Belgian corporate sector liquidity and solvency in the COVID-19 crisis: a post-first-wave assessment
The COVID-19 pandemic has led to a sharp fall in economic activity in Belgium. Many businesses have been forced to suspend (or severely downscale) their activities due to public health measures, supply chain disruptions, or the slump in demand for their products and services. Despite the fall in turnover, financial commitments (e.g. with respect to suppliers, employees, tax authorities, etc.) are still there, slowly but surely depleting firms’ liquidity buffers. Moreover, the erosion of equity and growing indebtedness risk turning liquidity stress into a solvency problem. Due to the exceptional and unanticipated nature of the shock, many firms are exposed to these issues.
With a view to gaining a better understanding of the economic magnitude of these risks, the NBB has developed – in parallel with many other central banks and international policy institutions – an extensive monitoring framework to appraise the liquidity and the solvency concerns of Belgian non-financial corporations. The purpose of this framework is threefold. First, to quantify the pockets of liquidity and solvency risk in the real economy. Second, to provide relevant indicators to the public authorities in their efforts in designing and calibrating possible support measures (and conducting an ex-post policy assessment). Third, to monitor the implications for financial sector stability. While the NBB is continuously updating and extending this framework, the purpose of this article is to provide an intermediate summary of the analyses conducted so far.
Based on this framework, it is estimated that the pandemic has caused 20% of firms to drain their cash reserves to the point where they need additional liquidity. Support measures taken by the Belgian authorities are shown to have alleviated these liquidity concerns by reducing the share of firms with a cash deficit to 15%.
The article also investigates whether these support measures have helped the most cash-strapped firms that should nonetheless be still viable after the pandemic. It reveals that nuisance and compensation premiums have leaked out to some firms that do not need it, whilst State-guaranteed loans and debt moratoriums disproportionately build up for firms that need cash due to the crisis and are mainly provided to profitable and productive firms. It appears however that 2% of the total number of firms (approximately 8 000 businesses) became profitable in 2020 solely due to the combination of tax exemptions, premiums, and easier recourse to temporary unemployment.
In addition, the Belgian banking sector is found to have played a role in dampening liquidity deficits, first through drawdowns of authorised credit lines mainly by large firms and, second, through an expansion of authorised amounts. Nonetheless, the riskiness of Belgian banks’ corporate loans has not appeared to have risen significantly during the first wave of the pandemic.
Finally, losses caused by the COVID-19 crisis have severely eroded many firms’ equity in the most affected sectors and replenishing their cash reserves would involve a substantial rise in their indebtedness in the absence of alternative funding sources such as, for instance, intra-group financing. One significant consequence of the crisis is that even businesses that used to be profitable before, and currently require a large amount of additional financing to offset their liquidity shortfall, would not be in a position to take out any additional debt as they would not have enough collateral to pledge, making them insolvent in the event of a default. It is also shown that many of the firms concerned would require a medium- or a long-term financing to absorb the shock of the coronavirus crisis.