Online set on solutions to the risk of non-payment
Covering our commercial risks is always a good practice for any company, but in the current scenario of uncertainty it seems more necessary than ever.
In this new online set of foreign business we address what solutions exist to face the risk of non-payment in international commercial relations.
Covering our commercial risks is always a good practice for any company, but in the current scenario of uncertainty it seems more necessary than ever. Today we have invited experts from four companies in the sector to give us an overview of the situation:
Juan Francisco Pacheco, Head of the Risk Unit at CESCE
Enrique Cuadra, Corporate Director of Risk, Information and Recovery at Solunion
Mikel Aguirre, Head of Political and Single Risk at Coface in Spain and Portugal
Mariano Villar Abad, Director Credit Solutions at Aon
With what words would you define the current situation of international trade relations?
Juan Francisco Pacheco: “Right now there are a series of key words. The first is uncertainty, It is very difficult to make forecasts, and it makes it very difficult for companies to try to make plans for how things are going to go. Another word is that it is unpublished; Until now we have had crises that have affected sectors and countries, but now we find ourselves in a situation in which the impact is global, multinational, and affects many sectors at the same time. And finally, a context of non-payments, of beginning of instability of payments due to the situation of stoppage of activity.”
Mariano Villar: “We are all fully aware of the situation we are experiencing. The main word that defines the current situation is volatility, that uncertainty and that unprecedented situation.. The complicated thing is how to navigate these uncertain times and how companies can try to guarantee some profitability. Try to make trade simply that, trade, and not a source of problems.”
Mikel Aguirre: “Aside from the uncertainty, an important issue is duration. This pandemic, which is global, was declared on March 11, 2020, so in four months we would only be a year old. Before the summer we thought that perhaps in the fall there would not be a second wave and now we are already talking about whether there will be a third wave.”
Enrique Cuadra: “We should also put another factor, which may not have occurred in other crises, greater protectionism, which is making these international relations have obstacles in reaching the markets. We are not very clear about how long the current pandemic will last, but it is likely to last a few quarters. We believe that this context of uncertainty and volatility will remain for quite some time.”
What are the main risks and threats for international trade at the moment?
Mikel Aguirre: “This year there is talk of a 3% drop in international trade; It is possible that countries like China and Taiwan will end up with positive growth. For next year there is talk of 3,5% growth in world trade, which we all expect; What is going to be important is something that Enrique just mentioned, we have had protectionism for several years and the impact that tariffs can have on Spanish exports to the United States is important. Let's see if in 2021 that protectionism decreases or remains the same.”
Could the change of government in the United States also be another influencing factor?
Juan Francisco Pacheco: “The issue of tariffs in the United States has hit very strong sectors in Spain but it seems that the elections in the United States are going to be a possible turning point on this issue. Joe Biden will possibly enable other types of foreign policies in the medium term that could help in some way. But it is not going to be something that is going to happen in the short term.”
Mariano Villar: “Apart from the brutal knowledge that my forum colleagues have, with a more analyst profile, it is very important to try to anticipate the macro trend, but it is very relevant in terms of risk and threat, the volatility of the micro, the very short term that makes us lurch and can affect companies.”
Is the Brexit factor also expected to have an impact?
Enrique Cuadra: “Of course, especially for Europe, we are the main partners. Going back to what Mariano said, in the world we live in everything is quite interconnected. The United States will have a lot of influence and we will also have to be very attentive to those tensions between two blocks, China and the United States, I do not think that this trade war will disappear because there is a new president, because both countries fight for technological supremacy. And although Brexit is a European problem, it will be affected by other external factors.
As for micro, everything that has to do with technology will be sectors that suffer greater changes, greater volatility, greater uncertainty; Then there are always refuge sectors, the entire food and industry part, is defending itself a little better and will be the first to find solutions, an agreement with the United Kingdom.”
What are the sectors or countries with the most risk?
Enrique Cuadra: “We are seeing global trends, globally there are more large insolvencies so far this year, it seems to be slowing down a bit; The second quarter was a historic point. The sectors that are suffering the most are energy, non-food retail distribution, and construction in part, and services of course, the entire tourism part. Everything that is food is behaving better. In Spain, food is maintaining itself, food exporters have managed to grow a little.”
Countries?
Mikel Aguirre: “We have 25 letters in the alphabet and now we are with K. The K is very graphic, there is an arm that goes up and another that goes down, the arm that goes down is clearly tourism, or residential construction or car sales, and the arm that goes up we are talking about food, transportation of goods or pharmaceuticals. The area of the world that is expected to grow the most in 2021 will be Southeast Asia; They are the ones who have best managed the pandemic. And countries in sub-Saharan Africa that have endured the pandemic better and the data for 2021 are at least encouraging.
Juan Francisco Pacheco: "Yes, there are a series of sectors clearly impacted, the main one being tourism, the horeca channel, but we also find some industrial sectors that are accompanied by large projects that have had a certain pause during this period, many investments have been blocked and some have been left on hold. These related sectors are suffering the stoppages that come with it. This stoppage also affects other sectors that, although it would seem that they are not impacted, are because their clients have had the end client's postponement, so there is little or no widespread impact.
Yes, I agree that there are sectors that have endured, such as food, food distribution, some sectors such as pharmaceuticals, with very appropriate behavior.
As for countries, we cannot talk about specific countries. From the vision of CESCE, there are sectors that are most affected and companies that have individually received an impact. Yes, we are analyzing that different countries have developed aid systems, such as ICO loans in Spain... that is working correctly but generates uncertainty because all the plans have been developed based on an estimated duration of this pandemic. Many of these plans may require new support. I think that the evolution of non-payments, of delays, will come hand in hand with all those measures that the states develop during this period of two, three, six months.”
What forecast levels of non-payment do you estimate can be reached in this crisis, and in comparison with those of the 2008 crisis?
Mariano Villar: “One thing is delinquency, another thing is insolvency and another thing more grounded in the insurance world is the loss ratios.. Insolvencies will of course increase, but what happens with delinquencies is that it will be lower than insolvencies, because the purchasing capacity, due to the interest in buying, due to the solvency assessments of the buyer that the sellers are making, will make them much more selective. And finally, the claims ratio, where we add an additional variable which is the premiums against the claims that are being paid to analyze the profitability of the contracts.”
Enrique Cuadra: “I would add an idea; Compared to the previous crisis, there is a somewhat disconcerting element for economists: in the previous crisis, practically no OECD country decreased by 4% or more; insolvencies did skyrocket, as did defaults; The situation of insurers suffered that impact.
In this case the falls in GDP are more pronounced but the aid from governments or supranationals is perhaps being more effective. These insolvencies are being contained, this disappearance of companies could happen if the aid is suddenly withdrawn; It is important to know how each country is going to manage this progressive withdrawal of aid, There cannot be permanent debt either.. That will be the key factor to see where insolvencies are going to evolve. We are indeed projecting that they will rise by around 20%. We'll see exactly where they are focused. Perhaps there are many companies that were already in difficulties that have been kept alive artificially, that do not contribute as much to the industrial fabric of the country, they can add to that insolvency statistic but not enough to reduce that economic recovery. Now government management will be key.”
Does this situation benefit your sector?
Mariano Villar: "No. I am not from the insurance sector although I work immersed in it, I am from the professional services, consulting and risk management sector, and my objective is to help clients improve and give stability to their results through insurance contracts or any other means. tool. If this situation can negatively impact my client's results, logically it cannot benefit me.. From a point of profitability of my business, the workload is much higher. Yes, it is putting on the table the potential loss of clients due to their insolvency.”
Mikel Aguirre: "The answer is no. In a situation like the current one we all lose. They lose clients because they lose sales and we have to be much more refined when analyzing the debtor and the country, because it is more difficult. We have already said that there are opportunities but it is more difficult to see them. Yes, it will create more sensitivity; "It gives more sensitivity."
Do companies know how companies can protect the risk of default in their international business operations?
Juan Francisco Pacheco: “In general, companies know credit insurance well. The exporter knows that he needs a partner because exporting is not easy and more know who you are exporting to. It does know the insurance market, it tries to reduce all export risks, you should not only see credit insurance as the one that will cover a non-payment in case of a problem but rather it is the manager of your risks that helps you take certain decisions.
Exporting was clearly the step that helped us get out of the previous crisis and it will be safe to relaunch the activity but you need a traveling companion, which is credit insurance.”
Just as important as the product is having the correct information about that potential client, business partner...
Juan Francisco Pacheco: "I think so; The insurers can tell you with this you can work, in this country you need this, because it is not all about selling, until the sale is not made. The exterior is the model that the Spanish company should tend towards, a mix of national market and a high percentage of exports that allows you when the local market is weak to rely on exports, and you need someone to support you at all times, partners like credit insurers.”
Are you now more demanding with the requirements you demand from companies?
Mariano Villar: “On the previous question, a comment. Beyond the magnificent tool that is credit insurance, I think we are also a little forced to think beforehand. If I have to have a meeting with a company in Paris I have different options: the first is that it is not in person, that they pay me in advance, in cash; Another option is for them to come, to provide me with a guarantee, a commercial bond; and then, when I have to go, then we do have to talk about the tools included in the world of credit insurance, there are many options here. The same applies to non-payment coverage.
What is clear is that all protection and prevention measures must be carried out with the greatest diligence, and priori, Credit insurance is the best tool to help you on your journey"
Mikel Aguirre: “There is no export if there is no financing and there is no financing if there is no insurance. In the 2009 crisis, we came out for export, and for export in emerging countries. So giving credit is essential, you get paid later and later, then there is more uncertainty, all of this without covid. And now with the covid, what we are going to find is more uncertainty and what the debtors are going to want is a longer credit period, so credit insurance is going to be essential, not only to give comfort to the exporter but also for the financial institution that discounts and has a fundamental role, because there is someone who supports the possible non-payment.
To close, I would like you to give some advice to internationalized companies to face this situation.
Enrique Cuadra: “Exporting companies are a little better prepared than average. The advice I would give them is to continue betting on what has brought them there."Because of what has worked for them, it is very likely that it will continue to work for them: good clients, good partners... and being open to looking for new opportunities, but what is advisable will always be the help of a specialist."
Juan Francisco Pacheco: “It is a complicated time but it is also a time of opportunities. You have to look for partners who can accompany you because I am convinced that opportunities will arise. It is a time when caution must be taken, important operations must be suspected, new clients with large operations, it is time to safeguard the treasury... One of the things that is quickly seen in the international market is that companies stop paying first to its foreign suppliers than to local ones. Moment of opportunities but in good company.
Mariano Villar"My advice is caution, caution and try to see the opportunities. We are in a very volatile environment where something can happen to everyone. The evolution will be in K, we will see who falls again and there will be those who recover. The key is to discriminate which buyers are on the ascending or descending side. Companies need to correctly carry out all the analysis procedures, decision monitoring and take measures in the event of incidents and for this the best tool is the help of credit insurance.”
Mikel Aguirre: “More than advice, comment, that they get good advice. Crises come and go, this is a crisis that we have never seen in its magnitude but I am sure it will pass. It would be good to think that credit insurance is here to stay, that it is not a problem of there being a crisis so that people need it, but rather it is someone who covers your client account, which is the most important thing in a company and serves you well. to give you peace of mind.”
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