Countries Should Act Now to Limit Rising Risks From Corporate Distress

IMF Blog, January 31, 2023

Source details

Canonical URL: Countries Should Act Now to Limit Rising Risks From Corporate Distress

Corporate debt rose by more than $12 trillion in advanced and emerging economies during the pandemic as companies borrowed to strengthen their balance sheets and survive the economic shock.
Steep rises in interest rates and more expensive debt service are stretching firms’ finances, even as global debt declines as a share of gross domestic product.
After a sharp rise in 2020-21, international debt issuance by non-financial companies fell by $136 billion in the year to June 2022, according to Bank for International Settlements figures.

IMF staff developed a machine-learning model to predict the probability of corporate distress spilling over into systemic economic risk, based on lessons from previous crises in 55 advanced and emerging economies since 1995.
The model used around 50 indicators, including firms’ debt ratios, credit expansion, and overvalued assets, to identify predictors of future crises.

The number of countries at medium or high risk of spillovers from corporate debt defaults and other forms of company distress increased sharply in 2022 due to tighter global financial conditions, reversing a decline in risk seen in 2021.
38 of the economies tracked by the early-warning model are at medium risk.
Seven economies, mostly from Europe and Asia, are at high risk of systemic corporate distress.
More countries are at high risk than before the pandemic.
High-risk countries accounted for 21 percent of world GDP in the third quarter of 2022, up from just 1 percent at the end of 2019.
Only nine economies are seen as low risk.

Spillovers from corporate distress could include:
- slower economic growth
- rising unemployment
- pressure on vulnerable households
- volatile asset prices
- a spike in non-performing loans at financial institutions
Further tightening of global financial conditions would increase risks for both advanced and emerging economies.
Dollar appreciation is cited as a factor that would add to pressures faced by many emerging economies.

Build effective insolvency systems and facilitate market-led restructuring of heavily indebted firms to contain systemic risks, with particular attention to strengthening crisis preparedness and insolvency frameworks in emerging economies.
Continue to use macro and microprudential policies that target high-risk sectors and borrowers.
Use lender-side macroprudential policies for banks and other financial institutions to limit spillovers to the financial sector, including:
- improving transparency of lenders’ assets and liabilities
- refraining from further lending to firms that cannot pay existing debts
- strengthening capital buffers
- conducting comprehensive stress tests

IMF Blog — Burcu Hacibedel, Ritong Qu — January 31, 2023