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Business Insolvency Worldwide Economic Outlook no. 1230-1231 November-December 2016 www.eulerhermes.com Insolvencies: The tip of the iceberg Special focus on state-owned enterprises around the world Economic Research Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes Contents Economic Research Euler Hermes Group Economic Outlook no. 1230-1231 BUSINESS INSOLVENCY OUTLOOK 2017 16 AMERICAS FOCUS From North to South, insolvencies are on the rise United Kingdom Insolvencies to rise by +5% as Brexit is allowed extra time 16 Germany The higher cost of insolvencies United States Insolvencies to rise by +1% in 2017, in spite of fiscal boost 16 France Going back to the 60,000 insolvencies mark for the first time since 2011 Canada Insolvencies to rebound by +2% in 2017 after reaching historical lows 16 Italy -5% decline in insolvencies 4 OVERVIEW 8 10 10 11 2 Western Europe Still a long road to pre-crisis insolvency levels EDITORIAL Business Insolvency Worldwide The Economic Outlook is a monthly publication released by the Economic Research Department of Euler Hermes Group. This publication is for the clients of Euler Hermes Group and available on subscription for other businesses and organizations. Reproduction is authorised, so long as mention of source is made. Contact the Economic Research Department Publication Director and Chief Economist: Ludovic Subran Macroeconomic Research and Country Risk: Ana Boata, Stéphane Colliac, Alberto González de Aledo Pérez, Mahamoud Islam, 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 (Office Manager), Ilan Goren (Content Manager), George Kibala Bauer, Benedetta Scotti (Research Assistants) Editor: Martine Benhadj Graphic Design: Claire Mabille Photo credits: Images courtesy of Allianz, Images courtesy of Pixabay (public domain under Creative Commons CC0) For further information, contact the Economic Research Department of Euler Hermes Group at 1, place des Saisons 92048 Paris La Défense Cedex – Tel.: +33 (0) 1 84 11 50 46 – e-mail: [email protected] > Euler Hermes Group is a limited company with a Directoire and Supervisory Board, with a capital of EUR 13 645 323, RCS Nanterre 552 040 594 Photoengraving: Talesca Imprimeur de Talents – Permit November-December 2016; issn 1 162–2 881 ◾ December 25, 2016 14 3 11 Latin America Mind the (many) turbulences 16 Spain A fourth decline ahead (-5% in 2017) 12 ASIA-PACIFIC FOCUS Insolvencies surge for the third year in 2017 17 Denmark Statistical zigzag 17 12 China Insolvencies to increase by +10% in 2017, the fourth consecutive rise Looking East Smaller economies are performing better 17 Russia Another +3% rise in insolvencies ahead Hong Kong Feeling the pain from China and the US 17 Poland Insolvencies to increase by +3% in 2017 South Korea and Singapore A domino effect? 18 Japan Insolvencies to rebound by +1%, a first since 2008 SPECIAL FOCUS Zombie State-owned enterprises (SOEs) around the world, what are the risks? 22 MAJOR INSOLVENCIES WORLDWIDE 24 OUR PUBLICATIONS 26 SUBSIDIARIES 13 13 13 13 Australia & New Zealand Stabilization ahead 14 EUROPE FOCUS The drop in insolvencies will be less imposing in 2017 Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide EDITORIAL © Image courtesy of pixabay.com. Under CC0 Public Domain frozen-1187920 Frozen LUDOVIC SUBRAN It took you over a year to get it out of your head. Your kids have stopped obsessing about it; they even managed to order 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 has been to companies around the world. No need to dwell on it, right? Let’s move on. How to forget about your problems other than by a very personal adaptation of Let It Go, the magic soundtrack of Frozen? It is called Let It Flow and is for Credit Managers and CFOs across the world! They can let it go, only if they’re insured. Any resemblance to your balance sheet 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 all It'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 income statement. My soul is spiraling in frozen millions all around And one non-payment crystallizes like an icy blast I'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 flow That perfect CFO is gone Here I stand, in the light of day. Let the non-payments rage on! Insolvencies never bothered me anyway... Happy holiday season to everyone! 3 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes OVERVIEW The tip of the iceberg BENETTA SCOTTI, MAXIME LEMERLE + In 2016, companies struggled to stay resilient despite robust support from policymakers. Strong deflationary pressure and subdued global demand made life harder for businesses. After two years of substantial declines in insolvencies, in 2016 our Global Insolvency Index will record a limited drop of -2%. + Indeed, the downward trend in global insolvencies is coming to an end. This is happening because global growth fails to accelerate and will linger below +3% in the upcoming years. Thus, companies are more vulnerable to external shocks. Bankruptcies are on the rise in Asia-Pacific and in the Americas, and Europe’s improvement is fading. We expect worldwide insolvencies to rise by +1% in 2017. + At a global level, the contained return of inflation should provide only limited relief to corporate turnovers, while companies will face higher input costs and upward wage pressures, in addition to tighter financing conditions. + The +45% surge in the number of major bankruptcies registered in the first three quarters of 2016 is a source of second-round turbulences. Top bankruptcies will have a domino effect, with adverse implications on fragile suppliers. 4 Total number of bankruptcies is back (only 3% (below) to pre-crisis level Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide © Image Allianz 106047682 In 2016, business insolvencies to decrease by -2% only, a sharp deceleration from previous years will fall back to its 2007 low and only slightly below its pre-crisis average (-3%). Yet, after two years of sharp drops in insolvencies (-14% in 2014 and -9% in 2015), the trend is rapidly losing momentum. The declining trend in business insolvencies initiated in 2010, has continued in 2016 for the seventh consecutive year. Euler Hermes’ Global Insolvency Index, which weighs countries on the basis of their GDP and represents 84% of world GDP, is expected to decrease by -2% in 2016. For the first time since the Great Recession, it Global headwinds and local turbulences Companies have absorbed the 2008-2009 shock at a global level, but they remain vulnerable to the lack of solid macroeconomic and financial environment and to local hot spots. In 2016 they faced three major global headwinds: (i) the slug- Chart 1 Euler Hermes Global Insolvency Index and regional indices Yearly changes in % and contribution to the Global Index 25% 23% Europe appears immune to the gloom in the rest of the world: Insolvencies decreased by -5% this year forecasts 21% 20% 15% 10% 7% 5% 5% -1% 0% -2% -5% -6% -2% -2% -5% -15% -14% North America Index Asia-Pacific Index -9% -10% -14% Africa & Middle East Index Central & Eastern Europe Index Western Europe Index -20% Latin America Index 05 06 07 08 09 10 11 12 13 14 15 16f 17f Sources: National statistics, Euler Hermes forecasts gish global economy, with real GDP growth posting only +2.5% in 2016 (versus +2.7% in 2015); (ii) the sharp slowdown in global trade, with export volume growth reaching an unprecedented low at +1.9% (+3.1% in 2015); (iii) fierce price competition, which has put turnovers under pressure; and (iv) volatility in exchange rates and international financial flows, which have kept financing under constraints and stress, particularly in emerging countries. Companies also had to confront localized political and economic hot spots, from the Chinese stock market crash in January to the impeachment of Brazilian president in April, to the Brexit vote in June and the Turkey’s failed coup in July. Global Insolvency Index Insolvencies in one country out of two, or two regions out of three, are to rise or stabilize in 2016. Firstly, Latin America will post its fifth consecutive increase in insolvencies (+18%): corporates suffered from the recession in Brazil, Argentina and Venezuela, as well as from a sharp deterioration of the terms of trade as commodity prices remained low and currencies depreciated. Secondly, Asia-Pacific continues to suffer from the side effects of China’s economic transition and aggravated slowdown: the rebound in insolvencies is expected to continue ▶ 5 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes Chart 2 2016 Insolvencies compared to 2003-2007 average* % change Spain Morocco Lithuania Chile Hungary Bulgaria Ireland Colombia Portugal Australia Czech Republic Luxembourg Italy Turkey Norway France Singapore Belgium Finland Estonia China Brazil Poland Switzerland Global Insolvency Index Sweden New Zealand Netherlands United States Austria Latvia United Kingdom Germany Japan South Africa Romania Slovakia Russia Canada Taiwan South Korea 341 272 235 231 228 222 203 124 82 72 60 54 38 37 37 26 25 17 11 11 11 3 0 -1 -3 -9 -12 -17 -19 -20 -25 -28 -36 -36 -39 -42 -42 -53 -57 -59 -69 -82 Sources: National statistics, Euler Hermes ▶ in 2016 with a +5% increase in the regional index (after a +9% in 2015). Our Africa index is to post another double digit increase in 2016 (+16% after +12% in 2015) while in North America insolvencies seem to have reached a plateau. After several consecutive years of steady decline both in the US and Canada, bankruptcies should stabilize as interest rates increase. All in all, the global picture for insolvencies would have been more negative, had policymakers not been supportive. Fiscal stimuli and dovish monetary policies have partially mitigated the global weaknesses and the local sources of turmoil. More importantly, global insolvencies would have trended upwards without the regional decrease in Western Europe. Despite uneven developments, Western Europe is the only region to record a sizable decline in bankruptcies in 2016 (-5% after -13% in 2015), thanks to the gradual improvement of the economic situation. However, the level of bankruptcies in Western Europe remains high: 10 out of 17 countries still report more insolvencies in 2016 than their 2003-2007 average. +1% for insolvencies worldwide in 2017 6 North America Index Asia-Pacific Index Central & Eastern Europe Index Africa & Middle East Index Western Europe Index Latin America Index Global Insolvency Index © Ice skating shoes. iceberg. image courtesy of terry matthews Insolvencies to increase by +1% in 2017, the first increase since the Great Recession In 2017, the Global Insolvency Index should climb by +1%, the first rise in seven years. This results from two different trends. On the one hand, the persistent and broad-based rise in insolvencies in Latin America (+12%), Africa (+9%), Asia-Pacific (+6%) and North-America (+1%). We forecast all the countries in these regions to contribute to the rebound. On the other hand, the expected decline in bankruptcies in Western Europe (-4%), as well as in Central and Eastern Europe (-1%), is losing momentum. Insolvencies are heading towards stabilization in 5 out of 17 countries, notably Germany where historically low levels render further declines mechanically difficult. Three main factors explain the return of credit risk: (i) global growth and trade have hit a glass ceiling of respectively +3% for GDP growth, and +4% for trade volume growth; (ii) global financing conditions will experience a regime switch as the US increase interests rates further; and (iii) the rebound in large bankruptcies i.e. bigger companies going bankrupt will cause a domino effect on fragile suppliers. Growth and trade still subdued but inflation is back Global growth is expected to tick up from +2.5% in 2016 to +2.8% in 2017 but should remain below +3%. Global trade will grow by +3.1% but will also stay below potential, growing half as fast as it used to grow before the Great Recession. Most of the rebound in global growth and global trade comes from the expected strong policy shift in the US, the end of recession for the fragile ones such as Brazil and Russia, and the resilience of China and Europe, ready to do whatever it takes to save growth. In doing so, trade barriers will continue to mushroom, making export more complex and costly. President-elect Trump also announced that the US could look into protecting some sectors, changing financial regulation and favoring US companies domestically and abroad. This could be a game changer. Last, the major difference between 2016 and 2017 lies in the return of inflation. First commodity 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 continued monetary stimulus in Europe, Japan and China should eventually push prices further. What does it mean for companies? After years of learning how to make decisions in a deflationary world (flat turnovers, high operating profits, cheap debt, cash piling, no investment), it could be time Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Chart 3 Insolvencies forecast in 2017 Yearly change in % Hungary Denmark Portugal France Czech Republic Romania Latvia Lithuania Slovakia Greece Spain Italy Ireland Sweden Belgium Colombia Bulgaria New Zealand Australia Estonia Switzerland Norway Finland The Netherlands Germany Global Insolvency Index Austria Japan United States Canada South Korea Russia Poland Luxembourg South Africa Turkey Hong Kong Taiwan United Kingdom Morocco China Chile Brazil Singapore 1 1 1 1 2 3 3 3 3 5 5 5 5 5 8 10 12 15 15 -25 -19 -7 -7 -6 -5 -5 -5 -5 -5 -5 -5 -4 -2 -2 0 0 0 0 0 0 0 0 0 0 North America Index Asia-Pacific Index Central & Eastern Europe Index Africa & Middle East Index Western Europe Index Latin America Index Global Insolvency Index Sources: National statistics, Euler Hermes forecasts for a wake-up call. Inflation will push turnovers but constrain operating profits and depreciate assets and cash. Working capital of companies could also be pressured by protectionism and higher demand, increasing pressure on suppliers’ credit both domestically and abroad, especially when payment terms are already long. Global financing conditions will change as the US increase interest rates As a result of inflationary pressures, Euler Hermes expects a faster tightening of the US monetary policy. The Fed will abandon its long-lasting dovish stance and increase rates 2 to 3 times in 2017, and another 2 to 3 times in 2018 to reach a 3% rate by 2019. This will raise financing costs in the US, and put historically high debt levels at risk. Unfortunately, higher interest rates in the US and a stronger dollar could affect companies in the emerging. Dollar-denominated debt could become scarcer and more expensive and investments could go either way: flow to the emerging world in search of returns, or fly back to quality. In addition, unbalanced economies could be forced to tighten their own monetary policies, which could cause credit crunches in countries with already high cost of debt. Chart 4 Number and cumulative turnover of major insolvencies in Q1-Q3 2016 v.s. Q1-Q3 2015 14 by size of turnover > 1 EUR bn 100-999 EUR min 13 107 50-99 EUR min +45% 72 71 3 Q1-Q3 2015 Q1-Q3 2016 Number of insolvencies Source: Euler Hermes 31 29 47 +27% 31 20 5 Q1-Q3 2015 Q1-Q3 2016 Cumulative turnover (EUR bn) A potential domino effect from toobig-which-failed companies In the first three quarters, the number of insolvent companies with a turnover exceeding EUR50mn has soared by +45% compared to the same period in 2015, with 192 instead of 132 insolvent companies. The increase proved to be considerable in terms of cumulative turnover, with a +27% surge over the same period, and a +55% jump for companies with a turnover between EUR100mn and EUR1bn. This trend is problematic insofar as it triggers adverse domino effects for non-strategic suppliers. Europe is the most at-risk (70 cases of top bankruptcies in Western Europe and 50 cases in Central and Eastern Europe). North America reported the largest number of bankruptcies in terms of cumulative turnover: EUR29bn in Q1Q3 2016 (compared to EUR11bn in Western Europe and EUR17bn in Asia-Pacific). Half of the major companies that filed for bankruptcy in North America were operating in the oil & gas industry. Indeed, energy companies have posted the largest failures in terms of cumulative turnover worldwide with more than EUR15bn in the first nine months. State-owned enterprises (SOEs) are also on the watch list: they are not immune to bankruptcy. In our special focus (see pages 18-21), we provide a framework to analyze SOEs in different regions, from China to Latin America along four risk dimensions. + 7 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes Insolvencies to increase in 2017 Business Insolvency Outlook and remain above the pre-crisis level 2017 Q4 2016 — UPDATE Global insolvency index Change in 2016e: -2% Change in 2017f: Insolvencies on a strong rise: more than +3% Insolvencies on the rise: between 0 % and +3% +1% Insolvencies down: between -1% and -5% Insolvencies down: more than -5 % Level of insolvencies above 2000-2007 average * Regional index basis 100=2000 Source: Euler Hermes as of December 16, 2016 North America 2015 Number Change Regional Index* United States Canada 66 24,636 3,089 -8% -9% -1% Change 2016e Change 2017f 0% 0% 0% 1% 1% 2% Latin America 2015 Number Change Regional Index* Brazil Colombia Chile 8 78 2,164 428 450 62% 25% 15% 176% Change 2016e Change 2017f 18% 24% -6% 11% 12% 15% 0% 12% Central & Eastern Europe 2015 Number Change Regional Index* Russia Turkey Poland Czech Republic Romania Hungary Slovakia Bulgaria Lithuania Latvia Estonia 262 10,086 13,701 747 2,191 10,269 35,509 622 737 1,987 797 376 -1% 7% -13% -9% -9% -50% -27% -11% 12% 18% -16% -12% Change 2016e Change 2017f -2% 7% -10% 5% -9% -20% -24% -10% -5% 20% -10% 4% -1% 3% 5% 3% -6% -5% -25% -5% 0% -5% -5% 0% Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide in 6 out of 10 countries worldwide, in more than half of the countries studied Western Europe Africa & Middle East 2015 Number Change Regional Index* Germany France United Kingdom Italy Spain The Netherlands Switzerland Sweden Norway Belgium Austria Denmark Finland Greece Portugal Ireland Luxembourg 151 23,123 63,198 19,887 14,722 4,818 6,006 4,519 6,426 4,462 9,762 5,150 4,029 3,068 362 4,382 1,049 902 -13% -4% 1% -12% -6% -24% -21% 7% -10% -7% -9% -5% 0% -12% 8% -4% -10% 3% Change 2016e Change 2017f -5% -4% -5% -3% -5% -15% -17% 2% -6% 5% -7% 3% 60% -5% 3% -18% 3% 10% -4% 0% -7% 5% -5% -5% 0% 0% -2% 0% -2% 1% -19% 0% -5% -7% -4% 3% 2015 Number Change Regional Index* South Africa Morocco 124 1,962 5,934 12% -5% 18% Change 2016e 16% 0% 8% Change 2017f 9% 5% 8% Asia Pacific 2015 Number Change Regional Index* China Japan Australia South Korea Taiwan Singapore Hong Kong New Zealand 62 3,237 8,812 8,079 720 162 189 305 2,322 9% 24% -9% 22% -14% 23% 17% 13% -6% Change 2016e Change 2017f 5% 20% -3% -7% -23% 27% 2% 0% -8% 6% 10% 1% 0% 3% 5% 15% 5% 0% 9 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes AMERICAS FOCUS From North to South, insolvencies are on the rise +1% insolvencies in North America in 2017 + The steady decline in insolvencies in North America has come to an end: bankruptcies should reach a plateau in 2016, in the US and Canada, and increase moderately in 2017 (+1% and +2% respectively). + In the US, companies will benefit from President Trump’s measures dedicated to boosting short term (and domestic) activity, but will suffer from negative factors on financing and international trade. + In Latin America, insolvencies will keep rising for a sixth consecutive year, posting a double digit increase (+12% in 2017) to the highest number of bankruptcies since 2000. The economic pendulum is slowly moving back to positive territory, but firms still feel the pain and will face new turbulences coming from the US. Chart 5 Bankruptcies in the energy sector in the US 50 Number of bankruptcies Debt held by corporates filing for bankruptcy (USDbn) 40 30 20 10 0 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Sources: Haynes & Boone, Euler Hermes 10 United States Insolvencies to rise by +1% in 2017, in spite of fiscal boost 2016 has been a mixed year for American corporates. On the one hand, US companies have enjoyed thriving stock markets, robust household consumption of goods and services (+2.6% in yearly average up to Q3), and longer than expected accommodative financing conditions. Indeed, the Fed was much less aggressive than anticipated, with only one hike. On the other hand, the energy sector and all the related activities have been highly affected by the low oil prices in the first half of the year, even if recovering oil prices have allowed for stronger bal- Euler Hermes ance sheets and a stabilization of claims. Specifically, after 34 North-American energy companies filed for bankruptcy in Q2 2016, defaulting on a total debt amounting to USD43bn, figures have normalized in Q3. More generally, US companies have continued to register a strong fall in (real) profits (-4.2% in Q1-Q3 2016 compared to the same period in 2015), exposing weak productivity and wage pressures. Thus, squeezed margins have in turn led to tighter financing conditions in spite of the Fed’s dovish stance. De facto, insolvencies have started to plateau while they reached their ‘natural rate’ after a six-year long decline. Looking ahead, we expect insolvencies in the US to rise by +1% in 2017. The fiscal boost promised by President Trump should provide momentum to the economy. Nevertheless the general 15% corporate tax cut and the infrastructure spending, which may realistically amount to USD0.5tn over the next decade, will not be equally beneficial to all sectors. Also, the appreciation of the US dollar will hurt exporting firms and the monetary tightening will hit all sectors, not only the highly indebted ones, such as machinery & equipment. Moreover, protectionist measures are to create winners, the metal in- Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide dustry for example, who would enjoy strong import taxes to the detriment of foreign competitors, but also losers, notably textile companies, who would be exposed to import tariffs of up to 32%. Canada Insolvencies to rebound by +2% in 2017 after reaching historical lows Euler Hermes expects the number of insolvencies in Canada to stabilize in 2016 and to head for a +2% increase in 2017. As in the case of the US, after fourteen consecutive years of steady decline, insolvencies have reached a plateau at just slightly more than 3,000 cases per year since 2012. This historical low leaves little room for a small increase, as business demography (+200,000 companies over the last decade up to 2.6 million) accelerated. Insolvencies bounced back in 2016, but only in the oil producing regions (Saskatchewan, Manitoba, British Colombia). In 2017, despite the gradual recovery of the energy sector, the combined effect of three negative dynamics should drive overall insolvencies up: weaker exports, slowing job growth and tightening lending con- ditions to cool the housing market and mortgage debt levels. Latin America Mind the (many) turbulences The Latin America insolvency index has already jumped up by more than +90% since 2014, mainly due to the recession in Brazil. Insolvencies in Brazil will continue to rise in 2017 (+15%), albeit at a more moderate tempo than in 2016 (+24%). The country is set to exit recession only gradually in 2017 with GDP to grow by a very marginal +0.6%. Smaller companies (+25% in insolvencies in 2016), medium companies (+7%) but also large companies (+18%), more exposed to international trade, will continue to feel the shock of the previous years (-3.8% in 2015 and -3.5% in 2016). The more dovish stance taken by the Central Bank (two interest rate cuts in the last two months) following the moderation of inflationary pressures may ease financing conditions for corporates. However, US policy-making will undoubtedly affect Brazilian companies at least on the short run via the foreign exchange rate channel.+ Chart 6 Corporate insolvencies in Americas Yearly levels, basis 100 in 2006 350 United States Canada Brazil forecasts 300 250 200 144 150 127 100 50 0 © Image Allianz 1386600763 47 06 07 08 09 10 11 12 13 14 15 16f 17f Sources: National statistics, Euler Hermes forecasts 11 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes ASIA-PACIFIC FOCUS Insolvencies surge for the third year in 2017 + In 2017, no country in the Asia-Pacific region is to report a decline in insolvencies. The regional index will record the third consecutive yearly increase (+6%) with another strong rise in China (+10%). + If policymakers were not supportive, the rise of insolvencies would probably be stronger. The region has to cope with the consequences of subdued global trade, which has already caused a series of major bankruptcies, notably in the maritime transportation sector. This is exacerbated by a continued rise in protectionist measures. + Structurally, the region has to adapt to the bumpy Chinese rebalancing. While consumer goods producers will benefit from the expansion of the Chinese middle-class, suppliers of industrial commodities (Australia, Indonesia, and Malaysia) and of semi-finished products (Taiwan, Singapore, and South Korea) will continue to suffer. % change compared to previous year 15% 2% 10% China Hong Kong 5% Taiwan 27% 3% South Korea -23% New Zealand -8% Australia -7% -20% -10% Sources: National figures, Euler Hermes forecasts 12 1% -3% -30% 20% 5% 0% Japan 0% 2017 0% 2016 0% insolvencies in Asia-Pacific in 2017 © Image Allianz 82627 China Chart 7: Insolvency forecasts in Asia-Pacific Singapore +6% 10% 20% 30% Insolvencies to increase by +10% in 2017, the fourth consecutive rise The insolvency outlook remains unfavorable. Insolvencies are expected to increase for the fourth year in a row in 2017 (+10%), after an estimated +20% in 2016. Firstly, demand growth is set to decelerate slightly. In 2016, Chinese GDP has grown by +6.7%, defying lower growth expectations, mainly thanks to a robust fiscal stimulus. In 2017 growth is expected to decelerate to +6.2% due to subdued growth in private investment and exports. Secondly, credit risk would remain elevated with high corporate debt (170% GDP in 2016), high levels of non-performing loans and a tightening of the property market. Thirdly, excess capacity for basic materials would remain an issue. New orders would probably be limited, reflecting both low demand and higher protectionist measures overseas. Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide 7840 Hong Kong Feeling the pain from China and the US The effects of the decrease in Chinese private demand will be particularly felt in Hong Kong, a favorite shopping destination for Chinese consumers. The retail sector will be the main casualty. Moreover, given the currency regime, tighter monetary conditions may ensue in the months to come. Indeed, the Central Bank is to take a more hawkish position in the wake of the US Federal Reserve. Consequently, we expect insolvencies to increase by +5% in 2017 after a stabilization in 2016. South Korea and Singapore A domino effect? South Korea is facing a reversal in its insolvency trend. While the country should record a decrease of -23% in 2016, in 2017 insolvencies may increase by +3%, after eight years of steady decline. Indeed, companies are expected to see the consequences of weak global trade growth and major insolvencies, such as Hanjin Shipping. Han- jin, with its USD5.7bn turnover represents the largest bankruptcy in 2016. If spillovers have been contained, for now, it is because the government has been reactive in supporting companies, notably SMEs. In Singapore, insolvencies are expected to accelerate in 2017 (+15% v.s. +2% in 2016). Supportive policies have been protecting the private sector from the negative impact of the failure of big players, such as Searights (maritime transportation) and Swiber (energy). So far. Japan Insolvencies to rebound by +1%, a first since 2008 An 8-year-long decline in insolvencies is to end in 2017, as the number of bankruptcies is expected to rise by +1%. The country has been strongly benefiting from the super-accommodative monetary policy, which allows companies, notably SMEs, to refinance their debt at favorable conditions. Moreover, GDP growth is to gradually improve sustained by a progressive pick up in private consumption and a favorable fiscal policy. However, there are three main points 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 to persist with producer prices contracting further in 2016. Thirdly, fiscal leeway is limited with a general government debt around 250% GDP. Australia & New Zealand Stabilization ahead In 2017, insolvencies will stabilize in both Australia and New Zealand, after decreasing by 7% and -8% respectively in 2016. In Australia, significant regional variations persist. On the one hand, there are states affected by the downturn in commodity prices, particularly Western Australia and Queensland, where insolvencies remain on an upward trend, while some states are experiencing a property boom and a steep decrease in insolvencies. Risks persist in the construction sector. As for New Zealand, the dairy sector is still under pressure, but overall the economy continues to be resilient, supported by low interest rates, tourism, and net positive migration.+ 13 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes EUROPE FOCUS The drop in insolvencies will be less imposing in 2017 + The declining trend in insolvencies remains on course for both Western, and Central and Eastern Europe (-4% and -1% respectively in 2017), in line with moderate but steady economic prospects and supportive financing conditions in the Eurozone. + Despite this broad-based improvement, insolvencies still remain 27% above their precrisis average in Western Europe (31% above in Central and Eastern Europe). + The regional picture still masks the heterogeneous recovery between sectors and countries. Insolvencies will stabilize in 5 out of 17 countries in Western Europe in 2017, and increase in some major economies such as Poland, Russia and the UK. -4% insolvencies in Western Europe in 2017 Chart 8 Overview of insolvencies in Western Europe 2017f compared to 2003-2007 average insolvency level (x-axis) v.s. 2017f compared to 2016f insolvency level (y-axis) 10% 8% Worsening trend 6% United Kingdom 4% Switzerland Norway Finland 0% -30% The Netherlands -10% ••• -50% 10% 30% 50% 100% 300% Belgium Ireland Spain -6% France -8% -10% 2017f vs.2003-2007 Portugal Improving trend Italy 14 200% -2% Sweden -4% Sources: National statistics, Euler Hermes forecasts ••• Austria Germany Stabilizing 2017f compared to 2016f Luxembourg 2% Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide © Image Allianz 98354891 Western Europe: Still a long road to pre-crisis insolvency levels The macroeconomic and financial backdrop will remain supportive for credit risk in 2017. We expect Eurozone to grow +1.6% thanks to the combination of three key drivers. First, domestic demand: household consumption, thanks to a pick-up in employment and subdued prices, should continue to grow steadily. This will support the decline in insolvencies in sectors such as retail which already recorded a -8% drop on average across Europe in 2016. This will also help the recovery in the construction sector, which usually accounts for 20% of total business insolvencies in the region. Second, the trade momentum, with a weaker euro around 1.05 USD in 2017 should help European exporters. Last, the supportive policy mix, the ECB’s continuation of QE and looser fiscal policy will help SMEs grow. Downward risks persist, stemming notably from the political calendar and its possibly negative confidence effects. Uncertainty over the political horizon in key countries (Italy, France, Germany, the Netherlands and Hungary) may hurt business confidence and the willingness to invest, slowing down the long-awaited recovery of pri- Chart 9 Business demography in Europe Number of firms, % Change between 2012 and 2014 vate investment. In that context, Euler Hermes expects its West- The Netherlands 22 ern Europe insolvency index to decline by -4% Germany 14 11 France in 2017, after -5% in 2016. This decrease marks 9 Switzerland a noticeable deceleration compared to 2015 8 United Kingdom (-13%). Half of the countries in the region are 7 Luxembourg heading towards a limited change in insolven5 Belgium 4 Austria cies, in part compensated by the sharp decline 3 Norway in the other half. 2 Sweden For the first set of countries, the stabilization 1 Finland trend relies on mechanical reasons: an already Denmark 0 low number of insolvencies (which limits further 0 Spain -1 Portugal sizeable decline), and a dynamic business de-3 Ireland mography (which translates into a higher num-3 Italy ber of bankruptcies as young firms display a -4 Greece higher mortality rate than established ones). This is the case in countries like Germany and the Sources: Eurostat, Euler Hermes Netherlands where insolvencies have fallen below the pre-crisis average, while the number of firms has been increasing faster than profit margins. In the same group, some countries experience stabilizing insolvencies for other reasons. This is the case for Belgium, where the soft decline (-2% in 2017) mainly reflects the lack of accountries to register celeration in GDP growth. This is also the case in a limited change Norway (0%), where insolvencies remain +37% in insolvencies above their pre-crisis average as the country has in 2017 suffered from the low oil prices downturn. ▶ 1 out of 2 15 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes © Image courtesy of pixabay.com. Under CC0 Public Domain gherkin-935126; berlin-1653002, milan-1826515; paris-843229; The second set of countries consists of France and Italy, Spain and Portugal, all still above precrisis levels. In 2016, Spain and Portugal were recording 341% and 82% more bankruptcies than before the crisis. The picture is already less troubling for Italy (38%) and France (27%), where the decline is supported by the recovery of corporate margins and strong fiscal boosters. For Ireland, we expect a return to a downward trend (-4%) as the Irish economy continues to grow +3% next year. The rise in Irish bankruptcies in 2016 was mainly due to statistical issues: many banks have been cleaning up their accounts, disposing of large batches of receiverships. Greece should also register a downward trend in 2017 (-5%) as the country exits recession, capital controls are removed, and banks are progressively recapitalized. The UK Insolvencies to rise by +5% as Brexit is allowed extra time In 2017, the UK will be the only major European country to see a sizable increase (+5%) in bankruptcy cases. Yet, in 2016, insolvencies decreased by -3%, for the fifth consecutive year, as the British economy has proved resilient in the aftermath of the Brexit vote. Next year, the expected trend reversal will be mainly due to the consequences of the economic slowdown (GDP to grow only by +1%) and the depreciation of the pound: the real effective exchange rate declined by -12% since June, pushing input prices higher and margins lower. Moreover, uncertainty will negatively affect investment, as proven by capital flows and M&As after the Brexit vote (-50% in November compared to last year). Germany The higher cost of insolvencies After decreasing by -2% to a record low (22,750 cases), business failures are expected to stabilize 16 at about 23,000 cases in 2017, putting an end to a 7-year-long downward trend. Indeed, the economy will continue to grow steadily but without acceleration (GDP growth forecast at +1.7% in both 2017 and 2018), while corporate profits have fallen below their long-term average. Lower margins, combined with the acceleration in the number of new businesses, and the higher cost of insolvencies (EUR26bn between August 2015 and August 2016) will increase pressure on German firms. Italy -5% decline in insolvencies Italian firms are recovering despite the low momentum of the economy (+0.9% in 2016, and +0.6% in 2017). Corporate profit margins have risen up to 41.4%, sustained by lower energy prices and favorable financing conditions. Accommodative monetary policy by the ECB has significantly decreased interest rates on corporate loans, although SMEs, which make up the backbone of the Italian economy, continue to face tighter conditions. In turn, stronger profitability is boosting corporate investment (+2.2% 4q/4q). Euler Hermes expects insolvencies to decline by -5% in both 2016 and 2017 with an orderly resolution of the banking sector vulnerabilities. However, Italian companies remain vulnerable to a confidence crisis linked to the prolonged political instability: the number of bankruptcies remains 40% above the pre-crisis average. France Going back to the 60,000 insolvencies mark for the first time since 2011 In France, business insolvencies are decreasing by -5% in 2016 and most likely by -7% in 2017. Growth prospects improved since 2015 (+1.3% in 2016), better corporate margins (29.8% end2013 to 31.6% in Q2 2016) thanks to targeted tax cuts, and better credit conditions did help especially the construction sector, where insolvencies went down -10% this year. However, total insolvencies are still 25% higher than pre-crisis level and sector and regional divergence persists. Tourism-related sectors (transports, accommodation) are not benefitting fully from the good news (only -1.8% y/y in 2016), especially the Ile-de-France region. Spain A fourth decline ahead (-5% in 2017) After a +3.3% in 2016, Spanish GDP growth will stand at +2.3% in 2017. Private consumption will slightly slow down (+2.4% in 2017 vs +3.1% in 2016) as the decline in unemployment will not be as strong as in 2016 and priced edge up. Fiscal adjustments are needed to address the Social Security deficit estimated at more than EUR2bn; hence a likely increase in corporate taxes. Insolvencies are nonetheless expected to continue to decrease for a statistical reason, though more slowly (-5% in 2017 v.s. -15% in 2016). Indeed, the number of companies going bust in a given year in Spain is still 3.5 times as high as before the crisis. Denmark Statistical zigzag Insolvencies increased by +60% in 2016 due to exceptional reasons. First, the higher insolvency rate recorded for a new form of company (Iværksætterselskab) that was introduced in 2014. Second, and more importantly, the resolution of a major backlog experienced by Danish tax authorities due to problems in their IT system, which has kept bankruptcy figures artificially low for the last 2-3 years. In 2017, we expect the number of bankruptcies to decline by -19%, mainly as a statistical adjustment. Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide © Image courtesy of pixabay.com. Under CC0 Public Domain torres-730997; copenhagen-1209572; moscow-city-1568042; warsaw-1743565 Looking East: Smaller economies are performing better +3% insolvencies in Poland and Russia in 2017 In Central and Eastern Europe, our regional insolvency index confirmed the decline started in 2015, with a -2% drop in 2016 and another -1% fall expected in 2017. However, this regional view hides two diverging trends. Insolvencies will increase in the biggest economies of the region (Russia, Turkey and Poland), while Baltic and Central European economies continue to experience another round of decrease. Russia Another +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 modest growth of +1% while sanctions remain. This improvement is sustained by the timid increase of oil prices. Companies will benefit from more favorable financing conditions, thanks to a softer monetary policy as well as from recovering do- mestic demand. After two years of sharp decline, household consumption is expected to increase by +1.5%, encouraged by lower inflation, although the base effect will play a significant role. In spite of these positive signals, recovery remains too weak to trigger a reversal in the insolvencies trend, at least in the short-term. Hence, we expect insolvencies to continue increasing, but at a more moderate pace (+7% in 2016, and +3% in 2017). Poland Insolvencies to increase by +3% in 2017 In Poland, the downward trend comes to an end as insolvencies will be up by +5% in 2016 and +3% in 2017. GDP growth is slowing down (from +3.6% in 2015 to +2.8% in 2016), as consumption has become the sole growth driver with investment declining in 2016. Further factors behind the insolvency trend reversal are persisting difficulties in the construction sector (due to a strong decrease in investment) and deflationary pressures (–0.8% in 2016, and +0.5% in 2017). + Chart 10 : Change in corporate insolvencies by sector for selected European countries 2016 versus 2015 in %, change in last 12 months (latest available data) 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% Sources: National statistics, Euler Hermes 17 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes SPECIAL FOCUS 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 be defined as state-owned enterprises (SOEs). SOEs may strongly impact the national economy 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 of systemic risk (such as Chinese SOEs in metals and chemicals), and those which can be an engine for industrial development and prosperity (such as petrochemical SOEs in Gulf Cooperation Council countries). Since SOE debt is not consolidated into official public debt, debt of individual SOEs (such as Petrobras in Brazil and Pemex in Mexico) may add 7-8pps to the public debt-to-GDP ratio. This is why the lack of an exit strategy for restructuring and privatizing SOEs contributes to uncertainty. + Overall, Chinese SOEs present the highest risk profile, followed by SOEs in Brazil and Russia. SOEs in GCC countries, present a moderate-low risk profile. SOEs in advanced economies, such as Italy and France can be considered low-risk. A four-dimension framework to analyze SOE risks Chart 11 Weight of SOEs appearing in Forbes Global 2000 on national economies 80% 70% Japan 60% Venezuela India Assets % GDP 50% 40% United Arab Emirates Russia China Colombia 30% Brazil Number of firms Saudi Arabia 20% 60 France 25 Italy 10% 10 Mexico 3 0% 0% 5% Sources: Forbes, Euler Hermes 18 10% 15% Turnover % GDP 20% 25% 30% 35% State ownership does not impede the ascent to global economic success. From the largest 2,000 listed companies in the world (Forbes ranking), more than 160 can technically be defined as state-owned enterprises (SOEs), that is to say, companies in which the state directly owns more than 50% of share capital. Far from being marginal players, they can significantly impact national economies, positively or negatively. Whether SOEs are an opportunity or a risk to national public finances depends on a number of 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 on their pervasiveness across different economic sectors), their level of indebtedness (measured as the ratio between debt and equity), their inefficiencies (that is SOEs’ capacity to generate turnover, cash and profits with respect to their level of indebtedness) and the existence of an exit strategy (whether the state is willing and/or Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Chart 12 The four risk factors for SOEs Relative weight in the economy Legend: Absence of exit strategy Level of indebtedness The relative weight in the economy is calculated based on: the number of SOEs, their size (in terms of turnover) and their pervasiveness across different sectors The level of indebtedness is based on: leverage (debt as % of equity) Source: Euler Hermes Inefficiencies capable of disengaging itself). A strong weight in the economy, combined with inefficiencies, high debt and the absence of an exit strategy, as in the case of China, are associated with higher risk. On the contrary, modest size, robust performance, low debt and the existence of an exit strategy, as in the case of advanced economies, diminishes the risk profile of SOEs (See the figure showing the four risk factors of SOEs). China: Debt is growing much faster than turnover and profitability Highly indebted, hardly profitable and potentially systemic, the 150,000 Chinese SOEs spread across all sectors, from aerospace to tourism, and are increasingly a financial burden for Bei- Advanced economies (Italy & France) Latam (Brazil & Mexico) Oil exporters (GCC countries) China Russia jing, and an obstacle to the Chinese market-oriented transition. Certainly, SOEs remain a major source of investment. In the first ten months of 2016, SOEs’ nominal investment increased by +20.5% YTD y/y, as a consequence of fiscal stimulus, while nominal investment has grown overall by +8% YTD y/y. Yet, they are often committed to social/political objectives, (e.g. ensuring employment) rather than to financial ones. This explains why Chinese SOEs fare systematically worse than their private counterparts. Many of them (the so-called zombie companies) are artificially kept alive by Beijing, as they are less capable of adjusting rapidly to negative shocks (e.g. the fall in commodity prices in early 2015). Even the profitability of top-tier Chinese SOEs has been deteriorating. Looking at listed SOEs centrally controlled by the State-owned Assets Supervision and Administration Commission The absence of exit strategy is based on: whether the State is willing or capable of disenganging itself from SOEs without major disruption The level of inefficiencies is based on: the capacity of generating turnover, cash flow and profits, with respect to indebtedness level (SASAC), we find that in the last three years debt has increased at an average of +9% y/y while turnover has grown at less than +1% y/y on average. Figures are particularly worrying when it comes to SOEs in sectors with massive overcapacity and poor profitability, where distressed cash flow makes debt barely sustainable. This is the case for SOEs in the chemical and metal industry, which would respectively need respectively 8 to 9 years of current cash flow to repay their debt, all things being equal. So far, China has addressed the problem of distressed SOEs mainly through consolidation efforts and through the partial listing of the biggest SOEs (which unintentionally fueled the stock market bubble that burst in August 2015). In September 2016, Beijing also announced the creation of a CNY350 billion-restructuring fund sponsored by the government. ▶ Chart 13 Debt in years of cash flow and by sector listed SOEs controlled by SASAC © Image Allianz 106646578 Chemicals 9.4 Metals & Mining 8.0 Construction 7.3 Energy/Utilities 4.8 Transportation 4.1 Railways 2.5 Oil & gas 1.9 Aeronautics 0.7 Automotive 0.7 Telecom 0.2 Pharma 0.2 Sources: SASAC, Bloomberg, Euler Hermes 19 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes Chart 14 Possible decision-tree for restructuring Chinese SOEs Is it a large employer? Likely supported Is it a strategic and innovative sector? Yes No Likely supported Is it a sector with overcapacities? Examples: Strategic resources, Large Telecommunication companies, Defense, Public High tech, High Value added content (Aeronautic, Automotive) No Yes Likely not supported Is it a sector heavily indebted? Examples: Steel, Coal, Shipping industry, Construction Yes Likely not supported Examples: Machinery and Equipment, Building materials, Wood and Paper No Likely not supported by authorities but could be supported by the market Examples: Tourism, Retailers Bankruptcy corner Source: Euler Hermes ▶ This initiative followed the guidelines, issued in July 2016, pushing for the restructuring of SOEs operating in equipment manufacturing, construction engineering, electric power, steel and iron, nonferrous metal, shipping, construction materials, tourism and aviation services. Yet, the path towards the state’s disengagement and orderly winding-up of distressed companies remains unclear. This adds to the considerable risk embedded in Chinese SOEs whose debt has increased up to +80% of GDP, as estimated by the IMF. Mexico and Brazil: Reforms are needed to cope with high debt and distressed profitability Less systemic than Chinese SOEs (because concentrated in strategic sectors) but highly indebted and not so efficient, SOEs in Mexico and Brazil are a long-standing issue. In fact, both countries have carried out extensive privatization programs in the 1980s-2000s. Yet, Mexico and Brazil are still struggling with major SOEs crippled by management practices that have been strongly politicized rather than oriented to strategic development. In Brazil, this is the case for Petrobras (oil & gas) and Eletrobras (electric utility), the two largest non-financial 20 federal SOEs. Both have been suffering from declining profitability in the last few years, especially Eletrobras (-40% operating margin in 2015), which has been affected by a decrease in electricity prices imposed by the government in 2012. At the same time, they have both experienced a strong increase in leverage between 2007 and 2015 (from 30% to 115% for Eletrobras and from 30% to 190% for Petrobras), which brought their debt from 2% to 9% of GDP. Although this may translate into a 9ppt increase in Brazilian public debt as a share of the GDP (from 74% to 83%), the government has not outlined an ad hoc strategy for mitigating the risk stemming from its key SOEs. On the contrary, reforming efforts are what partially mitigate risks associated with Pemex, the oil & gas giant, which is still 100% owned by the Mexican government. Having received a USD4.2bn cash injection from the government in April 2016, the company is expected to go through austerity measures to curb its debt. Between 2007 and 2015, Pemex’s debt has increased from 3% to 7% of GDP, while its turnover has shrunk from 5% to 2% of GDP. Given Pemex’s strategic nature, state’s disengagement remains a remote option. Nevertheless, in 2013 the Mexican government launched a reform program aimed at the partial liberalization of the energy sector in order to access foreign technology, in order to better cope with declin- 150,000 SOEs in China Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide ing oil production and reserves. Arguably, the government will keep on supporting Pemex as needed, but with the perspective of transforming it from a source of systemic risk into a profitable strategic asset. Russia: The increasing weight for the economy is mitigated by good performance Notwithstanding the wide privatization programs of the last two decades, major Russian companies remain firmly under Kremlin’s supervision, from energy giants, such as Rosneft and Gazprom, to financial institutions like VTB Bank. In fact, the weight of Russian SOEs on the national economy continues to increase. In 2015, the turnover of Russian SOEs appearing in Forbes Global 2000 represented 19% of Russian GDP while it stood at 15% in 2008. Importantly, a substantial share of their turnover is originated in Russia (up to 100% for companies such as RusHydro). Such a strong link to the domestic economy makes SOEs potentially vulnerable to internal shocks. Nonetheless, in spite of economic difficulties at home, Russian SOEs remain on average financially efficient with sustained turnover growth and leverage below 50%, which contains risks associated with their increasing weight. Good performance may explain why, despite repeated announcements of imminent privatizations to sustain the state’s budget, only partial steps have been taken so far (e.g. the sale of 11% of equity stakes in the diamond-mining company, Alrosa, in 2016). In such a context, Moscow’s reluctance to open up to foreign investors contributes to limiting the exit options and to worsening the risk profile of Russian SOEs. GCC countries: Systemic but efficient players going global SOEs also continue to weigh greatly in GCC countries. Just think about oil & gas companies such as Saudi Aramco, whose market value is estimated at USD3tn, or Kuwait National Petroleum, whose turnover represented more than +80% of Kuwait GDP in 2014. In fact, the state’s presence in the GCCs remains strong in diverse industries, such as utilities, airlines, banking, chemicals, and telecom. However, GCC SOEs tend to be managed like private enterprises and are overall financially efficient, as is the case for SABIC, one of the leading chemical companies in the world. 70%-controlled by the Public Investment Fund of Saudi Arabia, SABIC boasts operating margins that are 20 times higher than those of Sinochem, the largest Chinese chemicals SOE, with a debt-to-equity ratio equivalent to one fifth of that of Sinochem. SABIC is thus an example of how GCC countries have been capable of fostering enterprises in high valueadded industries by exploiting cheap and abundant natural resources, the objective being to shift from an oil-centered model to a diversified economic one. Advanced economies: Entrenched players kept under control In some advanced economies, the state continues to play an entrepreneurial role, while generally limited to a few strategic or publicoriented sectors such as energy, railways, and utilities. Contrary to countries such as the US and the UK, where state-ownership represents an emergency solution, (e.g. the bailout of General Motors in the US and the Royal Bank of Scotland in the UK), in Italy and France the state carries out a strategy of retaining equity stakes in big companies operating in the above-mentioned sectors. Admittedly, their weight is not negligible: Poste Italiane, the only listed Italian SOE holds debt equivalent to 3.5% of the Italian GDP, while EDF and Aéroports de Paris hold debt equivalent to 3% of the French GDP. However, these companies, being partially privatized or possibly oriented towards privatization, tend to adopt business-oriented corporate strategies. This, in turn, compels proper financial accounts that limit the risks imposed on public finances. + Chart 15 Level of debt for selected SOEs Average debt % equity (2012-2015) © Image courtesy of pixabay.com. Under CC0 Public Domain ski-lifts-1209812 Sinochem 132% Petrobras 110% Eletrobrás 72% State Grid Corporation of China 61% Transneft 53% SABIC 40% Gazprom 26% Sources: Bloomberg, Euler Hermes 21 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Major insolvencies worldwide in Q1-Q3 2016* Date S EP T EM B E R ANNEX 22 MAY * chronological (non exhaustive, in descending order) of the insolvencies of companies with an annual turnover exceeding EUR50Mn and identified by Euler Hermes in 2016 for the following countries: Australia, Austria, Belgium, Brazil, Bulgaria, Canada, China, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Ireland, Japan, Netherlands, Poland, Portugal, Romania, Russia, Slovakia, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States JUNE J U LY A U GU S T SOURCE: EULER HERMES Euler Hermes Country Company Last known turnover (in EUR millions) South Korea United States United States Singapore Canada Russia Turkey Germany Russia Russia Russia Russia Brazil Canada Singapore France Germany Japan Netherlands Australia France Turkey Poland Singapore China Australia Greece United States Netherlands United States Russia Germany China United States Poland Slovakia France Greece Turkey France Brazil United States Singapore United States United States China Finland Russia Turkey Sweden Canada Russia Russia Russia Sweden Turkey Japan United Kingdom United Kingdom Colombia Germany Germany South Africa Germany Turkey France Romania United States Italy Russia China United States Russia Netherlands Belgium Chile Netherlands Poland Belgium France Bulgaria Germany China Australia Belgium Belgium United Kingdom Switzerland United States United States United States Australia United States Germany Italy Hanjin Shipping Co.,Ltd. Itt Educational Services Golfsmith International Holdings Dragon Technology Distribution Pte Ltd Lightstream Resources Ltd Deti Zao Akfa Holding A.S Urlaubstours Gmbh Prominvest Ooo Specobsluzhivanie Zao Planetastrojj Ooo Glavstrojjgrupp Ooo Comil Ônibus S.A. Golf Town Canada Inc Sembawang Engineers And Constructors Oger International Magellan Maritime Services Gmbh Shin-Ei Corporation Componenta B.V. Hughes Drilling Ltd Ste Approval Park Bravo Tekstil San Ve Tic Ltd Sti Action Spółka Akcyjna Searights Maritime Services Pte Ltd Zhongjia Huachen Energy Co., Ltd. Mcaleese Ltd Alapis S.A. Global Geophysical Services Ms Mode Nederland Bv International Shipholding Uzdaewooauto Voronezh Zao Gebr. Kemmerich Gmbh Shandong Qiaochang Chemical Co., Ltd. Light Tower Rentals Fiten Spółka Akcyjna Nexis Fibers A.S. Altis Semiconductor Electroniki Athinon S.A. Hasirci Tekstil Sanayi Ve Ticaret A.S Ets Zilli Godiva Alimentos Ltda C&J Energy Services Swiber Holdings Atlas Resource Partners Halcon Resources Joyou Group Building Materials Co., Ltd. Anttila Oy Volgomost Ao Yolbulan Metal San Ve Tic A.S Basler Fashion Ab H.B. White Canada Corporation Realnet Ooo Rmz Ooo Behsk Ooo Liberala Tidningar I Mellansverige Ab Caliskan Ic Ve Dis Tic. San. A.S. Saitamaken Kosei Agricultural Cooperative Assoc. Cardy Construction Ltd Lowcosttravel Group Ltd Sainc Ingenieros Constructores Promod Deutschland Gesellschaft Mit Beschränkter Haftung Dress-For-Less Gmbh Vrystaat Mielies (Edms) Bpk Innova Handelshaus Ag Kablotek Kablo San. Ve Tic.A.S. Van Hulle Agro-Distribution Romenergy Industry Srl Seventy Seven Energy Inc. Ce.Di. Sisa Centro Sud S.P.A. Magnatehk Ooo Yunnan Yunwei Group Co., Ltd Hercules Offshore, Inc. (2016) Vedk Ooo Mcgregor Fashion Group B.V. Maritime Bunkering & Trading Su Bus Chile S A Scheer En Foppen Marcpol Spółka Akcyjna Truvo Belgium Societe Aveyronnaise De Metallurgie Solution Partners Eood Edc Gmbh Huizhou Trust Industrial., Ltd. Keystone Hospitality Group Jayam Optima Bank - Optima Banque Chromevalue Ltd Switcher Sa Linn Energy, Llc Dex Media, Inc. (2016) Breitburn Energy Partners Lp Dick Smith Holdings Ltd Sandridge Energy, Inc. German Pellets Gmbh Grandi Molini Italiani - S.P.A. 5,730 765 400 392 300 237 189 187 184 141 138 136 136 135 132 104 98 88 84 60 55 52 1,171 1,050 855 426 313 260 237 233 150 132 122 115 94 93 78 66 62 62 59 1,573 717 666 495 447 321 229 199 172 142 142 141 139 123 106 104 97 88 83 73 69 69 62 57 57 56 1,000 627 565 379 300 263 231 194 194 165 140 125 101 99 98 88 81 67 55 55 50 2,600 1,350 997 829 692 425 363 Activity Transportation Services Retail Machinery/Equipment Energy Retail Services Services Services Services Retail Construction Automotive manufacturers Retail Construction Construction Services Retail Metal Commodities Agrifood Retail Services Transportation Chemicals Commodities Pharmaceuticals Energy Retail Transportation Automotive manufacturers Metal Chemicals Machinery/Equipment Energy Chemicals Electronics Retail Textile Textile Agrifood Energy Energy Energy Energy Machinery/Equipment Retail Construction Metal Retail Construction Services Services Energy Paper Agrifood Services Construction Services Construction Retail Retail Agrifood Construction Services Agrifood Energy Energy Retail Services Chemicals Energy Agrifood Textile Retail Transportation Retail Retail Paper Metal Services Chemicals Electronics Services Commodities Construction Household Equipment Retail Energy Services Energy Retail Energy Commodities Agrifood Euler Hermes Economic Outlook no. 1211 October 2016 2014 | Business Insolvency Worldwide Economic Outlook no. 1230-1231 | November-December J A N U A RY F E BR U A RY MAR C H A PR I L MA Y Date Country United States Russia Canada Russia Russia France United Kingdom Romania Slovakia Romania Sweden Canada Sweden Italy Turkey United States Australia Canada United States United States China United Kingdom Turkey Russia Russia Turkey Russia Brazil Italy Germany Russia Canada Russia United Kingdom Australia Belgium Romania Germany Netherlands Germany Italy Italy Turkey Japan United States Italy Denmark Netherlands Poland Taiwan Japan Slovakia South Korea Australia Germany Romania France United States United States United States United States Romania France Turkey Romania United States Netherlands United States Germany Poland Netherlands Turkey Italy Germany Germany Australia France United States United States Australia Australia Turkey Turkey Romania United Kingdom United Kingdom Japan Turkey France Turkey South Korea Italy Canada Australia Company Last known turnover (in EUR millions) Activity Chaparral Energy, Inc. Umps Oao Connacher Oil And Gass Ltd Prodtrejjd Ooo Rmz Ao Continentale Nutrition Bfp Wholesale Ltd C.E.T. Govora Sa Provit Sk, S.R.O. Mazza Construct Srl Kncgroup Ab Ben Moss Jewellers Western Canada Ltd Knc20 Nm Sweden Ab Cordioli E C. S.R.L. Ucgul Corapcilik San Tic A.S Peabody Energy Corporation Arrium Ltd Pacific Exploration & Production Corporation Ultra Petroleum Corp. Sunedison, Inc. Zhejiang Ship Building Co., Ltd. Polestar Print Holdings Real Hipermarketler Zinciri A.S Janpz Im.D.I.Mendeleeva Oao Npkc Formoza-Al£ Tair Ooo Begendik Magaza Isletmeleri Tic.Ve San A.S Btk Zao Maralog Distribuicao S/A Ce.Di. Sisa Sicilia S.P.A. Fly Türk Gmbh Mir Mjagkojj Igrushki Ooo Firstonsite Restoration L.P Volkhovneftekhim Ooo Gajan Holdings Ltd (Austin Reed) Lync Energy Ltd Engineering Steel Belgium Prospectiuni Sa Firestixx Holz-Energie Gmbh Brova Holding Bv Hdm Gmbh Cantine Brusa - Societa' Per Azioni Societa' Agricola Consortile Cooperativa Siglabile Aps Umt Yapi Insaat Malzemeleri Nakliyat Taahhut San. Ve Tic. Ltd Sti Japan Logistic Cooperative Association Aspect Software Parent Inc. Ce.Di. Sisa Centro Nord Spa F Group A/S Tsn Thuiszorg B.V. Nomi Spółka Akcyjna W Upadłości Likwidacyjnej Chien Shing Stainless Steel Co., Ltd. Nisshoku Co.,Ltd. Ie Group, A.S. Dow Industrial Co.,Ltd Australian Careers Network Ltd Pfeifer Gmbh Stg Steel Srl Evolution Voyages Paragon Offshore Plc Republic Airways Holdings Inc. Noranda Aluminum Holding Corporation Horsehead Holding Corp. (2016) Interagro Sa Groupe Cauval Kurum Demir Sanayi Dis Ticaret A.S. Interagro Srl Sfx Entertainment, Inc. UnLtd Sports Group Bv Hancock Fabrics, Inc Walsum Papier Gmbh Partner Steel Spółka Z.O.O. Pdc B.V. (Paradigit) Dempas Demirayak Gida Tur. Isletmeciligi Gruppo Edom S.P.A. Esw-Röhrenwerke Gmbh Maple Bank Gmbh Global Intellectual Holdings Pty Ltd Hibiki Rcs Capital Corporation Verso Corporation (2016) Queensland Nickel Pty Ltd Om (Manganese) Ltd Gold Teknoloji Marketleri San. Ve Tic. Doga Organik Gida Ve Tarim Urun. Uretim A.S Societatea Complexul Energetic Hunedoara S.A. Buk (Realisations) Ltd A Levy Tsukiji Jitsugyo K.K. Benlioglu Yapi Malzemeleri Insaat Taah Ltd Sti Avenir Telecom Metro Elektronik Kuyumculuk Dis Tic. A.S Kyungdong Civil Engineering & Constructi Lames Spa Primus Telecomunications Canada Inc. Australian Careers Network Ltd 292 172 157 144 140 96 94 91 79 70 64 58 56 56 52 5,000 3,944 1,880 755 700 397 309 283 193 190 180 180 167 165 160 154 142 139 130 83 82 68 68 64 58 56 51 50 445 394 344 266 259 117 82 79 69 56 53 52 51 51 1,324 1,192 1,100 403 395 380 375 357 314 250 250 233 105 102 81 80 78 68 56 55 1,863 1,148 413 359 196 174 151 131 128 106 90 88 87 82 79 72 53 Energy Construction Energy Agrifood Metal Agrifood Agrifood Commodities Agrifood Construction Services Retail Services Metal Services Commodities Metal Energy Energy Electronics Other transport equipment Paper Retail Chemicals Services Retail Household Equipment Services Retail Services Household Equipment Construction Chemicals Retail Energy Metal Services Commodities Services Commodities Agrifood Agrifood Services Energy Electronics Agrifood Household Equipment Services Retail Metal Agrifood Construction Metal Services Construction Metal Services Energy Transportation Metal Commodities Agrifood Household Equipment Metal Agrifood Services Services Retail Paper Services Machinery/Equipment Agrifood Household Equipment Metal Services Services Agrifood Services Paper Commodities Metal Retail Agrifood Energy #N/A Retail Commodities Services Computer & Telecom Retail Construction Automotive manufacturers Services Services 23 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes 22/10/2016 13:03 Page2 Economic Research Euler Hermes Group Macroeconomic and Country Risk Outlook Economic Outlook no.1224-1225 Economic Outlook no.1228 Economic Outlook no. 1226-1227 Spring 2016 Summer 2016 Economic Outlook and other publications October 2016 Special Report Special Atlas www.eulerhermes.com Economic Outlook no.1229 September 2016 Special Report www.eulerhermes.com www.eulerhermes.com www.eulerhermes.com Public bumpers for the automotive market Around the World in eight maps The Price of Growth Trade Wars: The Force Weakens Global growth will slow down to +2.4% in 2016, its lowest level since the great recession Economic Research Economic Research Economic Research Economic Research 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 24 ◽ Macroeconomic and Country Risk Outlook Euler Hermes The Economic Talk N https://www.youtube.com/watch?v=LFElJTfVzd0. Economic Insight Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Weekly Export Risk Outlook N http://www.eulerhermes.com/economic-research/economic-publications/Pages/Weekly-Export-Risk-Outlook.aspx Country Report December 2016 update N http://www.eulerhermes.com/economic-research/economicpublications/Pages/economic-insights.aspx ◽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 Industry Report N N http://www.eulerhermes.com/economic-research/countryrisks/Pages/country-reports-risk-map.aspx ◽Angola ◽Australia ◽Bosnia & Herzegovina ◽Chile ◽Colombia ◽Ecuador ◽Ethiopia ◽Gabon ◽Guatemala ◽Iceland ◽Italy ◽Latvia ◽Lithuania ◽Mali ◽Myanmar ◽Mozambique ◽Namibia ◽Panama ◽Qatar ◽Sweden ◽Thailand ◽Uganda Global Sector Report February 2016 N http://www.eulerhermes.com/economic-research/sector-risks http://www.eulerhermes.com/economic-research/sector-risks ◽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 ◽Aeronautics ◽Agrifood ◽Automotive ◽Chemicals ◽Construction ◽Energy ◽Household Equipment ◽Information & Communication Technologies ◽Machinery & Equipment ◽Metal ◽Paper ◽Pharmaceuticals ◽Retail ◽Textile ◽Transportation 25 Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Subsidiaries Registered office: Euler Hermes Group 1, place des Saisons 92078 Paris La Défense - France Tel.: + 33 (0) 1 84 11 50 50 www.eulerhermes.com Euler Hermes >Argentina Solunion >Colombia Solunion >Hungary Euler Hermes Europe SA Av. 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