South Africa's economic progress offers hope in a world facing rising ...

16 October 2024 Allianz

• More than half of global GDP will face double-digit increases in business insolvencies in 2024. • Over 1.6 million jobs in Europe and North America could be at risk in 2025.• The total easing of monetary policy (-2pps by September 2025) should contribute to reducing the insolvency trend, especially in France and the US (by -4pps) by boosting corporate profitability (+4pps and +2.8pp, respectively).• For South Africa, Allianz Trade forecasts -5% with 1.500+ cases. The prolonged low level of insolvencies will continue in 2025 (-3%) and in 2026.

In its latest Global Insolvency Report, Allianz Group’s trade credit insurer, Allianz Trade reveals a more severe outlook for the global business landscape, with insolvencies projected to climb by +11% in 2024 – an even steeper rise than previously anticipated. The report highlights key trends and risks for businesses worldwide, as the global economy grapples with sluggish demand, ongoing geopolitical tensions, and uneven financing conditions. Allianz Group provides commercial, trade credit, and travel insurance solutions in South Africa.

Allianz Trade: South Africa's economic progress offers hope in a world facing rising insolvencies South Africa has made substantial progress in strengthening its economic environment, driven by improvements in electricity supply, business-friendly reforms, and rising investor confidence.

Eskom, the country’s public electricity provider, has increased energy supply by 14% over the last four months compared to the previous year, addressing a critical challenge in the business landscape. The enhanced energy reliability has significantly bolstered economic output, reduced business disruptions and improved overall productivity.

Series of pro-business reforms aimed at boosting economic growthFurthermore, the Government of National Unity (GNU) has implemented a series of pro-business reforms aimed at boosting economic growth. Key measures include opening specific sectors such as energy generation, ports, and freight rail to private participation. These reforms, coupled with planned infrastructure investments, are set to further enhance business activity and long-term economic prospects.

The South African Rand has emerged as one of the best-performing currencies among emerging markets over the past year, though it remains sensitive to global financial conditions. Following a -25-basis point interest rate cut, the Rand initially rallied, although some of the gains have since moderated.

Increased investor confidence in the country’s fiscal stabilityFurther signaling South Africa’s improved economic outlook, the cost of insuring the country’s sovereign debt through Credit Default Swaps (CDS) has reached its lowest level since June 2021, indicating increased investor confidence in the country’s fiscal stability.

Reflecting these positive developments, South Africa’s stock market has experienced a 10% rise over the last three months, underscoring the growing optimism in the nation’s economic trajectory. These advancements mark a significant step forward for South Africa’s economy, with business sentiment and investor confidence continuing to strengthen under the current government’s leadership.

Allianz Trade forecasts -5% with 1.500+ cases in insolvencies For these reasons Allianz Trade, which operates through Allianz Commercial South Africa license in South Africa, forecasts in 2024 -5% with 1.500+ cases. The prolonged low level of insolvencies will continue in 2025 (-3%) and in 2026.

A faster-than-expected global accelerationWhen Allianz Trade released its first global insolvency forecasts in February, the company was already expecting a strong increase in 2024 (+9%) followed by a stabilization in 2025. However, recent developments have led to an even grimmer picture, with a +11% rise now forecast for this year (+2pps vs previous forecast), followed by a peak in 2025 at +2% (+2pps vs previous forecast). Business insolvencies will therefore not stabilize until 2026, and even then, they will remain at high levels.

In the US, Allianz Trade expects insolvencies to rise by +12% in 2025 before falling by -4% in 2026. In Germany, they will increase by +4% before falling by -4% in 2026. In France and the UK, they will slightly moderate from very high levels (-6% in 2025 for both vs -3% and -4% in 2026 respectively) while in Italy they will continue to rise (+4% and +3% respectively). In China, business insolvencies will start to increase from low levels, +5% and +6% in 2025 and 2026, respectively.

More than half of the global GDP will be hit by double-digit increasesYear-to-date, business insolvencies have already increased by +9% and the rise has been broad-based across geographies and sectors. Globally, Allianz Trade’s 2024 insolvency index is likely to stand +13% above its 2016-2019 average, but -11% below its Global Financial Crisis [1] level.

“This global rollercoaster ride in business insolvencies is partly due to still-subdued global demand, persistent geopolitical uncertainty, and uneven financing conditions. It can also be explained by the ‘backlog’ of insolvencies, as companies are no longer shielded by the support measures put in place during the pandemic and the energy crisis. That’s why countries accounting for more than half of global GDP will be hit by double-digit insolvencies increases in 2024, and two-thirds may surpass their pre-pandemic numbers this year. Construction, retail, and services have been hit the hardest, both in terms of frequency [2] and severity [3],” adds Aylin Somersan Coqui, CEO of Allianz Trade.

Notably, major insolvencies have also reached a new record high level, with Western Europe leading this trend. This also poses a major threat to employment, particularly in Europe and North America. By 2025, over 1.6 million jobs[4] could be on the line in these regions, 8% of the total number of people unemployed, marking the highest level in a decade. Main sectors at risk are construction, retail, and services sectors.

Can lower interest rates be a game changer for corporates?While a gradual easing of monetary policies could offer some relief, it won’t be a silver bullet for struggling businesses. Lower interest rates reduce borrowing costs, improve cash flow, and boost profitability but they cannot fully address the financial challenges looming over companies.

“Corporates have already been deleveraging and adjusting to high rates. Our analysis suggests the current easing cycle (-2pps by September 2025) would lead to -4pps reduction in the insolvency trend, thanks to higher margins (up to +2pp in Germany, +4pps in France, +3pp in the UK and +2.8pp in the US). However, this would only slightly offset the overall increase in the US, for example, and reinforce the decrease in France”, ends Maxime Lemerle, Lead Analyst for insolvency research at Allianz Trade.

For more insights and in-depth analysis, check out Allianz Trade’s full Insolvency Report here...