South Africa is one of the few countries globally, reporting more business insolvencies in the first months of 2021 compared to 2020, data from insurance companies Allianz and Euler Hermes shows.
The country’s courts impose insolvency on those businesses unable to pay their debts or whose liabilities exceed their assets.
Business insolvencies in the country increased by +21.5% y/y over the first seven months of the year, with 1,162 cases compared to 956 in 2020.
This shows that South Africa has already returned to its pre-crisis level since business insolvencies reached 1,140 cases on average since 2014 for the same period, Euler Hermes said.
“Q3 liquidations for trade, food and accommodation have been impacted the most as a result of lockdown restrictions and lack of substantial state support,” said Luke Morawitz, head of credit intelligence at Euler Hermes South Africa.
“They were at 286 between January to August 2021 versus 229 for the same period last year. The majority of the other sectors showed marginal declines or improvements from last year.
Euler Hermes now expects business insolvencies to reach 2,200 cases for the full year, representing higher than pre-crisis levels since insolvencies were averaging 1,900 cases over the 2014-2019 period.
However, this is much less than the record reached in 2009 and 2001 when business insolvencies exceeded 4,100 for the year, said Morawitz.
Data from Statistics South Africa in July, showed that close to 1,000 businesses had been liquidated in the first half of 2021.
The group recorded 997 liquidations of companies and close corporations between January and June 2021, up from 763 businesses over the same period last year.
Over 2,000 liquidations were recorded by the end of 2020, the stats group said.
Across industries, the finance, insurance, real estate and business services sector was the hardest hit, accounting for 32% of all liquidations. The trade, catering and accommodation sector was also hard hit over the first half.
Other governments helping businesses weather the crisis
The data shows that global insolvencies decreased in 2020 (-12%) and will continue to do so in 2021 (-6%). The extension of many state support measures in a context of generally accommodative monetary policy is helping to manage the pressure on companies’ liquidity and solvability, Euler Hermes said.
“Looking at insolvency levels, governments succeeded in helping companies face the crisis: massive state intervention prevented one out of two insolvencies in Western Europe and one out of three in the US in 2020.
“Their extension will keep insolvencies at a low level in 2021, but what happens next depends on how governments act in the coming months,” said Maxime Lemerle, head of Sector and Insolvency Research at Euler Hermes.
According to the credit insurance company, the withdrawal of support measures for companies sets the stage for a gradual normalization of business insolvencies. The group expects global insolvencies to post a +15% y/y rebound in 2022, after two consecutive years of decline.
But with a fine-tuned and step-by-step removal, the return to pre-crisis insolvency levels will take longer: global insolvencies will remain -4% below 2019 levels in 2022.
Euler Hermes has identified five factors that will set the tone of the path ahead for global insolvencies:
- The global momentum of the economic rebound will be decisive for the pace of removal of state support measures and, in turn, impact the speed of business insolvency normalization. Most advanced economies should see GDP growth above the +1.7% required to stabilize insolvencies in 2021-2022. As a reminder, Euler Hermes estimates that global GDP will grow by +5.5% in 2021 and +4.2% in 2022;
- The pace of withdrawal of state support, since it will also influence the cash-burning dynamic of companies;
- This point is even more critical as many fragile companies will still be at high risk of default, notably the pre-Covid-19′ zombies’ kept afloat by emergency measures and the companies weakened by extra indebtedness from the crisis;
- The deterioration of companies’ financials, which is adding to debt sustainability issues;
- The quick recovery of business creation, since the increase in the number of businesses, will mechanically increase the base for potential insolvencies, particularly in sectors where creation is highly related to meeting new needs arising from the pandemic (i.e. home delivery) but with uncertain viability.