International Monetary Fund (IMF) chief economist Gita Gopinath urged governments to change the way they support companies facing difficulties during the COVID-19 crisis, focusing on equity investments rather than loans, Reuters reported.
According to her, given the scale of the shock, more and more companies may become insolvent, as for many months they will record a decrease in revenue.
She noted that state support in the form of loans would burden such companies with debts that would further complicate the way out of the crisis.
“Because there’s a bigger insolvency issue here, government support would have to shift more towards being equity-like as opposed to debt-like. Otherwise, you would end up with a lot of firms that exit this crisis with a huge amount of debt over-hang,” she said Friday in a webinar co-hosted by the IMF and the University of Tokyo.
“If the lending takes form more like equity ... then that’s less onus on the firms. That will make it easier for firms to recover from the crisis,” Gopinath noted.
She did not specify how such financial support should look like. During the banking crisis in the late 1990s, Japan injected capital into firms as part of schemes where state-affiliated bodies bought preferred shares issued by these firms.
Gopinath said the global economic recovery would be “highly uneven and highly uncertain,” urging countries to continue to take aggressive fiscal and monetary stimulus measures to support their economies.
While food price inflation has risen in some countries, overall consumer inflation is likely to remain low in most regions of the world, as job losses will restrain wage growth, she said.
“We have more concerns of inflation going too low, rather than inflation going too high,” she said.
The IMF sees the current recession as the worst since the Great Depression in the 1930s. In its latest forecast, the fund expects global GDP to decline by 4.9% in 2020, compared with the 3.0% forecast in April.