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Business Insolvency Worldwide
Economic Outlookno. 1230-1231November-December 2016
www.eulerhermes.com
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: re-search@eulerhermes.com > 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
4
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.
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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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
▶
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
-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
Africa & Middle East Index
Central & Eastern Europe Index
Western Europe Index
Latin America Index
Global Insolvency Index
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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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
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
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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
Africa & Middle East Index
Central & Eastern Europe Index
Western Europe Index
Latin America Index
Global Insolvency Index
Chart 3 Insolvencies forecast in 2017Yearly change in %
Sources: National statistics, Euler Hermes forecasts
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
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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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
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
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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
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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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
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
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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
Sources: National statistics, Euler Hermes forecasts
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.+
© Image Allianz 1386600763
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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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
© Image Allianz 82627
+ 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
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
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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
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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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
Sources: National statistics, Euler Hermes forecasts
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)
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
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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
© Image Allianz 98354891
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.
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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© 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). +
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
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© 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
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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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
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
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Chart 12 The four risk factors for SOEs
Source: Euler Hermes
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
▶
© Image Allianz 106646578
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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Chart 14 Possible decision-tree for restructuring Chinese SOEs
Source: Euler Hermes
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
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
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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. +
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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
23
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
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
MA
RCH
APR
ILJA
NU
ARY
FEBR
UA
RY
Date Country Company Last known turnover (in EUR millions) Activity
MA
Y
24
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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
25
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
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
N
◽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
26
Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide Euler Hermes
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>FranceEuler Hermes France SAEuler Hermes CollectionEuler Hermes World Agency1, place des SaisonsF-92048 Paris La Défense CedexPhone: +33 1 8411 5050
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>KuwaitPlease contact United Arab Emirates
>LatviaPlease contact Finland
27
Euler Hermes Economic Outlook no. 1230-1231 | November-December 2016 | Business Insolvency Worldwide
>LithuaniaPlease contact Finland
>MalaysiaEuler Hermes Malaysia BranchLevel 28, Menara Allianz SentralJalan Tun Sambanthan, 50470 Kuala LumpurPhone: +603 22721387
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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
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Department of Euler Hermes Group has no responsibility for the consequences hereof and no
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