When we welcomed 2020 with hopes and aspirations, the world was struggling at many fronts – progressing economic slump, rising global trade disputes, political uncertainties, social turmoil and an advancing struggle to establish geopolitical supremacy. Business insolvencies were rising globally for last three years and 2020 was expected to witness a further spike in the numbers.
At this precise moment of intensifying hardships, Covid-19 struck the world and froze all economic activities while claiming innumerable lives and livelihoods. Worldwide nations saw GDP drops and business closures. However, as per a recent report published by insurer Euler Hermes, darker days are yet to come with global business insolvency estimated to rise by 35% in 2021.
The report states that the aftereffect of Covid-19 impact will emerge gradually by the end of this year and be more pronounced in the first half of 2021, in terms of business insolvencies. USA is expected to pay the highest price with a surge of 57% in business insolvencies, compared to 2019. Brazil, UK and China are also likely to be hit hard with over 40% insolvencies. South Korea, India and Germany appear to be in a better position with estimated insolvency rise by 6%, 9% and 12% respectively.
Image source: Statista
Globally certain business sectors including travel, automotive, hotels and restaurants, non-essential retail and on ground entertainment have been hardest hit by the pandemic. The suddenness of the shock, mammoth scale and prolonged impact have weakened most business enterprises with the exception of a few companies from the IT services and pharmaceutical sectors.
Factors delaying insolvencies
The Euler Hermes report identifies three factors that is delaying the transmission of the pandemic shocks into insolvencies.
- Due to the lockdown business courts in many countries were non-functional for a considerable period. Countries that have a digital lag will be more affected and take longer to register the business insolvencies and consequently it will take longer to reflect statistically.
- Interventions and mitigation policies brought by national governments in most countries to help the corporates stay afloat and avoid liquidity crisis: debt moratoriums, state loans, tax deferrals, etc.
- Temporary changes brought in insolvency regimes in order to allow companies more time and flexibility before they choose to go bankrupt.
Specifically, in European countries relief measures for enterprises have kept them away from declaring insolvency till now. But as and when, these measures are withdrawn or tightened, a surge in insolvency declarations is expected. Premature withdrawal of supportive measures can increase the insolvencies by 5-10 points.
Moreover, recovery of the global economy would also have an effect on the global insolvency index. If the recovery period is prolonged than the current expectation, insolvencies could rise further by 50-60 points. However, extending support policies much longer can intensify the problem further.
The report offers an interesting perspective whereby the countries with longer lockdowns and better supportive policies would experience more business insolvencies. East Asian economies like Japan and South Korea where businesses were less affected would witness much lower loss. Interestingly, India – the second worst hit by the pandemic is also expected to get off rather lightly.