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COVID-19 and EMDE Corporate Balance Sheet Vulnerabilities : A Simple Stress-Test Approach

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  • Feyen,Erik H.B.
  • Dancausa,Fernando
  • O'Reilly Gurhy,Bryan
  • Nie,Owen

Abstract

This paper conducts a simple stress test to gauge the ability of listed nonfinancial corporates to withstand shocks to earnings and receivables. It targets two basic accounting ratios that capture a firm's ability to cover its short-term liabilities and interest expenses. The full sample consists of almost 17,000 firms in 73 emerging markets and developing economies and represents US$22.1 trillion in total assets and US$6.05 trillion in total debt. The findings show that, prior to the pandemic, almost 60 percent of the debt was associated with firms that already exhibited vulnerabilities according to at least one ratio. A 30-percent shock to earnings and receivables raises this to 88 percent, of which 29 percentage points is vulnerable in terms of both indicators, a 230-percent increase compared with before to the pandemic. Firms in East Asia and Pacific, the Middle East and North Africa, and South Asia appear to be the most exposed. Some countries with vulnerable corporate sectors also display weaknesses in insolvency frameworks, which may impede restructurings and write-downs and contribute to a surge in socially inefficient liquidations of cash-strapped but otherwise viable firms.

Suggested Citation

  • Feyen,Erik H.B. & Dancausa,Fernando & O'Reilly Gurhy,Bryan & Nie,Owen, 2020. "COVID-19 and EMDE Corporate Balance Sheet Vulnerabilities : A Simple Stress-Test Approach," Policy Research Working Paper Series 9324, The World Bank.
    • Handle: RePEc:wbk:wbrwps:9324
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    References listed on IDEAS

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    1. International Monetary Fund, 2020. "COVID-19: The Regulatory and Supervisory Implications for the Banking Sector: A Joint IMF-World Bank Staff Position Note," IMF Staff Position Notes 2020/001, International Monetary Fund.
    2. M. Ayhan Kose & Peter Nagle & Franziska Ohnsorge & Naotaka Sugawara, 2021. "Global Waves of Debt," World Bank Publications - Books, The World Bank Group, number 32809.
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    Cited by:

    1. Feyen,Erik H.B. & Alonso Gispert,Tatiana & Kliatskova,Tatsiana & Mare,Davide Salvatore, 2020. "Taking Stock of the Financial Sector Policy Response to COVID-19 around the World," Policy Research Working Paper Series 9497, The World Bank.
    2. Feyen, Erik & Alonso Gispert, Tatiana & Kliatskova, Tatsiana & Mare, Davide S., 2021. "Financial Sector Policy Response to COVID-19 in Emerging Markets and Developing Economies," Journal of Banking & Finance, Elsevier, vol. 133(C).
    3. Imdade Chitou & Gilles Dufrénot & Julien Esposito, 2021. "Linking Covid-19 epidemic and emerging market OAS: Evidence using dynamic copulas and Pareto distributions," Working Papers halshs-03297198, HAL.

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