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 As policy support is withdrawn and new variants raise uncertainty about how quickly the pandemic can be overcome, it is crucial to analyse the vulnerability of the corporate sector, to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 s...