Insolvencies tip iceberg - Euler Hermes · Business Insolvency Worldwide Economic Outlook no....

Business Insolvency Worldwide

Economic Outlookno. 1230-1231November-December 2016

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Economic Research

Insolvencies:The tip of the icebergSpecial focus on state-owned enterprisesaround the world

Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes

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Economic Research Euler Hermes Group

Economic Outlookno. 1230-1231Business Insolvency Worldwide

Contents

The Economic Outlook is a monthlypublication released by the EconomicResearch Department of Euler HermesGroup. This publication is for the clientsof Euler Hermes Group and available onsubscription for other businesses andorganizations. Reproduction is authorised,so long as mention of source is made.Contact the Economic Research Depart-ment Publication Director and Chief Eco-nomist: Ludovic Subran Macroeconomic Research and CountryRisk: Ana Boata, Stéphane Colliac, AlbertoGonzález de Aledo Pérez, MahamoudIslam, Dan North, Daniela Ordóñez,Manfred Stamer (Country Economists)Sector and Insolvency Research:Maxime Lemerle (Head), Farah Allouche,Yann Lacroix, Marc Livinec, Didier Moizo(Sector Advisors)Support: Laetitia Giordanella (OfficeManager), Ilan Goren (Content Manager),George Kibala Bauer, Benedetta Scotti(Research Assistants)Editor: Martine BenhadjGraphic Design: Claire Mabille Photo credits: Images courtesy of Allianz,Images courtesy of Pixabay (public do-main under Creative Commons CC0)For further information, contact theEconomic Research Department of EulerHermes Group at 1, place des Saisons92048 Paris La Défense Cedex – Tel.:+33 (0) 1 84 11 50 46 – e-mail: [email protected] > Euler Her-mes Group is a limited company with aDirectoire and Supervisory Board, with acapital of EUR 13 645 323, RCS Nanterre552 040 594 Photoengraving: Talesca Imprimeur deTalents – Permit November-December2016; issn 1 162–2 881 ◾ December 25,2016

14 Western EuropeStill a long road to pre-crisis insolvency levels

16 United KingdomInsolvencies to rise by +5% as Brexit is allowed extra time

16 GermanyThe higher cost of insolvencies

16 FranceGoing back to the 60,000 insolvenciesmark for the first time since 2011

16 Italy-5% decline in insolvencies

16 SpainA fourth decline ahead (-5% in 2017)

17 DenmarkStatistical zigzag

17 Looking EastSmaller economies are performing better

17 RussiaAnother +3% rise in insolvencies ahead

17 PolandInsolvencies to increase by +3% in 2017

18 SPECIAL FOCUS Zombie State-owned enterprises (SOEs) around the world, what are the risks?

22 MAJOR INSOLVENCIES WORLDWIDE

24 OUR PUBLICATIONS

26 SUBSIDIARIES

3 EDITORIAL

4 OVERVIEW

8 BUSINESS INSOLVENCY OUTLOOK 2017

10 AMERICAS FOCUS From North to South, insolvencies are onthe rise

10 United StatesInsolvencies to rise by +1% in 2017, in spiteof fiscal boost

11 CanadaInsolvencies to rebound by +2% in 2017 afterreaching historical lows

11 Latin AmericaMind the (many) turbulences

12 ASIA-PACIFIC FOCUS Insolvencies surge for the third year in2017

12 ChinaInsolvencies to increase by +10% in 2017, thefourth consecutive rise

13 Hong KongFeeling the pain from China and the US

13 South Korea and SingaporeA domino effect?

13 JapanInsolvencies to rebound by +1%, a first since2008

13 Australia & New ZealandStabilization ahead

14 EUROPE FOCUS The drop in insolvencies will be less imposing in 2017

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Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide

EDITORIAL

Frozen LUDOVIC SUBRAN

It took you over a year to get it out of your head. Your kidshave stopped obsessing about it; they even managed toorder something else than Elsa, Ana and Sven to Santa Claus.I just thought the last editorial of 2016 had to be special,given how special (yes, this is an understatement) 2016 hasbeen to companies around the world. No need to dwell onit, right? Let’s move on. How to forget about your problemsother than by a very personal adaptation of Let It Go, themagic soundtrack of Frozen? It is called Let It Flow and is forCredit Managers and CFOs across the world! They can let itgo, only if they’re insured. Any resemblance to your balancesheet is completely deliberate.

The topline glows on the mountain tonight,not an order to be seen.A kingdom of isolation and it looks like Cash is King.The bank is howling like this swirling storm inside.Couldn't keep it in, Heaven knows I tried.Don't let them in, don't let them see.Be the good CFO you always wanted to be.Conceal, don't feel, don't let them know.Well, now they know!

Let it flow, let it flow!Can't hold it back any more.Let it flow, let it flow!Turn away and slam the DSO.I don't care if they're going to pay.Let the costs rage on.The bottom line never bothered me anyway.

It's funny how some debt,makes everything seem small.And the fears that once controlled me, can't get to me at allIt's time to see what I can do,to test the limits and break through.No right, no wrong, no credit rules for me.I'm free!

Let it flow, let it flow.I am one with the working capital.Let it flow, let it flow.You'll never see me cry.Here I'll stand, and here I'll stay.Let the loss rage on.My power flurries through the balance sheet into the incomestatement.My soul is spiraling in frozen millions all aroundAnd one non-payment crystallizes like an icy blastI'm never getting it back; the past is in the past!

Let it flow, let it flow.And I'll rise like the break of dawn.Let it flow, let it flowThat perfect CFO is goneHere I stand, in the light of day.

Let the non-payments rage on!Insolvencies never bothered me anyway...

Happy holiday season to everyone!

© Image courtesy of pixabay.com. Under CC0 Public Domain frozen-1187920

Total number ofbankruptciesis back (only

3%(below)

to pre-crisis level

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OVERVIEW

The tip of the iceberg

BENETTA SCOTTI, MAXIME LEMERLE

+ In 2016, companies struggled to stay resilientdespite robust support from policymakers. Strongdeflationary pressure and subdued global demandmade life harder for businesses. After two years ofsubstantial declines in insolvencies, in 2016 our GlobalInsolvency Index will record a limited drop of -2%. + Indeed, the downward trend in global insolvenciesis coming to an end. This is happening because globalgrowth fails to accelerate and will linger below +3% inthe upcoming years. Thus, companies are morevulnerable to external shocks. Bankruptcies are on therise in Asia-Pacific and in the Americas, and Europe’simprovement is fading. We expect worldwideinsolvencies to rise by +1% in 2017.+ At a global level, the contained return of inflationshould provide only limited relief to corporateturnovers, while companies will face higher input costsand upward wage pressures, in addition to tighterfinancing conditions. + The +45% surge in the number of majorbankruptcies registered in the first three quarters of2016 is a source of second-round turbulences. Topbankruptcies will have a domino effect, with adverseimplications on fragile suppliers.


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In 2016, business insolvenciesto decrease by -2% only, asharp deceleration fromprevious years

The declining trend in business insolvencies ini-tiated in 2010, has continued in 2016 for theseventh consecutive year. Euler Hermes’ GlobalInsolvency Index, which weighs countries on thebasis of their GDP and represents 84% of worldGDP, is expected to decrease by -2% in 2016.For the first time since the Great Recession, it

▶


-15%

-20%

-10%

0%

10%

20%

25%

15%

North America Index

Asia-Pacific Index

Africa & Middle East Index

Central & Eastern Europe Index

Western Europe Index

Latin America Index

Global Insolvency Index

forecasts

5%

-5%

5%

-14%

7%

23% 21%

-6% -5%

-2%

-9%

-2%

-14%

-2% -1%

05 06 07 08 09 10 11 12 13 14 16f 17f 15

Chart 1 Euler Hermes Global Insolvency Index and regional indicesYearly changes in % and contribution to the Global Index

Sources: National statistics, Euler Hermes forecasts

will fall back to its 2007 low and only slightly be-low its pre-crisis average (-3%). Yet, after twoyears of sharp drops in insolvencies (-14% in2014 and -9% in 2015), the trend is rapidly losingmomentum.

Global headwinds and local turbu-lences Companies have absorbed the 2008-2009 shockat a global level, but they remain vulnerable tothe lack of solid macroeconomic and financialenvironment and to local hot spots. In 2016 theyfaced three major global headwinds: (i) the slug-

gish global economy, with real GDP growthposting only +2.5% in 2016 (versus +2.7% in2015); (ii) the sharp slowdown in global trade,with export volume growth reaching an un-precedented low at +1.9% (+3.1% in 2015); (iii)fierce price competition, which has putturnovers under pressure; and (iv) volatility inexchange rates and international financial flows,which have kept financing under constraintsand stress, particularly in emerging countries.Companies also had to confront localized polit-ical and economic hot spots, from the Chinesestock market crash in January to the impeach-ment of Brazilian president in April, to the Brexitvote in June and the Turkey’s failed coup in July.

Europe appears immune to thegloom in the rest of the world: Insol-vencies decreased by -5% this yearInsolvencies in one country out of two, or tworegions out of three, are to rise or stabilize in2016. Firstly, Latin America will post its fifth con-secutive increase in insolvencies (+18%): cor-porates suffered from the recession in Brazil,Argentina and Venezuela, as well as from asharp deterioration of the terms of trade as com-modity prices remained low and currencies de-preciated. Secondly, Asia-Pacific continues tosuffer from the side effects of China’s economictransition and aggravated slowdown: the re-bound in insolvencies is expected to continue

© Image Allianz 106047682

South KoreaTaiwan

CanadaRussia

SlovakiaRomania

South AfricaJapan

GermanyUnited Kingdom

LatviaAustria

United StatesNetherlands

New ZealandSweden

Global Insolvency IndexSwitzerland

PolandBrazilChina

EstoniaFinland

BelgiumSingapore

FranceNorway

TurkeyItaly

LuxembourgCzech Republic

AustraliaPortugal

ColombiaIreland

BulgariaHungary

ChileLithuaniaMorocco

Spain 341272235231228222203124

82726054383737262517111111

30

-1-3-9-12-17-19-20-25-28-36-36-39-42-42-53-57-59-69-82

North America Index

Asia-Pacific Index




Latin America Index



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in 2016 with a +5% increase in the regional in-dex (after a +9% in 2015). Our Africa index is topost another double digit increase in 2016(+16% after +12% in 2015) while in NorthAmerica insolvencies seem to have reached aplateau. After several consecutive years ofsteady decline both in the US and Canada, bank-ruptcies should stabilize as interest rates in-crease. All in all, the global picture for insolven-cies would have been more negative, hadpolicymakers not been supportive. Fiscal stimuliand dovish monetary policies have partially mit-igated the global weaknesses and the localsources of turmoil. More importantly, global in-solvencies would have trended upwards with-out the regional decrease in Western Europe.Despite uneven developments, Western Europeis the only region to record a sizable decline inbankruptcies in 2016 (-5% after -13% in 2015),thanks to the gradual improvement of the eco-nomic situation. However, the level of bank-ruptcies in Western Europe remains high: 10out of 17 countries still report more insolvenciesin 2016 than their 2003-2007 average.

Insolvencies to increase by+1% in 2017, the firstincrease since the GreatRecession

In 2017, the Global Insolvency Index shouldclimb by +1%, the first rise in seven years. Thisresults from two different trends. On the onehand, the persistent and broad-based rise in in-solvencies in Latin America (+12%), Africa(+9%), Asia-Pacific (+6%) and North-America(+1%). We forecast all the countries in theseregions to contribute to the rebound. On theother hand, the expected decline in bankrupt-cies in Western Europe (-4%), as well as in Cen-tral and Eastern Europe (-1%), is losing momen-tum. Insolvencies are heading towardsstabilization in 5 out of 17 countries, notablyGermany where historically low levels renderfurther declines mechanically difficult.Three main factors explain the return of creditrisk: (i) global growth and trade have hit a glassceiling of respectively +3% for GDP growth, and+4% for trade volume growth; (ii) global financ-ing conditions will experience a regime switchas the US increase interests rates further; and(iii) the rebound in large bankruptcies i.e. biggercompanies going bankrupt will cause a dominoeffect on fragile suppliers.

Growth and trade still subdued butinflation is backGlobal growth is expected to tick up from +2.5%in 2016 to +2.8% in 2017 but should remain be-low +3%. Global trade will grow by +3.1% butwill also stay below potential, growing half asfast as it used to grow before the Great Reces-sion. Most of the rebound in global growth andglobal trade comes from the expected strongpolicy shift in the US, the end of recession forthe fragile ones such as Brazil and Russia, andthe resilience of China and Europe, ready to dowhatever it takes to save growth. In doing so, trade barriers will continue to mush-room, making export more complex and costly.President-elect Trump also announced that theUS could look into protecting some sectors,changing financial regulation and favoring UScompanies domestically and abroad. This couldbe a game changer.Last, the major difference between 2016 and2017 lies in the return of inflation. First commod-ity prices will rise again, even if at a timid pace of+20% to USD54 per barrel for the FY average.Secondly, the fiscal stimulus in the US and con-tinued monetary stimulus in Europe, Japan andChina should eventually push prices further.What does it mean for companies? After years oflearning how to make decisions in a deflationaryworld (flat turnovers, high operating profits, cheapdebt, cash piling, no investment), it could be time

Chart 2 2016 Insolvencies compared to 2003-2007 average*% change

Sources: National statistics, Euler Hermes

▶

+1% for insolvenciesworldwide in 2017

© Ice skating shoes. iceberg. image courtesy of terry matthews


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for a wake-up call. Inflation will push turnoversbut constrain operating profits and depreciateassets and cash. Working capital of companiescould also be pressured by protectionism andhigher demand, increasing pressure on suppliers’credit both domestically and abroad, especiallywhen payment terms are already long.

Global financing conditions willchange as the US increase interestratesAs a result of inflationary pressures, Euler Her-mes expects a faster tightening of the US mon-etary policy. The Fed will abandon its long-last-ing dovish stance and increase rates 2 to 3 timesin 2017, and another 2 to 3 times in 2018 to

reach a 3% rate by 2019. This will raise financingcosts in the US, and put historically high debtlevels at risk. Unfortunately, higher interest rates in the USand a stronger dollar could affect companiesin the emerging. Dollar-denominated debtcould become scarcer and more expensive andinvestments could go either way: flow to theemerging world in search of returns, or fly backto quality. In addition, unbalanced economiescould be forced to tighten their own monetarypolicies, which could cause credit crunches incountries with already high cost of debt.

A potential domino effect from too-big-which-failed companiesIn the first three quarters, the number of insol-vent companies with a turnover exceedingEUR50mn has soared by +45% compared to thesame period in 2015, with 192 instead of 132insolvent companies. The increase proved tobe considerable in terms of cumulative turnover,with a +27% surge over the same period, and a+55% jump for companies with a turnover be-tween EUR100mn and EUR1bn. This trend isproblematic insofar as it triggers adversedomino effects for non-strategic suppliers. Europe is the most at-risk (70 cases of top bank-ruptcies in Western Europe and 50 cases in Cen-tral and Eastern Europe). North America re-ported the largest number of bankruptcies interms of cumulative turnover: EUR29bn in Q1-Q3 2016 (compared to EUR11bn in WesternEurope and EUR17bn in Asia-Pacific). Half ofthe major companies that filed for bankruptcyin North America were operating in the oil &gas industry. Indeed, energy companies haveposted the largest failures in terms of cumula-tive turnover worldwide with more thanEUR15bn in the first nine months. State-ownedenterprises (SOEs) are also on the watch list: theyare not immune to bankruptcy. In our special focus(see pages 18-21), we provide a framework to an-alyze SOEs in different regions, from China toLatin America along four risk dimensions. +

Q1-Q3 2016Q1-Q3 2015

Number of insolvencies

13

72

47

14

107

71

+45%

> 1 EUR bn

100-999 EUR min

50-99 EUR min

Q1-Q3 2016Q1-Q3 2015

Cumulative turnover (EUR bn)

29

203

31

315

+27%

Chart 4 Number and cumulative turnover of major insolvencies in Q1-Q3 2016v.s. Q1-Q3 2015by size of turnover

Source: Euler Hermes

SingaporeBrazilChile

ChinaMorocco

United KingdomTaiwan

Hong KongTurkey

South AfricaLuxembourg

PolandRussia

South KoreaCanada

United StatesJapan

AustriaGlobal Insolvency Index

GermanyThe Netherlands

FinlandNorway

SwitzerlandEstonia

AustraliaNew Zealand

BulgariaColombia

BelgiumSwedenIreland

ItalySpain

GreeceSlovakia

LithuaniaLatvia

RomaniaCzech Republic

FrancePortugal

DenmarkHungary -25

-19-7-7-6-5-5-5-5-5-5-5-4-2-20000000000

111123333555558

10121515

North America Index

Asia-Pacific Index




Latin America Index


Chart 3 Insolvencies forecast in 2017Yearly change in %


Insolvencies down: between -1% and -5%

Insolvencies on the rise:between 0 % and +3%

Insolvencies on a strong rise:more than +3%

Insolvencies down:more than -5 %

Level of insolvenciesabove 2000-2007 average

Source: Euler Hermes as of December 16, 2016

* Regional index basis 100=2000

North America

Latin America

Central & Eastern Europe


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Insolvencies to increase in 2017 and remain above the pre-crisis level

2015 Change Change Number Change 2016e 2017f 78 62% 18% 12% 2,164 25% 24% 15% 428 15% -6% 0% 450 176% 11% 12%

2015 Change Change Number Change 2016e 2017f 66 -8% 0% 1% 24,636 -9% 0% 1% 3,089 -1% 0% 2%

Regional Index*United StatesCanada

Regional Index*BrazilColombiaChile

2015 Change Change Number Change 2016e 2017f 262 -1% -2% -1% 10,086 7% 7% 3% 13,701 -13% -10% 5% 747 -9% 5% 3% 2,191 -9% -9% -6% 10,269 -50% -20% -5% 35,509 -27% -24% -25% 622 -11% -10% -5% 737 12% -5% 0% 1,987 18% 20% -5% 797 -16% -10% -5% 376 -12% 4% 0%

Regional Index*RussiaTurkeyPolandCzech RepublicRomaniaHungarySlovakiaBulgariaLithuaniaLatviaEstonia

BusinessInsolvencyOutlook

2017Q4 2016 — UPDATE

GlobalinsolvencyindexChange in 2016e:

-2%

Change in 2017f:

+1%

Western Europe Africa & Middle East

Asia Pacific


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in 6 out of 10 countries worldwide, in more than half of the countries studied

2015 Change Change Number Change 2016e 2017f 151 -13% -5% -4% 23,123 -4% -4% 0% 63,198 1% -5% -7% 19,887 -12% -3% 5% 14,722 -6% -5% -5% 4,818 -24% -15% -5% 6,006 -21% -17% 0% 4,519 7% 2% 0% 6,426 -10% -6% -2% 4,462 -7% 5% 0% 9,762 -9% -7% -2% 5,150 -5% 3% 1% 4,029 0% 60% -19% 3,068 -12% -5% 0% 362 8% 3% -5% 4,382 -4% -18% -7% 1,049 -10% 3% -4% 902 3% 10% 3%

Regional Index*GermanyFranceUnited KingdomItalySpainThe NetherlandsSwitzerlandSwedenNorwayBelgiumAustriaDenmarkFinlandGreecePortugalIrelandLuxembourg

2015 Change Change Number Change 2016e 2017f 124 12% 16% 9% 1,962 -5% 0% 5% 5,934 18% 8% 8%

Regional Index*South AfricaMorocco

2015 Change Change Number Change 2016e 2017f 62 9% 5% 6% 3,237 24% 20% 10% 8,812 -9% -3% 1% 8,079 22% -7% 0% 720 -14% -23% 3% 162 23% 27% 5% 189 17% 2% 15% 305 13% 0% 5% 2,322 -6% -8% 0%

Regional Index*ChinaJapanAustraliaSouth KoreaTaiwanSingaporeHong KongNew Zealand

From North to South,insolvencies are on the rise

+ The steady decline in insolvencies in North Americahas come to an end: bankruptcies should reach aplateau in 2016, in the US and Canada, and increasemoderately in 2017 (+1% and +2% respectively). + In the US, companies will benefit from PresidentTrump’s measures dedicated to boosting short term(and domestic) activity, but will suffer from negativefactors on financing and international trade.+ In Latin America, insolvencies will keep rising for asixth consecutive year, posting a double digit increase(+12% in 2017) to the highest number of bankruptciessince 2000. The economic pendulum is slowly movingback to positive territory, but firms still feel the pain andwill face new turbulences coming from the US.

AMERICASFOCUS


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United StatesInsolvencies to rise by +1% in 2017, in spiteof fiscal boost 2016 has been a mixed year for American cor-porates. On the one hand, US companies haveenjoyed thriving stock markets, robust house-hold consumption of goods and services (+2.6%in yearly average up to Q3), and longer thanexpected accommodative financing conditions.Indeed, the Fed was much less aggressive thananticipated, with only one hike. On the otherhand, the energy sector and all the related ac-tivities have been highly affected by the low oilprices in the first half of the year, even if recov-ering oil prices have allowed for stronger bal-

0

10

20

30

40

50

Debt held by corporates filingfor bankruptcy (USDbn)

Number of bankruptcies

Q3 2016Q2 2016Q1 2016Q4 2015Q3 2015Q2 2015Q1 2015

Chart 5 Bankruptcies in the energy sector in the US

Sources: Haynes & Boone, Euler Hermes

+1%insolvencies

in North Americain 2017


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ance sheets and a stabilization of claims. Specif-ically, after 34 North-American energy compa-nies filed for bankruptcy in Q2 2016, defaultingon a total debt amounting to USD43bn, figureshave normalized in Q3. More generally, US com-panies have continued to register a strong fallin (real) profits (-4.2% in Q1-Q3 2016 comparedto the same period in 2015), exposing weakproductivity and wage pressures. Thus,squeezed margins have in turn led to tighter fi-nancing conditions in spite of the Fed’s dovishstance. De facto, insolvencies have started toplateau while they reached their ‘natural rate’after a six-year long decline. Looking ahead, we expect insolvencies in theUS to rise by +1% in 2017. The fiscal boost prom-ised by President Trump should provide mo-mentum to the economy. Nevertheless the gen-eral 15% corporate tax cut and the infrastructurespending, which may realistically amount toUSD0.5tn over the next decade, will not beequally beneficial to all sectors. Also, the appre-ciation of the US dollar will hurt exporting firmsand the monetary tightening will hit all sectors,not only the highly indebted ones, such as ma-chinery & equipment. Moreover, protectionistmeasures are to create winners, the metal in-

dustry for example, who would enjoy strongimport taxes to the detriment of foreign com-petitors, but also losers, notably textile compa-nies, who would be exposed to import tariffs ofup to 32%.

CanadaInsolvencies to rebound by +2% in 2017after reaching historical lowsEuler Hermes expects the number of insolven-cies in Canada to stabilize in 2016 and to headfor a +2% increase in 2017. As in the case ofthe US, after fourteen consecutive years ofsteady decline, insolvencies have reached aplateau at just slightly more than 3,000 casesper year since 2012. This historical low leaveslittle room for a small increase, as business de-mography (+200,000 companies over the lastdecade up to 2.6 million) accelerated. Insol-vencies bounced back in 2016, but only in theoil producing regions (Saskatchewan, Mani-toba, British Colombia). In 2017, despite thegradual recovery of the energy sector, the com-bined effect of three negative dynamics shoulddrive overall insolvencies up: weaker exports,slowing job growth and tightening lending con-

0

50

100

150

200

250

300

350 BrazilCanadaUnited States

17f16f15141312111009080706

forecasts

127

47

144

Chart 6 Corporate insolvencies in AmericasYearly levels, basis 100 in 2006


ditions to cool the housing market and mort-gage debt levels.

Latin AmericaMind the (many) turbulencesThe Latin America insolvency index has alreadyjumped up by more than +90% since 2014,mainly due to the recession in Brazil. Insolven-cies in Brazil will continue to rise in 2017(+15%), albeit at a more moderate tempo thanin 2016 (+24%). The country is set to exit re-cession only gradually in 2017 with GDP togrow by a very marginal +0.6%. Smaller com-panies (+25% in insolvencies in 2016), mediumcompanies (+7%) but also large companies(+18%), more exposed to international trade,will continue to feel the shock of the previousyears (-3.8% in 2015 and -3.5% in 2016). Themore dovish stance taken by the Central Bank(two interest rate cuts in the last two months)following the moderation of inflationary pres-sures may ease financing conditions for cor-porates. However, US policy-making will un-doubtedly affect Brazilian companies at leaston the short run via the foreign exchange ratechannel.+



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Insolvencies surge for the third year in 2017

ChinaInsolvencies to increase by +10% in 2017,the fourth consecutive rise The insolvency outlook remains unfavorable. In-solvencies are expected to increase for thefourth year in a row in 2017 (+10%), after anestimated +20% in 2016. Firstly, demand growthis set to decelerate slightly. In 2016, ChineseGDP has grown by +6.7%, defying lower growthexpectations, mainly thanks to a robust fiscalstimulus. In 2017 growth is expected to decel-erate to +6.2% due to subdued growth in privateinvestment and exports. Secondly, credit riskwould remain elevated with high corporate debt(170% GDP in 2016), high levels of non-per-forming loans and a tightening of the propertymarket. Thirdly, excess capacity for basic mate-rials would remain an issue. New orders wouldprobably be limited, reflecting both low demandand higher protectionist measures overseas.

-30% -20% -10% 0% 10% 20% 30%

2017

2016-7%

-8%

-3%

-23%

27%

0%

20%

2%

0%

0%

1%

3%

5%

5%

10%

15%

Australia

New Zealand

Japan

South Korea

Taiwan

Hong Kong

China

Singapore

Chart 7: Insolvency forecasts in Asia-Pacific% change compared to previous year

Sources: National figures, Euler Hermes forecasts

ASIA-PACIFICFOCUS


+ In 2017, no country in the Asia-Pacific region is to report adecline in insolvencies. The regional index will record the thirdconsecutive yearly increase (+6%) with another strong rise inChina (+10%). + If policymakers were not supportive, the rise of insolvencieswould probably be stronger. The region has to cope with theconsequences of subdued global trade, which has alreadycaused a series of major bankruptcies, notably in the maritimetransportation sector. This is exacerbated by a continued rise inprotectionist measures.+Structurally, the region has to adapt to the bumpy Chineserebalancing. While consumer goods producers will benefitfrom the expansion of the Chinese middle-class, suppliers ofindustrial commodities (Australia, Indonesia, and Malaysia) andof semi-finished products (Taiwan, Singapore, and South Korea)will continue to suffer.

+6% insolvencies

in Asia-Pacificin 2017


13

Hong KongFeeling the pain from China and the USThe effects of the decrease in Chinese privatedemand will be particularly felt in Hong Kong,a favorite shopping destination for Chinese con-sumers. The retail sector will be the main ca-sualty. Moreover, given the currency regime,tighter monetary conditions may ensue in themonths to come. Indeed, the Central Bank is totake a more hawkish position in the wake ofthe US Federal Reserve. Consequently, we ex-pect insolvencies to increase by +5% in 2017after a stabilization in 2016.

South Korea andSingaporeA domino effect?South Korea is facing a reversal in its insolvencytrend. While the country should record a de-crease of -23% in 2016, in 2017 insolvencies mayincrease by +3%, after eight years of steady de-cline. Indeed, companies are expected to see theconsequences of weak global trade growth andmajor insolvencies, such as Hanjin Shipping. Han-

jin, with its USD5.7bn turnover represents thelargest bankruptcy in 2016. If spillovers havebeen contained, for now, it is because the gov-ernment has been reactive in supporting com-panies, notably SMEs.In Singapore, insolvencies are expected to ac-celerate in 2017 (+15% v.s. +2% in 2016). Sup-portive policies have been protecting the privatesector from the negative impact of the failure ofbig players, such as Searights (maritime trans-portation) and Swiber (energy). So far.

JapanInsolvencies to rebound by +1%, a first since2008 An 8-year-long decline in insolvencies is to endin 2017, as the number of bankruptcies is ex-pected to rise by +1%. The country has beenstrongly benefiting from the super-accom-modative monetary policy, which allows com-panies, notably SMEs, to refinance their debt atfavorable conditions. Moreover, GDP growth isto gradually improve sustained by a progressivepick up in private consumption and a favorablefiscal policy. However, there are three mainpoints that stand in the way of a further decline

in insolvencies (already at historically low levels).Firstly, weak new export orders will act as a drag.Secondly, deflationary pressures continue topersist with producer prices contracting furtherin 2016. Thirdly, fiscal leeway is limited with ageneral government debt around 250% GDP.

Australia & NewZealandStabilization ahead In 2017, insolvencies will stabilize in both Aus-tralia and New Zealand, after decreasing by -7% and -8% respectively in 2016. In Australia,significant regional variations persist. On theone hand, there are states affected by thedownturn in commodity prices, particularlyWestern Australia and Queensland, where in-solvencies remain on an upward trend, whilesome states are experiencing a property boomand a steep decrease in insolvencies. Risks per-sist in the construction sector. As for NewZealand, the dairy sector is still under pressure,but overall the economy continues to be re-silient, supported by low interest rates, tourism,and net positive migration.+

7840


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The drop in insolvencieswill be less imposing in 2017

+ The declining trend in insolvencies remainson course for both Western, and Central andEastern Europe (-4% and -1% respectively in2017), in line with moderate but steadyeconomic prospects and supportive financingconditions in the Eurozone.+ Despite this broad-based improvement,insolvencies still remain 27% above their pre-crisis average in Western Europe (31% abovein Central and Eastern Europe).+ The regional picture still masks theheterogeneous recovery between sectors andcountries. Insolvencies will stabilize in 5 out of17 countries in Western Europe in 2017, andincrease in some major economies such asPoland, Russia and the UK.

EUROPEFOCUS

-4%insolvencies

in Western Europein 2017


Belgium

Austria Finland

United Kingdom

Switzerland Germany

France

Italy

The Netherlands

Sweden

Norway

Luxembourg

Improvingtrend

StabilizingW

orseningtrend

2017f vs.2003-2007

2017

f com

pare

d to

201

6f

-10%

-8%

-6%

-4%

-2%

0%

2%

6%

8%

10%

-50% -30% -10% 10% 50% 100%30%

4%

200% 300%

••• •••

Portugal

Ireland

Spain

Chart 8 Overview of insolvencies in Western Europe2017f compared to 2003-2007 average insolvency level (x-axis) v.s. 2017f compared to 2016f insolvency level (y-axis)


15

Western Europe: Still a longroad to pre-crisis insolvencylevels

The macroeconomic and financial backdrop willremain supportive for credit risk in 2017. Weexpect Eurozone to grow +1.6% thanks to thecombination of three key drivers. First, domesticdemand: household consumption, thanks to apick-up in employment and subdued prices,should continue to grow steadily. This will sup-port the decline in insolvencies in sectors suchas retail which already recorded a -8% drop onaverage across Europe in 2016. This will alsohelp the recovery in the construction sector,which usually accounts for 20% of total businessinsolvencies in the region. Second, the trademomentum, with a weaker euro around 1.05USD in 2017 should help European exporters.Last, the supportive policy mix, the ECB’s con-tinuation of QE and looser fiscal policy will helpSMEs grow.Downward risks persist, stemming notably fromthe political calendar and its possibly negativeconfidence effects. Uncertainty over the politicalhorizon in key countries (Italy, France, Germany,the Netherlands and Hungary) may hurt busi-ness confidence and the willingness to invest,

slowing down the long-awaited recovery of pri-vate investment. In that context, Euler Hermes expects its West-ern Europe insolvency index to decline by -4%in 2017, after -5% in 2016. This decrease marksa noticeable deceleration compared to 2015(-13%). Half of the countries in the region areheading towards a limited change in insolven-cies, in part compensated by the sharp declinein the other half.For the first set of countries, the stabilizationtrend relies on mechanical reasons: an alreadylow number of insolvencies (which limits furthersizeable decline), and a dynamic business de-mography (which translates into a higher num-ber of bankruptcies as young firms display ahigher mortality rate than established ones). Thisis the case in countries like Germany and theNetherlands where insolvencies have fallen be-low the pre-crisis average, while the number offirms has been increasing faster than profit mar-gins. In the same group, some countries experi-ence stabilizing insolvencies for other reasons.This is the case for Belgium, where the soft de-cline (-2% in 2017) mainly reflects the lack of ac-celeration in GDP growth. This is also the case inNorway (0%), where insolvencies remain +37%above their pre-crisis average as the country hassuffered from the low oil prices downturn. ▶

Greece

Italy

Ireland

Portugal

Spain

Denmark

Finland

Sweden

Norway

Austria

Belgium

Luxembourg

United Kingdom

Switzerland

France

Germany

The Netherlands

0

0

-1

-3

-3

-4

22

14

11

9

8

7

5

4

3

2

1

Chart 9 Business demography in EuropeNumber of firms, % Change between 2012 and 2014

Sources: Eurostat, Euler Hermes

1 out of 2 countries to register

a limited changein insolvencies

in 2017


at about 23,000 cases in 2017, putting an endto a 7-year-long downward trend. Indeed, theeconomy will continue to grow steadily but with-out acceleration (GDP growth forecast at +1.7%in both 2017 and 2018), while corporate profitshave fallen below their long-term average.Lower margins, combined with the accelerationin the number of new businesses, and the highercost of insolvencies (EUR26bn between August2015 and August 2016) will increase pressureon German firms.

Italy-5% decline in insolvencies Italian firms are recovering despite the low mo-mentum of the economy (+0.9% in 2016, and+0.6% in 2017). Corporate profit margins haverisen up to 41.4%, sustained by lower energyprices and favorable financing conditions. Ac-commodative monetary policy by the ECB hassignificantly decreased interest rates on corpo-rate loans, although SMEs, which make up thebackbone of the Italian economy, continue toface tighter conditions. In turn, stronger prof-itability is boosting corporate investment (+2.2%4q/4q). Euler Hermes expects insolvencies todecline by -5% in both 2016 and 2017 with anorderly resolution of the banking sector vulner-abilities. However, Italian companies remain vul-nerable to a confidence crisis linked to the pro-longed political instability: the number ofbankruptcies remains 40% above the pre-crisisaverage.

FranceGoing back to the 60,000 insolvencies markfor the first time since 2011In France, business insolvencies are decreasingby -5% in 2016 and most likely by -7% in 2017.Growth prospects improved since 2015 (+1.3%in 2016), better corporate margins (29.8% end-2013 to 31.6% in Q2 2016) thanks to targeted

tax cuts, and better credit conditions did help -especially the construction sector, where insol-vencies went down -10% this year. However, to-tal insolvencies are still 25% higher than pre-cri-sis level and sector and regional divergencepersists. Tourism-related sectors (transports, ac-commodation) are not benefitting fully fromthe good news (only -1.8% y/y in 2016), espe-cially the Ile-de-France region.

SpainA fourth decline ahead (-5% in 2017) After a +3.3% in 2016, Spanish GDP growth willstand at +2.3% in 2017. Private consumptionwill slightly slow down (+2.4% in 2017 vs +3.1%in 2016) as the decline in unemployment willnot be as strong as in 2016 and priced edge up.Fiscal adjustments are needed to address theSocial Security deficit estimated at more thanEUR2bn; hence a likely increase in corporatetaxes. Insolvencies are nonetheless expected tocontinue to decrease for a statistical reason,though more slowly (-5% in 2017 v.s. -15% in2016). Indeed, the number of companies goingbust in a given year in Spain is still 3.5 times ashigh as before the crisis.

DenmarkStatistical zigzag Insolvencies increased by +60% in 2016 dueto exceptional reasons. First, the higher insol-vency rate recorded for a new form of com-pany (Iværksætterselskab) that was introducedin 2014. Second, and more importantly, theresolution of a major backlog experienced byDanish tax authorities due to problems in theirIT system, which has kept bankruptcy figuresartificially low for the last 2-3 years. In 2017,we expect the number of bankruptcies to de-cline by -19%, mainly as a statistical adjust-ment.


16

© Image courtesy of pixabay.com. Under CC0 Public Domain gherkin-935126; berlin-1653002, milan-1826515; paris-843229;

The second set of countries consists of Franceand Italy, Spain and Portugal, all still above pre-crisis levels. In 2016, Spain and Portugal wererecording 341% and 82% more bankruptciesthan before the crisis. The picture is already lesstroubling for Italy (38%) and France (27%),where the decline is supported by the recoveryof corporate margins and strong fiscal boosters.For Ireland, we expect a return to a downwardtrend (-4%) as the Irish economy continues togrow +3% next year. The rise in Irish bankrupt-cies in 2016 was mainly due to statistical issues:many banks have been cleaning up their ac-counts, disposing of large batches of receiver-ships. Greece should also register a downwardtrend in 2017 (-5%) as the country exits reces-sion, capital controls are removed, and banksare progressively recapitalized.

The UKInsolvencies to rise by +5% as Brexit isallowed extra time In 2017, the UK will be the only major Europeancountry to see a sizable increase (+5%) in bank-ruptcy cases. Yet, in 2016, insolvencies decreasedby -3%, for the fifth consecutive year, as the Britisheconomy has proved resilient in the aftermathof the Brexit vote. Next year, the expected trendreversal will be mainly due to the consequencesof the economic slowdown (GDP to grow onlyby +1%) and the depreciation of the pound: thereal effective exchange rate declined by -12%since June, pushing input prices higher and mar-gins lower. Moreover, uncertainty will negativelyaffect investment, as proven by capital flows andM&As after the Brexit vote (-50% in Novembercompared to last year).

GermanyThe higher cost of insolvencies After decreasing by -2% to a record low (22,750cases), business failures are expected to stabilize

Looking East: Smallereconomies are performingbetter

In Central and Eastern Europe, our regional in-solvency index confirmed the decline started in2015, with a -2% drop in 2016 and another -1%fall expected in 2017. However, this regionalview hides two diverging trends. Insolvencieswill increase in the biggest economies of theregion (Russia, Turkey and Poland), while Balticand Central European economies continue toexperience another round of decrease.

RussiaAnother +3% rise in insolvencies ahead After two years of recession (-3.7% in 2015 and-0.6% in 2016), Russia is to give way to modestgrowth of +1% while sanctions remain. This im-provement is sustained by the timid increase ofoil prices. Companies will benefit from more fa-vorable financing conditions, thanks to a softermonetary policy as well as from recovering do-

mestic demand. After two years of sharp decline,household consumption is expected to increaseby +1.5%, encouraged by lower inflation, al-though the base effect will play a significantrole. In spite of these positive signals, recoveryremains too weak to trigger a reversal in the in-solvencies trend, at least in the short-term.Hence, we expect insolvencies to continue in-creasing, but at a more moderate pace (+7% in2016, and +3% in 2017).

PolandInsolvencies to increase by +3% in 2017 In Poland, the downward trend comes to anend as insolvencies will be up by +5% in 2016and +3% in 2017. GDP growth is slowing down(from +3.6% in 2015 to +2.8% in 2016), as con-sumption has become the sole growth driverwith investment declining in 2016. Further fac-tors behind the insolvency trend reversal arepersisting difficulties in the construction sector(due to a strong decrease in investment) anddeflationary pressures (–0.8% in 2016, and+0.5% in 2017). +


17

© Image courtesy of pixabay.com. Under CC0 Public Domain torres-730997; copenhagen-1209572; moscow-city-1568042; warsaw-1743565

Chart 10 : Change in corporate insolvencies by sector for selected European countries 2016 versus 2015 in %, change in last 12 months (latest available data)

Sources: National statistics, Euler Hermes

Agriculture Manufacturing, Mining & Utilities Construction Retail/ Trade Transportation Services Other

Country total(including other

activities)Spain -49% -28% -32% -21% -26% -15% -10% -22%

The Netherlands -35% -10% -17% -28% -16% -15% -27% -17%

United Kingdom -19% -6% -15% -15% -22% -15% 3% -14%

Belgium -18% -14% -16% -7% 7% -9% — -7%

Sweden -21% -6% -8% -15% -16% -10% 44% -7%

Germany 19% -9% -3% -7% -10% -5% -3% -6%

France 4% -3% -10% -5% 1% -1% -8% -4%

Italy 0% 3% -6% -10% -4% 2% 0% -3%

Norway -20% 3% 11% -7% -1% 4% 4% 3%

Ireland — 0% 45% -12% -35% 63% -51% 3%

Russia -19% 1% 9% 4% -2% 12% 24% 4%

Average change by sector -16% -6% -4% -11% -11% 1% -3% -6%

+3% insolvenciesin Poland and Russiain 2017

Sources: Forbes, Euler Hermes

China

Mexico

Russia

Brazil

France

Saudi Arabia

United Arab Emirates

Italy

India Venezuela

Japan

Colombia

0%

10%

20%

30%

40%

50%

60%

70%

80%

0% 5% 10% 15% 20% 25% 30% 35%

60

25

10

3

Turnover % GDP

Asse

ts %

GDP

Number of firms

Chart 11 Weight of SOEs appearing in Forbes Global 2000 on national economies


18

SPECIALFOCUS

Zombie State-owned enterprises(SOEs) around the world,what are the risks? BENEDETTA SCOTTI, YANN LACROIX

+More than 160 out of the 2,000 biggest companies in the world can technically bedefined as state-owned enterprises (SOEs). SOEs may strongly impact the nationaleconomy or be confined to a few strategic sectors. +Euler Hermes analyzed four risk dimensions for SOEs across the world (size, debt,efficiency, handover strategy) and distinguished these SOEs that can be a source ofsystemic risk (such as Chinese SOEs in metals and chemicals), and those which canbe an engine for industrial development and prosperity (such as petrochemicalSOEs in Gulf Cooperation Council countries). Since SOE debt is not consolidated intoofficial public debt, debt of individual SOEs (such as Petrobras in Brazil and Pemex inMexico) may add 7-8pps to the public debt-to-GDP ratio. This is why the lack of anexit strategy for restructuring and privatizing SOEs contributes to uncertainty. +Overall, Chinese SOEs present the highest risk profile, followed by SOEs in Braziland Russia. SOEs in GCC countries, present a moderate-low risk profile. SOEs inadvanced economies, such as Italy and France can be considered low-risk.

A four-dimension frameworkto analyze SOE risks State ownership does not impede the ascent toglobal economic success. From the largest 2,000listed companies in the world (Forbes ranking),more than 160 can technically be defined asstate-owned enterprises (SOEs), that is to say,companies in which the state directly owns morethan 50% of share capital. Far from being mar-ginal players, they can significantly impact na-tional economies, positively or negatively.Whether SOEs are an opportunity or a risk tonational public finances depends on a numberof risk factors. We have identified four of them:the relative weight of SOEs in the economy(based on their number and size, as well as ontheir pervasiveness across different economicsectors), their level of indebtedness (measuredas the ratio between debt and equity), their in-efficiencies (that is SOEs’ capacity to generateturnover, cash and profits with respect to theirlevel of indebtedness) and the existence of anexit strategy (whether the state is willing and/or


19

Chart 12 The four risk factors for SOEs


Relative weight in the economy

Inefficiencies

Level of indebtedness

Absence of exit strategy

Advanced economies (Italy & France) Latam (Brazil & Mexico) Oil exporters (GCC countries) China Russia

capable of disengaging itself). A strong weightin the economy, combined with inefficiencies,high debt and the absence of an exit strategy,as in the case of China, are associated with higherrisk. On the contrary, modest size, robust per-formance, low debt and the existence of an exitstrategy, as in the case of advanced economies,diminishes the risk profile of SOEs (See the figureshowing the four risk factors of SOEs).

China: Debt is growingmuch faster than turnoverand profitability

Highly indebted, hardly profitable and poten-tially systemic, the 150,000 Chinese SOEs spreadacross all sectors, from aerospace to tourism,and are increasingly a financial burden for Bei-

jing, and an obstacle to the Chinese market-ori-ented transition. Certainly, SOEs remain a majorsource of investment. In the first ten months of2016, SOEs’ nominal investment increased by+20.5% YTD y/y, as a consequence of fiscal stim-ulus, while nominal investment has grown over-all by +8% YTD y/y. Yet, they are often commit-ted to social/political objectives, (e.g. ensuringemployment) rather than to financial ones. Thisexplains why Chinese SOEs fare systematicallyworse than their private counterparts. Many ofthem (the so-called zombie companies) are ar-tificially kept alive by Beijing, as they are lesscapable of adjusting rapidly to negative shocks(e.g. the fall in commodity prices in early 2015). Even the profitability of top-tier Chinese SOEshas been deteriorating. Looking at listed SOEscentrally controlled by the State-owned AssetsSupervision and Administration Commission

(SASAC), we find that in the last three yearsdebt has increased at an average of +9% y/ywhile turnover has grown at less than +1% y/yon average. Figures are particularly worryingwhen it comes to SOEs in sectors with massiveovercapacity and poor profitability, where dis-tressed cash flow makes debt barely sustainable.This is the case for SOEs in the chemical andmetal industry, which would respectively needrespectively 8 to 9 years of current cash flow torepay their debt, all things being equal.So far, China has addressed the problem of dis-tressed SOEs mainly through consolidation ef-forts and through the partial listing of thebiggest SOEs (which unintentionally fueled thestock market bubble that burst in August 2015).In September 2016, Beijing also announced thecreation of a CNY350 billion-restructuring fund sponsored by the government.

Legend: The relative weight in the economy is calculated basedon: the number of SOEs, their size (in terms ofturnover) and their pervasiveness across differentsectorsThe level of indebtedness is based on: leverage (debt as% of equity) The absence of exit strategy is based on: whether theState is willing or capable of disenganging itself fromSOEs without major disruption The level of inefficiencies is based on: the capacity ofgenerating turnover, cash flow and profits, with respectto indebtedness level

Pharma

Telecom

Automotive

Aeronautics

Oil & gas

Railways

Transportation

Energy/Utilities

Construction

Metals & Mining

Chemicals 9.4

8.0

7.3

4.8

4.1

2.5

1.9

0.7

0.7

0.2

0.2

Chart 13 Debt in years of cash flow and by sector listed SOEs controlled by SASAC

Sources: SASAC, Bloomberg, Euler Hermes

▶



20

Chart 14 Possible decision-tree for restructuring Chinese SOEs


Yes No

Yes No

Yes No

Is it a large employer?

Likely supported Is it a strategic and innovative sector?

Likely supported

Examples: Strategic resources, Large Telecommunication companies, Defense,

Public High tech, High Value added content (Aeronautic, Automotive)

Is it a sector withovercapacities?

Is it a sector heavily indebted?

Likely not supported by authorities but could be supported by the market

Bankruptcy corner

Likely not supported

Likely not supported

Examples: Steel, Coal, Shipping industry,Construction

Examples: Machinery and Equipment,Building materials, Wood and Paper Examples: Tourism, Retailers

This initiative followed the guidelines, issued inJuly 2016, pushing for the restructuring of SOEsoperating in equipment manufacturing, con-struction engineering, electric power, steel andiron, nonferrous metal, shipping, constructionmaterials, tourism and aviation services. Yet, thepath towards the state’s disengagement andorderly winding-up of distressed companies re-mains unclear. This adds to the considerablerisk embedded in Chinese SOEs whose debt hasincreased up to +80% of GDP, as estimated bythe IMF.

Mexico and Brazil: Reformsare needed to cope withhigh debt and distressedprofitabilityLess systemic than Chinese SOEs (because con-centrated in strategic sectors) but highly in-debted and not so efficient, SOEs in Mexico andBrazil are a long-standing issue. In fact, bothcountries have carried out extensive privatiza-tion programs in the 1980s-2000s. Yet, Mexicoand Brazil are still struggling with major SOEscrippled by management practices that havebeen strongly politicized rather than orientedto strategic development. In Brazil, this is thecase for Petrobras (oil & gas) and Eletrobras(electric utility), the two largest non-financial

federal SOEs. Both have been suffering fromdeclining profitability in the last few years, es-pecially Eletrobras (-40% operating margin in2015), which has been affected by a decreasein electricity prices imposed by the governmentin 2012. At the same time, they have both ex-perienced a strong increase in leverage be-tween 2007 and 2015 (from 30% to 115% forEletrobras and from 30% to 190% for Petrobras),which brought their debt from 2% to 9% of GDP.Although this may translate into a 9ppt increasein Brazilian public debt as a share of the GDP(from 74% to 83%), the government has notoutlined an ad hoc strategy for mitigating therisk stemming from its key SOEs. On the contrary, reforming efforts are what par-tially mitigate risks associated with Pemex, theoil & gas giant, which is still 100% owned by theMexican government. Having received aUSD4.2bn cash injection from the governmentin April 2016, the company is expected to gothrough austerity measures to curb its debt. Be-tween 2007 and 2015, Pemex’s debt has in-creased from 3% to 7% of GDP, while its turnoverhas shrunk from 5% to 2% of GDP. Given Pe-mex’s strategic nature, state’s disengagementremains a remote option. Nevertheless, in 2013the Mexican government launched a reformprogram aimed at the partial liberalization ofthe energy sector in order to access foreigntechnology, in order to better cope with declin-

▶

150,000SOEs

in China


21

Gazprom

SABIC

Transneft

State GridCorporation of China

Eletrobrás

Petrobras

Sinochem 132%

110%

72%

61%

53%

40%

26%

Chart 15 Level of debt for selected SOEsAverage debt % equity (2012-2015)

Sources: Bloomberg, Euler Hermes

ing oil production and reserves. Arguably, thegovernment will keep on supporting Pemex asneeded, but with the perspective of transform-ing it from a source of systemic risk into a prof-itable strategic asset.

Russia: The increasingweight for the economy ismitigated by goodperformanceNotwithstanding the wide privatization pro-grams of the last two decades, major Russiancompanies remain firmly under Kremlin’s su-pervision, from energy giants, such as Rosneftand Gazprom, to financial institutions like VTBBank. In fact, the weight of Russian SOEs on thenational economy continues to increase. In2015, the turnover of Russian SOEs appearingin Forbes Global 2000 represented 19% of Russ-ian GDP while it stood at 15% in 2008. Impor-tantly, a substantial share of their turnover isoriginated in Russia (up to 100% for companiessuch as RusHydro). Such a strong link to the do-mestic economy makes SOEs potentially vul-nerable to internal shocks. Nonetheless, in spiteof economic difficulties at home, Russian SOEsremain on average financially efficient with sus-tained turnover growth and leverage below50%, which contains risks associated with theirincreasing weight. Good performance may ex-plain why, despite repeated announcements of

imminent privatizations to sustain the state’sbudget, only partial steps have been taken sofar (e.g. the sale of 11% of equity stakes in thediamond-mining company, Alrosa, in 2016). Insuch a context, Moscow’s reluctance to openup to foreign investors contributes to limitingthe exit options and to worsening the risk profileof Russian SOEs.

GCC countries: Systemic butefficient players goingglobal

SOEs also continue to weigh greatly in GCCcountries. Just think about oil & gas companiessuch as Saudi Aramco, whose market value isestimated at USD3tn, or Kuwait National Petro-leum, whose turnover represented more than+80% of Kuwait GDP in 2014. In fact, the state’spresence in the GCCs remains strong in diverseindustries, such as utilities, airlines, banking,chemicals, and telecom. However, GCC SOEstend to be managed like private enterprises andare overall financially efficient, as is the case forSABIC, one of the leading chemical companiesin the world. 70%-controlled by the Public In-vestment Fund of Saudi Arabia, SABIC boastsoperating margins that are 20 times higher thanthose of Sinochem, the largest Chinese chemi-cals SOE, with a debt-to-equity ratio equivalentto one fifth of that of Sinochem. SABIC is thusan example of how GCC countries have been

capable of fostering enterprises in high value-added industries by exploiting cheap and abun-dant natural resources, the objective being toshift from an oil-centered model to a diversifiedeconomic one.

Advanced economies:Entrenched players keptunder control

In some advanced economies, the state con-tinues to play an entrepreneurial role, whilegenerally limited to a few strategic or public-oriented sectors such as energy, railways, andutilities. Contrary to countries such as the USand the UK, where state-ownership representsan emergency solution, (e.g. the bailout of Gen-eral Motors in the US and the Royal Bank ofScotland in the UK), in Italy and France the statecarries out a strategy of retaining equity stakesin big companies operating in the above-men-tioned sectors. Admittedly, their weight is notnegligible: Poste Italiane, the only listed ItalianSOE holds debt equivalent to 3.5% of the ItalianGDP, while EDF and Aéroports de Paris holddebt equivalent to 3% of the French GDP. How-ever, these companies, being partially privatizedor possibly oriented towards privatization, tendto adopt business-oriented corporate strate-gies. This, in turn, compels proper financial ac-counts that limit the risks imposed on publicfinances. +

© Image courtesy of pixabay.com. Under CC0 Public Domain ski-lifts-1209812


22

Date Country Company Last known turnover (in EUR millions) Activity

South Korea Hanjin Shipping Co.,Ltd. 5,730 Transportation United States Itt Educational Services 765 ServicesUnited States Golfsmith International Holdings 400 RetailSingapore Dragon Technology Distribution Pte Ltd 392 Machinery/EquipmentCanada Lightstream Resources Ltd 300 EnergyRussia Deti Zao 237 RetailTurkey Akfa Holding A.S 189 ServicesGermany Urlaubstours Gmbh 187 ServicesRussia Prominvest Ooo 184 ServicesRussia Specobsluzhivanie Zao 141 ServicesRussia Planetastrojj Ooo 138 RetailRussia Glavstrojjgrupp Ooo 136 ConstructionBrazil Comil Ônibus S.A. 136 Automotive manufacturersCanada Golf Town Canada Inc 135 RetailSingapore Sembawang Engineers And Constructors 132 ConstructionFrance Oger International 104 ConstructionGermany Magellan Maritime Services Gmbh 98 ServicesJapan Shin-Ei Corporation 88 RetailNetherlands Componenta B.V. 84 MetalAustralia Hughes Drilling Ltd 60 CommoditiesFrance Ste Approval 55 AgrifoodTurkey Park Bravo Tekstil San Ve Tic Ltd Sti 52 RetailPoland Action Spółka Akcyjna 1,171 ServicesSingapore Searights Maritime Services Pte Ltd 1,050 Transportation China Zhongjia Huachen Energy Co., Ltd. 855 ChemicalsAustralia Mcaleese Ltd 426 CommoditiesGreece Alapis S.A. 313 PharmaceuticalsUnited States Global Geophysical Services 260 EnergyNetherlands Ms Mode Nederland Bv 237 RetailUnited States International Shipholding 233 Transportation Russia Uzdaewooauto Voronezh Zao 150 Automotive manufacturersGermany Gebr. Kemmerich Gmbh 132 MetalChina Shandong Qiaochang Chemical Co., Ltd. 122 ChemicalsUnited States Light Tower Rentals 115 Machinery/EquipmentPoland Fiten Spółka Akcyjna 94 EnergySlovakia Nexis Fibers A.S. 93 ChemicalsFrance Altis Semiconductor 78 ElectronicsGreece Electroniki Athinon S.A. 66 RetailTurkey Hasirci Tekstil Sanayi Ve Ticaret A.S 62 TextileFrance Ets Zilli 62 TextileBrazil Godiva Alimentos Ltda 59 AgrifoodUnited States C&J Energy Services 1,573 EnergySingapore Swiber Holdings 717 EnergyUnited States Atlas Resource Partners 666 EnergyUnited States Halcon Resources 495 EnergyChina Joyou Group Building Materials Co., Ltd. 447 Machinery/EquipmentFinland Anttila Oy 321 RetailRussia Volgomost Ao 229 ConstructionTurkey Yolbulan Metal San Ve Tic A.S 199 MetalSweden Basler Fashion Ab 172 RetailCanada H.B. White Canada Corporation 142 ConstructionRussia Realnet Ooo 142 ServicesRussia Rmz Ooo 141 ServicesRussia Behsk Ooo 139 EnergySweden Liberala Tidningar I Mellansverige Ab 123 PaperTurkey Caliskan Ic Ve Dis Tic. San. A.S. 106 AgrifoodJapan Saitamaken Kosei Agricultural Cooperative Assoc. 104 ServicesUnited Kingdom Cardy Construction Ltd 97 ConstructionUnited Kingdom Lowcosttravel Group Ltd 88 ServicesColombia Sainc Ingenieros Constructores 83 ConstructionGermany Promod Deutschland Gesellschaft Mit Beschränkter Haftung 73 RetailGermany Dress-For-Less Gmbh 69 RetailSouth Africa Vrystaat Mielies (Edms) Bpk 69 AgrifoodGermany Innova Handelshaus Ag 62 ConstructionTurkey Kablotek Kablo San. Ve Tic.A.S. 57 ServicesFrance Van Hulle Agro-Distribution 57 AgrifoodRomania Romenergy Industry Srl 56 EnergyUnited States Seventy Seven Energy Inc. 1,000 EnergyItaly Ce.Di. Sisa Centro Sud S.P.A. 627 RetailRussia Magnatehk Ooo 565 ServicesChina Yunnan Yunwei Group Co., Ltd 379 ChemicalsUnited States Hercules Offshore, Inc. (2016) 300 EnergyRussia Vedk Ooo 263 AgrifoodNetherlands Mcgregor Fashion Group B.V. 231 TextileBelgium Maritime Bunkering & Trading 194 RetailChile Su Bus Chile S A 194 TransportationNetherlands Scheer En Foppen 165 RetailPoland Marcpol Spółka Akcyjna 140 RetailBelgium Truvo Belgium 125 PaperFrance Societe Aveyronnaise De Metallurgie 101 MetalBulgaria Solution Partners Eood 99 ServicesGermany Edc Gmbh 98 ChemicalsChina Huizhou Trust Industrial., Ltd. 88 ElectronicsAustralia Keystone Hospitality Group 81 ServicesBelgium Jayam 67 CommoditiesBelgium Optima Bank - Optima Banque 55 ConstructionUnited Kingdom Chromevalue Ltd 55 Household EquipmentSwitzerland Switcher Sa 50 RetailUnited States Linn Energy, Llc 2,600 EnergyUnited States Dex Media, Inc. (2016) 1,350 ServicesUnited States Breitburn Energy Partners Lp 997 EnergyAustralia Dick Smith Holdings Ltd 829 RetailUnited States Sandridge Energy, Inc. 692 EnergyGermany German Pellets Gmbh 425 CommoditiesItaly Grandi Molini Italiani - S.P.A. 363 Agrifood

ANNEX

Majorinsolvencies worldwide in Q1-Q3 2016*

SOURCE:EULER HERMES

* chronological (nonexhaustive, in descendingorder) of the insolvencies ofcompanies with an annualturnover exceedingEUR50Mn and identified byEuler Hermes in 2016 for thefollowing countries:Australia, Austria, Belgium,Brazil, Bulgaria, Canada,China, Czech Republic,Denmark, Finland, France,Germany, Hungary, Italy,Ireland, Japan, Netherlands,Poland, Portugal, Romania,Russia, Slovakia, SouthAfrica, South Korea, Spain,Sweden, Switzerland, Turkey,United Kingdom, UnitedStates

AU

GU

STJU

NE

SEPT

EMBE

RJU

LYM

AY

Euler Hermes Economic Outlook no. 1211 October 2014 | Business Insolvency Worldwide

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United States Chaparral Energy, Inc. 292 EnergyRussia Umps Oao 172 ConstructionCanada Connacher Oil And Gass Ltd 157 EnergyRussia Prodtrejjd Ooo 144 AgrifoodRussia Rmz Ao 140 MetalFrance Continentale Nutrition 96 AgrifoodUnited Kingdom Bfp Wholesale Ltd 94 AgrifoodRomania C.E.T. Govora Sa 91 CommoditiesSlovakia Provit Sk, S.R.O. 79 AgrifoodRomania Mazza Construct Srl 70 ConstructionSweden Kncgroup Ab 64 ServicesCanada Ben Moss Jewellers Western Canada Ltd 58 RetailSweden Knc20 Nm Sweden Ab 56 ServicesItaly Cordioli E C. S.R.L. 56 MetalTurkey Ucgul Corapcilik San Tic A.S 52 ServicesUnited States Peabody Energy Corporation 5,000 CommoditiesAustralia Arrium Ltd 3,944 MetalCanada Pacific Exploration & Production Corporation 1,880 EnergyUnited States Ultra Petroleum Corp. 755 EnergyUnited States Sunedison, Inc. 700 ElectronicsChina Zhejiang Ship Building Co., Ltd. 397 Other transport equipmentUnited Kingdom Polestar Print Holdings 309 PaperTurkey Real Hipermarketler Zinciri A.S 283 RetailRussia Janpz Im.D.I.Mendeleeva Oao 193 ChemicalsRussia Npkc Formoza-Al£ Tair Ooo 190 ServicesTurkey Begendik Magaza Isletmeleri Tic.Ve San A.S 180 RetailRussia Btk Zao 180 Household EquipmentBrazil Maralog Distribuicao S/A 167 ServicesItaly Ce.Di. Sisa Sicilia S.P.A. 165 RetailGermany Fly Türk Gmbh 160 ServicesRussia Mir Mjagkojj Igrushki Ooo 154 Household EquipmentCanada Firstonsite Restoration L.P 142 ConstructionRussia Volkhovneftekhim Ooo 139 ChemicalsUnited Kingdom Gajan Holdings Ltd (Austin Reed) 130 RetailAustralia Lync Energy Ltd 83 EnergyBelgium Engineering Steel Belgium 82 MetalRomania Prospectiuni Sa 68 ServicesGermany Firestixx Holz-Energie Gmbh 68 CommoditiesNetherlands Brova Holding Bv 64 ServicesGermany Hdm Gmbh 58 CommoditiesItaly Cantine Brusa - Societa' Per Azioni 56 AgrifoodItaly Societa' Agricola Consortile Cooperativa Siglabile Aps 51 AgrifoodTurkey Umt Yapi Insaat Malzemeleri Nakliyat Taahhut San. Ve Tic. Ltd Sti 50 ServicesJapan Japan Logistic Cooperative Association 445 EnergyUnited States Aspect Software Parent Inc. 394 ElectronicsItaly Ce.Di. Sisa Centro Nord Spa 344 AgrifoodDenmark F Group A/S 266 Household EquipmentNetherlands Tsn Thuiszorg B.V. 259 ServicesPoland Nomi Spółka Akcyjna W Upadłości Likwidacyjnej 117 RetailTaiwan Chien Shing Stainless Steel Co., Ltd. 82 MetalJapan Nisshoku Co.,Ltd. 79 AgrifoodSlovakia Ie Group, A.S. 69 ConstructionSouth Korea Dow Industrial Co.,Ltd 56 MetalAustralia Australian Careers Network Ltd 53 ServicesGermany Pfeifer Gmbh 52 ConstructionRomania Stg Steel Srl 51 MetalFrance Evolution Voyages 51 ServicesUnited States Paragon Offshore Plc 1,324 EnergyUnited States Republic Airways Holdings Inc. 1,192 Transportation United States Noranda Aluminum Holding Corporation 1,100 MetalUnited States Horsehead Holding Corp. (2016) 403 CommoditiesRomania Interagro Sa 395 AgrifoodFrance Groupe Cauval 380 Household EquipmentTurkey Kurum Demir Sanayi Dis Ticaret A.S. 375 MetalRomania Interagro Srl 357 AgrifoodUnited States Sfx Entertainment, Inc. 314 ServicesNetherlands UnLtd Sports Group Bv 250 ServicesUnited States Hancock Fabrics, Inc 250 RetailGermany Walsum Papier Gmbh 233 PaperPoland Partner Steel Spółka Z.O.O. 105 ServicesNetherlands Pdc B.V. (Paradigit) 102 Machinery/EquipmentTurkey Dempas Demirayak Gida Tur. Isletmeciligi 81 AgrifoodItaly Gruppo Edom S.P.A. 80 Household EquipmentGermany Esw-Röhrenwerke Gmbh 78 MetalGermany Maple Bank Gmbh 68 ServicesAustralia Global Intellectual Holdings Pty Ltd 56 ServicesFrance Hibiki 55 AgrifoodUnited States Rcs Capital Corporation 1,863 ServicesUnited States Verso Corporation (2016) 1,148 PaperAustralia Queensland Nickel Pty Ltd 413 CommoditiesAustralia Om (Manganese) Ltd 359 MetalTurkey Gold Teknoloji Marketleri San. Ve Tic. 196 RetailTurkey Doga Organik Gida Ve Tarim Urun. Uretim A.S 174 AgrifoodRomania Societatea Complexul Energetic Hunedoara S.A. 151 EnergyUnited Kingdom Buk (Realisations) Ltd 131 #N/AUnited Kingdom A Levy 128 RetailJapan Tsukiji Jitsugyo K.K. 106 CommoditiesTurkey Benlioglu Yapi Malzemeleri Insaat Taah Ltd Sti 90 ServicesFrance Avenir Telecom 88 Computer & Telecom Turkey Metro Elektronik Kuyumculuk Dis Tic. A.S 87 RetailSouth Korea Kyungdong Civil Engineering & Constructi 82 ConstructionItaly Lames Spa 79 Automotive manufacturersCanada Primus Telecomunications Canada Inc. 72 ServicesAustralia Australian Careers Network Ltd 53 Services

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Economic ResearchEuler Hermes Group

Economic Outlookand otherpublications

Already issued:

no. 1210 ◽ Special Report The global automotive market: Back on four wheels

no. 1211-1212 ◽ Business Insolvency Worldwide A rotten apple can spoil the barrel Payment terms, past dues, non-payments and insolvencies: What to expect in 2015?

no. 1213 ◽ Special Report International debt collection:The Good, the Bad and the Ugly

no. 1214 ◽ Macroeconomic and Country Risk Outlook Overview 2015: Not such a Grimm tale but no fabled happy ending

no. 1215 ◽ Special Report Global trade: What’s cooking? Introducing twelve countries’ recipes for boosting exports no. 1216 ◽ Macroeconomic, Country Risk and Global Sector Outlook Focus on the signal and ignore the noise

no. 1217-1218 ◽ Macroeconomic, Country Risk and Global Sector Outlook Riding into risks or recovery? no. 1219 ◽ Special Report Auto market – a live wire

no. 1220-1221 ◽ Business Insolvency Worldwide The insolvency U-turn

no. 1222 ◽ Macroeconomic and Country Risk Outlook The 7 dwarfs of global growth

no. 1223 ◽ Global Sector Outlook Let the Sector games begin

no. 1224-1225 ◽ Special Report Around the World in eight maps

no. 1226- 1227 ◽ Macroeconomic and Country Risk Outlook The Price of Growth no. 1228 ◽ Special Report Public bumpers for the automotive market

no. 1229 ◽ Special Report Trade Wars: The Force Weakens

no. 1230-1231 ◽ Business Insolvency Worldwide The tip of the iceberg

To come:

no. 1232 ◽ Macroeconomic and Country Risk Outlook

Macroeconomicand Country Risk Outlook

EconomicOutlook no. 1226-1227Summer 2016

www.eulerhermes.com

The Price of GrowthGlobal growth will slow down to+2.4% in 2016, its lowest level sincethe great recession

Economic Research

Economic Outlookno.1224-1225Spring 2016

Special Atlaswww.eulerhermes.com

Around the Worldin eight maps

Economic Research

Economic Outlookno.1229October 2016

Special Reportwww.eulerhermes.com

Trade Wars: The Force Weakens

Economic Research

22/10/2016 13:03 Page2

Economic Outlookno.1228September 2016

Special Reportwww.eulerhermes.com

Public bumpers for the automotive market

Economic Research

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http://www.eulerhermes.com/economic-research/country-risks/Pages/country-reports-risk-map.aspx

http://www.eulerhermes.com/economic-research/economic-publications/Pages/economic-insights.aspx

https://www.youtube.com/watch?v=LFElJTfVzd0.

CountryReport

◽Aeronautics ◽Agrifood ◽Automotive ◽Chemicals◽Construction ◽Energy ◽Household Equipment ◽Information & Communication

Technologies

◽Machinery & Equipment ◽Metal ◽Paper ◽Pharmaceuticals ◽Retail ◽Textile ◽Transportation

IndustryReport

GlobalSectorReport

http://www.eulerhermes.com/economic-research/economic-publica-tions/Pages/Weekly-Export-Risk-Outlook.aspxN

NN

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◽Five Vitamin C’s for the Chinese Winter >December 2016◽Italy: The show must go on >December 2016◽Renewable energy: Seeing the full half of the COP >November 2016◽Afri-can or Afri-can’t? 10 Myths to debunk on Africa >October 2016◽2016-17: Tectonic shifts and risk of local tremor >October 2016◽Russia-Turkey-Iran: Why the Caspian Sea region is not the Bermuda Triangle

of business >October 2016◽Three Asian Tigers caught in a (Chinese) Typhoon >August 2016◽The Olympics: A false (economic) start for Brazil >July 2016◽Worldwide DSO: Paying the penalty for low growth >July 2016

◽Angola◽Australia◽Bosnia & Herzegovina◽Chile ◽Colombia◽Ecuador ◽Ethiopia ◽Gabon

◽Guatemala ◽Iceland ◽Italy ◽Latvia ◽Lithuania ◽Mali ◽Myanmar ◽Mozambique

◽Namibia ◽Panama ◽Qatar ◽Sweden◽Thailand◽Uganda

http://www.eulerhermes.com/economic-research/sector-riskshttp://www.eulerhermes.com/economic-research/sector-risks

WeeklyExport RiskOutlook

TheEconomicTalk

December 2016 update

NN

◽Europe’s Chemical Sector >September 2016◽US Oil >February 2016◽US Retail >February 2016◽US Household equipment >February 2016◽France agrifood >November 2015◽US agrifood >November 2015◽Germany agrifood >October 2015◽Construction in France >October 2015◽Construction in Germany >October 2015

February 2016

EconomicInsight





http://www.eulerhermes.com/economic-research/economic-publications/Pages/Weekly-Export-Risk-Outlook.aspx

http://www.eulerhermes.com/economic-research/sector-risks

http://www.eulerhermes.com/economic-research/sector-risks

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Euler Hermes EconomicOutlookis published monthly by the Economic Research Departmentof Euler Hermes Group1, place des Saisons, F-92048 Paris La Défense Cedex e-mail: [email protected] - Tel. : +33 (0) 1 84 11 50 50

This document reflects the opinion of the Economic Research Department of Euler Hermes Group.

The information, analyses and forecasts contained herein are based on the Department's current

hypotheses and viewpoints and are of a prospective nature. In this regard, the Economic Research

Department of Euler Hermes Group has no responsibility for the consequences hereof and no

liability. Moreover, these analyses are subject to modification at any time.

www.eulerhermes.com

EconomicOutlook

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