Insolvencies increase as government support ends

RISK Identifying

Insolvencies increase as government support ends

Mark Hoppe Managing Director Oceania Atradius

During the Covid-19 pandemic, global insolvencies fell by a cumulative 32% in 2020 – 2021. We believe generous government support measures saved not only viable companies but also created zombie companies i.e. the ones that would have defaulted even in normal times. The highest insolvency contractions in 2020 were in Australia, Singapore, France, Austria, Belgium and Italy as insolvency legislation was temporarily relaxed to protect companies from bankruptcy. There has been speculation about insolvencies rising over the last couple of years but there was a question mark on when. Now that government support is being withdrawn for businesses across most markets, the tide is beginning to turn and we expect a rise in insolvencies to occur in 2022 and 2023 for the majority of markets globally.

Countries with the highest insolvency forecasts

The highest insolvency rates for 2022 are expected in Portugal (124% yoy growth), Netherlands (101%), Singapore (88%), Belgium (83%) and the United States (70%). This is due to these countries experiencing low insolvency levels in 2021 and the withdrawal of fiscal support in late 2021 or early 2022.

Countries with the lowest insolvency forecasts

Turkey and Brazil are forecast to experience some of the lowest increases in 2022, at 9% and 6% respectively but not because of the pandemic related adjustment, as fiscal support was already phased out in 2020. Instead, our forecast for these countries reflects a deterioration of GDP growth relative to its long-term trend. The Czech Republic (5%), Romania (16%), Finland (24%) and Switzerland (35%) are forecast to see insolvencies grow by a relatively small percentage because in their case most or all of the adjustment to normal took place in 2021.

Countries with a decrease in insolvencies

Two striking outliers are New Zealand and Hong Kong, both are forecast to see a decrease in insolvencies for 2022. This is because in their case

“During the Covid-19 pandemic, global insolvencies fell by a cumulative 32% in 2020 – 2021.”

the fiscal support is estimated to extend until the end of 2022. This effectively concentrates all the adjustment in 2023, therefore inflating the insolvency growth rate to the highest across all markets, with NZ forecast to increase 188%, and Hong Kong 63%.

So how does Australia compare?

At this stage, the number of insolvencies in Australia are well below pre-pandemic numbers but we do expect insolvencies to rise in the back half of 2022 which is when we’d expect to see the numbers reflect pre-pandemic levels. We’re forecasting Australian insolvencies to grow by 64% in 2022. We’ve already seen some high profile insolvencies in Q1 2022 with Probuild and Condev construction companies collapsing, with flow on effects expected so the tides appear to turning in our region.

You’ll also see on Chart 1 that 2023 growth rates of insolvencies are on the high side for Australia (31%), South Korea (61%), France (40%), Poland (40%) and Norway (32%), this is still due to low insolvency levels in 2021 and a later withdrawal of fiscal support in mid 2022. As a result the insolvency levels will still be high at the start of 2023 and will progressively normalise through the year.

Beyond 2023, we expect that insolvencies globally will again start to decline or remain constant.

This is because insolvency levels will have largely returned to normal and zombie firms that are not able to survive without support, have gone bankrupt already. In the coming years, firms will have to adjust to an environment without significant government support. For firms that have taken up a lot of debt during the pandemic, this could be a challenge.

Read the full Atradius Economic Insolvency Forecast

Mark Hoppe

Managing Director Oceania Atradius T: +61 2 9201 5222 atradius.com.au

Chart 1: Insolvency growth, year-on-year % change

Spain Turkey Czech Republic

South Africa Finland Romania

Switzerland

Hong Kong Sweden Russia Denmark United Kingdom Italy Germany Japan Canada Ireland Poland Brazil Norway

United States Belgium Singapore Austria Australia France

New Zealand

Netherlands

South Korea Portugal -50 0 50 100 150 200 2022 2023

Source: Atradius