Although companies are outwardly keeping calm, they have reasons to be alarmed. Demand has slumped significantly for many companies with payment behaviour deteriorating drastically over the past few months.
The current global economic landscape
The OECD’s latest economic outlook states that the global economy is continuing to grow at a modest pace. However, the outlook from country to country differs, with weaker outcomes in many advanced economies, especially in Europe, and strong growth in the United States and many emerging markets.
The economic situation in Europe is looking a little bit gloomy to say the least. Growth forecasts for 2024, such as in Germany, have once again been curtailed, whilst an increase in insolvencies is expected. In addition, the uncertainty for companies and households regarding the financing of planned subsidies and infrastructure projects is high which, in turn, is hindering companies’ investment endeavours and restraining household spending.
From a broker’s point of view, we are seeing an increasing number of claims and problem cases both in terms of the number of instances and the augmented level of the losses. Allianz Trade`s insolvency heat map shows Turkey, Ireland, the Netherlands, and Spain as the worst hot spots:
Source: Alliance Research
Caution is better than hindsight
Credit insurers are becoming increasingly concerned, and rightly so, as they look at their portfolios to separate the wheat from the chaff. Any combination of external and internal factors can create a threatening situation for the existence of a company, and trade credit insurers are focusing specifically on those companies which do not have the risk-bearing capacity to cope with multiple risks at the same time. As a result, certain credit limits are being reduced or cancelled.
Industries under the spotlight include construction, real estate, the automotive sector, the timber industry, and the steel trade. In the retail sector, tensions persist. Needless to say, the situation is not catastrophic, but it is difficult. It is not surprising during the past few years that companies have been more generous with their supplier credit in a bid to catch up post pandemic and in reaction to increased business volumes, several government measures, and the absence of insolvencies. However, it is time to focus on credit risk again.
Although companies are outwardly keeping calm, they have reasons to be alarmed. Demand has slumped significantly for many companies with payment behaviour deteriorating drastically over the past few months.
Credit Risk Management – it’s more than just three words
Risk management in trade credit insurance refers mainly to the identification, assessment, monitoring, and mitigation of risks in connection with the default of receivables from the delivery of goods and services.
Timely credit risk monitoring is once again playing an important role for businesses. The early identification of risks which have deteriorated may be crucial for a company`s success. Once these risks have been identified, they must be reassessed and prioritized to optimize the company’s resources. They should be monitored closely to ensure they remain under control, and risks that cannot be eliminated must be mitigated to bring the risk to an acceptable level. Furthermore, all relevant information and data must be presented and analysed on an ongoing basis.
Revenue, profitability, debt ratio, and cash flow are the most important figures to scrutinise. However, changes in a company’s payment behaviour and any payment delays should also be analysed as these are often the first indications of a serious problem. Those who show fluctuations in their payment habits should always be flagged so a reassessment of their credit limits can take place.
With this in mind, it is therefore not surprising that credit insurers want to analyse current financial reports to assess the existing creditworthiness of a company. They are also monitoring the development of industries, sectors, and overall country risks because successful company-wide risk management systems focus not only on individual risks but also on the integration of all risks that could affect their business.
In particular, the payment behaviour of a company`s customers plays an important role for every company that should not be underestimated. The timely release of the capital tied up in receivables has a direct impact on its liquidity and profitability. Hence, the success of a company is determined by taking the “right” risks. Managing credit risks also means assessing the payment risk of customers as accurately as possible and trusting efficient credit risk management. Hence, each step of credit risk management influences the next and the process should continuously repeat to manage the credit risk in these challenging times in the best possible way.
Lisbeth Lorenz
Practice Leader Credit & Political Risk
GrECo Austria
T +43 664 883 805 12
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