Business leaders and economists had been debating the timing of the next recession and its most likely triggers. Unfortunately, no one could predict or prepare for the destructive power of the coronavirus (COVID-19).
Exogenous shocks such as epidemic and pandemic crises are difficult to control. Affected countries globally are considering a range of policy measures including guaranteeing business loans, wage subsidies (to prevent layoffs), payroll tax cuts and expansion of sick leave to cushion the impact of the epidemic on the economy.
Regardless of the planned economic stimulus, the Dow Jones fell by 7.8 percent, or 2,014 points, on March 9, 2020. This was the largest decline since the 2008 financial crisis, followed by the largest Dow Jones value drop in March 1987.
Correlation between recessions and bankruptcies
CIAL Dun & Bradstreet is closely following these developments in the global economy. Our analysis shows that the last two recessions, in 2001 and 2008, have been accompanied by precipitous increases in bankruptcies (as can be seen in the chart below). The trend is very clear both in the Dotcom Recession of 2001 and in the Great Recession of 2008.
During the Great Recession, U.S. business bankruptcies rose by 35 to 40 telegram number list percent for more than two years, just before the recession itself. During that period, Dun & Bradstreet reported a total of 101,000 bankruptcies. The speed of these bankruptcies was two to three times faster than the annual average reported during the economic expansion from 2010 to 2019.
Divergence in performance between Dow Jones and bankruptcies during recessions
[Source: Dun & Bradstreet]
Central banks are taking strong measures to counter the impact of the coronavirus. These precautions the value of data for survival in the operation of smes could help financially secure companies that require a short-term liquidity solution, but, as we saw in 2008, companies with weak financial health are at a higher risk of going bankrupt.
With a track record of more than 10 years of expanding business creation and low bankruptcy rates, it is worrying that an economic downturn could result in an unprecedented number of bankruptcies.
How to prepare for potential impacts on global trade credit
Finance and credit teams are advised to re-evaluate their credit policies to ensure that:
- Incorporate an appropriate balance of risks: A prolonged period dating data vof economic prosperity and minimal bankruptcies may have influenced the approach to day-to-day credit policy, allowing for greater risk in the portfolio than would be prudent in a slow-growth or recessionary economy. Reassessing a company’s credit policy is necessary to recalibrate the risk profile of the portfolio of new and existing clients.
- Set appropriate credit limits: This is an opportunity to realign credit limits and become aware of your credit exposure to the entire global corporate hierarchy of that client. Similarly, it is advisable to adjust credit limits (increasing or decreasing them) based on your assessment of the individual risk of that client.
- Set appropriate terms: Assessing the potential risk of each new customer opportunity or renewal will help realign credit terms based on the likelihood that the customer will pay on time and within those terms.
- Portfolio risk monitoring: Perhaps most urgently, consideration should be given to implementing credit risk monitoring across the global portfolio to identify weak points that could lead to bad debt losses from potential bankruptcies.
There are opportunities in every
economic situation. Many companies may need to quickly recognize that while bad debt losses have eased over the past 10 years, we may be entering a new economic reality that requires a more active approach to credit risk mitigation.
Let CIAL Dun & Bradstreet help you understand the hidden risk in your client portfolio through CIAL 360 Credit and identify which of your clients are located in an area affected by the coronavirus.