Category Risk Management

Global business insolvencies: South Africa sees significant drop in insolvencies, but challenges remain

04 March 2024 Allianz

• In 2023, 3 out of 4 countries recorded a rebound in business insolvencies, resulting in a +7% rise at the global level.
• 2024 might mark the end of the catch-up, with a third rise in a row in business insolvencies (+9%) driving 2 out of 3 countries above their pre-pandemic levels.
• After these gradual yet consecutive rises, global business insolvencies might stabilize in 2025 (0%) but settle at a high level.
• Insolvencies in South Africa have reached a record low, dropping by 13% year on year in 2023

Allianz Trade releases today its latest Global Insolvency Report and unveils updated forecasts for 2024 and 2025. According to the world’s leading trade credit insurer, after two gradual rebounds in 2022 (+1%) and 2023 (+7%), global insolvencies are set to accelerate again in 2024 (+9%) before stabilizing in 2025 (0%) at high levels.

South Africa sees significant drop in insolvencies, but challenges remain
Insolvencies in South Africa have reached a record low, dropping by 13% year on year in 2023, according to the report. The decrease, which marks the lowest number of cases in over 30 years, is a positive sign for the country's economy.

Throughout the year, all quarters reported fewer insolvency cases compared to the previous year, indicating a consistent downward trend. However, the report predicts that the economic inertia experienced since 2022 will have lingering effects in 2024, resulting in a relatively stable number of insolvencies. It is expected that a moderate decrease will materialize again in 2025, driven by a substantial economic recovery.

The overall resilience of firms and the economy has been commendable, considering the challenges faced. South Africa's real GDP growth decelerated to 0.9% in 2023, a significant drop from the nearly 2% growth in 2022 and 5% in 2021.

One of the key obstacles hindering growth is the lack of reliable electricity supply and logistics networks, which have been identified as the country's top risk in the Allianz Risk Barometer. This ongoing issue continues to impede businesses and households from reaching their full potential.

Furthermore, the report warns that insolvencies may increase further due to the absorption of margins for interest repayment and potential business interruption events triggered by the potential recrudescence of social unrest related to the electoral cycle.

Despite the challenges, the significant reduction in insolvencies is a positive development for South Africa. It reflects the resilience and adaptability of businesses in navigating the economic landscape. As the country works towards addressing the underlying issues affecting growth, there is hope for a brighter future.

Insolvencies are (already) above pre-pandemic levels in most advanced economies
As expected, 2023 recorded a high-speed and broad-based rebound in business insolvencies and 2024 started with insolvencies above pre-pandemic levels in most advanced economies. The number of business insolvencies rebounded in three out of four countries in 2023, with most recording a double-digit increase. We saw sharp rises in the US (+40% in 2023) and in the Eurozone (+14%), with the Netherlands (+52%), France (+35%) and Germany (+23%) on the front lines.

The increase in global insolvencies accelerated by +6 percentage points (pps) in 2023 compared to 2022, moderated only by the declines seen in China (-14%) and emerging markets such as South Africa (-13%) and India (-8%). Western Europe remained a key contributor to the global rise in business insolvencies despite a slight slowdown (+15% in 2023, -8 pps vs 2022). North America boosted the global rebound too, with a sharp acceleration (+41%, +43 pps). Another worrying factor is the rise in large business insolvencies[1], which could generate further non-payment risk for smaller suppliers: 2023 recorded one case per day globally (365),explains Maxime Lemerle, Lead Analyst for insolvency research at Allianz Trade.

The global insolvency acceleration is not done yet, but the catch-up is coming to an end
Lower growth, trade disruptions and geopolitical uncertainty set the stage for another acceleration in global business insolvencies in 2024. Allianz Trade expects a third escalation in a row this year (+9%), fueled by a continuing increase in four out of five countries. The largest increases are expected in the US (+28%), Spain (+28%) and the Netherlands (+31%).

This broad-based rise would push two out of three countries above their pre-pandemic number[2] of insolvencies in 2024, from half in 2023. The after-shocks economy brings a large set of headwinds and challenges. These will now test the resilience of corporates that have become the most fragile over the past 3 years. We expect that these developments will lead business insolvencies to settle at a high level in 2025: +12% above their 2019 level in the US, +8% in France and +6% in Germany,states Aylin Somersan Coqui, CEO of Allianz Trade.

Allianz Trade Expects Limited Impact on Business Insolvencies
Allianz Trade, which operates in South Africa through the Allianz Commercial license, does not expect a tsunami of business insolvencies as recorded in the aftermath of the great financial crisis, when global insolvencies skyrocketed by +17% and +19% in 2008 and 2009, respectively. However, the catch-up should be noticeable in several countries, in particular the advanced economies of Europe, due to specific firms (the most exposed to profitability and financing issues) and specific sectors (notably B2C related sectors and construction).

Want to check all our insolvency forecasts and analysis? Take a look at our 2024 Allianz Trade Insolvency Report!

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