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Corporate debt in Emerging Market and Developing Economies (EMDEs) was at a historic high prior to the pandemic. The crisis will lead to a large increase in corporate insolvencies, which are forecast to grow by 35 percent globally by 2021. Fifty percent of firms worldwide may not have enough cash to pay debt servicing costs over the coming year and the International Monetary Fund predicts that Small and Medium-sized enterprises (SMEs) could see a tripling of insolvencies. A Facebook/OECD/World Bank global survey of 30,000 small businesses found that over 25% closed between January and May 2020. Prior crises showed a serious decline in creditors’ ability to recover from defaulting debtors. During the Asian financial crisis, Non-Performing Loans (NPLs) rose to almost 30% in key Asian EMDEs from 4.7% the year the crisis started; in the global financial crisis of 2008, NPLs in key EMDEs rose to 27.5% from 3% the year the crisis started.
The surge in the number of bankruptcy cases is likely to result in higher costs, longer procedures and worse capital reallocation decisions. This is especially problematic in countries with weak insolvency systems, where courts can quickly become overwhelmed. The average time to resolve an insolvency case pre-pandemic in EMDEs was over two years, and studies have shown that lengthy resolution periods severely inhibit positive outcomes. Out-of-Court Workouts (OCWs) can help. To address a large amount of financial distress in a timely manner, governments may need to develop an OCW framework to encourage negotiations between private debtors and their creditors, which has been a successful as a tool in past crises. As largely informal tools, which can be put in place relatively quickly, they can be a complement or alternative to formal insolvency legal systems.
This session examines the following questions in the context of EMDEs:
- What are OCW frameworks (spectrum from hybrid to purely out-of-court)?
- Why is OCW important in the context of COVID-19, especially in emerging economies?
- How have OCW frameworks been successfully applied and why was a certain model of OCW chosen for the country?
- What are the benefits and challenges/limitations of OCW frameworks?