A rent furlough for Timor-Leste?
Even with wage assistance programs from governments rolling out in many countries, businesses are still finding themselves burdened with a second financial hurdle: rent on premises that are not producing income.
While many businesses are already in discussions with landlords about temporary rent reductions, not all will be successful in negotiating such changes. After all, not all landlords will have the ability or flexibility to cover the loss of rental income from their properties through negotiation with their lenders. Then the question becomes how much can lenders bear before they too face financial strains of their own? The Financial Times reports that in the retail sector, many shops are finding that even if they wish to borrow to finance their rent, lenders will not give them money, presumably because the risk is too high.
The Telegraph reported this week that in the UK, taxpayers might subsidise the rent for furloughed shops and restaurants in the pandemic-induced recession. The idea is that for businesses or shops taking leave (a ‘furlough’) from their usual operation because of the lockdown rather than closing permanently, an agreement ensuring landlords receive some income for continuing rent payments would be established.
Under this scheme, tenants would contribute some rent, landlords would agree to a reduction in payments, and the UK Treasury would contribute money to fill the gap. This spending would add substantially to the national debt, but provide immediate relief to landlords and lenders and hopefully protect many businesses until better days return.
In the US there is talk of two-thirds of small businesses closing if there is a further three months of lockdown. If this occurs, thousands or potentially millions of landlords will have no rental income, creating another tier of risk to the economy – a tsunami of defaults to lenders.
Denmark has instituted a furlough for rents, but they have a strong economy with a large surplus and substantial public savings, so are in a vastly different financial position to many other countries. Denmark will be spending 10% of its GDP before July. They have agreed on such enormous spending because all ten political parties have agreed almost unanimously on the strategy and implementation. Furthermore, many policy decisions are tripartite, between the government, unions and employer’s associations.
As Professor Flemming Larsen, from the Center for Labor Market Research at Denmark’s Aalborg University said, the Danish Government’s philosophy is ‘if we don’t do it now, it will be more expensive to save the economy later.’
In many ways, all these government payments are a leap of faith that things will play out as expected. But when you consider that the alternative is to let a large percentage of businesses close, with the resulting flow-on effects through the society and the economy, then supporting them seems a wise, if not the only course of action for governments. The big question is, how much can a government afford to spend now, with no guarantee of success?
Timor-Leste over the past, almost three years, has faced political gridlock due to an inability between parties to negotiate the release of governments funds. Are they in a position now to agree on the spending of such large amounts of money, when they couldn’t only four months ago? At a glance, it seems unlikely. But, so far, they have implemented extremely successful strategies to contain COVID-19 and if they continue on this trajectory, Prime Minister Taur Matan Ruak’s Government will be one of the global success stories of this period. Now, the parties holding the purse-strings might consider leaving politics aside and considering what other strategies they might implement to expand their rescue of the Timorese economy.