COVID-19 and SME Failures

Pierre Olivier Gourinchas, Şebnem Kalemli-Özcan, Veronika Penciakova, and Nick Sander
Working Paper 2020-21
December 2020

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Abstract: We estimate the impact of the COVID-19 crisis on business failures among small and medium-size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. Accommodation and food services; arts, entertainment, and recreation; education; and other services are among the sectors most affected. The SME jobs at risk due to business failures related to COVID-19 represent 3.1 percent of private sector employment. Despite the large impact on business failures and employment, we estimate only moderate effects on the financial sector: the share of nonperforming loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets, and would result in a 0.75 percentage point decline in the common equity tier 1 capital ratio. We also evaluate the cost and effectiveness of various policy interventions. The fiscal cost of an intervention that narrowly targets at-risk firms can be modest (0.54 percent of gross domestic product). However, at a similar level of effectiveness, nontargeted subsidies can be substantially more expensive (1.82 percent of gross domestic product). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery.

JEL classification: D2, E65, G33

Key words: COVID-19, business failures, liquidity, small business

The authors thank Philippe Martin, Xavier Ragot, David Sraer, colleagues at the International Monetary Fund, and seminar participants at the Organisation for Economic Co-operation and Development and the Banco Central de Chile for useful comments. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Pierre Olivier Gourinchas,; Şebnem Kalemli-Özcan,; Veronika Penciakova,; or Nick Sander,

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