Trade credit fallout from pandemic to worsen in 2021

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Despite positive news on vaccinations, the outlook for trade credit risk remains uncertain and insolvencies are predicted to rise significantly in 2021, according to Atradius.

The pandemic has weighed heavily on the world’s economy, with Atradius forecasting a 3.9% fall in global GDP in 2020 and a contraction in global trade growth of about 10%. However, as Covid -19 containment measures are lifted and vaccination starts, 2021 will likely bring global GDP growth of 5%, the insurer predicts.

“Economists have described 2020 as an ‘annus horribilis’ for the global economy. The Covid-19 pandemic swept around the world like a shockwave, while the ongoing US-China trade war continued to negatively impact international trade. And of course, in the UK and in Europe there was the added challenge of Brexit,” explained James Burgess, Atradius UK’s head of commercial business.

While vaccines bring the prospect of economic growth, the costs of last year’s recession will remain high in terms of unemployment and bankruptcies, explained Mr Burgess. “Extensions of government support measures continue to obscure forecasts, with the true impact of the pandemic yet to be fully evidenced in insolvency figures,” he told CRE.

The depth of economic contraction varies by country depending on various factors, said Mr Burgess. Contraction is forecast to be highest in countries with longer and more stringent lockdown measures. In addition, countries that are highly dependent on tourism and services activities are far more exposed, he said.

According to Atradius, eurozone GDP growth is only expected to rebound partially this year to 4.2%, after a deep recession with GDP down 7.1% in 2020. GDP in the UK is forecast to contract by 10.3% in 2020, with an economic rebound of plus 4.5% forecast this year. The election of Joe Biden as US President is expected to have a positive influence on its economy, which is forecast to expand by 4.2% in 2021 after a 3.5% fall in 2020.

In contrast, emerging Asian markets proved relatively resilient against the pandemic, while the Chinese economy is forecast to grow by 8.1% in 2021.

The prospects for 2021 are positive but the recovery will be gradual, according to Mr Burgess. A return to full capacity will take time because fear of infection and social distancing measures continue to act as a brake on consumer spending. Ongoing travel restrictions risk dampening tourism prospects, while goods exports will still feel the impact of weak demand, he said.

“It’s clear that the pandemic has affected businesses indiscriminately, but those that continue to struggle the most are those within the tourism, retail, leisure and hospitality sectors, as well as those that are reliant on global export demand,” Mr Burgess said.

The pandemic’s impact on trade credit risk is likely to linger for some time and worsen before improvements brought about by vaccines begin to filter through. “As far as the economic environment and insolvency landscape go, we expect things to get worse before they get better, with a sharp rise in insolvencies in 2021. It’s clear that the full impact of Covid in terms of bankruptcies is yet to be fully determined and will likely take years to recover from,” said Mr Burgess.

The risk outlook for the year ahead is uncertain, he continued. “The good news is that while infection rates are still at critical levels, the vaccination rollout is underway, already improving business sentiment. Should the vaccine be both swiftly administered and effective, it should enable industry and normal behaviours to resume, which will have a positive boost to GDP. However, after many months of disruption, this may come too late for some businesses,” he said.

The pandemic has already had an inevitable effect on company insolvencies. “The Covid-19 pandemic triggered an economic crisis of global magnitude, with a bigger economic downturn than that of the 2008/2009 recession. As a consequence, an increase in business insolvencies is, regrettably, inescapable,” said Mr Burgess.

According to Atradius, global insolvencies are forecast to have increased by 26% in 2020. However, insolvency figures decreased in the first half of the year, driven by a combination of insolvency regime changes and fiscal measures introduced by governments and central banks around the world to support businesses. “As a result, the surge in insolvencies was not experienced until the second half of 2020 and we anticipate an increase into 2021. Unfortunately, for some, the supportive measures will simply serve to delay the inevitable,” said Mr Burgess.

The risk of non-payment has increased during the pandemic, according to Atradius. The insurer’s Payment Practices Barometer reports that nearly half the value of B2B invoices is being paid late and for every £100 of products or services sold, £8 is being written off as uncollectable. The toll on businesses is also demonstrated by the rise in late payments. Without exception, every European country polled in the Payment Practices Barometer reported an increase in late payments that corresponds to an average two-thirds rise on pre-pandemic figures.

A pandemic-driven increase in insolvencies is not good news for trade credit insurers, although government reinsurance schemes set up during the first lockdowns in 2020 have helped soften the blow. According to Mr Burgess, the level of losses anticipated as the pandemic took hold did not initially materialise to the extent expected, but the insurer is now seeing significant increases in trade credit insurance losses.

“The number of government support schemes in place for businesses have helped, although, for some companies, this may be suppressing deterioration to a certain extent. Atradius is forecasting an increase in insolvencies during 2021 and it’s likely the impact will continue to be felt over the long term,” he said.

Trade credit schemes exist in many European countries, including Germany, France, the UK, the Netherlands, Spain and Italy.

The question going forward is: what will happen when government support is withdrawn? According to Mr Burgess, the six-month extension of the UK scheme until 30 June 2021 is a realistic time period to allow for further breathing space and the continuity of trade.

“As to the future, the environment is fast changing and impossible to predict. Possibly, by the summer, normal market forces will be strong enough to manage the future position, but we continue to monitor the situation closely and our dialogue with government representatives will continue,” he said.

Given the economic uncertainty during the pandemic, demand for trade credit insurance is high from both new and existing customers looking to expand protection, explained Mr Burgess. “The impact of the pandemic only serves to demonstrate the crucial support trade credit insurance provides,” he said.