Bankruptcies of small businesses in G20 countries may triple without government help, IMF says

The fund's managing director Kristalina Georgieva warned the global economy is 'not out of woods yet'

IMF Managing Director Kristalina Georgieva speaks at a press briefing on Covid-19 in Washington, DC. Despite some signs of recovery, the global economy faces continued challenges, including the possibShow more

The number of small and medium-sized enterprises (SMEs) across G20 countries that go bankrupt may triple this year without government help, as the global economy is "not out of the woods yet", the International Monetary Fund's chief said.

“Widespread bankruptcies could weigh on the economic recovery,” the Washington-based lender said. “Bankruptcy filings and corporate bond defaults in the United States in 2020 reached highs not seen since the global financial crisis, and forward-looking indicators for the rest of the G20 are pessimistic.”

An analysis on a sample of 17 countries suggests that SME bankruptcies could rise to 12 per cent in 2020 –from four per cent before the pandemic hit – in the absence of policy support, the IMF said in a report.

The largest increase would occur in Italy, one of the hardest pandemic-hit countries in Europe, because of a drop in aggregate demand and large share of contact-intensive industries in the country’s economy.

More than one third of small businesses in Canada, South Korea, the US and the UK worry about their viability or expect to close permanently within the next year, according to the fund.

Services sectors have taken the hardest hit, with bankruptcy rates in countries increasing by more than 20 percentage points for businesses including administration services, arts, entertainment and recreation and education, the IMF said.

Unemployment rates are high across some of the largest economies around the world and are unlikely to return to pre-crisis levels in the short term. More jobs were lost in March and April in Canada and the US than were created since the end of the global financial crisis.

Though some jobs in the US were regained in May and June, a sharp rise in Covid-19 cases and re-imposition of lockdowns have put a quick economic recovery in doubt.

The IMF estimates the global economy will shrink 4.9 per cent this year, pushing it into the deepest recession since the Great Depression before a sluggish recovery in 2021. The fund projects a cumulative loss to the global economy of more than $12 trillion (Dh44tn) in 2020 and 2021 as a fallout of the pandemic.

The virus has infected more than 13.5 million people worldwide and killed more than 584,000, with the US accounting for about 26 per cent of infections worldwide, according to Johns Hopkins University, which is tracking the outbreak.

Globally two thirds of governments have pumped about $11tn into their economies to stabilise financial markets, support smaller businesses and protect jobs.

Although fiscal and monetary measures by governments and central banks have put a floor under the world economy, "we are not out of the woods yet", Kristalina Georgieva, managing director of the IMF said in a blog post.

Economic activity is slowly picking up as most economies around the world open up, however, the rate of infection is still on the rise in parts of North America, Africa and Asia.

“A second major global wave of the disease could lead to further disruptions in economic activity,” Ms Georgieva said. “Other risks include stretched asset valuations, volatile commodity prices, rising protectionism and political instability.”

Many countries will be “deeply affected” by the economic scars of this crisis, she said.

In June, the IMF said about 170 countries will be left worse off by the pandemic, with lower per capita income by the end of this year.

The fiscal cost of measures to support the global economy is evident in the rise of global debt levels, which is a serious concern, she said. Public debt is now more than 100 per cent of global gross domestic product and has surpassed the record level it reached at the end of Second World War, the IMF said earlier this month.

“At this stage in the crisis, however, the costs of premature withdrawal are greater than continued support where it is needed, Ms Georgieva said. “Of course, measures must be targeted and budgets assessed with an eye to cost-effectiveness – and to medium-term debt sustainability.”