June MarketMonitor

June MarketMonitor

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  marketmonitor adapting to thechallenging economic environment April 2009 The immediate outlook for key markets and sectors Every month, Atradius brings you an up to the minute snapshot report on a range of export markets and key trade sectors. Our underwriters have a specialist view of the world economy – and the industries that make that economy tick - that you won’t find in the general press coverage of events, so we hope that you will find our summary reviews a useful addition to your Atradius credit insurance. Even more importantly, our underwriters use their expertise and experience to look to the future. In each edition of Atradius Market monitor you’ll find our outlook for a number of key market economies. In this issue… …we feature the following markets: The United Kingdom – with a spotlight on the metals and automotive sectors Mexico – with a spotlight on manufacturing, construction and retail Germany Spain Denmark Greece Portugal South Africa 1
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  Expected default inWestern Europe and USA One of the most important factors that any business needs to know is the trend of insolvencies in their markets. The following Expected Default Frequency (EDF) chart is based on listed companies in the markets referred to, and the likelihood of default across all sectors within the next year. In this context, default is defined as a failure to make a scheduled payment, or the initiation of bankruptcy proceedings. Probability of default is calculated from three factors: market value of a company’s assets, its volatility and its current capital structure. As a guide, the probability of one firm in a hundred defaulting on payment is shown as 1%. Source: Atradius Economic Research and KMV Credit Monitor The deteriorating global economic environment translates into an increase in insolvencies. As confirmed by the EDF indicators, insolvencies are predicted to increase steeply across all major economies in 2009. The heightened default expectation has been evident since mid-2007 (see chart above). In February 2009, the median EDF of all major Western economies rose again compared to the previous month, with sharp increases recorded for France, Italy, and the US. This development suggests an even steeper accelerating default risk for all major Western economies in line with the increasingly worsening economic situation since the beginning of this year. On the following pages, we assess the impact of expected default in key markets 2
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  United Kingdom The currentbusiness environment After a very difficult second half of 2008, there are no real signs of improvement within the UK economy as we work towards second quarter of 2009. GDP for the last quarter of 2008 has just been revised down from the original contraction figure of 1.5% which fed through to a 2008 GDP increase of just 0.7% for the 12 month period. When compared with the 3% increase registered for 2007 this gives a clear signal as to the size of the problem that the UK is currently facing. In comparison to the third quarter of 2008, in the last quarter exports of goods and services fell by 3.9% and imports were down by 5.9%. To date there is little evidence that the numerous Government stimulus packages have had any positive impact. Whilst a number of banks have had a significant level of financial support, this does not appear to be filtering through to either the general public or the corporate market. Attractive mortgage deals are available only for individuals with large deposits or high levels of equity, and small businesses are being hit hard as additional funding packages are almost impossible to obtain without offering significant levels of security. The outlook for the UK Looking forward at 2009 there are some very conflicting opinions on the level of GDP contraction for the UK market. Some analysts are taking an optimistic view with contraction of 2.9% to 3.0%, but many believe that we could be looking at a doomsday scenario with contraction of at least 5.0%. The Atradius view is that the 5% figure could turn out to be a little too optimistic. The dramatic effects of a large GDP contraction would be seen in the potential impact on the level of company failures. If GDP fell by just 2.9% then this would feed through to a rise in business failures of around 59%. It is also likely that this figure would rise during 2010 as businesses would continue to struggle and only the strongest would survive. If GDP contracted by 4% then the failure rate would rise much quicker and it would not be long before it reached a position where we would see a 100% rise. This is, of course, in comparison with the 2008 period where business failures were already at high levels. All sectors are being impacted by the current market conditions, but construction, metals, automotive and retail are suffering more than most. In construction alone, conservative predictions suggest that business failures will double to a level of over 10,000 in 2009. . 3
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  Spotlight on industriesin the UK Metals How has the global economic downturn impacted the metals industry? The global downturn has massively affected the UK metals industry. The three sectors which consume the largest proportion of steel in the UK are Construction (30%), General Engineering (25%) and Automotive (15%). All three are currently experiencing a significant downturn in activity with UK construction output down 6.4% in the last quarter of 2008, with a further deterioration anticipated in the first quarter of 2009, UK industrial production down 2.4% in January 2009 despite the weakness of sterling and new car registrations having plummeted year-on-year by 59% to February 2009. The situation in the aluminium sector is, if anything, even worse, as automotive is even more critical to its fortunes. Secondary aluminium smelters in particularly have been hard hit through a combination of slack end-user demand and high input costs vis-à-vis scrap and energy prices. What is the current trend in payment delays, payment defaults and insolvencies and why? There has been a steep rise in payment delays and reported overdues with a knock-on effect in terms of the number of repayment proposals being received. Even companies that were previously considered ‘strong’ have seen a serious decline in their cash flow positions as their working capital has been eroded. Insolvencies are also on the rise as could be anticipated given the weakness of the end-user market. What should companies selling products into the metals sector pay particular attention to? Given the strength of the markets up to September 2008, audited financial figures for the last twelve months are practically superfluous as they will invariably show a good performance. Companies selling into the UK metals sector should therefore focus on obtaining as up-to-date management accounts as is possible so that they can assess the recent, as opposed to historical, financial performance. In addition to financials, there needs to be a focus on the strength of management. Many businesses are family owned and may now be controlled by a generation that has experienced nothing but economic growth. An inability to adapt to harsher economic climes will undoubtedly result in corporate failure. What is Atradius’ short term (6 month) outlook for the metals sector? Extremely negative. There is little prospect of an improvement in this sector until at least early 2010, and therefore the short term outlook is bleak. We anticipate a continued increase in insolvencies before the situation stabilises towards the latter part of the year. 4
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  Spotlight on industriesin the UK Automotive How has the global economic downturn impacted the automotive industry? Automotive suppliers into the original equipment manufacturers sector (OEM) have been severely affected by the downturn. It would appear that the major OEMs reacted too slowly to the economic downturn and only started cutting production in the UK around the Christmas period - which has meant a severe oversupply of vehicles in the marketplace. The aftercare market has fared better, as consumers affected by the recession choose to maintain their existing vehicle as opposed to upgrading or purchasing a new vehicle. What is the current trend in payment delays, payment defaults and insolvencies and why? Due to the oversupply of vehicles, extended terms will be sought as manufacturers seek to reduce stock. The biggest dealerships are currently cutting costs to cope with the downturn, and for them this seems to be working at the moment. However, a number of smaller dealers have already fallen by the wayside. What should companies selling products into the automotive sector pay particular attention to? It is important for companies to realise the effect that the downturn is having on their customers and suppliers. There are a number of automotive manufacturers that are either still on shutdown or on a shortened working week and budgets and forecasts made for 2009 will have to be adjusted accordingly. What is Atradius’ short term (6 month) outlook for the automotive sector? There is no real evidence that the outlook will improve over the next 6 months. The first indicator in the UK will be when the new car registration figures for March - which traditionally account for 18% of annual sales - are released in early April. For the first 2 months of 2009 new car sales were down 28.2%. There will also be the knock-on effect from what develops with the big three in the U.S, with the prospect of major developments in the coming months. 5
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  Mexico The current businessenvironment 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. 6
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  Spotlight on industriesin Mexico Manufacturing, construction and retail How has the global economic downturn impacted the manufacturing, construction and retail sectors? Given the extent of economic integration that Mexico has with the US, it is unsurprising that the sharp decline in construction activity in the US has also badly hurt Mexican companies in the construction sector, despite material level of government funding for domestic infrastructure projects. Similarly, and as most manufacturing in Mexico is tied to US exports, its Northern neighbour’s downturn has caused large declines in virtually all sectors and resulted in increased unemployment, which in turn impacts the Mexican retail sector, where we are also seeing deterioration in operating performance. What is the current trend in payment delays, payment defaults and insolvencies and why? We are seeing substantial increases in past dues and re-scheduling of debts due to the impact of the peso devaluation and weak end-market demand. While rare in a market more prone to protracted defaults, there are increasing numbers of insolvencies, known as “concurso mercantil”, occurring as companies succumb to the downturn. What should companies selling products into the manufacturing and retail industry pay particular attention to? Always consider the impact of the downturn on your customers’ end-markets, the potential impact of continued exchange rate volatility on their customers’ financial position, and the likelihood of local substitutes for what was previously imported into Mexico. Terms of trade can be enhanced to add security, for example by requiring a so called “pagaré” (promissory note). What is Atradius’ short term (6 month) outlook for manufacturing and construction industries? The outlook is very poor as the manufacturing sector will only be reactivated with an economic recovery in the US, which is not expected in the near future. In the construction sector the outlook will remain negative for housing projects while infrastructure projects may show improvement due to investment planned by the Mexican government. If the price of oil recovers then investment in the energy sector would also serve as a basis for recovery. 7
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  Germany The current businessenvironment The overall prospects for the German economy have deteriorated further since the beginning of the year. Estimates of 2009 GDP contraction now range from 3% to as high as 7% (Commerzbank economists’ estimation). The main reason for this bleak outlook is the high dependency of key German industries on exports, which are expected to decrease by 15% in 2009, according to the Federation of German Wholesale and Foreign Trade (BGA). German exports are heavily impacted by both the lack of foreign demand and the very strong Euro. As a consequence of decreasing global demand and a decline in capacity usage (-11% compared to previous year, according to Deutsche Bank analysts), in 2009 investment in equipment and construction is expected to fall by 12% and 4.5 % respectively. This will lead to a strong decline in industrial production, headed by the automotive industry (-15%), the textile and clothing sectors (-12%) and the chemicals, metals, machines and electronic industries (all -8%), according to Deutsche Bank. Support from private consumption cannot be expected either. Despite a flat inflation rate - close to zero - the private savings ratio will rise to 12% in 2009, which will hamper private consumption. Additionally, by the end of 2009, unemployment will increase by 750.000. On the refinancing side, the situation remains critical, in terms of both a lack of trust among refinancing parties and the availability of refinancing in the corporate sector. Although we have not experienced a credit crunch in Germany, the banks’ lack of risk appetite makes it extremely difficult for highly geared companies to roll over their credit packages on acceptable terms. The outlook for Germany After five consecutive years of decreasing corporate insolvencies, the figure increased by 2.2% to roughly 30.000 (Verein Creditreform) in 2008. From an industry perspective, transport, automotive and construction are harder hit by this increase than other sectors. In 2009, Verein Creditreform expects corporate insolvencies to rise further: to between 33.000 and 35.000. Having already experienced a number of insolvencies in the automotive supplier sector over recent months, especially in those businesses with Private Equity backing, we expect another wave of critical cases – this time in the machines industry - later this year. Many companies in this sector that have so far benefited from large order backlogs from 2007 and early 2008 will feel the pinch toward the end of the year as, now, new orders are decreasing sharply. In February 2009 new orders contracted by nearly 50% on an annualised rate, the highest decline since 1958. 8
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  Spain The current businessenvironment The problems of lack of liquidity and tightened credit conditions have been most strongly felt in countries which, like Spain, have recorded high growth rates during the past decade. For the first time since 2003 the Spanish economy has entered recession and, while the construction sector was the first industry to be hit by the downturn, now all other sectors have also been affected. During the latter months of 2008, industrial activity showed a marked turnaround, mainly due to falling consumption. Private consumption expenditure decreased because of tighter credit conditions, economic uncertainty and growing job insecurity, and this trend has mainly hit sales of durable goods such as cars and consumer electronics. The inflation rate has fluctuated markedly over the last 12 months. After increasing to 5.3% in July 2008, it fell to an historic low due to decreasing consumption and sharply falling oil prices. In March 2009 inflation declined by 0.8% on an annualised rate, and Spain registered its first ever annual decline in inflation since records began. The outlook for Spain In 2009 a profound economic crisis is forecast, with falling private consumption and decreasing company asset values. It is estimated that the economy will contract by more than 1%, and this will manifest itself in massive job losses. Currently, the construction and manufacturing sectors account for 80% of all employment, but adverse developments in the service sector with its increasing share in overall employment, could lead to an unemployment rate of more than 15% this year. We estimate that the economy will not show signs of recovery before 2010. In these circumstances, companies must enhance their risk management and tighten their collections processes. Although the economic slump will be deep this year, it is clear that its impact will be felt less by companies who use credit insurance, as the related analysis of credit risks, provided by credit insurers like Atradius, enables them to better match their sales strategy to an environment of sharply increased payment defaults. The Spanish government has recognised the value that credit insurers provide, especially at this time of crisis, and has therefore given its firm support to the insurance sector as a stabilising element for mitigating inter-company risks. The government will act as a reinsurer for credit insurance in Spain via the Insurance Compensation Consortium (Consorcio de Compensación de Seguros). This will be a fundamental factor in ensuring that an adequate level of credit insurance cover can be provided to businesses. 9
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  Denmark The current businessenvironment The general business climate has deteriorated further since January 2009. Revised data shows that GDP decreased by 2% in the fourth quarter of 2008 and, in the first half of 2009, GDP is expected to contract by another 3.5%. The unemployment rate came from a very low level in 2008 and was still only 2.5% by the end of February 2009, but is now rising fast. The decrease in consumer spending during the latter months of 2008 has continued into first quarter 2009. In February spending by credit card was down 10% year-on-year and new car sales also fell by 43%. The outlook for Denmark Taken as an average of various forecasts, GDP is expected to fall by 2.5% in 2009 and most analysts do not expect growth to pick up before 2010 - and then only slowly. All indicators are currently negative. In February 2009 business confidence indicators were down by 41% in the construction sector, 34% in other industry sectors and 25% in the service sector. Consumer confidence was down by 11.7% in March. The number of corporate insolvencies increased by 62% in 2008 compared to 2007 and, during the first quarter of 2009, the monthly number of insolvencies was 450 – 500. If the number remains at this high level for the rest of the year, 2009 will show an annual increase of insolvencies of 48%. The Danish Government has introduced several packages aimed at stabilising the financial sector and boosting private consumption, the construction industry and export business. A large tax reform was agreed in February, which will reduce income tax and increase some others, including “green” taxes. This will not take effect before 2010, but the Government has also decided to release some pension funds in June 2009, which will probably have an immediate effect on consumption. Also, a Government-backed temporary reinsurance scheme, designed to support Danish short-term export business, is now available to private credit insurers. Atradius Denmark has entered into this scheme March 17th. Construction: In 2008 house prices fell by 8% - and by 20% in the Copenhagen area - and some analysts expect prices to fall by another 10-15% in 2009-2010. Consequently, investment in new houses and office facilities has fallen dramatically, leading to a sharp increase in insolvencies in the construction industry during 2008. That insolvency rate is expected to remain high in 2009. The supporting packages agreed so far by the Government will have only modest effects. Recent decisions on large infrastructure investments in railways, the building of a Metro City ring in Copenhagen and the Fehmarn Belt bridge will not have substantial effect until 2011 and beyond. 10
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  Denmark (continued) Retail: Consumerspending on clothing, electronics, domestic appliances, furniture and other goods related to housing fell during the second half of 2008 and is expected to remain at low levels, even though Danish households will have more spending power in 2009 compared to 2008. We have seen a sharp increase in insolvencies, mainly amongst small retailers. This has also had a negative effect on the Danish textiles, furniture and electronics industry. These industries are also hit by lower demand on their most important export markets, due both to the general economic downturn and to the depreciation of the Swedish Krona, the Norwegian Krone and the British Pound. 11
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  Greece The current businessenvironment Greek GDP-growth was still at 2.4% in the fourth quarter of 2008. But this period was already characterised by shrinking foreign trade, after exports had steadily increased in the years before. Economic growth is now expected to plunge to 0.2%-1% in 2009. Greek creditworthiness has decreased in recent months and, due to the strained fiscal situation, the government is constrained in helping the economy with stimulus packages. The outlook for Greece At the beginning of the credit crisis, it was assumed that Greek banks would remain relatively unscathed because they had few “exotic” financial products in their portfolio. But now it has become increasingly clear that they are burdened with the high credit defaults suffered by their subsidiaries active in Eastern and South-eastern Europe. As a result, the volume of non-performing loans could double in 2009. It remains to be seen how key sectors like tourism (with a GDP share of 10%), construction and retail will perform during the course of the year. In the tourism sector, early booking rates are already 25% lower than previous year. Despite increased public investments, the outlook for the construction sector is rather bleak. In the residential construction subsector, in particular, there is already a high stock of unsold houses. The textile sector is now seriously uncompetitive, and will be severely affected by insolvencies, as will the food sector. After a decline in 2007, corporate insolvencies rose by 10% year-on-year in 2008, mainly affecting small companies. This year an increase by 15% is expected. This development is also reflected in the Expected Default Frequency indicator for Greece, which has risen from 0.75% in January 2008 to 5% in February 2009. In general the financial gearing of Greek companies is high, so that there is an increasing danger of liquidity problems due to tighter credit conditions and rising refinancing costs. Suppliers should be aware that a client’s deteriorating payment behaviour may be an early warning indicator of something worse. 12
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  Portugal The current businessenvironment Last year the Portuguese economic environment was characterised by zero growth. The qualitative data has shown a steep decline in consumption. Some changes in the tax system, e.g. an alteration in car taxation and a reduction of the value added tax rate, led to some economical recovery in the third quarter of 2008. Nevertheless, this recovery flattened out again during the latter months of the year. In line with these developments the consumption indicator based on the opinions of entrepreneurs has shown historically low levels. Currently indicators for business climate and economic activity are at their lowest levels since 1989. Business confidence has shrunk in all industries, especially in the manufacturing sector, which is mainly affected by the considerable decrease in global production and demand. Activity in the industry and service sector is currently spiralling downwards. The construction sector is also affected by this development, but its decrease is, at least, not as intense as in previous months. After a period of increase starting in January 2008, since July 2008 overall employment has continued to decrease. With the exception of the service sector this negative development is affecting all industries. The outlook for Portugal The current economic forecasts for 2009 show a GDP contraction of 0.8% in 2009 and a modest increase of 0.3% in 2010. The decline of economic activity and the negative perspectives for global growth, together with growing uncertainty about the duration and depth of the current recession, tend to negatively affect companies´ expectations. We have seen an increase in business risks in Portugal since the first quarter of 2008, manifesting itself in the ever deteriorating payment behaviour of Portuguese companies. 13
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  South Africa The currentbusiness environment South Africa has one of the most sophisticated business environments in Sub Saharan Africa and is considered the economic powerhouse for the region. The current business environment is challenging, brought about by a severe slowdown in the economy and political uncertainty surrounding this month’s parliamentary elections. Real GDP growth has experienced its sharpest decline in the last 10 years with some sectors already in recession. South Africa is also suffering from weak global demand, low consumer confidence and a tightening of lending criteria by the banks. Lower levels of foreign direct investment and currency stability are also areas of concern. South Africa has a highly developed banking system which has been largely unaffected by the global credit crisis. Domestic exchange controls appear to have enabled the local banking system to largely avoid exposures to many of the toxic assets. Interest rates are high but we are expecting the Reserve Bank to make significant cuts over the course of the year, which should provide some relief. South Africa has experienced record low levels of insolvencies in recent years and there is no doubt that companies are entering this difficult period in a much stronger financial position than in previous recessions. However, there is evidence that the incidence of payment default is on the increase and we expect this to continue for the next 12 months. Most of the companies that we met during a recent visit were downsizing in an effort to contain costs. The outlook for South Africa In the coming months we expect conditions to remain difficult and South Africa will not escape the effects of the global slowdown. 63% of South Africa’s exports are destined for the US, EU and Japan and, since deeper recessions are forecast for these territories, we can expect a further deterioration. To some extent this will be buoyed by South Africa playing host to the 2010 FIFA World Cup. The massive ongoing investment in infrastructure has led to a construction boom in the last few years, and we expect the benefits of this event to continue, with increased consumer spending and tourism receipts providing a further boost. On the political front, it is widely expected that the ANC will win the next South African parliamentary elections, but the party is at risk of losing its two-thirds majority in parliament. Whilst we anticipate an increase in political in-fighting we do expect political stability to be maintained. 14
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  Atradius Copyright. Whilewe have made every attempt to ensure that the information contained in this report has been obtained from reliable sources, Atradius is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this document is provided ’as is’, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied. In no event will Atradius, its related partnerships or corporations, or the partners, agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this report or for any consequential, special or similar damages, even if advised of the possibility of such damages. 15