Thilo Kroeger, Anh Thi Ngoc Nguyen, Yuanyan Sophia Zhang, Pham Dinh Thuy, Nguyen Huy Minh, and Duong Danh Tuan
The paper uses firm-level data to assess the financial health of the Vietnamese non-financial corporate sector on the eve of pandemic. Our analysis finds that smaller domestic firms were particularly vulnerable even by regional comparison. A sensitivity analysis suggests that the COVID-19 shock will have a substantial impact on firms’ profitability, liquidity and even solvency, particularly in the hardest hit sectors that are dominated by SMEs and account for a sizeable employment share, but large firms are not immune to the crisis. Risks of default can propagate more broadly through upstream and downstream linkages to industries not directly impacted, with stresses potentially translating into an increase in corporate bankruptcies and bank fragility. Policy measures taken in the immediate aftermath of the crisis have helped alleviate liquidity pressures, but the nature of policy support may have to pivot to support the recovery.
Carlos Caceres, Diego A. Cerdeiro, Dan Pan, and Suchanan Tambunlertchai
This paper analyzes a group of 755 firms, with aggregate indebtedness of US$6.2 trillion, to assess the solvency risks and liquidity needs facing the U.S. corporate sector based on projections of net income, availability and cost of funding, and debt servicing flows under different stress test scenarios. The paper finds that leveraged corporates account for most of the potential losses arising from the macroeconomic stresses associated with the COVID-19 crisis, with a concentration of these losses in the oil and gas, auto, and capital and durable goods manufacturing sectors. However, potential losses from corporate debt write-downs appear to be a fraction of banks’ capital buffers and, given the size of the leveraged segment and the relatively long duration of that sector’s debt, the near-term liquidity needs of these corporates appear modest. Corporate stresses could, however, amplify the current economic downturn—as firms cut investment spending and reduce employment—potentially giving rise to significant indirect losses for the financial system.
Mr. Armand Fouejieu, Anta Ndoye, and Tetyana Sydorenko
Countries in the MENAP and CCA regions have the lowest levels of financial inclusion of small and medium enterprises (SMEs) in the world. The paper provides empirical evidence on the drivers of SME access to finance for a large sample of countries, and identifies key policy priorities for these two regions: economic and institutional stability, competition, public sector size and government effectiveness, credit information infrastructure (e.g., credit registries), the business environment (e.g., legal frameworks for contract enforcement), and financial supervisory and regulatory capacity. The analysis also shows that improving credit information, economic competition, the business environment along with economic development and better governance would help close the SME financial inclusion gap between MENAP and CCA regions and the best performers. The paper concludes on the need to adopt holistic policy strategies that take into account the full range of macro and institutional requirements and reforms, and prioritize these reforms in accordance with each country’s specific characteristics.
Mr. Nicolas R Blancher, Maximiliano Appendino, Aidyn Bibolov, Mr. Armand Fouejieu, Mr. Jiawei Li, Anta Ndoye, Alexandra Panagiotakopoulou, Wei Shi, and Tetyana Sydorenko
The importance of financial inclusion is increasingly recognized by policymakers around the world. Small and medium-sized enterprise (SME) financial inclusion, in particular, is at the core of the economic diversification and growth challenges many countries are facing. In the Middle East and Central Asia (MENAP and CCA) regions, SMEs represent an important share of firms, but the regions lag most others in terms of SME access to financing.
Using cross-country national accounts and firm-level data, we document a broad-based trend in rising gross saving and net lending of non-financial corporates across major industrialized countries over the last two decades, though most pronounced in countries with persistent current account surpluses. We find that this trend holds consistently across major industries, and is concentrated among large firms, driven by rising profitability, lower financing costs, and reduced tax rates. At the same time, higher gross corporate saving have not supported a commensurate increase in fixed capital investment, but instead led to a build-up of liquid financial assets (cash). The determinants of corporate cash holding and saving are also broad-based across countries, with the growth in assets of large firms, R&D intensity, and lower effective tax rates accounting for most of the increase over the last 15 years.
Steve Brito, Mr. Nicolas E Magud, and Mr. Sebastian Sosa
We show that the response of firm-level investment to real exchange rate movements varies depending on the production structure of the economy. Firms in advanced economies and in emerging Asia increase investment when the domestic currency weakens, in line with the traditional Mundell-Fleming model. However, in other emerging market and developing economies, as well as some advanced economies with a low degree of structural economic complexity, corporate investment increases when the domestic currency strengthens. This result is consistent with Diaz Alejandro (1963)—in economies where capital goods are mostly imported, a stronger real exchange rate reduces investment costs for domestic firms.
Mr. Jorge A Chan-Lau, Weimin Miao, Mr. Ken Miyajima, and Mr. Jongsoon Shin
Under adverse macroeconomic conditions, the potential realization of corporate sector vulnerabilities could pose major risks to the economy. This paper assesses corporate vulnerabilities in Indonesia by using a Bottom-Up Default Analysis (BuDA) approach, which allows projecting corporate probabilities of default (PDs) under different macroeconomic scenarios. In particular, a protracted recession and the ensuing currency depreciation could erode buffers on corporate balance sheets, pushing up the probabilities of default (PDs) in the corporate sector to the high levels observed during the Global Financial Crisis. While this is a low-probability scenario, the results suggest the need to closely monitor vulnerabilities and strengthen contingency plans.
International Monetary Fund. Western Hemisphere Dept.
This paper presents an assessment of the monetary policy stance and broad financial conditions in Colombia, which provides insights about macro-financial linkages. It also discusses how nonfinancial corporate debt and leverage have increased in recent years, supported by easy access to capital markets, abundant global liquidity, and low interest rates. While some sectors look somewhat more strained than others (oil, gas, and airlines), debt servicing capacity has also improved with recent economic growth. This paper explores three possible drivers of inflation dynamics in Colombia: exchange rate pass-through, the El Niño meteorological phenomenon, and wages. The Colombian peso depreciated in line with the decline in oil prices, pushing up tradable-goods inflation.
This paper analyzes the potential risks and vulnerabilities of non-financial corporates in
Latin America and Canada. We quantify the impact of company-specific, countryspecific,
and global factors in driving corporate spreads. Overall, we found that all these
factors play a role in explaining corporate risk. In particular, country specific factors such
as exchange rate and sovereign CDS spreads are significantly associated with changes in
corporate spreads, underscoring the importance of solid policy frameworks. We also find
that global conditions, such as the VIX, are dominant drivers of corporate spreads. In
recent years, the adverse effects from deteriorating domestic conditions have been broadly
offset by relatively bening global financial conditions. However, a sustained reversal in
these conditions would put significant pressure on corporate risk.