Allianz Trade, operating in South Africa through the Allianz Commercial license, is pleased to announce the release of its latest Global Insolvency Report and unveils updated forecasts for 2023 and 2024. According to the world’s leading trade credit insurer, after a small rebound in 2022 (+1%), global insolvencies are set to jump by +6% in 2023 and +10% in 2024.

Waning cash buffers and worsening profitability are putting many sectors at risk

What’s behind this acceleration? The recession in corporate revenues is gaining traction amid lower pricing power and weaker global demand: As of Q2 2023, the revenue recession has been broad-based across all regions for the first time since mid-2020 (-1.9% y/y). This combined with continued high costs is squeezing profitability. As a result, liquidity positions are worsening fast and are not likely to improve before 2025.

“Companies still have a sizable amount of excess cash, EUR3.4bn in the Eurozone and USD2.5bn in the U.S. But these cash buffers remain highly concentrated in the hands of large firms and in specific sectors such as tech and consumer discretionary. And in general, most companies are unable to increase their cash positions through operations in the context of lower-for-longer economic growth. All in all, we expect two accelerations in global business insolvencies, with +6% in 2023 and +10% in 2024, after +1% in 2022,” states Aylin Somersan Coqui, CEO of Allianz Trade.

The most vulnerable corporates and sectors are caught between a rock and a hard place in 2023, with hospitality, transportation and wholesale/retail on the front line. Other sectors are catching up fast, in particular construction, where backlogs of work have been almost completed – especially in the residential segment. 

At the same time, higher-for-longer interest rates are reducing demand in sectors such as real estate and durable goods and will start pressuring solvency in highly indebted sectors, such as utilities and telecom, in addition to real estate, on both sides of the Atlantic. Moreover, global WCR currently stands at a record high of 86 days, more than +2 days above pre-pandemic levels. Higher interest rates also make it even more expensive for companies to finance structurally higher working capital requirements (WCR), which poses risks for sectors such as construction and machinery and transport equipment,” explains Maxime Lemerle, Lead Analyst for Insolvency Research.

3 out of 5 countries will reach pre-pandemic business insolvency levels by the end of 2024

At the end of 2023, the normalization of business insolvencies will be complete in most advanced economies, and 55% of countries are likely to see large double-digit increases. This includes the U.S. (+47%), France (+36%), the Netherlands (+59%), Japan (+35%) and South Korea (+41%). Globally, three out of five countries will reach pre-pandemic business insolvency levels by the end of 2024, including large markets such as the US and Germany. On both sides of the Atlantic, GDP growth would need to double to stabilize insolvency figures, which will not occur before 2025.

“Moreover, in a context of slowing global economic growth, payment terms are likely to lengthen, adding to the rise in insolvencies in the coming quarters: Global Days Sales Outstanding already stand above 60 days for 47% of firms. One additional day of payment delay is equivalent to a financing gap of USD100bn in the U.S., USD90bn in the EU and USD140bn in China. With bank loans already drying up for SMEs, closing this financing gap could be a significant challenge,” explains Aylin Somersan Coqui, CEO of Allianz Trade.

South Africa’s economic resilience: insolvencies show promising decline

Economic resilience has been tested and remains a feature of South Africa, which is evidenced by a declining trend in insolvencies from a historical perspective, even though the latest results signal a moderate resurgence. Despite an increase in the last quarter compared to Q2 2023, the number of insolvencies remains quite low compared to the average of recent years and may also be connoted with a slight pickup in economic activity after the months when load shedding was most intense. The level for the first 9 months of 2023 is 13 percent lower than the same period in 2022, with the year possibly ending below the 1,900-case threshold – on 2017-2018 levels. The severity of individual insolvencies and the possibility that industries serving public entities may suffer more difficult financing conditions, however, require attention.

Moderate economic growth remains on the horizon for South Africa this year

Allianz Trade maintains a forecast of GDP growth at +0.7% in 2023 for South Africa, although output in the energy-intensive mining sector and manufacturing is still below pre-pandemic levels due to business interruptions, and fiscal consolidation efforts. Inflation is again slightly on the way up at 5.4% in September, after falling consistently since the peak of 8% a year ago. Our forecast on GDP growth is unchanged for 2024 at +1.4%, thanks to mining output, resilient private consumption and lower external vulnerabilities, with foreign debt to GDP now at less than 40%, down from 53% in 2019 and 56% in 2020, and financing conditions in line with those of Colombia and Brazil. Foreign direct investment is also moderately on the rise.

In the next 12 months, social unrest and violence are likely to intensify, while the need to increase social spending before the 2024 election and idiosyncrasies among public entities and institutions pose risks to the outlook. The next 12 months will tell if election-related expenditure by the government, enhanced electricity supply and the potential improvement of the employment rate, which remains slightly above 40% despite growing for 7 consecutive months, may help unleash additional growth.

By Admin