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Sebnem Kalemli-Ozcan, Pierre-Olivier Gourinchas, Veronika Penciakova, and Nick Sander
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. We estimate a large increase in the failure rate of SMEs under COVID-19 of nearly 9 percentage points, ab-sent government support. Accommodation & Food Services, Arts, Entertainment & Recreation, Education, and Other Services are among the most affected sectors. The jobs at risk due to COVID-19 related SME business failures 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 Non Performing Loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets and resulting in a 0.75 percentage point decline in the common equity Tier-1 capital ratio. We 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% of GDP). However, at a similar level of effectiveness, non-targeted subsidies can be substantially more expensive (1.82% of GDP). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery.
Sebnem Kalemli-Ozcan, Pierre-Olivier Gourinchas, Veronika Penciakova, and Nick Sander

relative to GDP (column 3). Non-performing loans are presented as a percent of all SME loans (column 4) and the overall policy cost is presented as a percent of overall economy-wide GDP (column 5). Firm coverage in ORBIS is imperfect and so to get aggregate costs we scale the total costs by the inverse of the coverage ratio of ORBIS (based on 1-digit data on value added for policy costs, total remuneration for wages saved and employment). For some sectors the country-wide 1-digit data was unavailable. For these sectors we assume the coverage ratio is the same as the

Sebnem Kalemli-Ozcan, Pierre-Olivier Gourinchas, Veronika Penciakova, and Nick Sander
Mr. Adrian Alter and Mr. Selim A Elekdag

. Robustness: Firm Fundamentals 16. Robustness: Alternative Leverage Ratios Appendix Table 1. Country and Firm Coverage Figures 1. Emerging Markets: Aggregate and Firm-Level Measures of Corporate Leverage 2. The Shadow Rates

Position 18. Leverage Ratio of Pre-COVID-19 Highly Leveraged Firms Tables 1. Stylized Balance Sheet and Income Statement of a Firm 2. Firm Coverage in the Sample Appendix Figure 1: Policy Measures Incorporated in the Simulations by Country

International Monetary Fund. Strategy, Policy, & and Review Department

the Fund’s monetary and macroprudential policy modeling work. The Unit will contribute to the cutting-edge debate on monetary and macroprudential policy, deliver technical expertise on these policy issues to the Fund membership, and provide in-depth advice and guidance to country teams as needed. To enhance the Fund’s surveillance of financial risks emanating from the corporate sector, staff will upgrade the existing corporate vulnerability tool (CVU). The upgraded version of CVU will significantly expand country and firm coverage vis-à-vis the current version and

International Monetary Fund. Strategy, Policy, & and Review Department
The actions in this Management Implementation Plan aim at: • Strengthening financial and macrofinancial analysis in Article IV consultations • Refocusing FSAP country selection and scope • Increasing traction of multilateral surveillance • Enhancing the IMF’s macrofinancial analysis toolkit • Building financial skills and expertise at the Fund