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. But 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.
This build-up of risk in the corporate sector and a doubling of funding
costs for even the safest issuers could pose serious problems for many
economies and their financial systems. A new
machine-learning model developed by IMF staff predicts 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. We identify around 50 indicators—from firms’ debt ratios to
credit expansion and overvalued assets—that might have power to predict
future crises and then train the model.
As the
Chart of the Week shows, the number of countries at medium or high risk of spillovers from
corporate debt defaults and other forms of company distress increased
sharply last year due to tighter global financial conditions. This reversed
a decline in risk seen in 2021 when policymakers raced to support stricken
companies with cash and debt forbearance.
Thirty-eight of the economies tracked by our early-warning model are at
medium risk and 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. Moreover, the proportion of large economies in this
category has increased, with high-risk countries accounting 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.
After a sharp rise in 2020-21, international debt issuance by non-financial
companies fell by $136 billion in the year to June 2022 as firms found it
costlier to access finance, figures from the
Bank for International Settlements show.
Further tightening of global financial conditions would increase the risks
faced by both advanced and emerging economies. Spillovers from corporate
distress could include slower economic growth, rising unemployment,
pressure on vulnerable households, volatile asset prices and a spike in
non-performing loans at financial institutions. And the situation could be
made worse by other factors, such as
dollar appreciation, which would add to pressures faced by many emerging economies.
Time to act
What can governments do? First, countries where companies are failing or
likely to should build effective insolvency systems and facilitate
market-led restructuring of heavily indebted firms to contain systemic
risks, as discussed in a
previous IMF blog. Countries’ crisis preparedness and insolvency frameworks matter greatly
and could be strengthened particularly in emerging economies.
Second, countries should continue to use macro and microprudential policies
that target high-risk sectors and borrowers. To limit the possibility of
spillovers to the financial sector, countries should also use lender-side
macroprudential policies for banks and other financial institutions. For
example, by improving transparency of lenders’ assets and liabilities,
refraining from further lending to firms that cannot pay existing debts,
strengthening capital buffers, and conducting comprehensive stress tests.
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