Insolvency Prospects Among Small-and-Medium-Sized Enterprises in Advanced Economies

Abstract

The COVID-19 pandemic has increased insolvency risks, especially among small and medium enterprises (SMEs), which are vastly overrepresented in hard-hit sectors. Without government intervention, even firms that are viable a priori could end up being liquidated—particularly in sectors characterized by labor-intensive technologies, threatening both macroeconomic and social stability. This staff discussion note assesses the impact of the pandemic on SME insolvency risks and policy options to address them. It quantifies the impact of weaker aggregate demand, changes in sectoral consumption patterns, and lockdowns on firm balance sheets and estimates the impact of a range of policy options, for a large sample of SMEs in (mostly) advanced economies.

Firm-level policy support during the crisis: So far, so good?

“…Although constrained by data availability limitations, early firm-level evidence is positive on the impact of national COVID-19 policy support measures. A selection of model-based simulation exercises have helped to inform policymakers from early on in the pandemic, such as Gourinchas et al (2020Gourinchas et al ( , 2021, Lopez-Garcia (2020), Barnes et al (2021), Blanco et al (2021), Demmou et al (2021a,b), Díez et al (2021), andEbeke et al (2021), Maurin and Pal (2020). These studies have highlighted the potential of support measures to reduce liquidity shortfalls, bankruptcies, as well as output and employment losses relative to a no-policy scenario.…”

Development of Strategic Resilience Framework for Small Businesses Post-COVID-19

“…Pedauga et al (2021) predict an overall 43% drop in SMBs operating in Spain [28]. Similarly, Diez et al (2021) expect that the proportion of insolvent small-and medium-sized enterprises (i.e., SMBs with negative equity) may rise by six percentage points over 2020-2021 [29]. McKinsey's global empirical surveys (2020) indicate that between 25% and 36% of small businesses may have closed down permanently from the disruption in the first four months of the pandemic [30].…”

Digitalization and Resilience: Firm-level Evidence During the COVID-19 Pandemic

“…targeted training), especially to SMEs which have limited collateral to take risk and access nance for investing in ICTs. Technology di usion is also linked to business dynamism (Andrews et al, 2016;Diez et al, 2021). Reducing barriers to rm entry and strengthening insolvency regimes, can a ect positively a ect competition and resource allocation.…”