Pandemic Bankruptcy Boom Looms, Former IMF Deputy Director Warns
The number of corporate bankruptcies is likely to spike worldwide over the next few months, as the Covid-19 pandemic batters companies around the globe, a former deputy managing director of the International Monetary Fund (IMF) warned.
Following an acute shortage of liquidity, many enterprises are now facing debt problems, which may result in a bankruptcy boom during the fourth quarter and the first half of 2021, Zhu Min, who is also a former deputy governor of the People’s Bank of China, said at a recent forum in Shanghai.
A total of 424 U.S. companies have gone bankrupt this year as of Aug. 9, a 10-year high for the period, as “the U.S. economy contracts and the coronavirus takes its toll on numerous industries,” said an intelligence unit of S&P Global Ratings Inc.
The global pandemic’s economic impact remains strong and business operations have been fundamentally changed, Zhu said.
Zhu thinks the pandemic has changed human behavior and brought fundamental changes to both supply and demand. “As long as Covid-19 is not under control, people will be less willing to spend money, especially in the services and tourism sectors,” Zhu said. “It won’t be easy to restart consumption.”
That’s the case even in China, which the IMF predicts will be the only major economy to experience growth this year. The country’s GDP grew 3.2% year-on-year in the second quarter, returning to growth after a record 6.8% decline in the first quarter. However, the rebound was mainly driven by accelerating investment, with demand remaining weak, National Bureau of Statistics (NBS) data showed (link in Chinese).
In the second quarter, gross capital formation boosted China’s GDP growth by 5 percentage points, reversing the first quarter’s downward trend, as investment declines narrowed and industrial inventories increased, the NBS said. However, diminishing consumption spending dragged GDP growth downward by 2.3 percentage points in the second quarter, though less than the 4.4 point drag in the first quarter.
The IMF expects the global economy to grow by 5.4% in 2021, up from a predicted 4.9% drop this year. Before that, companies need to figure out how to survive in a volatile world, Zhu said.
Global business insolvencies are likely to increase by 35% in 2021 from 2019, a unit of German insurer Allianz SE predicts, calling bankruptcies a “time bomb” created by Covid-19.
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