Money Buzz! Europa

Tag: insolvency

  • Coface: We are heading towards a sudden global surge in business insolvencies

    Coface: We are heading towards a sudden global surge in business insolvencies

    At first, the COVID-19 epidemic in China only affected a limited number of value chains – but it has since turned into a global pandemic.

    Its repercussions have created a double shock – supply and demand – that is affecting a large number of industries in all over the world. The uniqueness of this crisis makes comparisons with the previous ones useless, as they all had financial origins (e.g. global credit crisis of 2008-09, great depression of 1929). The question is no longer which countries and sectors of activity will be affected by this shock, but rather which few will be spared.

    The shock could be even more violent in emerging economies: in addition to managing the pandemic, which will be more difficult for them, they are also facing the fall in oil prices, as well as capital outflows that have quadrupled compared to their 2008 levels.

    In this context, Coface forecasts that 2020 will see the global economy’s first recession since 2009, with a growth rate of -1.3% (after +2.5% in 2019). Coface also expects recessions in 68 countries (vs only 11 last year), world trade to fall by 4.3% this year (after a -0.4% drop in 2019), and a 25% worldwide increase in business failures (compared to our previous January forecast of +2%).

    The largest increase in business failures since 2009: +25% expected in 2020

    Companies’ credit risk will be very high even in a “best-case” scenario, where economic activity gradually restarts in the third quarter of the year, and there is no second wave of the coronavirus epidemic in the second half of 2020.

    This trend in business failures would affect the United States (+39%) and all the main Western European economies (+18%): Germany (+11%), France (+15%), United Kingdom (+33%), Italy (+18%) and Spain (+22%). The shock could be even more violent in emerging economies: in addition to managing the pandemic, which will be more difficult for them, they are also facing the fall in oil prices, as well as capital outflows that have quadrupled compared to their 2008 level.

    International trade volume to drop for the 2nd consecutive year; a possible modification of goods international trade structure?

    The risks weighing on the forecast of a 4.3% decline of world trade in volume in 2020 are downward, as the numerous border closure announcements are not taken into account in Coface’s forecasting model (model based on oil prices, shipping costs, confidence of manufacturing companies in the United States, and Korean exports as explanatory variables).

    In the longer term, the COVID-19 crisis could also have consequences on the structure of global value chains.The main source of companies’ vulnerability in the current context is their heavy dependence on a reduced number of suppliers located in a few, or even a single country. Therefore, increasing these numbers to anticipate possible supply chain disruptions will now be a priority for companies.

    Most sectors affected, although some are spared

    For businesses, the sudden confinement measures taken by governments in more than 40 countries to stem the expansion of the COVID-19 virus, representing over half of the world’s population, have had immediate consequences.

    These measures have resulted in a supply shock unlike any observed during previous major crises. The initial shock was not due to a financial crisis, but related to the real economy: people cannot work, and companies are experiencing disruptions to intermediate goods supply.

    Tourism, hotels, restaurants, leisure, and transport are badly affected, as are almost all specialised distributions segments and most of the manufacturing sectors (excluding the agri-food industry). Other service sectors have been much less affected: telecommunications, water, and sanitation, to name a few.

    Accompanied to this supply shock is an equally brutal demand shock. Many consumers are cancelling or postponing their expenditure on goods and services. In addition, household confidence is being weakened by the impact of confinement.

    Durable consumer goods such as vehicles will likely be among the most punished by this shock. Other expenses, such as textiles and clothing, as well as electronics, are also likely to be reduced to almost zero.

    At the other end of the spectrum, the consumption of agri-food and pharmaceutical products might actually benefit from this exceptional situation.

    The pandemic’s political consequences

    The most obvious consequence of the pandemic in the short term is the exacerbation of existing geopolitical tensions.

    The risk of a new wave of protectionist measures, targeting particularly the key sectors of the new health and economic order (e.g. limiting exports of agri-food and/or pharmaceutical products, deemed vital) cannot be excluded. The continuation of the US-China “trade war” targeting strategic sectors, notably electronics, also remains a possibility. This could be reinforced by the presidential campaign in the United States, and/or by the event of rising in social protests in one of these two countries.

  • Insolvencies in Romania decreased by 22% in 2019, at its lowest level over the last decade

    Insolvencies in Romania decreased by 22% in 2019, at its lowest level over the last decade

    The majority of insolvencies were registered in the wholesale and distribution sector followed by the constructions and retail sectors

    The most recent Coface Romania study shows that in 2019 there were 6,384 insolvent companies, -22% less compared to the level registered in the previous year. The data also indicate a gradual decrease of insolvent companies with revenues over EUR 0.5 million (medium and large companies).

    The latter reached 444 companies during 2019, below the average of 550 over the last three years. This evolution was also reflected in the decrease of financial losses of only RON 4.6 billion in 2019, half of the average for the last three years.

    The active business environment situation in Romania

    Coface analysis also reveals a number of vulnerabilities that put pressure on the Romanian companies. The amounts refused to pay with debit instruments during the year 2019 amounted to RON 3.2 billion in total, with 67% increase from the previous year, respectively RON 1.9 billion. The number of companies that interrupted their activity in 2019 increased to almost 160,000, the maximum of the last decade.

    At the same time, the number of SRL companies newly registered last year remained relatively close to 90,000. In other words, for each new company established in 2019, there were almost 1.8 companies that interrupted their activity, compared to the OUT: IN ratio of 1.6 in 2018.

    In comparison to the regional evolutions, active companies in Romania are characterized by an average lifespan of only 10 years, the lowest in the EU. Also, the number of companies that ended their activity is constantly above the ones newly established. Last but not least, the local business environment is characterized by a high degree of concentration amongst the big companies, the first 1,000 companies concentrating half of all the revenues from the entire business environment, respectively 500,000 companies.

    Sectorial and regional distribution of insolvencies

    Most insolvencies opened in 2019 were registered in the wholesale and distribution sector (1,037), followed by constructions (936) and retail (899). Analyzing the evolution of the cases of insolvency over the last 5 years, there is a tendency to consolidate the degree of concentration of volumes in the first 3, respectively 5 sectors.

    The territorial distribution of insolvency cases in 2019 did not undergo significant changes compared to the situation in the previous year. Thus, despite the decrease of -26%, Bucharest ranked first in terms of the insolvencies number, followed by the regions N/V and S. The largest decreases in the number of insolvent companies were registered in the N/E area (-35%), S/E (-27%) and Bucharest (-26%).

    Business environment – main challenges

    Compared to what is happening in the region, the companies active in Romania are very young. Thus, 55% of the companies active today in Romania were established after 2010, while only 15% started their activity before 2000. Only 15% of the companies active today have been in business for over two decades, concentrating almost 40% of revenues, half of assets and one third of employees.

    The data show that almost 1.4 million companies have interrupted their activity after 2010, while the total of the newly registered companies is only half that level. Also, at the end of 2019, Romania registered only 25 companies per 1,000 inhabitants, twice below the ECE (Central and Eastern Europe) average, as well as three times more insolvencies in relation to the number of companies.

  • Situation of insolvencies in Central and Eastern Europe remains positive

    The Central and Eastern European region has experienced unparalleled growth in the European Union. However, a slowdown is expected in the coming years. The region has seen an improvement in economic activity in recent years. In 2017 and 2018, GDP growth in the region rose to 4.6% and 4.3%, respectively, the highest rates since 2008.

    This acceleration in the CEE economy was mainly due to the increase in domestic demand, in particular thanks to the significant fall in unemployment that benefited households. At the same time, households also benefited from strong wage growth, which had a direct impact on consumption. Beyond households’ consumption, growth was supported by an increase in public and private investment.

    The aforementioned period of favourable macroeconomic environment brought effects on solvency of companies in the CEE region. GDP weighted average insolvencies dropped by 4.2% in 2018, contrary to an increase of proceedings recorded a year prior.

    Global economic conditions, particularly in Europe are becoming more tense and will have an impact on insolvencies

    Despite these positive developments, CEE companies also experienced difficulties. The low unemployment rate has led to labour shortages, which have become the main obstacle for businesses, both in their daily activities and in their potential expansion.

    Supply-side constraints – including labour shortages, high capacity utilization rates, rising input costs and the impact of the external slowdown (direct and indirect) – are of concern to companies operating in the CEE region. Household consumption is expected to remain the main driver of growth, although the limited acceleration of investment in fixed assets and lower exports will dampen GDP growth.

    In addition, the slowdown in the euro zone, the escalation of the trade war between the United States and China and the unclear process of the United Kingdom’s withdrawal from the European Union are causing exporters concern because of the potential impact on their companies and economies. Indeed, the expected slowdown in growth in the Central and Eastern European region will be mainly due to the direct and indirect effects of a slowdown in external demand. Average growth in the CEE is expected to reach 3.6% in 2019 and 3.2% in 2020.

    As CEE economies are mostly highly open to external markets, weaker foreign demand will manifest not only in growth rates, but also gradually via insolvency statistics. In this regard, sectors that are strongly exposed to foreign markets will suffer, such as the automotive industry and the ones supplying it with parts and components, namely chemicals and metals sectors.