- IMF report says that government relief programs have focused on maintaining the liquidity of small and medium-sized businesses without adequately addressing their solvency
- Report warns that insolvencies among smaller companies could be as severe as those after the Great Recession and concentrated in a smaller timeframe
- IMF recommends quasi-equity investments, better insolvency support, and continued liquidity support
Summary by Dirk Langeveld
While the governments of several advanced economies have taken steps to support the liquidity of small and medium-sized businesses, a recent report from the International Monetary Fund says steps need to be taken to keep these enterprises solvent as well.
The IMF says small and medium-sized businesses have been more likely to struggle during the COVID-19 pandemic because they’re often concentrated in heavily impacted sectors, such as food service, entertainment, and accommodations. In an analysis of 20 mostly advanced economies in Europe and the Asia-Pacific, the IMF determined that the insolvency share among small and medium-sized businesses is likely to increase from 10 percent to 16 percent.
This bankruptcy share would be similar to that brought on by the Great Recession, but the insolvencies would be concentrated in a shorter timeframe. The IMF projects that the insolvencies would result in 20 million job losses, or about one in every 10 people employed at a small or medium-sized business.
The IMF says there is a further risk of 18 percent of small and medium-sized businesses losing their liquidity, including 40 percent of hard-hit industries. The overall trends could result in hampered economic growth as well as debt defaults and write-offs, which could strain banks’ capital – especially among smaller lenders who are more likely to specialize in lending to small businesses.
The IMF says government policies have often allayed concerns of immediate bankruptcy concerns through liquidity support such as loan programs, credit guarantees, and moratoria on debt. However, it warns that policies have not addressed the increased risk of insolvency brought on by businesses suffering long-term losses and being forced to borrow funding. The report says governments could work to minimize insolvencies by continuing liquidity support, quasi-equity injections, and improved mechanisms to address insolvency and restructure debt.
Quasi-equity investments would provide loans with a repayment partially tied to the company’s profits. These could be set up through partnerships with private investors and targeted to companies that are insolvent due to the pandemic but have sustainable business models allowing for recovery with support. The IMF says this approach would be four times as effective as blanket support, which could potentially go to unsustainable businesses or companies that do not need funding.
The IMF also recommends strategies such as out-of-court restructuring mechanisms, hybrid restructuring tactics that minimize court involvement, and strengthened insolvency procedures to better support small and medium-sized businesses facing insolvency.
