Good news for the economy?
In times of restrictions due to the pandemic, optimistic news is important for the population – positive signals are good. From a political point of view, next year is an election year – the parties in the current government do not need any negative headlines.
For credit managers, however, this is more than ever a time for increased vigilance. Processes of economic realignment are approaching in which the solvency of many companies will be endangered and the risk of bankruptcy will therefore rise.
Increasing insolvencies expected in 2021
Although compulsory filing of bankruptcy when there is an excess of liabilities over assets has been suspended until December, the increasing difficulty of companies to pay their debts will certainly now lead to an increase in insolvencies. In the long term it remains to be seen how companies that took advantage of long payment periods even before the crisis and have only a small liquidity buffer are able to survive. Here, discussions must be held.
The dramatic increase in total insolvencies, however, will probably take place next year.
Structural changes in the coming months caused by the pandemic
Particularly critical are the structural changes, which will have a significantly stronger effect. Some examples: The pandemic has triggered the following changes:
- We have seen that a lot of communication – especially that of a factual-professional nature (not all) can take place via online media/video conferences. Therefore, business travel will decrease significantly. This will affect hotels and the airline industry including their suppliers (e.g. aircraft manufacturers).
- Even some conferences will take place virtually. Conference hotels will need to look for new concepts.
- Trade fairs will be subject to changes. This will negatively affect their locations.
- Cruises – on which the pandemic can spread especially easily – will certainly no longer be in such high demand. This also has consequences for shipbuilding and equipment suppliers.
- The increase in working from home will probably lead to adaptation processes in office space. Experience with the pandemic will mean that open-plan, large-area office design will certainly be less attractive.
There were structural problems before the pandemic
In addition, structural problems are becoming apparent that have existed for a long time but the changes resolving them have been triggered or accelerated by the corona crisis:
- Especially in the case of high-street travel agencies, the tourism industry has failed to make the necessary adaptations in terms of online business and consultation possibilities. These changes are now taking place.
- The automotive industry has two tasks to deal with. In Europe there has been overcapacity for many years – changes are urgently necessary. In parallel, there is the structural change to electromobility, which is affecting the German automobile industry especially strongly because it had concentrated on clean Bluetech diesel. This focus has been dramatically ended by politics and the industry's own behaviour in relation to exhaust emission values. Suppliers in the automotive industry are suffering even more than automobile manufacturers themselves as they are threatened with insolvency or need to cope with adaptation processes, generally with only small liquidity reserves. Automobile manufacturers – like all the large DAX conglomerates – are in the comfortable situation of being able to obtain liquidity from the market by issuing bonds, which are then bought by Madame Lagarde from the ECB. Small and medium-sized companies cannot do this.
- The mechanical engineering and metal industries are also affected. Companies dependent on exports are suffering from the pandemic problems in many parts of the world. Those whose main markets are in Asia are less affected than companies who export to southern Europe, the USA or South America – regions in which the pandemic is still raging and affecting the economy badly. Here also, adaptation processes are necessary.
Credit managers need to be on the lookout
This means: Looking carefully at industries that are either experiencing structural changes due to Covid 19 or are having to deal with structural changes that were already necessary but are now taking place more quickly or to a greater extent. Strongly export-dependent companies also need to be closely observed.
The challenges are not subsiding
It looks like there will be a "hard" Brexit with new trade restrictions in relation to Great Britain. The presidential election in the USA is nowhere near decided. If Trump wins, he will surely continue along his current path in terms of economic policy even more strongly. This means "America first" and increased protectionism, which will also have an effect on our exports. The direction of political developments in, and with, China will also influence our imports and exports.
So credit managers are currently faced with challenging times. The relevance of credit management for the success of our companies will continue to increase.