Business Resilience in the Pandemic and Beyond E-Book

• Herausgeber: European Investment Bank
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2022

Seitenzahl: 295

Beschreibung

COVID-19 set new challenges for the economies in Eastern Europe and Central Asia. Strong policy and fiscal support allowed businesses to stay afloat, with firms making long strides in innovation and in becoming global suppliers. This report examines the pandemic's business impact, trade and innovation, green economy and the financial gaps in this region. The report's analysis is based on the EBRD-EIB-WBG Enterprise Survey 2019, covering over 28 000 registered firms, and the first round of the COVID-19 Follow-up Enterprise Surveys, with over 16 000 firms.

Leseprobe

BUSINESS RESILIENCE IN THE PANDEMIC AND BEYOND

Adaptation, innovation, financing and climate action from Eastern Europe to Central Asia

About the European Investment Bank

The European Investment Bank is the EU bank and the world’s biggest multilateral lender. We finance sustainable investment in small and medium-sized enterprises, innovation, infrastructure, and climate and environment. For six decades, we have financed Europe’s economic growth from start-ups like Skype to massive projects like the Øresund Bridge linking Sweden and Denmark. We are committed to supporting €1 trillion in investment in climate and environmental sustainability to combat climate change by the end of this decade. About 10% of all our investment is outside the European Union, supporting Europe’s neighbours and global development.

Table of contents

Executive summary

I.I. The EBRD-EIB-WBG Enterprise Survey: providing an in-depth perspective on firms and the obstacles in their business environment

I.II. Enterprises in Eastern Europe and Central Asia during the pandemic

I.III. Trade participation, innovation and competitiveness

I.IV. The green economy

I.V. Financial deepening and firms’ access to finance

I.VI. Conclusions and policy implications

Chapter 1

Enterprises in Eastern Europe and Central Asia during the pandemic

1.1. Introduction

1.2. Context: the pandemic in Eastern Europe and Central Asia

1.3. Firm performance during the pandemic: stylised facts

1.4. Firm characteristics and performance during the pandemic

1.5. Access to finance and policy support

1.6. Conclusions and policy implications

1.7. References

1.8. Annex

Chapter 2

Trade participation, innovation and competitiveness

2.1. Introduction

2.2. Trade integration, economic development and barriers to trade

2.3. Innovation, management practices and firms’ competitiveness

2.4. International trade and innovation

2.5. The European Union as a trade facilitator and driver of innovation

2.6. COVID-19 adaptability of innovators and traders

2.7. Conclusions and policy implications

2.8. References

2.9. Annex

Chapter 3

The green economy

3.1. Introduction

3.2. Taking stock

3.3. Green management

3.4. Corporate ESG responsibility practices

3.5. Green investment

3.6. Energy efficiency investments

3.7. Conclusions and policy implications

3.8. References

Chapter 4

Financial deepening and firms’ access to finance

4.1. Introduction

4.2. Firms, banks, credit constraints and financial autarky

4.3. Access to finance, investment and growth

4.4. Estimating credit gaps: quantifying the extent to which private enterprises are underserved

4.5. Conclusions and policy implications

4.6. References

4.7. Annex

Glossary and Acronyms

Foreword

The development of a more dynamic, innovative and globally integrated private sector lies at the heart of the transformation of the economies of Eastern Europe and Central Asia. Drawing on Enterprise Surveys conducted across this region, this report provides unique insights into the progress that the regions’ firms have made, and the structural challenges they face. It also investigates the adaptation and resilience of firms during the coronavirus pandemic.

Just prior to the publication of this report, Russia launched an armed invasion of Ukraine. Aside from the tragic loss of human lives, this event marks a political turning point for the region and for the globe, affecting the geopolitical balance of power. It also comes just after two years of COVID-19, as economies were starting to recover from the pandemic and firms had to prove their resilience to a return to a normal policy framework. This report is published as the war spreads, sanctions are being imposed on Russia and Belarus, and the economic shocks are still being transmitted to the wider region. The analysis presented in this report therefore predates the war. It also predates the full unfolding of the economic consequences of the pandemic. However, it offers unique insights into the underlying situation and potential of firms in the region, which are key to designing appropriate policy actions from this point onward.

Analysing the early policy response to the pandemic, this report highlights the role played by government support measures, pre-existing credit lines and intra-group funding in enhancing firms’ resilience and ability to adapt. Credit lines and intra-group funding complemented government intervention in the region, providing lifelines that helped firms to withstand the shock created by the pandemic. The report documents the existence of credit constraints and gaps in financing associated with both demand and supply factors. Many firms in the region are discouraged from any engagement with the financial sector and are financially autarkic, particularly small and medium-sized enterprises and young, innovative firms. The report notes that financial autarky and discouragement impair firms’ growth and investment activity.

The report also notes that firms that are integrated in global value chains, that are more innovative and that are better managed were better able to withstand the effects of the pandemic. It highlights the positive role that participation in global value chains (GVCs) and trade had on firms’ efficiency, profitability and strength. It shows how the European Union has acted as a trade facilitator and driver of innovation. The now heightened geopolitical risks and uncertainty have increased the risk of a retrenchment of cross-border flows. It is therefore essential to reflect on the cost that deglobalisation might have on the region, even beyond the direct disruption of trade.

In the changing geopolitical context, energy security and dealing with a protracted energy shock are new priorities. The report recognises the costs associated with the adverse incentives created by energy subsidies in the context of the net zero transition. It also notes the importance of external factors in driving firms’ greening efforts. Customer and shareholder pressure and energy taxation, combined with firms’ direct experience with climate risk and their specific characteristics, help to shape firms’ efforts in terms of ESG standards, green managerial practices and ultimately green investment.

In short, the structural drivers and constraints on private sector transformation in Eastern Europe and Central Asia provide valuable insights to inform policy development as the region adapts to the new shock and geopolitical context emerging from the war in Ukraine.

Executive summary

The COVID-19 pandemic led to a sharp contraction in economic activity in Eastern Europe and Central Asia.[1] On average, GDP in the region declined by 4% in 2020, with enterprises in contact-intensive service sectors being especially hard-hit. But the policy support was unprecedented, with fiscal measures amounting to around 6% of GDP. Thanks to this support, to date, corporate bankruptcies have remained limited, job losses contained and private sector balance sheets protected.

The resilience of firms in the initial stages of the pandemic is a testament to the importance of productivity gains, innovativeness, managerial quality, global integration and access to finance. To strengthen future resilience, firms will need to keep improving in these areas, as well as adapting to longer-term changes, such as global warming and shifting global value chains (GVCs). Supportive government policies, regulations, investments in key sectors, such as green and digital infrastructure, and continued development of the financial sector could all play important complementary roles.

The war in Ukraine once more changes this landscape. The loss of human lives in Ukraine and a massive humanitarian refugee crisis in Europe, combined with major physical disruptions to trade, the united response from a large part of the international community and the sanctions on Russia and Belarus, signal a reshaped geopolitical context and a turning point for the region. Economic consequences will be severe, and not only for those countries directly involved in the conflict or directly affected by sanctions. These effects will once again test firms’ resilience and ability to adapt. Structural features characterising the business environment will continue to play a role in defining firms’ capacity to transform.

Global value chains have contributed to defining the growth model for the region and have remained resilient to date. During the pandemic, firms in the region benefited from policy support, combined with credit and intra-group funding. The ability to draw on intra-group funding was an additional life-saving form of support. The growth of trade and the expansion of GVCs have been important drivers of economic development, especially in Eastern Europe and Central Asia. But the COVID-19 crisis disrupted economic activity across the globe, with global merchandise trade decreasing by 7% in 2020. While GVCs have remained resilient, many pandemic-induced mismatches of demand and supply have emerged during the recovery phase and have been transmitted globally via trade. These may lead to long-term effects on international trade and the organisation of GVCs. Firms’ profitability, competitiveness and survival depend on cross-border trade, foreign direct investment (FDI), the availability (or migration) of skilled workers, and international flows of research and development (R&D) and innovation. The analysis presented in the report shows that export and global value chains have a causal effect on firms’ innovation capacity in the region, through better management and the transfer of technology. The European Union thus emerges as a trade facilitator and a driver of innovation.

I.I.The EBRD-EIB-WBG Enterprise Survey: providing an in-depth perspective on firms and the obstacles in their business environment

This report uses a unique firm-level dataset. Specifically, it analyses data from the latest wave of the EBRD-EIB-WBG Enterprise Survey (ES 2019), which collected data on more than 28 000 formal (registered) firms between 2018 and 2020. The survey was conducted just before the outbreak of the pandemic, providing a structural snapshot of firms in the region. The report also uses the first round of the COVID-19 Follow-up Enterprise Surveys (covering more than 16 000 firms), carried out by the World Bank to illustrate how firms have reacted and adapted during the crisis. The ES 2019 and the follow-up COVID-19 module (COV-ES) include a sample of countries in Southern Europe (SE), which are employed as a comparator group; the other comparators are firms in the lower-middle-income (LMI) and upper-middle-income (UMI) countries.[2] All statistics for regional aggregates are reported as simple averages of individual countries, whereby firms within countries are weighted with survey weights.

The Enterprise Survey provides a rich source of information about firms and their business environment. The questionnaire includes firm characteristics, annual sales, costs of labour and other inputs, performance measures, access to finance, workforce composition and participation in the labour market. There is also a special module on the green economy. The survey provides a representative sample of the non-agricultural, formal private sector for firms with at least five employees and operating in the manufacturing or services sectors.[3] The survey uses random sampling, stratified by firm size, sector of activity and regional location within each economy. Stratification ensures that there are enough observations for robust analysis within each stratum. The survey design, comprehensive sample frames and sampling weights together ensure that the surveys are statistically representative of the private sector in each economy.

Firms continue to suffer mainly from unfair competition from the informal sector, a poorly educated workforce and limited access to finance. Firms in the Enterprise Survey (ES) were asked to select the “top obstacle” from a list of 15 potential obstacles. Figure 1 shows the top six obstacles affecting the day-to-day operations and performance of firms across the region. These are tax rates, competition from the informal sector (labelled informal sector in Figure 1), a poorly educated workforce and difficulties with access to finance. Access to finance scores among the top obstacles in all regions except for Central and Eastern Europe. Political instability also matters although in fewer regions, notably the Eastern Neighbourhood, the Western Balkans, Central Asia and Turkey. Transport is less of an obstacle but is mentioned in the Western Balkans, Central and Eastern Europe, and Russia.

Figure 1

Top six obstacles to business operations – share of firms in the sub-regions of Eastern Europe and Central Asia

Source: Authors’ calculations based on the EBRD-EIB-WBG Enterprise Survey.

I.II.Enterprises in Eastern Europe and Central Asia during the pandemic

Chapter 1 examines the performance and adaptation of enterprises in the region during the initial phase of the pandemic. It explores key determinants of firms’ survival and ability to adapt, foreshadowing discussion in the rest of the report of the structural characteristics of the sector during “normal” times. Finally, the chapter examines the complementarity between financial sector “lifelines,” the structure of corporate ownership, and policy support.

To date, firms have come through the pandemic better than initially feared. During the first wave, firms lost 25% of turnover and shed 11% of their labour force, with the pandemic hitting contact-intensive services and SMEs especially hard. But massive policy support helped to prevent large-scale bankruptcies, with only 4% of firms filing for insolvency or closing permanently at the time of the first wave of the COV-ES.

Some firms have been more resilient than others, rapidly adapting their business models to the pandemic (Figure 2). Firms that were more productive before COVID-19 were significantly less likely to close their businesses, to have arrears or to end up in bankruptcy. Instead, they expanded online business practices and switched to remote work. Firms that were integrated into GVCs, those that had been more innovative in the past, those that were more digitalised and those with better quality management also adapted better during the pandemic. They expanded their online presence, switched to remote work, adjusted production or took advantage of the available policy support more effectively.

Financial lifelines as an insurance mechanism played an important role in firms’ survival. Firms with overdraft facilities and those operating in corporate groups with access to intragroup funding were less likely to experience bankruptcy, as they were able to draw down contingent liquidity under stress. Government programmes also played a stabilising role by mitigating the stress of vulnerable firms, such as SMEs, stand-alone firms and those lacking overdraft facilities.

Taken together, the findings in Chapter 1 suggest that many of the structural characteristics associated with stronger firm growth, job creation and innovation during normal times (as documented in Chapters 2-4 of this report) also helped enterprises during the pandemic.

Figure 2

Adaptation during the pandemic and firm characteristics (percent)

Source: Authors’ calculations based on COV-ES.

Note: The chart plots the average predicted probability of firms’ adaptation during the pandemic based on separate logit regressions on relevant firm characteristics pre-COVID-19. For productivity and management quality, “High” firms are those at the 90th percentile of the distribution. For GVC participation, innovativeness and digitalisation, “High” firms are those for which the relevant indicator takes the value of 1. See Chapter 1, section 1.4 for details on definitions and methodology.

I.III.Trade participation, innovation and competitiveness

The findings of Chapter 2 indicate that globalisation has been essential in enabling many countries in the region to leverage their comparative advantages and increase their competitiveness. The chapter shows that firms participating in international trade, in particular in GVCs, tend to be more innovative, better managed and more productive.

Most firms in Eastern Europe and Central Asia engage in trade activity, and engaging in trade is positively associated with innovation. Overall, the breakdown of firms’ trading profiles outlines the import dependence of most of the sub-regions. Moreover, most of the firms that export their goods or services also participate in GVCs by importing, transforming and adding value before re-exporting. But trade participation varies across regions. In Central and Eastern Europe and the Western Balkans, the share of firms that directly export goods abroad is significantly higher than the averages of lower- and upper-middle-income economies, while Central Asia and Russia lag significantly. An economic model oriented toward exports and industrialisation, supported by a proactive policy of attracting FDI, may enable transfer of technology and know-how, thereby supporting the rapid increase of productivity. The ES reveals that firms that trade in international markets tend to innovate more (see Figure 3). Among non-exporters, the share of innovative firms is about 30%, while it increases to around 40% for importers. Innovation is particularly prevalent among exporters and participants in GVCs (above 50% of firms).

Firms in the region generally invest more in innovation than firms in comparator economies, even though the innovation process is led by adapting new technologies developed elsewhere. Innovative firms tend to be more productive when they trade, while exporters tend to grow faster when they also invest in innovation. Innovation and trade are thus closely intertwined and both are necessary elements for improving firms’ competiveness. Trade integration with developed economies, in particular the European Union, access to information and know-how through participation in GVCs, the use of foreign licensed technology and modern management practices all contribute to higher rates of innovation. Innovative firms and firms connected to international markets are more likely to adapt better and to be more resilient to COVID-19 shocks.

Figure 3

Innovative firms (percentage of firms), by trading profile

Source: Authors’ calculation based on the EBRD-EIB-WBG Enterprise Survey.

I.IV.The green economy

Firms can improve their environmental performance through the adoption of good green management practices (Chapter 3). These include having clear, measurable and realistic environmental objectives, together with managers’ incentives and expertise to achieve those targets. Firms in Eastern Europe and Central Asia lag those in Southern Europe in the average quality of their green management practices (see Figure 4), particularly in terms of specific targets for energy use and emissions. External factors, such as customerpressure and energy taxes, play a more important role in determining the quality of green management practices than firm-level characteristics, such as size and age.

The ability to handle environmental issues in a proactive manner is just one aspect of effective management: the ability to handle social and governance issues is also important. Information on firms’ environmental, social and governance (ESG) practices is often only available for listed companies. To fill this gap and shed some light on whether smaller firms in the region pay sufficient attention to ESG practices, Chapter 3 introduces a “Corporate ESG Responsibility” composite indicator. Firms in Eastern Europe and Central Asia lag those in Southern Europe on ESG practices too, with those with fewer than 20 employees, on average, the weakest in every sub-region.

In addition to improving their green management practices and their broader ESG practices, firms can also invest in energy efficiency and/or reducing pollution or other negative environmental effects. Firms are more likely to invest in a greater number of green measures if they experience fewer financial constraints and have better green management practices. Investments in energy efficiency are beneficial for the bottom line as well as for the environment. Policymakers should provide a business environment that is conducive to green investment and encourage all firms to improve their management practices and, more broadly, their corporate ESG responsibility.

Figure 4

The average quality of green management differs across sub-regions of Eastern Europe and Central Asia

Source: Authors’ calculation based on the EBRD-EIB-WBG Enterprise Survey.

I.V.Financial deepening and firms’ access to finance

Chapter 4 documents substantial gaps in terms of financial deepening and firms’ access to finance, particularly affecting SMEs and young and innovative firms in the region. About 55% of firms perceive access to finance as an obstacle. Credit constraints are particularly binding for SMEs and young firms: 24% of SMEs and 27% of young firms are credit-constrained. Innovative firms are also more likely to be credit-constrained, particularly young innovative SMEs. The chapter proposes a methodology for measuring credit gaps – the difference between desirable and actual levels of credit – making use of firm-level data. Figure 5 showcases the ranges of gaps as percentages of GDP for the major sub-regions investigated in the report.

The сhapter also analyses the operations of financially autarkic firms, those that rely solely on internal financing. Financial autarky is more likely in less developed institutional frameworks: about 50% of firms in the Eastern Neighbourhood and Central Asia are autarkic, with a lower incidence in Central and Eastern Europe, Russia and the Western Balkans, and only 7% of firms in Turkey. Autarky is also a function of firm characteristics. More sophisticated, larger, older and more export-oriented firms are less likely to be financially autarkic. Autarkic firms are particularly present among SMEs and young firms.

Credit availability for firms is associated with higher investment and faster growth.While fully disentangling the impact of demand and supply factors on access to finance is challenging, the analysis establishes that credit availability for firms is associated with investment and growth, thus showing the practical benefits of being supported by and connected to the financial system. This implies the need for policies that promote financial sector development, such as improvements in collateral frameworks, and targeted financial and advisory support – for example, financial literacy and improvements in audit and accounting standards – in conjunction with a genuine reform agenda geared to improving institutional quality. These can help to reduce information asymmetries and increase firms’ capacity, appetite and confidence in engaging with the banking sector.

Figure 5

Estimated credit gaps as percentages of GDP for the major sub-regions in Eastern Europe and Central Asia

Source: Authors’ calculations based on the EBRD-EIB-WBG Enterprise Survey.

Note: These figures represent the total credit gap in a given region (as a percentage of GDP). They are computed making use of the methodology explained in Chapter 4: see Section 4.4 and Annex D for a methodological description of the key stages for determining a credit gap. The bands are determined applying different parametrisations, thus reflecting alternative risk aversion parameters.

I.VI.Conclusions and policy implications

The COVID-19 outbreak put businesses in Eastern Europe and Central Asia through a severe test.Their resilience has been enhanced by effective policy support, as well as by their achievements before the pandemic. To date, the corporate sector has been resilient to the COVID-19 crisis, supported by the unprecedented policy response that eased the financial strains facing firms through a wide array of measures. Banks and other financial intermediaries also played a critical role by maintaining the flow of credit to the economy. As the analysis in this report demonstrates, firms with access to bank lifelines prior to the pandemic or with support from a corporate group could absorb the cash flow shock more easily and were significantly less likely to experience bankruptcy. Government policies played a stabilising role, especially for firms that lacked access to formal and informal lifelines before the pandemic (Chapter 1). The COVID-19 outbreak also demonstrated clearly that firm characteristics associated with stronger growth and productivity prior to the pandemic, namely their integration into global markets, as well as their innovativeness, managerial quality and digitalisation, helped businesses to adapt to the new economic circumstances. These findings underscore the important role that government policies can play in further strengthening business resilience in the region.

Engaging in trade and integration via global value chains is important for firms in the region, as trade is positively linked to productivity, innovation and growth. The findings in Chapter 2 indicate the importance of policy measures aimed at further strengthening trade integration and innovation. Improving customs and trade regulations, which lowers entry costs for firms seeking to engage in trade, will increase access to international markets for a larger share of firms, especially smaller ones. Policymakers should prioritise investment in digital infrastructure and facilitate improvements in management practices and investment in workers’ skills. Governments could encourage intensive training programmes, in particular aimed at improving the management of SMEs and enhancing incentives to reskill the workforce, including in less well-connected areas so as to attract innovative firms. Combined with investment in digital infrastructure, this could help to rebalance discrepancies within the region in terms of development and to improve resilience and adaptability to shocks, such as the COVID-19 crisis.

Policymakers should prioritise investment in green infrastructure, and strive to provide a business environment that encourages all firms to improve their management practices and, more broadly, their corporate ESG responsibility (Chapter 3). The transition to sustainable growth and a green economy will only be a success if the private sector applies its ingenuity, investment and entrepreneurship to that endeavour. Firms can improve their environmental performance through the adoption of good green management practices and by making green investments. Green management practices are important for all types of green investments, and external factors, such as customer pressure or energy taxes, are more important determinants of the quality of green management practices than firm characteristics. This suggests that there is a role for government guidance and stricter regulation.

Continued development of the financial sector will be essential not only to improve firms’ access to formal lifelines when faced with liquidity shocks, but also to relieve credit constraints that limit firms’ growth during normal times (Chapter 4). The report documents the persistence of gaps mostly linked to a mismatch between demand and supply: realigning the two requires increased institutional focus on credit market infrastructure. Improvements in collateral frameworks can help to tackle inefficiencies in the allocation of credit, to reduce risks and to increase the accessibility of credit. Targeted financial and advisory support can reduce constraints and increase firms’ investment opportunities, particularly for SMEs, young and innovative firms. Further diversification in terms of financial instruments and products is warranted. For example, the deployment of guarantee schemes can boost the risk-taking appetite of banking sectors, while their effectiveness can be enhanced via better risk assessment and screening capabilities. Moreover, financial literacy as well as improvements in audit and accounting standards, in conjunction with a genuine reform agenda geared to improving institutional quality, can reduce information asymmetries and increase firms’ capacity, appetite and confidence in engaging with the banking sector.

[1] The region of Eastern Europe and Central Asia is made up of several sub-regions: Central Asia (CA), comprising Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan and Uzbekistan; Central and Eastern Europe (CEE), comprising Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia; the Eastern Neighbourhood (EN), comprising Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine; Russia (RUS); Turkey (TUR); and the Western Balkans (WB), comprising Albania, Kosovo, Montenegro, the Republic of North Macedonia and Serbia.

[2] Southern Europe (SE) comprises Cyprus, Greece, Italy, Malta and Portugal. The LMI and UMI aggregates are defined making use of the full sample of countries plus the countries covered by the EIB-EBRD-WBG Enterprise Survey 2019 in the Middle East and North Africa (MENA).

[3] “Services” include retail and wholesale trade, hospitality, repairs, construction, information and communication technology (ICT) and transport. Not included in the survey are agriculture, fishing and extractive industries, as well as utilities and some services sectors, such as financial services, education and healthcare. Firms with 100% state ownership are also not included.

CHAPTER I

Enterprises in Eastern Europe and Central Asia during the pandemic

Summary

The COVID-19 outbreak left many enterprises around the world at risk of insolvency, as economies weakened under the disruptions to supply and reduced consumer demand. This chapter uses firm-level data from the EBRD-EIB-WBG Enterprise Survey to assess the direct impact of the COVID-19 shock on firms in Eastern Europe and Central Asia, their adaptation strategies and the effectiveness of mitigating policies during the early stages of the pandemic.

The findings show that firms were severely affected by the first wave of the pandemic. Average sales dropped by a quarter, leading firms to shed one-tenth of their workforce. But bankruptcies and permanent exit of firms remained relatively limited, amounting to about 4% of the surveyed firms. More productive firms often fared significantly better and were more likely to adopt mitigation strategies, such as increasing online business or remote work. Firms that were integrated in global markets, were more innovative, had better management practices, were more digitalised and/or were run or owned by women also proved more dynamic during the pandemic.

This chapter also documents the important role played by formal and informal “lifelines” in the face of a severe liquidity shortfall. Firms with access to bank lifelines prior to the pandemic or with support from a corporate group could absorb the cash flow shock more effectively and were significantly less likely to experience bankruptcy. Government policies also played a stabilising role, especially for firms that lacked pre-pandemic access to formal and informal lifelines.

Taken together, the chapter’s findings suggest that many of the structural characteristics associated with stronger firm growth, job creation and innovation during normal times, as documented in Chapters 2-4 of this report, also helped enterprises in the region during the extraordinary shock of the pandemic.

1.1.Introduction

Growth in most of the world ended abruptly in 2020 due to the pandemic – and Eastern Europe and Central Asia were no exception. Economic activity across economies in the region contracted, on average, by 4% in 2020, with contact-intensive services being hit the hardest. The policy support in response to this shock was unprecedented in many countries in the region. Aid granted to households and firms in the form of job retention schemes, grants, tax relief and loan guarantee programmes amounted to around 9% of GDP with large cross-country variation, which may reflect differences in policy space and levels of development. Debt moratoriums and changes to insolvency frameworks also protected enterprises and households in the face of significant liquidity pressures.

Thanks to the unprecedented policy support, corporate bankruptcies have remained subdued to date, but enterprises in the region remain fragile. As policy support is withdrawn and new variants raise uncertainty about how quickly the pandemic can be overcome, it is crucial to analyse the vulnerability of the corporate sector, to assess its near-term prospects, to evaluate the potential for longer-term “scarring,” and to understand enterprises’ ability to adapt to the extraordinary situation of the pandemic and the role of policy support.

Against this backdrop, this chapter examines firm performance and adaptation in Eastern Europe and Central Asia during the initial waves of the pandemic.[1] The chapter addresses four main questions: (i) How did firms in the region perform during the COVID-19 crisis? (ii) How did they adapt to the pandemic? (iii) What are the key determinants of firm performance and adaptation strategies? and (iv) What was the role of lifelines – both formal and informal – from banks and governments in stabilising firms? More concretely, the analysis focuses on the survival likelihood and management actions taken by firms to weather the COVID-19 crisis. It examines the role of various firm characteristics prior to the pandemic, including firm size, sector, productivity, participation in global trade, innovativeness, management quality, digital footprint and access to finance.

To answer these four questions, the chapter relies mainly on the first wave of the COVID-19 Follow-up Enterprise Surveys (COV-ES). The analysis focuses on the 16 000 firms surveyed across 23 countries in Eastern Europe and Central Asia, plus five countries in Southern Europe, during the first wave of the follow-up surveys conducted between May 2020 and April 2021.[2] Results from the second wave of the follow-up surveys are used for robustness. Country-level information on government aid schemes granted to corporates during the pandemic, compiled by the IMF, complements the firm-level database when analysing policy effectiveness.

The findings contribute to two strands of research: the drivers of firm performance; and the effects of the pandemic on firms. First, a large body of literature examines drivers of firm performance, such as productivity (Aghion et al, 2005), global integration (De Loecker et al, 2016, Bloom et al, 2016), management quality (Bloom and Van Reenen, 2010), and access to finance (Rajan and Zingales, 1998 and 2003). Chapters 2 and 4 in this report leverage the richness of the full Enterprise Survey to build on this literature and analyse the role of these factors for firm performance in “normal” (pre-COVID-19) times in Eastern Europe and Central Asia. This chapter sheds light on whether factors associated with improved performance in normal times also improved firm resilience during the pandemic. Second, a growing body of literature explores the effects of the pandemic on firms in various parts of the world (see, among others, Banerjee et al, 2020, Maurin and Pál, 2020, Ebeke et al, 2021a, IMF Global Financial Stability Report, 2020b, and the Bank of England’s Financial Stability Review, 2020). This literature examines the effects of supply shocks from disruptions in production and depressed demand during the pandemic on firm revenues, employment, business closures and bankruptcies in various parts of the world.[3] Overall, the findings indicate stark differences across countries and sectors, with contact-intensive sectors being especially hard-hit. Most of these studies rely on financial statements and income statements of firms prior to the pandemic to simulate the impact of the shock and policy measures. In contrast with this literature, this chapter is among a group of studies that document the actual experience of firms during the initial waves of the pandemic and analyse the determinants of their resilience. [4]

The rest of this chapter is organised as follows.Section 1.2 provides an overview of the pandemic in the region and the macro shock that it engendered. Section 1.3 documents the performance of firms during the initial waves of the pandemic, focusing on firm survival and adaptation strategies, based on COV-ES data. Section 1.4 analyses the key drivers of firms’ resilience and adaptation during the pandemic, while Section 1.5 assesses the role of firms’ capital structure for their survival, and its interplay with access to lifelines from the financial sector, government and within corporate groups. Section 1.6 concludes and discusses the policy implications of the findings.

1.2.Context: the pandemic in Eastern Europe and Central Asia

1.2.1.Evolution of the pandemic

The pandemic is exacting a heavy human toll in the region. Most countries were spared from the initial wave of the virus. But infections rose sharply in the autumn of 2020, and surged again in the spring and autumn of 2021. Infection rates vary notably across the region: countries in Central Asia have managed to keep infection rates rather subdued to date, in contrast with the dramatic surges experienced in the Western Balkans, Central and Eastern Europe, the Eastern Neighbourhood and Turkey.[5] The death toll from the pandemic has been high: by mid-September 2021, nearly 800 000 people in the region had lost their lives due to COVID-19, with some countries registering the highest cumulative number of deaths in the world, adjusted by population size (Figure 1).

The arrival of vaccines has improved the pandemic outlook, but vaccination rates remain uneven across the region. After a slow start to the vaccination campaign, over 40% of the region’s population had received at least one dose of the vaccine by September 2021. But vaccination rates in some countries remain well below the global average and below the goal of vaccinating at least 40% of the population by the end of 2021, as recommended by the Multilateral Leaders Task Force on vaccines. The slow progress reflects a combination of factors, including supply and procurement bottlenecks, logistical obstacles and vaccine hesitancy. The uneven vaccination rates across the region amplify the health and economic ramifications of potential future waves of infection.

Figure 1

COVID-19 in Eastern Europe and Central Asia

Panel A

Number of COVID-19 cases (cases per million)

Panel B

Number of COVID-19 deaths (number per million)

Panel C

Vaccination rates: at least one shot (percentage of total population)

Source: Authors’ calculations based on Our World in Data.

Note: Data as of 20 September 2021. EN: Eastern Neighbourhood, CA: Central Asia, RUS: Russia, TUR: Turkey, CEE: Central and Eastern Europe, WB: Western Balkans. See Table A.1 for country ISO codes.

1.2.2.The collapse in economic activity and the policy response

The impact of the pandemic on aggregate activity in 2020 was severe.