IMF Study: SME Insolvencies Could Threaten Bank Capital Ratios

Thanks to the mass of liquidity granted to SMEs in the form of loans, credit guarantees and debt moratoria, several of them have escaped bankruptcy. However, this granted liquidity will not be able to solve the problem of insolvency, because by accumulating losses while continuing their activity, the companies will become insolvent, the study carried out by the IMF has revealed. In the countries that have been examined, reports Le matin, insolvent SMEs should reach 10 to 16% this year 2021.

According to IMF experts, including Chiara Maggi, an economist in the Middle East and Central Asia department, where she is in charge of Morocco, "this increase would be of a similar magnitude to the increase in liquidations observed during the five years following the global financial crisis of 2008, but it would occur over a much shorter period," noting that the impacts of insolvency on banks would also be considerable. Thus, in the most affected countries, the core capital ratios of banks (a key measure of their financial strength) could drop by more than 2 percentage points.

In addition, the Wali of Bank Al-Maghrib leans towards state support that highlights viable companies. "We must let companies, structurally, in great financial difficulty, and which were already suffering well before the Covid-19 crisis, die, to support viable companies," stressed Abdellatif Jouahri, after the meeting of the Bank Al-Maghrib Board on March 23 last. Same reaction from the credit insurer Euler Hermes. Furthermore, "it would be much more useful and effective to inject quasi-equity into certain companies rather than helping all companies," the institution recommends, stressing that a well-targeted support program would give a much better result than the overall strategy of supporting all SMEs without distinction.