The global number of insolvencies may increase by 21% in 2023 and by 4% in 2024, after a slight rebound in 2022 (+2%), while insolvencies in Poland can be expected to increase by 18% in 2023. Most countries are likely to exceed pre-pandemic insolvency levels by the end of 2024, according to a report by Allianz Trade.
Allianz Trade’s Global Insolvency Index is expected to continue growing over the next few years, but this significant jump may not be enough for insolvencies to reach 2019 levels. According to Allianz Trade, global corporate insolvencies could remain -5% below pre-pandemic levels in 2023 and -1% in 2024. Allianz Trade forecasts that insolvencies will exceed pre-pandemic levels in half of the countries included in its panel in 2023, and in 3 out of 5 in 2024.
“In Europe, we expect insolvencies to reach 59,000 in France in 2023 (+41% y/y), 28,500 in the UK (+16%), 17,800 in Germany (+22%) and 8,900 in Italy (+ 24%). In the United States, we expect an increase of +49% in 2023 as a result of tighter credit conditions and an expected sharp economic slowdown, which would mean a return to more than 20,000 defaults per year. In Asia, China should see moderate growth (+4%) as the reopening has not eliminated all risks, especially in the real estate sector,” said Allianz Trade Chief Insolvency Research Analyst Maxime Lemerle.
“We calculate that the eurozone and the U.S. would need 1.3 percentage points and 1.5 percentage points of additional GDP growth between 2023 and 2024, respectively, for insolvency levels to stabilize. In addition, companies will have to watch out for contagion: the number of insolvencies of companies with revenues of more than €50 million is now slightly higher than before the pandemic. The most affected sectors are construction, trade and services,” He added.
In addition to lower growth, increasing pressure on profitability, weaker cash buffers and tighter financial conditions for longer are driving an increase in the number of insolvencies of fragile companies. This includes those with the least pricing power (e.g., specialized retail such as textiles, home appliances and some services, including restaurants); those most exposed to higher wage costs, such as retail, transportation and construction; and those most exposed to rising interest repayment costs (construction, durable goods), it stated.
Recent disruptions experienced by the banking sector in Europe and the United States are raising concerns about the impact of a possible credit crisis on corporate insolvency.
“According to our estimates, a financial crisis like the one in 2008 would mean 21,600 additional insolvencies in the United States in 2023 and 2024, and 99,900 in Western Europe. Even without a major financial crisis, a credit crunch on the scale seen in the early 2000s during the bursting of the tech bubble would lead to 12,900 and 95,300 additional insolvencies in 2023 and 2024, respectively. And in the event of a credit freeze that would halt new lending, the number of insolvencies would increase by an additional 10,700 cases in the US and 46,300 in Europe,” the analyst estimated.
Allianz Trade pointed out that insolvency has been on the rise in Poland for the past four years, and there is no end in sight to this trend, with the increase in financial costs for Polish companies reducing their profitability. In 2023, the number of insolvent companies in Poland may increase by 18%, influenced by:
– High loan servicing costs and problems in obtaining financing
– Unprecedented increases in labor costs, often above the rate of inflation
– Lack of new orders limits the ability to settle previous obligations
– Consumer austerity in the eurozone is being felt by Polish suppliers of consumer goods (furniture, electronics, etc.).
“There are many market causes, the cumulative effect of which is widespread financial problems for Polish companies. First and foremost, financial costs reported in companies’ reports have increased dramatically, eating up most of their margins,” Allianz Trade in Poland board member responsible for debt collection and risk assessment Slawomir Bak said.
“One can’t help but notice that many companies have maintained liquidity through new orders, financing previous costs and liabilities with advances for these new ones, which may not be feasible now with the decline and even stagnation (e.g., in some areas of the construction industry) in the dynamics of their inflows. Staying with orders – they are also a problem for exporters. Easy, unformalized exports within the EU allowed to win a large part of the eurozone market, but because of this, Polish exporters were often not motivated to further search for buyers and diversify their sales. That’s why this “easy” success now has unpleasant consequences – an overdependence on the market and the economic situation in Europe. When German consumers save, for example, this is very clearly felt by Polish suppliers,” he added.
Allianz Trade also pointed out that energy and component costs are not everything, and the effects of higher interest rates are also very significant.
First, those who took out loans at low interest rates and are now paying them back at much higher rates (and costs) are in trouble. After all, profitability has not increased, on the contrary, it has decreased. Even in industries that successfully pass on cost increases to the prices of their products, such as the food sector, this is offsetting, not overtaking, cost increases. (High) interest rates have a doubly negative effect, as they also affect the ability to renew financing – its real availability, not just the repayment of previous obligations..
An unprecedented problem for Polish entrepreneurs, so far unprecedented on such a scale, is also wage pressure – a huge problem in construction or transport, but not only, also in industry, among others. Such increases on wages in companies’ financial plans have not yet been seen – many industries have to offer higher rates not only in line with inflation, but even above it due to a real shortage of labor.
Source: Allianz Trade and ISBnews
