Covid-19 has generated a real challenge to national health systems worldwide and its consequences have put the world economy at risk, causing a sharp decline both in demand and supply.
The Italian reaction was particularly severe compared to other countries. The pandemic has disrupted factories, supply chains and demand for goods and the consequences to industrial production and sales have been heavy.
Given the uncertainty related to the economic repercussions of the virus starting from the second semester of 2020 and the still unclear developments of Covid-19, it becomes very difficult to understand the recent past and the current state of the economy, but also to predict the short-term future.
In this context, the research team composed by professors Giovanni Marseguerra and Daniela Bragoli from Università Cattolica and Davide Fedreghini and Tommaso Ganugi from Confindustria Brescia has developed the ISM (Indice Sintetico Manifatturiero, tr. Synthetic Manufacturing Index), an index which reports the financial health of 2,905 manufacturing firms in the province of Brescia. Usually, the soundness of a firm is captured through the analysis of one single profile ‒ financial solidity, profitability, liquidity and so on ‒ measured with balance sheet ratios. The aim of the UCSC-Confindustria Brescia joint project is to develop a bankruptcy prediction model à la Altman, tailored for Brescia, whose output is a single number which combines all the aforementioned profiles of firms’ financial health and provides each firm with a score from 0 to 1. As for rating agencies, scores are divided into 8 categories ranging from A1 (perfectly sound) to D2 (almost distressed).
The ISM is calculated both for the pre-id period (2019) and for the Covid period (2020). The problem with calculating the ISM for 2020 is that the last available data on the financial status of firms date back to 2019. Estimates of balance sheet ratios are produced and fed into the bankruptcy prediction model, based on 2019 data and modified by the effects of Covid-19. The ISM scores for the Covid period are then calculated.
In order to make some assumptions on how 2019 balance sheet variables should be changed, the first data considered were the preliminary estimates related to total sales in 2020 published by Centro Studi of Confindustria Brescia, which estimates a -11% for total manufacturing. Three different scenarios were then constructed based on how variable costs should react to the drop in total sales. The first scenario (‘zero elasticity’) is characterized by a reduction in total sales without any adjustment in variable costs. This is a benchmark worst-case scenario. The second scenario (‘2008-2009 elasticity’) reconstructs the reduction in variable costs according to the elasticities of costs to the reduction in total sales registered in Brescia during the 2008-2009 financial crisis. The third precautionary scenario (‘intermediate elasticity’) reports the 2008-2009 elasticities reduced by half.
Results based on the ISM show that in 2019, in the pre-Covid period, more than 40% of manufacturing firms in Brescia scored A1 and A2 and only 1.2% of them scored D1 and D2. These results are the natural outcome of the increase in capitalization registered by manufacturing firms in Brescia in the last 10 years, which made them more prepared for the Covid-19 crisis than they were for the 2008-2009 financial crisis. Clearly, the distribution of the firms within the different classes is worse off compared to the pre-Covid period in all three scenarios. In the worst-case scenario, the percentage of sound firms (A1 and A2) decreases to 24.8% (from 40%) and the percentage of distressed (D1 and D2) increases to 37.3% (from 1.2%). Small enterprises and the Metallurgy and Textiles sectors turn out to be the hardest hit by the crisis. In general, however, results show that the Manufacturing sector in Brescia holds up, despite the difficulties faced in the recent months. If it is true that the ‘Made in Brescia’ has somehow managed to overcome the pandemic crisis, drawing conclusions on sectors such as Services and Construction is a different matter, as these latter faced a more intense crisis and a longer period of lockdown. Further research within the project could expand the analysis by including other sectors and/or also other geographical areas in Italy.
The ISM is a powerful tool which UCSC and Confindustria Brescia have developed to provide insights on the impact of Covid-19 on the Manufacturing sector in Brescia but it may be very useful also in the future to study the financial health dynamics of manufacturing firms.
