Trade Environment deteriorating in Europe, USA and Japan

In a recent statement released by the International Credit Insurance & Surety Association (ICISA) members are concerned about a possible further deterioration of the business environment brought on by sovereign debt, in particular in the European Union, t

Current market conditions are generally considered to be soft but these may harden during 2012. Claims in Europe are increasing and trade credit insurance members express a negative outlook for trade in 2012, preparing for a further rise in claim payments. Growth is seen in the BRIC countries, in Eastern Europe and more generally in Asia and in Latin America. The industry outlook for Asia and Latin America is positive and ICISA expects a surge in demand for trade credit cover in these regions.

Mike Truter, CEO of Credit Guarantee Insurance Corporation of Africa Limited, comments, “The deteriorating trend in country ratings and rising corporate insolvencies appear likely, especially in Europe. Obviously it is hoped that the recession in the region will be shallow and short-lived, but nonetheless corporate payment defaults are expected to display an upward trend as a consequence.”

Recently, S&P issued a cautionary note on rising default rates in the region for the following reasons:

· an expected recession for the first six months of 2012

· normalisation in debt and loan markets following the 2008 financial crisis, came to a halt in the second half of 2011

· amid renewed tightening in bank lending, government’s ability to offer relief to distressed borrowers was reaching a limit given the 2013-14 debt maturity bottleneck, while banks themselves were under pressure to improve the quality of assets on their balance sheets.

“As far as the South African market is concerned,” continues Truter, “a softer growth trend, relative rand weakness, rising inflation and cost pressures are adding to an already ultra competitive market where margins are under continual pressure. Consequently, the improvement in business payment behaviour may come under increasing strain this year.”

ICISA members are particularly worried about the development of sovereign debt and an increase in political instability in 2012. They are equally concerned about the financing constraints and the solvency of banks involved in financing trade. It remains unclear to what extent governments are willing or able to actively support trade by e.g. stimulating exports, making additional market capacity available or through fiscal measures. Competition between government agencies and the private market on any risk is to be avoided.

As far as the surety market is concerned, the outlook is mixed, although members share the concern about public indebtedness and banker’s finance restrictions. They expect an increase in contractor insolvencies and a continued weakness in the construction industry. Lack of public sector spending and a continued sovereign debt problem in the EU and the US add to this. The surety market is generally seen as soft with ample capacity in some areas and a growing appetite for surety risks, although this varies per country.

Members express a more positive outlook for Latin America, in particular Brazil, and for China and the Asia Pacific region where continued growth in construction is expected. However, the absence of surety legislation and regulation in many rapidly growing economies are an obstacle and put the sector at a disadvantage.

ICISA expects adequate reinsurance capacity for the trade credit and surety sectors to remain in place in the coming year. Higher claims and a deteriorating corporate outlook may cause the reinsurance market to harden somewhat.