11 Things You Shouldn’t Do Before or During a Recession

With the looming recession being the talk of the town right now, everyone’s taking pre-emptive steps to bolster its impact. Brace yourself for the trying times ahead by avoiding these key things before and during a recession.

Recessions can occur for a multitude of reasons: economic disturbances (e.g. persistently high inflation), financial panics, crowd speculations or even, all three at once. 

Whatever the trigger may be, recessions are no fun; and for the most part, there’s nothing we can do to avoid them. In general, recessions are usually expected during bouts of continuous inflation; or more specifically, when there is an economic downturn for more than two adjacent quarters.

If there's any time to practise financial responsibility fervently, it would be during a recession. Financial risks are abound — meaning that businesses are more prone to failure, more occurrences of defaulting and ostensibly, bankruptcy.

Such economic turbulence can be incredibly disheartening and frightening, but there is a light at the end of the tunnel. There are ways to mitigate damage caused by recessions. Sometimes, those lessons are best learnt by knowing what not to do.

• Don't incur new loans
• Don't refinance loans
• Don't hold onto personal guarantees you can't fulfil
• Don't let debt linger
• Don't remain centralised (as a firm)
• Don't spend extravagantly
• Don't forsake your emergency fund
• Don't neglect your side hustle
• Don't succumb to the "animal spirit"
• Don't put all your eggs into one basket
• Don't stop learning recession-proof skills

Things to avoid doing during a recession in Singapore 2022

In general, there are four main areas of scrutiny during a recession: debt, decision-making, workforce management, and digital transformation. 

Survival and subsequent recovery from a recession are heavily dependent on these aspects and are dealt with by individuals, companies and the government as a whole.

As a general rule of thumb, you should not…

1. Incur new loans

This is a no-brainer but in recessions, you want to be as debt-free as possible. You wouldn’t want to be hounded by repayments in a time of economic instability. Assuming new debt in the form of car loans, student loans, home equity loans or any other loans could give you temporary monetary relief, but this may backfire quickly unless you’re unable to repay your monthly dues.

Additionally, the persistent fear or risk of unemployment and losing your income source is a constant stressor. All in all, unnecessarily adding the debt variable into the financial equation is unwise and unstable. 

2. Refinance loans

Along the same thread, postpone any loan refinancings if possible. Interest rates might fall at first due to lower demand, but they rebound quickly. In Singapore’s context, many first-time HDB owners seek this small window period as a chance to refinance their mortgage from an HDB loan to a bank loan. 

Given Singapore’s small and open economy, we are an interest rate-taker and do not influence prevailing rates. Instead, Singapore closely follows any US Fed rate hikes or drops. In June alone, the Singapore overnight rate average (SORA) and Singapore interbank offered rate (SIBOR) jumped to 0.65% and 1.56% respectively. These two benchmarks largely control floating-rate mortgages.

As a result, many homeowners have converted from floating-rate products to fixed-rate products to lock in better rates and protect themselves against future SORA and SIBOR rate increments. Hence although generally discouraged, refinancing (home) loans during a recession might be justified when switching from a variable rate to a fixed rate.

The only justified time to refinance a loan would be in the early onset when signs of a recession are slowly manifesting. This is where banks tend to lower loan interest rates in a bid to attract more demand.

Otherwise, the last thing you’d want is to be at the mercy of interest rates soaring to all-time highs.

3. Hold on to personal guarantees you can’t fulfil

Personal guarantees are similar in concept to seed funding and angel investing, but in credit deals. Typically used by smaller businesses, they’re usually not established enough to have sufficient credit history to qualify for other credit loans.

Thus, the principals of these businesses will pledge their own assets and capital as collateral to the bank. If the company fails to meet repayment obligations, the onus falls on these individuals. In other words, the business owners are credit co-signers and will be held entirely responsible to repay the leftover debt balance.

This legal liability is not something anyone wants to face during a recession. It might have sounded like a good idea at the start but in hindsight, it’s often regrettable. Engage at your own risk.

4. Let debt linger on

If there’s ever a time for a reality check, a recession is a pretty good one. The common motif among our first three points thus far is to not be in debt. We know, it’s easier said than done, but prioritising debt freedom is one of the best steps you can take toward financial liberation.

In this 2017 study, it was discovered that businesses with high levels of debt were extra vulnerable with an equally unfavourable outlook during a recession. For clarity, let’s break down the process:

The higher the debt → more cash needed for interest repayments → companies are forced to cut costs more extensively → infringe productivity and impede new investment endeavours → increased risk of defaulting and forced business closures/industry exits

Conceptually, having modest debt levels isn’t problematic. Some companies owned by private equity (PE) firms are required to take on debt.

What was discovered subsequently is that these PE-backed firms endured the economic strain of a recession much better than non-PE-backed firms. However, it should be noted that their success was only attributed to the principals’ ability to raise timely capital.

Nonetheless, it’s ideal to have minimal to no debt for the generic business. Companies should be deleveraging by lowering their debt-to-asset ratio in anticipation of recessions.

When push comes to shove, concurrently clearing a debt and building savings should be everyone’s top two priorities to settle before venturing further into other avenues like investments.

But what happens if the debt becomes too overwhelming?

At that juncture, it might be tempting to seek bankruptcy relief. But do note that there is no automatic debt discharge in Singapore. Instead, there are three potential solutions:

• Annulment of Bankruptcy Order by full settlement / Offer of Composition / Scheme of Arrangement
• Discharge by the High Court
• Discharge by Certificate of the Official Assignee

During your bankruptcy, the creditors will bear the right to sell your secured assets or goods if they please. Whatever the case may be, filing for bankruptcy should be your last case scenario. 

5. Refusing to decentralise and not downsize where necessary

During recessions, it’s natural for everyone’s “fight or flight” instinct to kick in. For businesses, this desperation might translate into “making deep cuts” and simply “going into survival mode” --- reducing expenditure wherever they can. Saving on rent, scaling back manpower, and reducing wages are typically the first few areas affected.

However, not all downsizing has to happen in the form of retrenchment. Layoffs are harmful to both the company and individual because rehiring and retraining will drain resources that could’ve otherwise been used for future purposes.

Other possible ways to cut labour costs include hour reductions, furlough (unpaid or partially compensated leaves), and reducing or temporarily halting performance pay.

On the contrary, experts argue that decentralising your firm is more substantial. Decentralising organisational structure helps businesses to weather sudden shocks easily. 

“Decentralisation matches decisions with expertise”  because business owners can “delegate decision making further down the pipeline” and “change product offerings in accordance with demand”. 

Raffaella Sadun (of Harvard Business School)

The key here is for businesses to remain flexible and responsive to changes in the economy. Overly adhering to procedures through a centralised, top-down, bureaucratic approach comes at the expense of a company's efficiency. 

A recession is not the time to stick to the red tape rule book. Decentralising and adapting to changes accordingly is arguably more sensible.