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The recent study “Top or flop? 2016” marks a trend reversal in global insolvencies. Given the latest developments as world trade weakens, Euler Hermes, the worldwide leader in trade credit insurance, expects global corporate bankruptcies to rise in 2016 for the first time in seven years (+2 percent). In Germany, the number of cases is expected to stagnate in 2016 for the first time after years of steady decline and even increase slightly in 2017 (+1 percent).
The positive news, however, is that although risks may be rising, so too are German exports. Over the coming years, exports are expected to grow by 104 billion dollars – despite global trade nominally growing by just 2.7 percent in 2016 and, in value terms, actually shrinking by a further two percent compared to last year.
Formula 1 of exports: high speeds, overtaking maneuvers, high risks and danger of “jostling”
“At the moment, German exports are a bit like the Formula 1 – high speeds and increasing risks, surprise overtaking maneuvers and the danger of unexpected “jostling” from the blind spot,” says Ron van het Hof, CEO of Euler Hermes Germany, Austria and Switzerland. “Exporters are pressing hard on the gas pedal. Over the next two years, they will even post stronger export growth than China (+96 billion dollars) and gain the pole position through this overtaking maneuver. At the same time, greater risks lie in wait for them on the track. They will only win by taking risks, but they also need to be well-protected, drive carefully and employ an effective pit-stop strategy with the right partners.”
FLOP: Risk increases – three of Germany’s five main trading partners are suffering more insolvencies
Course and weather conditions vary depending on the race circuit and the economic climate. “The export trade remains risky, but without risk, it won’t work,” explains Ludovic Subran, chief economist at Euler Hermes. “Three of Germany’s five main trading partners are seeing a rise in insolvencies in 2016, and therefore an increase in risks. We predict that the frontrunner, the United States, will experience a three percent rise in insolvencies, the United Kingdom a rise of 1 percent and China as much as 20 percent. In the Netherlands and France, Germany’s second-most important trading partners, bankruptcies are falling – although they are still close to record levels in France.”
The emerging markets, where German exporters also detect growth opportunities, are also seeing a significant increase in insolvencies. Brazil holds the negative record ahead of China (+20 percent), with bankruptcies up 22 percent. Asian supplier countries follow and are heavily dependent on China: Taiwan (+17 percent), and Hong Kong and Singapore (+15 percent each), as are the South American countries of Colombia (+13 percent) and Chile (+11 percent). Insolvencies are also on the rise in Australia (+12 percent), South Africa (+10 percent), Turkey (+8 percent), Russia (+7 percent), and Greece and Switzerland (+3 percent each).
Staying home is not an option: Other countries will start from the pole position
“Staying home is not an option because export companies would have to go to the end of the line if things kick off again in markets that are currently riskier,” says Subran. “Other countries with better stamina and steadier nerves will have gained the pole position long before and stayed there. The emerging markets are aptly named – they are aspiring markets with all the associated characteristics: non-linear, volatile development with highs and lows, and significant long-term growth opportunities.”
TOP: Overtaking maneuver in exports, but currency effect set to weaken in 2016
Germany will benefit from growth opportunities over the next two years, especially from strong import growth among their main trading partners China, France, the Netherlands, the UK and the US.
“German exporters are positioning themselves to overtake in terms of export growth,” says Subran. “This is despite weakening of the favorable currency turbo that makes German goods cheaper abroad. Potential export growth outside the Eurozone is therefore lower than in 2015. Exports to France in 2016 are growing more strongly than those to the US, which in 2015 took the crown as Germany’s main trading partner for the first time. Exports to the UK, which is mired in the pit lane, can only rise minimally. Losers from the German export markets include Brazil, Greece and Russia.”
Health check: Export outlook and profits good, margins below average, expectations fall
The profits of German exporters are stable, but profit expectations have lowered as a result of turmoil, especially in emerging markets. Margins are also lower than the long-term average. Despite this, many companies are in a strong position as confirmed by payment behavior. German companies make payments much faster than the global average. In Germany, the period between invoice and payment (days of sales outstanding, or DSO) at listed companies is just 56 days, whereas globally companies have to wait 67 days, i.e. 11 days longer.
Trend reversal: Payment delays down, non-payments up
“It is interesting that payment delays fell last year, but non-payments were up three percent,” says Subran. “This, combined with high competitive pressure and below-average margins, confirms the trend reversal we predicted, with insolvencies stagnating once again in Germany in 2016 followed by a slight rise in 2017.”
Beware of unexpected “jostling”: Political risks and capital controls waiting in the wings
Exporters should also keep an eye out for possible “jostling” from their blind spot, said Subran. “2016 may have some nasty surprises in store. For example, a wave of capital controls could reach emerging markets. Political uncertainties due to elections and the threat of social unrest in many countries, including Brazil, Thailand and Turkey, are keeping politics and, above all, the economy on tenterhooks this year. Some of these surprises lurk at our own front door in Europe, including a possible UK Brexit and elections in Spain. Conflicts in Turkey and the Middle East also cast shadows in terms of economic risk. After the turmoil this year, surprises will continue. There will always be winners and losers. The key to ensuring a place on the winner’s podium is to do business with the right companies, whatever the market or sector.”
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