Dealing with Corporate Distress, Repair, and Reallocation after the Pandemic

Publication | February 2021

The economic response to the coronavirus disease (COVID-19) pandemic has varied across the world, depending on whether countries have had fiscal resources and monetary room to address its challenges.

The economic response to the coronavirus disease (COVID-19) pandemic has varied across the world, depending on whether countries have had fiscal resources and monetary room to address its challenges. Typically, in the first phase, resource-rich countries focus on containment. They use regional lockdowns and limits on certain commercial activities (such as hospitality and public transport) to lower the virus caseload to the point where testing, tracking, and isolation can contain further spread. During this phase, governments (often together with central banks) have provided relief to households and firms to enable them to survive the period of constrained economic activity. When the virus spread has been contained, the second phase, rebound, commences. Restrictions are lifted, mobility picks up, and economic activity rebounds, if not across all sectors, at least substantially. No large country thus far (with perhaps the exception of the People’s Republic of China) has been sufficiently free of the virus and subsequent waves of reinfection to embark fully on the third phase—dealing with corporate distress. This policy brief will focus on the need for such a phase in the economic response plan and the desirability of preparing for it. This third phase will be especially important for resource-poor economies that have not been able to provide significant relief to households and small enterprises, and where economic scarring is likely to be extensive.

Key points
  • Countries have spent all they could to buffer households and firms against the economic scarring associated with the pandemic.
  • The promise of vaccines suggests the pandemic will end, but new infection waves and virus variants mean full recovery could take time, especially in poorer countries.
  • Advanced economies will continue to support firms, though the support should become more targeted and be within the constraints of political feasibility.
  • More constrained countries should prepare to put firms through a form of triage, something advanced economies will also eventually have to do.
  • Triage should focus on preserving firms with viable post-pandemic business models while restructuring their balance sheets so that they do not stand in the way of activity.
  • Governments should revisit their bankruptcy system and laws to ensure that they can handle the load as support and moratoria end, to avoid many viable firms being liquidated.
  • Governments should also prepare to support borrowing, especially for small start-ups and riskier mid-sized firms.
  • Finally, they should ensure they have mechanisms to invest in corporate equity where it is critical to corporate survival.
Policy Brief No: 2021-1

Additional Details

Author
Type
Series
Subjects
  • Economics
  • Governance and public sector management
  • Health
ISSN
  • 2411-6734