Extraordinary times, extraordinary measures

By Fernando Latorraca

As of the end of May, employees of companies that registered a 25% or more drop in sales, compared to May 2019, and meet the requirements (to be detailed next week), will no longer be included in the FASE program. These employees will now receive a subsidy equivalent to maximum of 80% of their salary. This amount will depend and will be proportional (it is not specified yet) to the drop in sales.

Employers must pay 20% of 80% of the payroll, plus AOV/AZV which add up to 19% of 80% of the payroll. This represents almost 30.5%!! of the payroll.

For how many months will this subsidy be available? Nothing confirmed yet. Apparently, it depends on the Netherlands’ approval monthly. This uncertainty makes planning more difficult.

HORECA companies that have been closed since mid-March will be the target group of the subsidy with a drop in sales of 100% from March until who knows when.

Besides payroll, companies which are not generating any income for almost 2 months, must pay:

  • Utilities
  • Rentals
  • Vendors
  • Loans
  • Insurance
  • Accountants
  • Security (alarm systems with monitoring)
  • Other fees such as POS, computer systems, web pages, etc.

All relying on funds generated until mid-March.

Restaurants and bars should also add the loss of perishable merchandise that had to be given away and/or wasted.

The funds available for all the above mentioned expenses are limited, for some more than others, but limited for all. Therefore, the survival of companies depends, not only of the end of ‘shelter in place’ and the curfew, but of several other variables that are not in their hands, and not even in GOA’s hands.

Even if we are virus free and open internal circulation, HORECA businesses depend almost exclusively on tourists. (a mix of 90% tourism and 10% locals). HORECA companies offer products and services for approximately 1.5 million tourists per year; without that demand, only the local population remains, which is less than 10% of the number of tourists that come to the Island every year. From this population, a very small portion consumes tourist goods and services.

But the bad news doesn’t end there; unfortunately, the survival of these companies, does not simply depend on the date Aruba opens the borders either.

Why?

Let’s use James Hepple’s projections for 2020, also used by AHATA (When will Aruba’s tourism industry recover, April 25, 2020). I had to adjusted it a little since the reopening of the border in this paper was estimated for May, and that will not be the case.

Assuming that the borders open in July, the most conservative projection expects a drop of stayovers of -53%, compared 2020 with 2019. To be realistic we should compare tourism from April to December 2020 with that period in 2019, then the drop is -73%!!  Both estimates are not the most pessimistic.

Operating at less than 50%, without being able to adjust expenses (personnel, lease, etc.) DOESN’T make sense. We would open businesses to generate more loss.

To these discouraging projections we must add other factors that threaten to increase loss during the balance of 2020:

  • These are the regulations that, due to social distancing and sanitary norms, will limit the number of customers that may be served per hour or per day in different establishments. Especially in restaurants, bars and clubs where at most 30-50% of the available capacity may be used. This means one table used per two tables empty or in the best scenario, the same number of empty tables than the ones in use. So, beyond the number of tourists arriving in Aruba, we will be limited to a maximum of 50% of our capacity.
  • The new social distancing rules and protocols will also require new investment and expenses that we did not have till now.

Therefore, the panorama on December 2020 will be that companies would have been generating losses during 3 months of closure + 6 months operating inevitability below the breakeven point.

If, with the border open and the gradual arrival of tourists, the F&B companies would be accumulating losses for more than 9 months, catering mostly to the local market.

To summarize, HORECA will be able to operate at no more than 20-30% of its capacity!

The projection of our Cash Flow for the next 8 months is not viable: Bankruptcy is our destiny.

How to achieve the minimum amount of companies in bankruptcy?

The good intention of GOA to help maintain the income of workers during this unthinkable crisis is commendable.

Despite our full support of this goal, we must emphatically point out that the way in which it is proposed and formalized, will end up killing the “Aruba’s hen with the golden eggs”.

We should agree that:

  1. Return of tourists in volumes (that allow companies to operate at breakeven point), will not happen before December 2020.
  2. Recovery to income levels prior to March 2020, will not occur until the end of 2021, if everything goes smoothly.

Having accepted these facts, we should redo projections, adapt and conserve the little resources we have available.

  • The subsidy must be extended, at least until December 2020.
  • The income/wages paid by the subsidy should not be 80% of the existing payroll. Aruba’s economy and tourism are in a standstill, spread less, among more people.
  • An income equivalent to 70% of the minimum wage would allow more people to survive for longer.
  • AOV/AZV and SVB portion must be cut in half.
  • Make labor laws more flexible (ie. Speed up and facilitate labor mobility. Allow “cambio di firma”.)
  • Access to subsidized credit with repayment starting in 2 years; same as the credits GOA receives. Debts that ultimately, we will end up paying with taxes.

What if we do not take these measures?

Then, many HORECA companies and especially those in F&B will face less loss if they stay closed, than if they open. No one wants to operate at a loss. Starting to operate under the current conditions would only lengthen the agony of ab impending death.

  • An avalanche of HORECA bankruptcies will become a reality.
  • Companies supplying goods and services to HORECA will be seriously affected.
  • These bankruptcies will cause a massive and long-lasting loss of employment.
  • These unemployed people will be a greater burden to the government and the health system.
  • Tax collection will drop sharply, worsening the government’s deficit.

As the Minister of Finance said, the pandemic did not come with a manual.

This is my contribution because I know the sector from the inside out.

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May 04, 2020
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