Prepare for a record-high increase in global insolvencies

The Covid-19 crisis will trigger a major acceleration in business insolvencies due to both the suddenness and historic size of the economic shock and its expected lasting effects, according to a study by Euler Hermes, one of the world's largest credit insurer.

These lasting effects are critical for companies that were already the most fragile before the crisis and are now among the sectors hit the hardest by measures to contain the pandemic, such as transportation, automotive, non-essential retail, hotels and restaurants.

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At a global level, Euler Hermes’ insolvency index is expected to surge to a record high of +35% cumulated over a two-year period (after +17% in 2020 and +16% in 2021) as the global economy faces a U-shaped recovery from the Covid-19 crisis. This would represent a +16% y/y CAGR of insolvencies over the two-year period, similar to the intensity level of the 2008 financial crisis.
 

Bulk of insolvencies to be recorded between H2 2020 and H1 2021

Unlike in 2007-09, all regions and countries are expected to post double-digit increases in insolvencies, with the biggest surges seen in North America (+56% by the end of 2021), followed by Central and Eastern Europe (+34%), Latin America (+33%) and Western Europe (+32%).

Maxime Lemerle, Head of Sector and Insolvency Research at Euler Hermes, says: “So far, government interventions to prevent a liquidity crunch for corporates, including tax deferrals, state loans and guarantees, wage subsidies and debt moratoriums, have helped limit the immediate translation of the Covid-19 shock into official insolvencies in many countries. But if this policy relief is withdrawn too fast, we expect the increase in insolvencies to be +5 to +10pp higher.

“At the same time, prolonging support for too long could prop up ‘zombie’ companies, increasing insolvency risk in the medium to long term.”
 

Asia Pacific expected to register +31% more insolvencies by 2021

The study identified two clusters of countries, those that will see a stronger rise in insolvencies in 2020, and those that will see a delayed surge in 2021.

Most Asia Pacific economies are in the first group (China, Japan, South Korea, Taiwan, Hong Kong and New Zealand, with India as key exception) mainly because they were the first to be impacted by the Covid-19 outbreak.

China tops the list with an expected +40% more insolvencies by the end of 2021, followed by Singapore (+39%), Hong Kong (+23%), Japan (+13%) and Australia (+11%).

Françoise Huang, Senior Economist for Asia Pacific at Euler Hermes, says: “In Asia Pacific, not only have we estimated insolvencies to increase by +31% by the end of 2021, we also marked down the region’s 2020 GDP contraction to -1.3% from our estimation of -0.6% made in April.

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“We consider transportation, automotive, retail and textile are the most vulnerable sectors under the latest lockdown measures and environments. On the positive side, economies such as Australia, New Zealand, South Korea and Taiwan are seen benefiting from the comparatively earlier recovery of the Chinese economy, as trade data shows that exports to China have outperformed those to the US and the Eurozone.”

Global insolvency forecasts

Source: Euler Hermes

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