sierra Quadrant - such as the textile, clothing and leather sector.

The turnover of companies that filed for insolvency last year reached 1 billion euros, 25% higher than in 2019, and the value of the assets involved amounts to 1.6 billion euros, more than 30% higher than in 2019. In the past, most insolvencies were in HoReCa, industry, retail, energy, automotive, in companies from Bucharest, Brasov, Cluj, Constanţa, Timişoara and Iaşi. In 2021, the Sierra Quadrant estimates that, aside from those segments, insolvencies and related areas will be affected, from air transport to agriculture, cars (parts and sub-assemblies) and tourism.

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The analysis prepared by Sierra Quadrant shows that, in 2020, amid the pandemic, companies have accumulated debts and rolled them over. Many of them have tried to reinvent themselves, but the crisis has shattered many areas of activity, such as traditional trade, HoReCa, the events industry, etc.

The decrease in the number of new insolvency cases, in 2020, by 12.72% compared to the previous year, from 6,524 in 2019 to 5,694 in 2020, must be attributed to the breaks offered by the Government and the gridlock of the courts.

In 2021, according to the analysis, it is not out of the question that we will reach a level of insolvencies similar to the one recorded 10 years ago. Sierra Quadrant specialists estimate that, in total, almost 60,000 companies will be affected by some form of restructuring (insolvency, creditor agreement, bankruptcy, suspension of activity, etc.), amid declining state support and difficult access to bank financing lines.

Florin Jianu: "The only solution is a tax amnesty"

The financial situation of small and medium enterprises is dramatic, even if last year's governments allocated funds to maintain working capital, to help with technical unemployment, to finance part of the wages for employees who resumed their work, and for telework. or kurzarbeit. The restrictions imposed by the authorities due to the Covid-19 pandemic and the delay in the application of other support measures for SMEs have left their full mark on the decrease in the turnover of Romanian private companies, often times as much as 60% lower than in 2019. Because of this, many companies no longer have the liquidity to pay both their suppliers and loans to banks or taxes and fees to the state budget and local authorities.

"We are now collecting data from the analysis on the number of affected SMEs. Last year was a year in which fewer companies closed, went bankrupt or suspended their activity, but the number of new companies registered with the Trade Registry was quite small. For now, in 2021, SMEs are waiting and waiting to see how the uncertain health situation, related to the Covid-19 pandemic, and the restrictions imposed by the authorities evolve. We also expect that, following the financial losses recorded last year by companies, in 2021 we will face more closures and bankruptcies of companies in various fields of activity. What is certain is that, in order to prevent bankruptcies, the only solution is a tax amnesty. The measure is necessary, because the companies have not recovered so that they can ensure the payment of the debts accumulated last year both to the state budget and to the suppliers", said Florin Jianu, president of the National Council of Small and Medium Private Enterprises from Romania (CNIPMMR), an organization with over 60,000 member companies.

In fact, according to the data included in the recent edition of the White Paper on SMEs, the big problem of the business environment was, last year, the uncertainties of future developments (reported in 55.69% of SMEs). The second systemic problem was identified as the decrease in domestic demand (52.42%), followed by the temporary suspension of activity due to the Covid-19 situation (49.03%). Another extremely important aspect is represented by the fact that 60.77% of the interviewed SMEs have seen their activity contract in 2020.

Cristian Pârvan, president of the PIAROM: "Supporting production, the only chance for escaping the crisis"

Local investors in the industry have not reported major financial difficulties so far, although they would also need financing for their production capacities and to keep their current working capital, said Cristian Pârvan, president of the Professional Association of Domestic Romanian Investors.

"The most disturbing aspect is the uncertainty regarding everyday operations, due to the restrictions that the authorities may impose at any time, depending on the evolution of the Covid-19 pandemic. Therefore, I believe that the losses caused by these restrictions should be offset by the state. I think that the most affected by the current crisis have been companies that have been caught with ongoing investments and there is a possibility for some of them to become insolvent. Unlike the HoReCa sector, where, for example, in a maximum of six months, the activity of a restaurant can be resumed at optimal parameters, when it comes to construction-related industries, things are completely different", said Cristian Pârvan.

He mentioned that there are sectors of activity, such as clothing, where in the last year several companies have gone into insolvency or bankruptcy or suspended their activity. The president of PIAROM said that this was caused by the lack of orders, which is also felt in large companies, which are left with goods in stock, which they are trying to get rid of quickly this year.

"It is tragic that no more orders are coming into the manufacturing industry. The state could help with that, but not like it did last year when it told entrepreneurs in the beginning of the pandemic to focus on the production of sanitary protection materials and then did not place any orders, but preferred to resort to imports", said Cristian Pârvan.

Regarding the situation of the private business sector as a whole, the president of PIAROM showed that the data from the Trade Register show that the number of company closures and suspensions of companies was much lower in 2020 compared to 2019.

"For 2021, it is difficult to say what will happen because we are facing several factors that matter, and the most important is the one regarding the European and world economic relations that affect production in Romania. The only sector where we are sure that things can go right is construction and it is up to us to use the funds that will be allocated to do what we need. Instead, in the field of services, we notice that entrepreneurs are taking precautions for this year and are waiting to see how things evolve. Practically, apart from the construction sector, all other economic areas are in wait-and-see mode. Under these circumstances, it is very difficult to generalize and say that the year 2021 will be one with many insolvencies or bankruptcies in the private sector", Cristian Pârvan told us.

The president of the Association of Local Investors also said that in the machinery manufacturing industry the biggest problems faced by entrepreneurs are the high staff turnover and the age of the current employees, most of whom are on the verge of retirement. He believes that the state must first of all help industries that have a more difficult time recovering, because domestic producers have decreased in share in the GDP, from 24% to 20%, in the last three to four years.

"An example in this sense would be that, while the countries focused on tourism - Spain and Italy, find it harder to get out of the crisis, Germany - which relies heavily on industry, on production, more easily overcomes the current moment," concluded Cristian Pârvan.

Mihai Păsculescu, president of FEPAIUS: "Orders from the state - the only solution for saving producers"

Entrepreneurs in the textile, clothing and leather sector are facing major problems, as they ran out of orders at the end of last year, which led to the closure of 30% of companies in this economic field, said Mihai Păsculescu, president of the Federation of Professional Associations in Textiles, Clothing and Leather (FEPAIUS).

"90% of the production of our industry gets exported. What happened last year had a negative effect on both the 9,000 companies in the field and the 220,000 employees. The situation is terrible. About 30% of companies, that were subcontractors went bankrupt or disappeared. More than 20,000 employees have disappeared from the sector, who were permanently made redundant, and the rest of the companies are working at a capacity between 30% and 50%, helped by customers from abroad who send them the necessary materials for production", said Mihai Păsculescu.

He mentioned that the industry was not helped by either the Orban governments of 2020 or the current government. Mr. Păsculescu mentioned that he asked the former Prime Minister Ludovic Orban for state orders so that the entrepreneurs in the textile, clothing and leather industry could produce uniforms and clothing for the armed forces - military, police, gendarmes - as well as for those in the secret services, but the former prime-minister replied that he did not have the funds due to the former hostile Parliament which would passed laws which included too many electorally-motivated handouts.

The industry has not been successful in producing the much-needed sanitary protection materials during the Covid-19 pandemic. Although, according to the president of FEPAIUS, the former Minister of Economy, Virgil Popescu, was informed that 8000 companies can work in this sector, but they need the necessary raw material, the Romanian state did not order any masks from the companies that are part from this federation.

"In 2021, the final nail in the coffin for this industry came. The Minister of Economy, Claudiu Năsui, cut our funds for export. This means that we will not have any orders this year either, because we have nowhere to exhibit and promote our goods, and the current situation is likely to worsen. Many entrepreneurs have postponed their debts to the state and banks and it is possible, due to the lack of orders, to end up in insolvency. In that state, you don't even have anything to foreclose to pay off all the debts, because the maximum technical endowment of a garment company does not exceed, for example, 500,000 or 600,000 euros", Mihai Păsculescu also told us.

He mentioned that if the state does not take action, the companies will go bankrupt, especially since, from January 1, 2021, they will not be able to keep their employees, because the aid for technical unemployment is granted only in the HoReCa sector. However, the President of FEPAIUS considers that a tax amnesty is not a viable solution.

"I do not agree with the tax amnesty, because there are companies that have made efforts to pay taxes to the state. The only solution is to receive orders from the state in this field of activity ", said Mihai Păsculescu, who also criticized the major salary discrepancies between the public sector and the private sector.

He specified that the entrepreneurs in this field offered several solutions for the National Recovery and Resilience Plan, one of them being the making of wool and cotton weaving mills to ensure the raw material necessary for the textile and clothing industry. Another project that entrepreneurs in the field would like to carry out through PNRR refers to the recovery of old clothes and their sorting to get them back into the production circuit.

Aurica Sereny, president of the APMR: "The situation will be harder in 2021, unless we get orders from abroad"

Furniture manufacturers in our country are also facing problems, in view of the fact that the number of foreign orders has decreased considerably in the last year, amid the suspension of international trade fairs.

"From the official data we have for the first 10 months of last year, industrial production fell by 20%.

Because of this, there are many companies that have downsized their activity, have reduced the number of employees, but we also have companies that at the beginning of 2021 reported to us that they will close their doors. Fortunately, only companies that were already losing money before the launch of Covid-19 reported problems with financial flows. The others did well in 2020, because they had foreign orders following the international participation in 2018 and 2019. But now they also exhausting those orders and, if we do not participate in 2021 in international trade fairs, the situation will be difficult, for other entrepreneurs as well", said Aurica Sereny, president of the Association of Furniture Manufacturers in Romania (APMR).

Even though they are not able to participate in exporting for the time being, according to the information provided by Ms. Sereny, some companies have refocused and are working on various products on domestic orders, which until now they refused to take, or subcontract certain works for major companies participating in public procurement.

She pointed out that, at the moment, the main problem furniture manufacturers are facing is the lack of raw materials, as it is difficult, from their point of view, to prepare the required documentation when the Sumal 2.0 program started operating, which monitors the cutting and shipping of timber from Romania.

The president of APMR also said that entrepreneurs need financing for working capital - based on measure 2 of GEO 130/2020, in which this activity was not initially included, and complained that in measure 3 - investment grants, producers of furniture get a score that is 10 points lower, because they work for export.

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