Spike in company failures ‘could persist for some time’ as pandemic supports removed

Ireland could face a sharp rise in company insolvencies as government pandemic supports are wound down, and a higher rate of company failure could persist for some time, according to a new paper from the National Competitiveness and Productivity Council (NCPC). It says the Government faces a difficult balancing act as the pandemic supports are wound down, with the risk that moving too quickly could push some viable companies to the wall.

The number of insolvent liquidations in 2020 remained lower than in 2019, according to the paper and, after a temporary rise in early 2021, they have since remained broadly in line with pre-pandemic levels, despite the problems affecting some sectors. A range of government supports and low interest rates are likely to be the key factor in holding down the insolvency rate, the paper says.

The NCPC paper, Firm Dynamism and Productivity, points out that a Central Bank paper in April 2021 estimated that almost a quarter of SMEs could be vulnerable to liquidation due to the pressures of the pandemic. It also referred to a Department of Finance survey that showed almost one in five companies missed at least one loan repayment in March 2021, compared with just 5 per cent in March 2019, indicating likely financial pressure.

Time lag

As government supports are withdrawn, more companies could face difficulties, the paper says. It notes that increases in insolvencies can typically take time to appear after a recession and can be long-lasting. World Bank research found it was more than three years after the financial crash before there was a spike in non-performing loans, while in Ireland the rate of non-performing loans continued to rise until 2013.

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“This suggests higher insolvency rates could persist for some time due to the complexity and time lags associated with recessionary events,” it said. The uncertainty and risk in relation to this creates a dilemma for policymakers, it said. If government pandemic supports are extended for too long, then many unviable firms could be kept alive. However, if they are cut off too quickly, then some viable businesses could be pushed into insolvency. The tapering and eventual withdrawal of supports needs to be “carefully balanced”, the NCPC says, while helping those who lose their jobs permanently to retrain and find new jobs will be another significant policy challenge.

In terms of start-ups, it sees some encouragement in the data. After a sharp fall-off in new company registrations in early 2020, they picked up sharply later last year and into 2021. Data from Crif Vision-net shows a 28 per cent rise in start-ups in 2021 compared with last year, with a strong rise across most sectors except for some, such as construction and hotels and restaurants, worst hit by the pandemic, which continue to lag.