We are all personally affected by the Covid-19 virus. But the measures being taken to slow the spread of the virus are having profound economic impacts as well.
One topic which has received surprisingly little attention from both governments and commentators is the impact of the crisis on the availability of trade credit: In an environment where many of your customers face potential ruin, it becomes almost impossible to distinguish those who you can still supply on credit terms from those who will be unable to pay you. And this is causing a crisis in what has traditionally been the largest single source of businesses finance. This article discusses the implications of the Covid-19 measures on insolvency rates and talks about the sectors which are particularly impacted and how we are helping our customers to navigate this challenging environment.
Since 2010, global GDP has progressed at a solid pace driven by emerging countries such as China and India. GDP growth was however, expected to slow down in 2020, with the IMF publishing in January 2020, a downward revision to global GDP growth of 0.1% for 2020 and 0.2% for 2021. While corporate insolvencies have been on a downward trend since world economies started recovering from the Global Financial Crisis, insolvencies had already started to rise again in 2019.
The spread of coronavirus has created new pressures on the economy and small businesses. Since the magnitude of its threat has been understood, important measures have been taken: cancelling all events, confining people, closing borders... As a result, global consumption is falling, tourism is at standstill, global supply chains are disrupted and ultimately global economies are slowing down. Economists are slashing their forecasts for growth: on March 19th, Fitch Ratings published a revised GDP growth for 2020 at 1.3% compared to 2.5% in December 2019.
In recognition of this risk, governments have announced a range of measures to help businesses, and in turn, support their economies. The support announced so far, including state guarantees on corporate bank loans, deferred payment of taxes, wage support and lower interest rates will help many businesses cope with a period of disruption lasting 2-3 months. Additionally, in France, the big 3 credit insurers have committed to the government to not make dramatic cuts to coverage in the short term, and to extend claims periods to reflect potential delays in invoice settlement.
However, if the shutdown extends much longer than 2-3 months, greater government support will likely be needed.
With the impact of coronavirus continuing to intensify, we view a number of business sectors as being particularly exposed:
The impact on services will be more nuanced. Some sectors, such as professional services, will be able to migrate to remote working with relatively little interruption. In others, one needs to look a level deeper. For example, in retail, there are winners (such as grocery retailers and other ‘essential goods’) but many more losers, with sectors as diverse as fashion and garden centres likely to have to write off huge volumes of unsold stock.
Overall, economists are predicting rises in insolvency between 10% and 30%. This is similar to the 2008-2009 Global Financial Crisis, which saw a 25% growth in insolvencies in parts of Western Europe. The GFC lasted more than a few months, but at this stage we are unsure how long Covid-19 and its impacts will last. The longer the confinement, the greater the impact on companies.
At Hokodo we are working with all our customers to help them get through the coming months. In some sectors, we are still able to offer the same levels of cover as before the crisis. Where this is possible, our customers are able to continue trading on the same terms as they have been previously. In other sectors, where risks have clearly increased, we are having to work much more closely with our customers to develop tailored approaches. For example, in the most exposed sectors, we are encouraging customers to offer their buyers shorter credit terms in order to manage overall exposures more carefully. In this way, despite the challenging environment, we’re able to help customers to keep trading through what is likely to be a very challenging few months.