Published on All About Finance

COVID-19 and corporate balance sheet vulnerabilities in emerging markets and developing economies

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The non-financial corporate (NFC) sector in emerging markets and developing economies (EMDEs) entered the pandemic with elevated financial vulnerabilities and corporate debt currently stands at record levels: the World Bank estimates that non-financial corporate debt for EMDEs stood at 39.1 percent in 2019,1 up from 34.9 percent in 2010; the BIS estimates a much higher level of 102 percent for a group of large EMDEs2 in 2020Q1, up from 71 percent a decade ago. Against the backdrop of a global recession that has turned out deeper than expected for most EMDEs, a prolonged period of reduced earnings induced by the COVID-19 pandemic may give way to corporate solvency problems.

Credit markets in EMDEs were heavily affected by the COVID-19-induced financial market volatility in March 2020, although sentiment has improved since then and only a few corporate issuers have defaulted so far, most due to prior ailments.3 These trends have also been evident for non-investment grade NFCs. This outcome has been supported by the wide open primary market, ample global liquidity, as well as supportive policy responses from governments. However, looking forward, the outlook for NFC issuers in EMDEs depends highly on the future course of the pandemic, although many have used the recent benign market conditions as an opportunity to bolster balance sheets.

Gauging preexisting corporate vulnerabilities

In a recent working paper, we conduct a simple stress test to gauge the ability of listed NFCs to withstand shocks to earnings and receivables. We target two basic and widely used accounting ratios: the interest coverage ratio (ICR), a measure of a firm’s debt service capacity (defined as earnings before interest and taxes/interest expenses), and the quick ratio (QR), a measure of a firm’s ability to cover short-term liabilities (defined as (current assets inventories)/current liabilities). Our stress test scenarios consist of negative shocks of increasing magnitude to corporate earnings and receivables. We focus on the impact of these shocks to the total amount of debt at risk according to the ICR or QR in a country (or region) debt at risk is the total amount of debt associated with companies that exhibit balance sheet fragilities according to the ICR or QR (that is, less than 1).

First, we focus on conditions that preceded the pandemic. Our sample for 2019Q4 consists of almost 17,000 listed firms in 73 EMDEs and represents US$22.1 trillion in total assets and US$6.05 trillion in total debt. We find that over 60 percent of the debt was associated with firms that already exhibited vulnerabilities according to at least one ratio. A 30-percent shock to earnings and receivables raises this number to 88 percent, of which 29 percentage points is vulnerable in terms of both indicators. Firms in East Asia and the Pacific, the Middle East and North Africa, and South Asia appear to be most exposed.

Have corporate vulnerabilities increased during the pandemic?

Second, we update the analysis in the paper by analyzing corporate balance sheets for 2020Q2, well into the pandemic. We find that the median ICR and QR have remained relatively stable compared with 2019Q4. However, a tail of weaker firms has experienced a marked deterioration in their ICR during the pandemic — the 25th percentile fell from 0.35 to 0.06. In other words, firms that were already facing difficulties in covering their interest expense have worsened further during the pandemic . We find that corporate debt at risk according to the ICR has increased for almost all regions from 2019Q4 to 2020Q2 (figure 1). Latin America and the Caribbean has experienced the biggest increases, with debt at risk more than tripling, from 9.3 to 29.8 percent.  The Middle East and North Africa and South Asia also registered notable increases.

Third, based on these results, we take a closer look at the ICR. Using 2020Q2 data, we show that a 30-percent shock to earnings increases the fraction of debt at risk from 21.5 to 42.3 percent, an increase of 100 percent (figure 1). South Asia is affected most, with its debt at risk increasing sharply from 20.1 to 78.2 percent.

Figure 1. Debt at risk of listed non-financial firms

Note: The interest coverage ratio (ICR) captures the ability of a firm to cover interest expenses with current earnings. A lower value indicates higher difficulty in meeting these expenses. Debt at risk is the fraction of total corporate debt that is associated with listed non-financial firms that have an ICR less than 1.

Strong legal and institutional frameworks for corporate insolvency are crucial

Some countries with vulnerable corporate sectors also display weaknesses in insolvency frameworks, which may impede restructurings and write-downs and contribute to a surge in socially inefficient liquidations of cash-strapped but otherwise viable firms. Moreover, corporate insolvency institutions may weaken during the crisis due to disruptions to basic operations of courts and insolvency agencies.

In normal times, firm distress is mitigated by rescuing viable firms and preserving jobs as well as liquidating unviable businesses quickly to redeploy productive assets efficiently. However, during the crisis, reforms are needed to “flatten the curve” of insolvencies and prevent viable firms from being forced prematurely into insolvency through possible extraordinary and temporary measures. Without intervention, even ordinarily effective frameworks may lead to a flood of insolvencies, which could trigger fire sales.

Despite the extraordinary measures adopted so far to support liquidity and provide relief to distressed firms, some countries are expected to see record high bankruptcy filings  (see figure 2). The readiness of the insolvency system to deal with a surge in corporate defaults is therefore important to interpret the implications of the corporate vulnerabilities we identified in our analysis. The World Bank’s Principles for Effective Insolvency and Creditor/Debtor Regimes4 provide useful guidance to policy makers looking to improve their domestic insolvency systems to absorb a surge in filings. 

Figure 2. Evolution and forecast of bankruptcy filings (2008–21) (percentage increase year-over-year)

A line chart of US, Brazil, Turkey, Russia, Morocco, South Africa. Showing Figure 2. Evolution and forecast of bankruptcy filings (2008?21) (percentage increase year-over-year)
Source: Euler Hermes/Allianz Research (July 2020). Covering 44 countries that account for 83 percent of global gross domestic product.

1 M. Ayhan Kose, Peter Nagle, Franziska Ohnsorge, and Naotaka Sugawara. 2020. Global Waves of Debt: Causes and Consequences. Advance Edition. Washington, DC: World Bank.

2 Bank for International Settlements credit statistics:

3 According to JP Morgan, the 2020 EM corporate default rate is now expected to be around 3.5 percent, compared with an average of 2.9 percent over the preceding five years.

4 Available at


Erik Feyen

Head Global Macro-Financial Monitoring and Lead Financial Sector Economist

Owen Nie

Financial Sector Economist

Fernando Dancausa

Senior Financial Sector Specialist

Bryan Gurhy

Senior Financial Sector Specialist

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