Global Corporate Stress Tests—Impact of the COVID-19 Pandemic and Policy Responses

WP/21/212 Global Corporate Stress Tests—Impact of the COVID-19 Pandemic and Policy ResponsesBy Thierry Tressel and Xiaodan Ding 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. © 202 1 In ternatio na l Mon eta ry Fund WP/21/212IMF 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 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 a n 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 1 The authors are thankful to Vikram Haksar, Jim Morsink and Hiroko Oura for very useful discussions and support, to Martin Cihak for supporting the initiation of the project, and to Tobias Adrian, Fabio Natalucci, and other MCM senior staff, Na ssira Abbas, Sergei Antoshin, Jorge Chan-Lau, Ruo Chen, Federico Diez, Romain Duval, Ivo Krznar, Sole Martinez-Peria, Willia m Oman , Nico la Pierri, Lu c Ried weg, Anna Shabunina, Laura Va lderrama, Richard Va rghese, Torsten Wezel, Li Zeng, Jing Zhou, M CMFS d iv isio nal co lleagues, Quantm seminar participants a nd Executive Directors Offices for useful comments and suggestions. 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. 3 CONTENTS ABSTRACT _________________________________________________________________________________________________ 2 CONTENTS _________________________________________________________________________________________________ 3 I. INTRODUCTION________________________________________________________________________________________ 5 II. LITERATURE____________________________________________________________________________________________ 9 III. DATA AND DESCRIPTIVE STATISTICS____________________________________________________________12 A. Data Sources ___________________________________________________________________________________________ 12 B. Descriptive Statistics___________________________________________________________________________________ 13 IV. CONCEPTUAL FRAMEWORK ______________________________________________________________________13 A. Firm Level Vulnerability Indicators ___________________________________________________________________ 13 B. Multi-Factor Sensitivity Analysis______________________________________________________________________ 14 C. Dynamic Scenario-Based Stress Tests _______________________________________________________________ 15 D. Financial Stability Implicatio ns _______________________________________________________________________ 19 V. SENSITIVITY ANALYSIS _____________________________________________________________________________21 A. Main Results ___________________________________________________________________________________________ 21 B. Counterfactual Policy Analysi