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January 23, 2022
BUSINESS BUSINESS COMPANIES ECONOMY

Euler Hermes Global Insolvency Index: Insolvencies to rise in 4 out of 5 countries in 2020

  • The upward trend in business insolvencies continued in 2019 for the third time in a row: +9% y/y, according to Euler Hermes Global Insolvency Index, which covers 44 countries that account for 87% of global GDP
  • This year, business failures will rise again for the fourth consecutive year: +6% y/y Asia will be the key contributor to the rise in insolvencies, while Western Europe will see an increase in most countries. USA and Canada have shown increases for the first time in many years in 2019 and we expect +4% and +5% respectively in 2020
  • Failures of large companies – those with over EUR50mn of turnover – remain at a persistent and worrying high level

 

Euler Hermes, the global leader in commercial credit insurance and a recognized specialist in collateral and debt collection, presented a Global Insolvency Index, which shows that insolvencies rise in 4 out of 5 countries in 2020.

Global bankruptcies are still on the rise, implying higher export risks: this is the conclusion of the latest Global Insolvency Report by Euler Hermes, which covers 44 countries and 87% of global GDP and provides the last update of its Global Insolvency Index. Business insolvencies increased by +9% in 2019, mainly due to a prolonged surge in China (+20%) and, to a lesser extent, a trend reversal in Western Europe (+2%) and North America (+3%).

 

The situation in Romania

 

“In Romania, we expect the downward slope of the insolvencies of the last two years (-21.5% in 2019 /-8.8% in 2018) to change its direction. The slowdown of economic growth in tandem with the one manifested at the global level and the increase of imbalances in the current account deficit and the budget deficit are reasons of concern at the macroeconomic level.

Also, at the microeconomic level, we find an increase in the number of non-payment incidents when settling payment instruments. This should be corroborated by an increase in the terms of collection reported or confirmed by companies in various sectors, especially in the pharmaceutical sector, distribution mainly non-food, construction and related sectors – metals, building materials, agriculture.

In more and more areas, we see a general slowdown in profit margins, either because of maintaining or increasing volumes, or because of the increase in fixed costs.

Indeed, one should not neglect the impact on the performance of companies of factors independent of internal decision makers, such as administrative or regulatory measures of the State in fields such as pharmaceutical or construction, but also the disturbances induced by external factors.

Far from being completed, the process of adapting European affairs to the realities of Brexit has diminished as a perception at companies level. With major impact remains the trade war between the United States and China, which affects the entire world trade.

Last but not least, the recent spread of coronavirus and the extraordinary measures taken to combat its widespread expansion already tend to affect not only the Chinese economy, but also the related industries in other countries. In the case of Romania, the impact could be significant in the sectors importing the technology and the products used as raw material or subassemblies from China for finished products under their own brand commercialized in the territory of our country. Stopping the production of such subassemblies would be mainly because to restrictions on the movement of goods abroad.

However, although we expect an increase in the number of insolvencies, at least for 2020 we estimate an increase of only 3%. Gross domestic product, although at a slower pace, was on an upward slope and the rate of non-performing loans continued to improve steadily in the post-crisis years. Nor do we neglect the positive impact on incomes of an election-laden year, previous experiences suggesting pro-cyclical measures to stimulate the economy”, says Mihai Alexandru Chipirliu, Head of Risk Analysis, Euler Hermes Romania.

 

Continuing economic weakness, political and social uncertainties

 

Euler Hermes’ experts believe this worrying trend is due to the combination of a low-for-longer pace of economic momentum, notably in advanced economies, in the industrial sector, and the lagging effects of trade disputes, political uncertainties and social tensions.

In 2020, even if monetary policies should remain supportive, it will not be enough to counterbalance softer demand, tougher price competition and an increase in production costs, notably wages.

 

Export risks are on the rise almost everywhere

 

As a result, insolvencies should rise again by +6% globally this year for the fourth time in a row, with Asia still as the key contributor (+8% y/y) notably due to China (+10%) and India (+11%). In Western Europe, economic growth will remain below the historical threshold which usually stabilizes the number of insolvencies (+1.7%), leading to an increase in most countries. All in all, four out of five countries will post a rise in insolvencies in 2020, with Brazil (-3% y/y) and France (0%) as the key exceptions.

In 2019, the overall increase was higher, but only two out of three countries were impacted by rising insolvencies. This means that export risks are on the rise almost everywhere: there is hardly a safe haven anymore.

 

Serious domino effects of major insolvencies

 

The number of major insolvencies from Q1 to Q3 2019 remained relatively stable year-on-year (249 major insolvencies) but their severity worsened in terms of cumulative turnover (+EUR39.1bn to EUR145.2bn), which could have serious domino effects on providers along supply chains. The greater the turnover of the bankruptcy candidates, the greater the damage to individual suppliers.

The hot spots were construction in Asia, energy and retail in North America, and retail and services in Western Europe.

“Overall, this insolvency outlook calls for a close monitoring of trade disputes and other political and policy-related risks, as the level of economic volatility will be very high all along 2020. More selectivity and preventive credit management actions will be needed”, said Maxime Lemerle, Head of Sector and Insolvency Research at Euler Hermes.

 

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