Prepare for a record spike in global insolvencies, says Euler Hermes

Prepare for a record spike in global insolvencies, says Euler Hermes | Insurance Business Asia

Prepare for a record spike in global insolvencies, says Euler Hermes

The COVID-19 crisis will cause a rapid increase in business insolvencies due to both the suddenness and historic size of the economic shock and its lasting effects, according to a study by Euler Hermes.

According to the study, these lasting effects will hit companies that were already vulnerable before the crisis, such as those in the sectors of transportation, automotive, non-essential retail, hotels, and restaurants.

At a global level, Euler Hermes said that its insolvency index is expected to surge to a record high of +35% cumulated over a two-year period (after +17% in 2020 and +16% in 2021) as the global economy faces a U-shaped recovery from the COVID-19 crisis. This, it said, would represent a +16% year-on-year CAGR of insolvencies over the two-year period, which is similar to the intensity level of the 2008 financial crisis.

Furthermore, most of these insolvencies will be recorded during the second half of 2020 and the first half of 2021. All global regions and countries are expected to post double-digit increases in insolvencies, with the biggest surges seen in North America (+56% by end-2021), followed by Central and Eastern Europe (+34%), Latin America, (+33%) and Western Europe (+32%).

In Asia-Pacific, insolvencies are expected to increase by 31%. Euler Hermes identified two clusters of countries – those that will see a stronger rise in insolvencies in 2020, and those that will see a delayed surge in 2021. Due to being among the first to be impacted by COVID-19, most Asia-Pacific economies are in the first group, with India as the notable exception.

China leads the region with +40% more insolvencies by end-2021, followed by Singapore (+39%), Hong Kong (+23%), Japan (+13%), and Australia (+11%).

“In Asia-Pacific, not only have we estimated insolvencies to increase by +31% by the end of 2021, we also marked down the region’s 2020 GDP contraction to -1.3% from our estimation of -0.6% made in April,” said Françoise Huang, senior economist for Asia-Pacific at Euler Hermes

“We consider transportation, automotive, retail and textile are the most vulnerable sectors under the latest lockdown measures and environments. On the positive side, economies such as Australia, New Zealand, South Korea, and Taiwan are seen benefiting from the comparatively earlier recovery of the Chinese economy, as trade data shows that exports to China have outperformed those to the US and the Eurozone.”