Credit insurance company Euler Hermes expects business insolvencies in South Africa to increase by about 2% this year, following a 3% increase in 2018.

The company stated on Tuesday that this was the first outright deterioration since 2009 and the global financial crisis.

The forecast is premised on the level of gross domestic product (GDP) growth, which is expected to stay low at 1%, following 0.7% growth in 2018; and the business environment, which remains clouded by ongoing structural rigidities.

Euler said external debt was increasing and, despite the accumulation of foreign exchange (FX) reserves, some external liquidity indicators remain weak.

The debt due ascended to 87% of FX reserves, as corporates, particularly State-owned ones, accumulated more dollar debt as a consequence of high debt costs in rand terms.

“The South African business environment is clouded by ongoing structural rigidities, including uneasy labour relations and periodic disruptions to power supplies, and is compounded by at least four other factors.

“These factors include weak international commodity prices; a slowdown in China, the country’s largest trading partner; drought conditions, with weakened agricultural output and a need to import maize and other foodstuffs; and uncertainties relating to US monetary policy tightening,” explained Euler sector and insolvency research head Maxime Lemerle.

The ongoing deterioration of the business climate is also witnessed by the World Bank Doing Business 2019 survey, which ranked South Africa 82 out of 190 economies (compared with seventy-fourth three years ago), just below Panama, Tunisia and Bhutan.

South Africa strongly retains aspects of an Advanced Economy, particularly on protection of minority investors (twenty-third) and paying taxes (forty-sixth).

However, recurrent power blackouts, difficulties to start a business (134th) and strong barriers to trade (143rd) are key bottlenecks. Barriers to domestic transactions and to register a property (106th) are among other key weaknesses, added Lemerle.  

“South Africa’s increase is in line with global insolvencies, which confirmed their upward trend from 2017 after seven consecutive years of sizable declines. Indeed, Euler Herme’s Global Insolvency Index, which covers 43 countries totaling 83% of global GDP, is to post a 10% year-on-year increase for 2018. Overall, we expect 20 countries of our sample to see more insolvencies in 2018 than in 2017.”

Euler states that the upside trend in insolvencies will continue in 2019 (at a 6% year-on-year rate). However, this outlook will reflect a universal reason – the soft landing of the global economy to a slower pace of growth at 3% in 2019 from 3.1% in 2018 and 3.2% in 2017.

The firm expects real GDP growth to soften in the US (from 2.9% in 2018 to 2.5% in 2019), the Eurozone (from 1.9% to 1.6%) and Asia (from 5.1% to 4.8%).

This lowering demand is increasing the vulnerability of companies with high-fixed costs and firms with larger inventories or issues in their working capital requirements.

At the same time, the end of easy financing is increasing the vulnerability of debt intensive sectors and more globally, the vulnerability of the most indebted companies.

“In fact, most economies, notably the developed ones, are expected to revert to and even cross their respective tempo of GDP growth, which has historically proved to be necessary to stabilise the level of insolvencies,” noted Lemerle.

Euler expects economic growth to become gradually insufficient for a higher number of companies in a higher number of countries with regard to their production costs, refinancing costs and structural challenges.

In this context, the firm foresees two out of three countries posting an increase in business insolvencies in 2019, compared with three out of five in 2018, and one out of two countries registering more insolvencies in 2019 than observed in average between 2003 to 2007, before the financial crisis of 2008.

“All in all, this insolvency outlook calls for more selectivity and preventive actions such as stellar credit management practices by risk managers and business leaders worldwide.

“It also calls for a close monitoring of the political and policy-related risks, which will nurture volatility all along 2019 even if we expect positive outcomes for most of them in our base line scenario,” said Euler Hermes chief economist Ludovic Subran.