Portuguese firms’ financial vulnerability and excess debt in the context of the COVID-19 shock

March 8, 2021

The economic shock prompted by the COVID-19 pandemic strongly restricts Portuguese firms’ ability to generate profits, contributing to an increase in their financial vulnerability and undermining their capacity to meet credit commitments in the short and medium term.

This paper assesses the impact of the COVID-19 pandemic on the debt levels of vulnerable firms. Firms are defined as financially vulnerable if their operating profits are less than twice the amount of interest expenses. Excess debt is measured as the difference between a firm’s current debt and the amount of debt it can bear without becoming financial vulnerable.

The paper analyzes two scenarios for the Portuguese economy, a central or base case scenario and a severe scenario, from Banco de Portugal’s December 2020 projections.

Financially vulnerable firms’ debt (EUR billions and percentage of firms’ debt)
Caption: Financially vulnerable firms’ debt (EUR billions and percentage of firms’ debt)

In 2020, vulnerable firms’ debt is estimated to increase by 9 p.p., reaching 31% of the total firms’ debt (see Figure). The increase in excess debt is less sharp over the same period, reaching 21% of total debt. In both scenarios, the paper projects a progressive decline of vulnerable firms’ debt and excess debt in 2021 and 2022, to levels close to those observed in 2019.

In the severe scenario, the share of vulnerable firms’ debt and of excess debt is projected to remain at higher levels in 2022. However, even in the severe crisis scenario, projected debt levels remain below those observed during the sovereign debt crisis, perhaps reflecting the greater financial robustness of Portuguese firms in the period preceding the pandemic crisis as compared to their robustness prior to the sovereign debt crisis (see Figure).

The share of debt held by vulnerable firms and the level of excess debt is projected to increase more in manufacturing, trade, and accommodation and food services sectors, where vulnerable firms have worse liquidity and capitalization ratios than non-vulnerable firms.

Click here to go to the paper by Francisco Augusto and Márcio Mateus.


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