Thus, Allianz Trade analysts expect the global insolvency index to increase from 8% to at least +10% in the third quarter of 2022, compared to the same period last year.
In Romania, the number of insolvencies increased by 10.7% for the first 9 months of 2022 compared to the same period last year, in line with global expectations for the current year. Although it is double-digit growth that comes amid worsening macroeconomic fundamentals hit by inflation and exacerbated by the impact of the war in Ukraine, an optimistic approach would signal a slight slowdown from the previous month when the advance for the first 8 months was 11.3%.
“If the experience of the last quarter of last year is relevant – when inflation had started to be felt in the economy – an acceleration of 1-2 percentage points would lead the rate of insolvencies to the area of +12-14% growth, which corresponds to a significant number over 6,000 insolvencies. The number is important as it would mark the return or exceeding of the 2019 level of 6,500 insolvencies, the pre-pandemic year that was not influenced by the state’s massive support measures in the economy,” stated Mihai Chipirliu, CFA Risk Director, Allianz Trade.
A main factor that kept the pressure on commodity prices high was also the spillover effect of the war in Ukraine, mainly through rising commodity prices and the various episodes of the Chinese blockade. At this stage, despite signs of normalization, most countries are still experiencing business insolvencies below pre-pandemic levels. Based on the latest YTD figures, one in four countries is already below or above the number of insolvencies recorded in the same period in 2019. Two of the markets are in Asia – Taiwan and Hong Kong – while four are in Western Europe – Spain, Great Britain, Switzerland and Denmark, with Finland very close to joining the list. In contrast, Central and Eastern Europe is the main contributor, with half of the countries in the region recording business insolvencies above 2019 levels (Turkey, Poland, the Czech Republic, Romania and Bulgaria), with the exception of Russia, Slovakia and the Baltic countries.
Rising insolvencies are already a reality for most countries, especially for major European markets such as the UK, France, Spain, the Netherlands, Belgium and Switzerland. However, the US, China, Germany, Italy and Brazil still have the lowest levels. Half of the countries surveyed by Allianz Trade analysts have already seen double-digit increases in business insolvencies for the first part of 2022. India saw +64% YTD growth in June, Singapore +42% in August, Australia +104 % in September and Taiwan +10% in August. In the Americas, the return reached +36% YTD since August in Canada. In Central and Eastern Europe, the upward trend is driven by the acceleration in Turkey (+69% in August), as well as in Bulgaria, Romania and the Baltic States. In Western Europe, the rebound is led by Austria (+92% YTD since September), the UK (+70% since September) and Belgium (+52% since August), but double-digit increases are also visible in countries such as Denmark, France, Ireland, Norway, Spain and Switzerland.
Europe has seen a return of insolvencies to pre-pandemic levels in almost 60% of industries, particularly tourism, manufacturing and B2C services. At the same time, the overall recovery is mainly due to the insolvencies of small companies and is confirmed by the moderate number of major insolvencies (58 cases in Q3 2022 and 182 in the first three quarters, compared to 187 and 332 for the same period in 2021 and 2020). Only a few countries saw a rebound in insolvencies broken down by sector: Belgium, France and the United Kingdom – all three of which were among the countries with the largest decline in insolvencies in 2020/2021.
If in recent months the advance of energy prices has negatively influenced the profits of many economic segments, the successive increases in interest rates – natural countermeasures to the inflationary situation – will be the tip of the spear influencing net profits and liquidity in the coming quarters. In this sense, abandoning the triumphalist discourse, accepting the current climate and financial discipline will have to be enhanced by an optimal relationship with creditors.
The shock of the interest rate increase is looming in the first half of 2023, along with the acceleration of wages. As expected, large corporate cash balances (still 43% above pre-Covid-19 levels in the US, +36% in the UK and +32% in the Eurozone) provided a significant buffer for monetary policy normalization in 2022. Analysts forecast that future key rate hikes in the US, UK and Eurozone should raise average corporate interest rates by another 200 basis points by mid-2023, which in turn will reduce margins by -1.5 pp in the US, -2.2 pp in the UK and more than -3pp in the Eurozone countries. Italy, Spain and France being the most at risk.
However, a strong short-term liquidity squeeze in Europe should be avoided as banks have stepped in to offset the bond market (+22% y/y in new loans YTD) and more than 50% of corporate loans have increased maturity to over five years, while only 20% increased by less than one year. For industrial sectors in Europe, the wage bill is higher compared to the US. Thus, growth of 4-5% in 2023 could remove on average between -0.5 pp and -1 pp from margins. In a context of low economic growth, rising wages and financing costs are most at risk in areas such as: construction, telecommunications, automotive, retail, home appliances, electronics.
To avoid the biggest annual growth since 2009, government support will increase in Europe if the recession doubles to -2.4% as a result of a stronger energy crisis. The current fiscal support, more targeted and focused on limiting the acceleration of the severity rates is expected to reduce this increase in insolvency by more than -10 percentage points compared to 2022 for the largest European economies: -12 percentage points in Germany (2,600 firms respectively), -13 pp in France and Italy (6,700 and 1,900 firms respectively), -15 pp in the United Kingdom (4,300) and -24 pp in Spain (2,100). However, if the energy crisis worsens, intensifying the coming recession, governments will increase the size of fiscal support measures, as business insolvency would increase by a further +8 percentage points to +25% in 2023 in the EU – the largest increase annually from 2009 until now. To fully absorb the additional shock, fiscal support measures would need to rise to 5% of GDP on average. However, these large fiscal jumps can be much more contained under tight monetary policies.
After two years of declines, analysts expect an overall acceleration in business insolvencies (+10% in 2022 and +19% in 2023 globally). In Western Europe, the Insolvency Regime Shift Model, which uses thousands of macro-financial data series using machine learning, indicates that insolvency is expected to increase by more than +10% for both France and the UK in 2022, while it could decrease by more than – 10% in Italy, without a major increase in Germany. Insolvencies are expected to exceed 53,000 cases in France in 2023 (+29% from +46% in 2022), 27,000 cases in the UK (+51% and +10% respectively), 17,000 cases in Germany (+5% and +17%) and 10,900 cases in Italy (-6% and +36%). The region should surpass pre-pandemic business insolvency levels in 2022 (+5%), despite mixed dynamics.
In Asia, China is expected to see 15% more insolvencies in 2023 amid low growth and the limited impact of monetary and fiscal easing. In the US, a +38% increase in business insolvencies is expected in 2023 as a result of tighter monetary and financial conditions, which will mean a return to over 20,000 insolvencies per year.