| Abstract: |
This paper analyzes corporate vulnerabilities in the Middle East, North Africa
and Pakistan (MENAP hereafter) in the wake of the COVID-19 pandemic shock.
Using a sample of nearly 700 firms from eleven countries in MENAP, we assess
the non-financial corporate (NFC) sector’s liquidity and solvency risk and
viability over the medium term under different stress test scenarios. Our
findings suggest that the health crisis has exacerbated vulnerabilities in the
corporate sector, though the effects are heterogenous across the region. Small
firms, which entered the pandemic in a more vulnerable position, would remain
under high liquidity stress over the medium term, putting a substantial share
of these firms’ debt at risk of default. Similarly, liquidity needs of firms
in contact-intensive sectors have also worsened and would remain elevated in
2022-23. We also show that an adverse scenario of subdued growth and premature
withdrawal of policy support would impair the capacity to service interest
expenses, especially among small firms, resulting in higher insolvency risk.
Overall, our results indicate that some segments of the MENAP corporate sector
could remain reliant on policy support during the recovery phase and that
structural reforms are critical to save distressed but viable firms from
bankruptcy and ensure an efficient liquidation of “zombie” firms. |
| Keywords: |
MENAP, COVID-19 crisis, non-financial corporate vulnerabilities, stress tests, “zombification”, policy support.; non-financial corporate; solvency risk; liquidity needs; NFC stress tests; vulnerabilities in the Middle East; COVID-19; Liquidity; Solvency; Stress testing; Corporate sector; Middle East; North Africa; Middle East and Central Asia; Global |