SME viability in the COVID-19 recovery

ABSTRACT: Using survey data from a representative sample of Irish Small and Medium Enterprises (SMEs), we study how firms are likely to perform under macroeconomic forecasts of the pandemic recovery. The rate of financial distress among firms is expected to fall under baseline forecasts from a peak of 12% in 2020 to 7% by 2024. We find that those firms that struggle to recover by the end of our scenario window were mostly unprofitable or distressed prior to the pandemic. Beyond our baseline case, we further model three alternative recovery scenarios to study the effect of fiscal support tapering, a partial recovery due to structural change in sectoral demand, and a financing gap driven by credit risk retrenchment by lenders. Our findings highlight the continued importance of “bridging” liquidity finance provision to ensure the long-term solvency of viable firms. PLAIN ENGLISH SUMMARY: What proportion of SMEs are financially unviable in the post-pandemic economy? We study data from a representation sample of Irish SMEs and consider how they will perform under forecasts of the pandemic recovery. In our baseline scenario, we estimate that 7% of firms will remain distressed by 2024 and we find that most of these firms were unprofitable or already distressed prior to the pandemic. We look at a number of alternative macroeconomic scenarios, including where government supports are withdrawn, firms in some sectors do not fully recover, and where lenders lower the amount of money they are willing to extend to loan applicants. The impact of government support tapering alone is expected to be modest, and a partial recovery for some firms is not expected to raise aggregate distress by a sizeable amount. However, a sharp contraction in lending to otherwise viable firms leads to a significantly heightened distress rate. Policy measures that seek to support liquidity finance provision to viable firms will continue to have a role in the pandemic recovery.