- Global insolvencies are set to rise +10% next year after a +6% jump in 2023 and a +1% rise in 2022
- 3 out of 5 countries will reach pre-pandemic insolvency levels by the end of 2024
- Belgium will fare better than the rest of the Eurozone in the coming years and will also see insolvency rates lower than pre-covid-19 levels
- This is the outcome from the Global Insolvency Report we published recently. The report provides updated insolvency figures for 44 countries for 2023 and 2024. It also includes a look ahead to 2025.
Decline of cash buffers and decrease of profitability are putting many sectors at risk
What's behind this global acceleration in insolvencies? 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 not likely to improve before 2025.
'Companies still have a sizeable amount of excess cash: EUR3.4bn in the Eurozone and USD2.5bn in the US. 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 the number of global business insolvencies, with +6% in 2023 and +10% in 2024, after +1% in 2022,' states Aylin Somersan Coqui, CEO of Allianz Trade.
The current situation is extremely difficult for certain sectors, such as hospitality, transportation, wholesale and retail. Other sectors, such as construction, are catching up fast. Many construction companies, partly due to the shortage of personnel, could not keep up with demand. These backlogs of work have almost been completed now. This is especially the case in the residential segment.
'Higher interest rates are reducing demand in sectors such as real estate and durable goods. Solvency is also coming under pressure in certain sectors. This is especially true for sectors with high debt burdens, such as energy companies and telecom, for example. We're also seeing an increased need for working capital. Global WCR (the time businesses have to bridge between expenses and revenues) 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). This poses risks for sectors such as construction, machinery and transportation, for example,' explains Maxime Lemerle, Chief Analyst of Insolvency Research.
3 out of 5 countries will reach pre-pandemic insolvency levels by the end of 2024
By the end of 2023, the normalisation in business insolvencies will be complete in most advanced economies. In 55% of countries, the increase will run into double digits this year. This includes the US (+47%), France (+36%), Japan (+35%) and South Korea (+41%). The Netherlands is at the absolute top with +59%. Next year, the level of insolvencies in 3 out of 5 countries will be back to pre-covid-19 levels. That includes key markets such as the US and Germany. On both sides of the Atlantic, GDP growth would have to double to stabilise insolvency rates, which will not happen 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 US, USD90bn in the EU and USD140bn in China. With bank loans drying up for SMEs, closing this financing gap could be a significant challenge,' explains Aylin Somersan Coqui, CEO of Allianz Trade.
'In the Benelux, the normalisation process started earlier in Belgium (+49% in 2022) than in the Netherlands (+18%),' explains Johan Geeroms, Director of Risk Underwriting Benelux at Allianz Trade. 'But both countries are on track for another jump in insolvencies in 2023 (+9% and +59%, respectively) and in 2024 (+4% and +28%, respectively). The Netherlands will witness a more substantial increase, given its higher exposure to the (international) economic cycle. The prolonged weaker economic and financing outlook foreseen for 2024 will materialise in additional insolvencies in most sectors, while accommodation/food activities and transport/storage already returned to pre-pandemic levels in H1 2023 in both countries. We do not expect Belgium to fully close the gap to 2019 levels - as that was the second highest number ever. With 10,500 cases in 2024 and 10,000 in 2025, Belgium will however reach the average of the period between 2010 and 2019. The resurgence in the number of business insolvencies (+1,250 cases in 2023 and +950 in 2024) will again push the Netherlands higher than in 2017 to 2019, but not as high as the wave we saw during the great financial crisis (an average of 7,900 cases per year from 2009 to 2014),' said Johan Geeroms.
The list of insolvency figures by country shows that Allianz Trade expects insolvencies in the Eurozone to show a marked decline (-7%) by 2025. We do not anticipate seeing this decline in the Netherlands (+2%) and some southern European economies, however.
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