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© 2021 International Monetary Fund
WP/21/212
IMF Working Paper
Monetary and Capital Markets Department
Global Corporate Stress Tests—Impact of the COVID-19 Pandemic and Policy Responses
by Thierry Tressel and Xiaodan Ding1
Authorized for distribution by Vikram Haksar
August 2021
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
Corporate sector vulnerabilities have been a central policy topic since the outset of the COVID-19 pandemic. In this paper, we analyze some 17,000 publicly listed firms in a sample of 24 countries, and assess their ability to withstand shocks induced by the pandemic to their liquidity, viability and solvency. For this purpose, we develop novel multi-factor sensitivity analysis and dynamic scenario-based stress test techniques to assess the impact of shocks on firm’s ability to service their debt, and on their liquidity and solvency positions. Applying the October 2020 WEO baseline and adverse scenarios, we find that a large share of publicly-listed firms become vulnerable as a result of the pandemic shock and additional borrowing needs to overcome cash shortfalls are large, while firm behavioral responses and policies substantially help overcome the impact of the shock in the near term. Looking forward, while interest coverage ratios tend to improve over time after the initial shock as earnings recover in line with projected macroeconomic conditions, liquidity needs remain substantial in many firms across countries and across industries, while insolvencies rise over time in specific industries. To inform policy debates, we offer an approach to a triage between viable and unviable firms, and find that the needs for liquidity support of viable firms remain important beyond 2020, and that medium-term debt restructuring needs and liquidations of firms may be substantial in the medium-term.
JEL Classification Numbers: G3, G21, G01, G17, E65
Keywords: Covid-19 pandemic, corporate sector vulnerabilities, stress tests, debt restructuring, viability of firms, solvency and liquidity support policies.
Authors’ E-Mail Addresses: TTRESSEL@imf.org, XDING@imf.org
Contents
ABSTRACT
CONTENTS
I. INTRODUCTION
II. LITERATURE
III. DATA AND DESCRIPTIVE STATISTICS
A. Data Sources
B. Descriptive Statistics
IV. CONCEPTUAL FRAMEWORK
A. Firm Level Vulnerability Indicators
B. Multi-Factor Sensitivity Analysis
C. Dynamic Scenario-Based Stress Tests
D. Financial Stability Implications
V. SENSITIVITY ANALYSIS
A. Main Results
B. Counterfactual Policy Analysis
VI. DYNAMIC SCENARIO-BASED LIQUIDITY AND SOLVENCY STRESS TEST
A. Regression Results
B. Scenarios
C. Results of Scenarios-Based NFC Stress Tests
D. Impact on the Financial System
VII. MEDIUM-TERM POLICIES: TRIAGE OF FIRMS, DEBT RESTRUCTURING AND LIQUIDITY PROVISION
VIII. CONCLUSIONS
REFERENCES
Figures
1. Moody’s Aggregate Matrices by Rating Category
2. Country Industry Specific Shocks
3. Sensitivity Analysis: Shocks to ICR and to Cash Balance
4. Policy Analysis
5a. Baseline and Adverse Scenarios
5b. Country Industry Specific Shocks by Calendar Year
6. Debt servicing problems rise sharply in 2020 and decline in 2021–2022 as profitability recovers
7. Borrowing needs remains elevated 2020–2022
8. Firms Solvency Position under Baseline and Adverse Scenario
9. Sectoral Results
10. Probabilities of Default and Impact on the Banking System
11. Triage of Firms—Results
12. Survivor and Viable Firms with Liquidity Needs
13. Selected Financial Indicators
Tables
1. Country Sample
2. Variable List
3. Industry Classification
4. Output Share of Sample Firms of Total Output
5. Debt Share of Sample Firms of Total Debt
6. Pooled Panel Regressions
7. Country level regressions I: Probit (ICR<1)
8. Country level regressions II: OLS: Growth rate of sales
9. Triage of Firms
10. Triage and taxonomy of Policies during the Recovery from the Pandemic
The authors are thankful to Vikram Haksar, Jim Morsink and Hiroko Oura for very usefuldiscussions and support, to Martin Cihak for supporting theinitiation of the project, and to Tobias Adrian, Fabio Natalucci, and other MCM senior staff, Nassira Abbas, Sergei Antoshin, Jorge Chan-Lau, Ruo Chen, Federico Diez, Romain Duval, Ivo Krznar, Sole Martinez-Peria, William Oman, Nicola Pierri, Luc Riedweg, Anna Shabunina, Laura Valderrama, Richard Varghese, Torsten Wezel, Li Zeng, Jing Zhou, MCMFS divisional colleagues, Quantm seminar participants and Executive Directors Offices for useful comments and suggestions.