COVID-19 and SME Failures

IMF Working Papers, September 25, 2020

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COVID-19 and SME Failures

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Bibliographic details

• Authors: Sebnem Kalemli-Ozcan, Pierre-Olivier Gourinchas, Veronika Penciakova, Nick Sander
• Published: September 25, 2020
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781513557748.001

Overview and methodology

• Study objective: estimate the impact of the COVID-19 crisis on business failures among small and medium size enterprises (SMEs) in seventeen countries.
• Data and approach:
  • Uses a large representative firm-level database.
  • Employs a simple model of firm cost-minimization to measure each firm’s liquidity shortfall during and after COVID-19.
  • Framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks.

Key findings on SME failures and sectoral impacts

• Increase in SME failure rate under COVID-19:
  • Estimated increase of nearly 9 percentage points, absent government support.
• Most affected sectors:
  • Accommodation & Food Services
  • Arts, Entertainment & Recreation
  • Education
  • Other Services

Employment consequences

• Jobs at risk due to COVID-19 related SME business failures:
  • Represent 3.1 percent of private sector employment.

Financial sector effects

• Non Performing Loans (NPLs):
  • Share of Non Performing Loans on bank balance sheets would increase by up to 11 percentage points.
  • This increase represents 0.3 percent of banks’ assets.
• Bank capital impact:
  • Resulting decline in the common equity Tier-1 capital ratio of 0.75 percentage point.
• Overall characterization: despite large SME and employment impacts, effects on the financial sector are estimated to be moderate.

Policy evaluation: cost and effectiveness

• Targeted intervention:
  • Fiscal cost of an intervention that narrowly targets at risk firms can be modest: 0.54% of GDP.
• Non-targeted subsidies:
  • At a similar level of effectiveness, non-targeted subsidies can be substantially more expensive: 1.82% of GDP.

Implications

• Results have important implications for:
  • The severity of the COVID-19 recession.
  • The design of policies to support SMEs.
  • The speed of the recovery.

Source: "COVID-19 and SME Failures", Sebnem Kalemli-Ozcan, Pierre-Olivier Gourinchas, Veronika Penciakova, Nick Sander, September 25, 2020.

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