Despite sparking a slump in global GDP and trade in 2020, the COVID-19 shock did not translate into a wave of insolvencies. In fact, our Global Insolvency Index not only ended 2020 with a -12% year-on-year (y/y) drop, but the decline remained steady and broad-based all along the year. Thirty-five of the 44 countries in our sample (80%) recorded a decline for the full year.
The exceptions were mainly the emerging economies of Central and Eastern Europe (+4% in Bulgaria, +13% in Turkey and +32% in Poland), Latin America (+2% in Colombia and +11% in Chile) and China (+1%), where insolvencies quickly returned to pre-COVID levels in H2 2020 after a noticeable but temporary surge in Q2 (+21% y/y). The largest declines were seen in India (-62%, notably due to the specific duration of the suspension of courts) and in Western Europe overall (-18% for the regional index to the lowest level since 2007, with an above -30% drop seen in Austria, France, Italy and Belgium).
The overall picture for Asia-Pacific is hiding some diverging trends across economies which are due to uneven exits from the pandemic and uneven magnitude of support measures to companies. China, Japan and South Korea will remain stand out with fewer insolvencies in 2021 than 2020. Meanwhile, Hong Kong and Singapore are to register a higher increase as soon as 2021, despite absolute number of cases being low. With respect to this, we expect all major economies in Asia-Pacific to post a higher number of insolvencies in 2022.
Exhibit 1: Global (left) and regional (right) insolvency index – quarterly changes, y/y in %
What explains the prolonged low level of insolvencies?
First, the rapid implementation of multiple support measures for companies. Emergency packages helped companies cope with the unprecedented impact of lockdowns by preventing a liquidity crisis, notably among the sectors most severely affected by restrictions. De facto, the IMF estimates that the first packages of public support provided for 60% of firms’ increased liquidity needs and mitigated the increase in illiquid firms – with better results for advanced economies compared to emerging Europe.
Second, the renewal of support measures towards the end of 2020 and then the first half of 2021, albeit to a lesser extent, has also been crucial to avoid the cliff-edge effect and keep insolvencies under control.
Third, the strong catch-up of the global economy mechanically gave substantial support to firms, especially in a context of generally accommodative monetary policy, which helped mitigate the risk of insolvencies induced by a swift bouncing-back of activity.
No sign of a trend reversal in 2021
Our global index reached a new low in the first half of 2021 after two additional quarters on the downside (-19% y/y in Q1 and -3% y/y in Q2, respectively, that is -12% y/y for the first half of the year). Yet this outcome results from two opposing regional trends: on the one hand, North America and Asia both registering lower insolvencies and on the other hand, regions showing a pick-up in Q2 in annual comparison that is partly the materialisation of the basis effect created by the impact of lockdown measures on business courts in the same period of 2020.
The first figures available for July and August indicate that the trend of low levels of insolvencies persists. This has kept the year-to-date number of insolvencies below 2020 figures in most countries in all regions, with the exception of Africa, where both Morocco and South Africa are already facing a significant rebound in insolvencies, as well as Hong Kong and India in Asia, Poland and Romania in Eastern Europe and Colombia in Latin America. The Western Europe picture is also mixed, with three clusters as of September 2021:
(i) A majority of countries with still lower insolvencies than in 2020 and in 2019, including the UK, despite the start of a noticeable trend reversal.
(ii) Two countries already facing more insolvencies than in 2020, namely Italy (+50% y/y as of end August) and to a lesser extent Switzerland (+1%).
(iii) The remaining two other countries already back above the 2019 level of insolvencies: Luxembourg (by +5% as of August) and more significantly Spain (by +34%). Note that Spain is one of the three European countries that recorded the largest declines in insolvencies prior to the pandemic.
Exhibit 2: Business insolvencies – figures available for 2021 (selected countries)
Where are the hotspots?
Emerging markets are already seeing a normalisation of business insolvencies amid renewed restrictions in response to new waves of infections and less generous policy support. We expect those in Africa to largely exceed pre-COVID levels as soon as 2021, and those in Central/Eastern Europe and Latin America to do so in 2022.
After a noticeable decline in 2020-2021 due to the faster exit from the pandemic and the corresponding economic recovery, most Asian countries will post higher insolvencies in 2022 (+18% y/y for the region). India in particular will see a strong surge (+69% y/y) due to the specific duration of the suspension of courts over 2020-2021. However, while most countries will return to the ‘natural’ number and trend in insolvencies related to their business demographic and economic outlook, the region overall will still record less insolvencies in 2021 than in 2019, unless a prolonged resurgence of the virus continues to disrupt ports, plants and supply chains.
Europe, excluding Germany and France, will see the bulk of insolvencies materialising in 2022. The region is set to post mixed trends, with three main clusters of countries:
(i) Those that will see a large recovery of insolvencies by 2022, notably in the south due to a higher share of sectors sensitive to COVID restrictions include Spain and Italy.
(ii) Those that will see a noticeable rebound in insolvencies in 2022, but not yet return to pre-COVID levels include Switzerland, Sweden, Portugal, Luxembourg, and to a lesser extent Denmark and the UK.
(iii) Those with a delayed return to pre-crisis levels, due most often to large packages of support and/or the extension of their support measures include France, Germany, Belgium and the Netherlands.
In this context, the key exception would be the US, with a prolonged low number of insolvencies likely both in 2021 and 2022. This is the result of the massive support and the strong economic rebound. US companies should still benefit from a strong economy via the support from consumer spending (and the $2.4 trillion in excess savings left over) after the strongest recovery over three decades likely in 2021.
What lies ahead?
We expect the withdrawal of pandemic-related support measures to kick start a return to the normal level of insolvencies. But the trajectory will be both asymmetric due to the multi-speed economic recovery—and gradual—due to the delicate but pragmatic phasing-out process.
In practice, the phasing-out process has already begun, especially in countries where an improving sanitary situation has allowed for a faster recovery (for instance in Asia and North America). It is also visible in countries where authorities have decided not to further extend some measures (such as the insolvency moratorium in France) or to switch to more targeted measures, for instance by excluding sectors not sensitive to COVID-19 restrictions or specific companies, the non-viable ones, for some (or all) of the renewed support measures.
Maxime Lemerle
Maxime joined Euler Hermes in 1993. He now leads cross-cutting sector and insolvency research and is in charge of sector risk ratings. He also covers the automotive sector. He joined the Research team in 1999, first working on sectors, then on macroeconomic analyses, before becoming the team leader for global forecasts. Prior to that, he worked as a credit analyst for Euler Hermes France, specialising on the food and retail sectors.
