Since 2020, state support measures have helped most economies avoid a large wave of business insolvencies despite the historic economic shock caused by the Covid-19 crisis. But will their gradual withdrawal spark a resurgence in the coming months? Euler Hermes’ [1] economists investigate in their latest report.

Global insolvencies are on the rise, but still at a lower level than in 2019

Global insolvencies decreased in 2020 (-12%) and will continue to do so in 2021 (-6%) as the extension of many state support measures in a context of generally accommodative monetary policy is helping to manage the pressure on companies’ liquidity and solvability.

_“Looking at insolvency levels, governments succeeded in helping companies face the crisis: massive state intervention prevented one out of two insolvencies in Western Europe and one out of three in the US in 2020. Their extension will keep insolvencies at a low level in 2021, but what happens next depends on how governments act in the coming months,” said Maxime Lemerle, Head of Sector and Insolvency Research
at Euler Hermes.

According to Euler Hermes, the withdrawal of support measures for companies sets the stage for a gradual normalization of business insolvencies. The world’s leading trade credit insurer expects global insolvencies to post a +15% y/y rebound in 2022, after two consecutive years of decline. But with a fine-tuned and step-by-step removal, the return to pre-crisis insolvency levels will take longer: global insolvencies will remain -4% below 2019 levels in 2022.

The US and Asia could take longer to see a resurgence compared to parts of Europe and several Emerging Markets

Emerging Markets are already seeing a normalization of business insolvencies amid renewed restrictions in response to new waves of infections and less generous policy support. We expect those in Africa to largely exceed pre-Covid-19 levels as soon as 2021, and those in Central/Eastern Europe and Latin America to do so in 2022.

Business insolvencies in South Africa rise by 21.5%

South Africa is one of the few countries posting, for the first months of 2021, more business insolvencies compared to 2020 - with notably Italy and Spain and Morocco. Business insolvencies increased by +21.5% y/y over the first seven months of the year, with 1,162 cases compared to 956 in 2020. This shows that South Africa has already recovered to its pre-crisis level since business insolvencies were reaching 1,140 cases on average since 2014 for the same period (January to July).

“Q3 liquidations for trade, food and accommodation have been impacted the most as a result of lockdown restrictions and lack of substantial state support. They were at 286 between January to August 2021 versus 229 for the same period last year. The majority of the other sectors showed marginal declines or improvements from last year,” says Luke Morawitz Head of Credit Intelligence at Euler Hermes South Africa, which operates through the Allianz Global Corporate & Specialty (AGCS) license in South Africa.

“Euler Hermes expects business insolvencies in South Africa to reach 2,200 cases for the full year, which would represent more than pre-crisis levels since insolvencies were averaging 1,900 cases over the 2014-2019 period), but much less than the record reached in 2009 and 2001 when business insolvencies exceeded 4,100 at the full year,” adds Morawitz.

After a noticeable decline in 2020-2021 due to the faster exit from the pandemic and the corresponding economic recovery, most Asian countries will post higher insolvencies in 2022 (+18% y/y for the region). India in particular will see a strong surge (+69% y/y) due to the specific duration of the suspension of courts over 2020-2021. However, while most countries will return to the ‘natural’ number and trend in insolvencies related to their business demographics and economic outlooks, the region overall will still record less insolvencies in 2021 than in 2019, unless a prolonged resurgence of the virus continues to
disrupt ports, plants and supply chains.

Western Europe will post mixed trends: Spain and Italy are likely to see a large recovery of insolvencies by 2022 (5,110 and 10,500 insolvencies, respectively) due to their higher shares of sectors sensitive to Covid-19 restrictions. In contrast, Germany (16,300), France (37,000), Belgium (8,150) and the Netherlands (2,400) will take longer to return to pre-crisis levels because of large support packages and/or the extension of support measures.

The US is the main outlier, with a low number of insolvencies likely both in 2021 and 2022 due mainly to the combination of massive support (notably the PPP virus loan program in 2020 and the recovery plan in 2021-22) and the fastest economic rebound in over three decades.

5 indicators will shape how insolvencies evolve in the coming months
Euler Hermes has identified five factors that will set the tone of the path ahead for global insolvencies:

* The global momentum of the economic rebound, which will be decisive for the pace of removal of state support measures, and in turn impact the pace of business insolvency normalization. Most advanced economies should see GDP growth above the +1.7% required to stabilize insolvencies in 2021-2022. As a reminder, Euler Hermes estimates that global GDP will grow by +5.5% in 2021 and +4.2% in 2022;
* The pace of withdrawal of state support, since it will also influence the cash burning dynamic of companies;
* This point is even more important as many fragile companies will still be at high risk of default, notably the pre-Covid-19 ‘zombies’ kept afloat by emergency measures and the companies weakened by extra indebtedness from the crisis;
* The deterioration of companies’ financials, which is adding to debt sustainability issues;
* The quick recovery of business creation, since the increase in the number of businesses will mechanically increase the base for potential
insolvencies, particularly in sectors where creation is highly related to meeting new needs arising from the pandemic (i.e. home delivery) but with uncertain viability.