Industry & Economic News
Economic Outlook
Atradius Credit Insurance
| CANADA |  |
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The Current Business Environment
Canada slipped into a deep recession in the final months of 2008, as the economic decline expanded to most sectors across the country. The economy has been further negatively impacted by the collapse of commodity prices, as Canada is still heavily dependent on natural resources.
Canada’s current economic situation parallels that of most major economies. The current weakness is being compounded by declining global demand, a deteriorating credit environment and weakening consumer confidence.
- GDP-growth dropped sharply in the fourth quarter of 2008, falling by 3.4% year-on-year.
- In December 2008 exports fell by 9.7% year-on-year, the largest monthly decline since 1982.
- Imports decreased by 5.7% in the same month, tempering the weakening trade balance.
- Retail sales dropped 5.4% in December - the largest contraction in 15 years.
- Overall, housing starts decreased by 10.9% in 2008, while employment has fallen by record numbers in the latter half of 2008, with the unemployment rate jumping to a decade high 7.2%.
The Outlook for Canada
Canadian bankruptcies have shown a dramatic increase, in December bankruptcies rose by 47% compared to the previous month, while, on an annualised rate, the increase was 12%. As companies are still in the cost-cutting, employee-downsizing stage, increased insolvencies are expected in the near term. The Expected Default Frequency indicator for Canada has increased tremendously since January 2008 (0.4) - to 4.27 in January 2009.
For the current fiscal year, Canada is set to fall into a budget deficit for the first time in more than a decade, as the government pours money into infrastructure projects and tax breaks to stimulate growth. Canada has aggressively managed interest rates and, with inflation remaining below 2%, further rate cuts are expected in the near future. However, despite these all-time low borrowing rates, businesses have complained that Canadian lending institutions are not providing adequate domestic finance.
The Canadian economy is expected to contract further through 2009 and is not expected to recover until at least 2010, mirroring the rebound of commodity prices.
| UNITED STATES OF AMERICA |  |
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The Current Business Environment
The US economy has entered a dangerous transitionary period, as the financial system and consumers alike continue to reel from the aftershocks of the last summer’s collapse of Lehman Brothers and the bail-out of major financial players. While the Federal Government continues to inject liquidity into the credit markets, looks at yet another bail-out of the banking system and debates a stimulus package for the US economy, most major economic measures are flashing red.
Real GDP-growth fell by 3.8% in Q4 2008 following a 0.3% decline in Q3. Consumer demand, which drives over two-thirds of the US economy, and business investment both collapsed - not surprising when unemployment statistics to the end of January 2009 indicate the worst three month period of job losses since 1945, with companies ruthlessly controlling costs. Residential housing prices in most major cities have been falling since July 2006: a pattern not seen since the Great Depression. Rounding off the litany of bad news, US Banks continue to tighten lending credit available to business and consumers.
The Outlook for the USA
The impact on business is evident in the accelerating pace of corporate defaults and insolvencies. January’s speculative grade defaults reached 5 times the level of that at the end of 2007, and the expectation is that 2009 default rates will steeply rise. This trend is confirmed by the sharp increase in the Expected Default Frequency (see chart above). Particularly vulnerable are companies in highly cyclical sectors, like chemicals, those suffering from sharp drops in demand, like automotive and retailers, and leveraged businesses across all sectors, reflecting the continued tightening in credit availability.
It is increasingly likely that, despite aggressive government action to fix the banking system and stimulate the economy, the road to recovery will extend well into 2010. With credit markets virtually frozen and the ratio of private sector debt to GDP reaching 300% in 2008, a substantial unwinding is required. We are already seeing an increase in consumer saving, and, while this bodes well for the future, it will hit an already struggling retail sector. Unfortunately the housing market appears some way from hitting bottom, with substantial unsold inventory in most markets, and, in view of rising unemployment rates, it is difficult to see a housing recovery in the short term.
| MEXICO |  |
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The Current Business Environment
Operating in an economy heavily dependent on trade with the US, businesses in Mexico have been hurt both by the devaluation of the Mexican peso against the US-$ and shrinking exports to Mexico’s main commercial partner. Sectors that are particularly affected include automotive components and assembly operations as well as consumer electronics and similar segments undermined by weakening US consumer spending.
Mexican companies were surprised by the extent of the peso devaluation, itself a reflection of US economic downturn and collapsing oil prices in 2008, with many incurring substantial losses on poorly thought-out foreign exchange hedging strategies that have caused several high-profile companies to fail. To the extent that such entities borrowed in US-$, the resulting increase in debt levels has added an additional burden, in particular for companies that import raw materials and components.
While only partially developed even in the boom times, and despite efforts by the Federal Government to encourage lending, bank credit has become increasingly restricted, with the imposition of stricter loan covenants and higher interest rates even where credit is available. Anecdotal evidence indicates that private banks have significantly reduced their commercial loan portfolios and are carefully managing their consumer loan books as well.
The Outlook for Mexico
Mexico’s financial position remains solid in the short-term as the government has run a prudent fiscal policy in recent years, reflective of the country’s investment grade ratings and reinforced by a newly granted US-$ 47 billion credit line by the IMF that was provided under very flexible terms. In addition, we understand that Mexico’s oil revenues, a major earner for the government, are well-protected using hedges in the US-$ 80 barrel range at least through to the last quarter of 2009, when pressure will increase, depending on the pricing environment at that time. The Mexican government has injected substantial stimulus into the domestic economy, equal to a projected 1.5% of GDP for 2009, in order to dampen the impact of the slowdown. However the longer economic conditions, and oil prices, remain depressed the more difficult the situation will become for Mexico’s finances.
ATRADIUS COLLECTIONS
Atradius Collections, which handles both credit insured recoveries and uninsured debt collections, has seen debt placements escalate enormously in the last years. Compared to Q1 of 2008, the value of debt placed with Atradius Collections in Q1 of 2009 has increased by 109 index points.
When these two – insured recoveries and uninsured collections – are taken separately (see the chart below) the rise in the latter is considerably greater – up 181 index points since Q1 of 2008.
This difference to a large extent reflects the benefit to insured Atradius customers of the early warning system that is integral to our risk underwriting service: guiding customers away from risks that are most likely to result in loss.
We expect debt collection submissions to rise even more in the coming months, for two main reasons. With credit management departments focusing intently on maintaining cash flow during the current recession, there is a trend to refer outstanding debts to external collection agencies at an earlier stage, and of course we continue to see a steep rise in insolvencies.
ATRADIUS
The Atradius Group provides trade credit insurance, surety and collections services worldwide, and has a presence in 42 countries. Its products and services aim to reduce its customers’ exposure to buyers who fail to pay for the products and services they buy. With total revenues of more than EUR 1.8 billion and a 31% share of the global trade credit insurance market, its products help protect companies throughout the world from payment risks associated with selling products and services on credit. With 160 offices, it has access to credit information on 52 million companies worldwide and makes more than 22,000 trade credit limit decisions daily.
Source: Atradius Market Monitor - May 2009
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