The Insolvency Act approved by the parliament will raise the number of bancruptcies in Slovakia.
photo: SME - Pavol Funtál
THE WORLD economy appears to have hit the peak of the business cycle in late 2003 and early 2004 and is now in a slowdown phase. After growing 4 percent in 2004, world GDP growth should slow to 3.2 percent in 2005 and then to 2.8 percent in 2006. There is nothing catastrophic in this scenario, but it does imply a trend reversal for business insolvencies around the world.
A rise in insolvencies across the world in 2006
This is mainly due to the economic situation in the United States, which remains the driving force in the global economy, accounting for roughly 30 percent of world GDP. After years of monetary and budgetary stimuli, the rise in interest rates, the firming of the dollar against the euro and yen, and the return to a slightly less open-handed budget policy should take American growth to below 3 percent in 2006, causing US business insolvencies to rise for the first time since 2002.
In Europe, the eurozone missed out on world recovery and has seen lower growth in 2005, while the United Kingdom is in net economic slowdown. In the eurozone, business insolvencies should remain stable at a high level in 2005 and 2006, but they should increase in the United Kingdom. Growth in the new industrialised countries (or NICs), with China in the lead, should remain more dynamic than in what we term the old industrialised countries (or OICs).
Nonetheless, growth in the NICs should slow, given their economies' strong dependence on US domestic demand. How this will impact on insolvencies in these countries is more difficult to predict.
Generally, cyclical elements are bringing a downward trend in insolvencies in countries such as Brazil and South Korea, among others. But insolvency legislation in these countries is of recent vintage or in the gestation stage, the statistics are often incomplete, and business legal status and accountancy methods are often very different from those encountered in the OICs.
Growing GDP in Slovakia will not reverse the negative trend in insolvencies.
photo: TASR
Developing a legal framework for insolvencies can involve a significant wave of increased insolvencies (e.g., in Slovakia), and a shake-out among large money-losing public companies (eg, in China) could hold some nasty surprises for the years to come.
Annual change of insolvencies
In very many countries, there is a close correlation between the business cycle and insolvency figures. Generally, it takes GDP growth of 2 to 3 percent to stem the rise in insolvencies, and there is a very high elasticity of insolvencies to growth.
A 1 percent decline in GDP usually leads to a 5-10 percent increase in insolvencies. Beyond cyclical fluctuations, different countries have for a long period enjoyed very different average rates of growth, and this is reflected in long-term insolvency rate of change.
From 1991 to 2004, insolvencies fell by half in the US and the UK, but remained fairly steady in France and rose by a factor of 4.5 in Germany. Over the same period, growth averaged 3.3 percent in the US and 2.8 percent in the UK, compared to 1.9 percent in France and 1.3 percent in Germany.
Insolvencies in Slovakia - the shake-out will continue
The situation in Slovakia is somewhat different. In 2005, Slovakia's economic growth reached its historical maximum of 6.0 percent which exceeded all the expectations.
The strength of the economy relies mainly on strong domestic demand, and particularly on household consumption, which has profited from strong growth in wages. This does, however, bring a swelling in imports and reduces contributions from the foreign trade sector.
Paradoxically, the fast growth of the gross domestic product will not be enough to turn the trend in the number of insolvent companies. This paradox is explained by the housecleaning in businesses that began in 2004, which has brought an explosion in insolvency petitions, a large part of which made their way into the effective insolvency statistics for 2005. The number of bankruptcy petitions boomed from 2,184 in 2004 to 3,907 in 2005. Almost 70 percent of these petitions were placed by the courts in the second half of the year.
The total number of insolvencies in Slovakia in the last year increased by 66 percent to 1,645 from 990 in 2004. Most alarming is the fact that in 80 percent of these 1,645 cases, the bankruptcy declaration was refused due to the lack of assets. The number was 1,352 cases, almost doubled from 767 cases in 2004. These figures show that there is an increase of companies that are completely insolvent.
2006 outlook for Slovakia
The economic outlook for Slovakia remains excellent, with GDP expected to rise by around 6 percent in 2006. However, this will not be enough to reverse the trend in insolvencies, especially with new legislation coming into force at the beginning of year.
On January 1, 2006 completely new legislation, the Insolvency and Restruc-turalization Act, became effective. The aim of the Act is to speed up procedures, transferring decision-making power from the court to the trustee and creditors. Other aims are to decrease costs and maximize the bankruptcy dividend. The Act places greater emphasis on rehabilitation rather than liquidation. This new legislation should inflate the number of insolvencies. These should accordingly increase by 8.7 percent, to nearly 1,800 cases in 2006.
Karel Tkáč is claims
and debt collection manager
in Euler Hermes Servis, sro
Insolvency in selected countries
Number of insolvencies
2000
2001
2002
2003
2004
2005
2006
USA
35 472
40 099
38 540
35 037
34 317
33 900
34 900
Canada
10 040
10 371
9 458
8 838
8 118
7 800
7 600
Japan
18 769
19 164
19 087
16 255
13 679
12 900
13 200
Germany
28 235
32 278
37 579
39 320
39 213
38 600
40 000
France
43 572
42 036
42 897
48 095
48 673
51 000
51 000
Italy
11 641
10 767
10 683
10 463
11 083
11 700
12 300
Spain
828
759
1 037
1 012
983
810
850
Netherlands
3 579
4 330
4 963
6 386
6 648
6 820
6 670
Belgium
6 791
7 062
7 200
7 593
7 910
8 000
8 080
Austria
5 340
5 178
5 281
5 643
6 318
7 200
6 500
Portugal
1 558
1 703
1 929
2 412
2 605
2 400
2 530
Finland
2 790
2 674
2 807
2 714
2 385
2 290
2 170
Greece
805
700
618
608
730
770
800
Luxembourg
581
750
682
656
663
690
700
Ireland
373
483
428
377
361
370
350
United Kingdom
24 269
24 811
25 159
23 322
21 756
22 500
22 500
Denmark
1 770
2 329
2 469
2 506
2 620
2 400
2 300
Sweden
6 733
7 433
7 930
8 237
7 649
6 800
6 410
Norway
3 576
3 562
4 473
5 223
4 297
3 900
3 700
Switzerland
3 842
3 613
4 002
4 539
4 955
4 940
5 000
Poland
1 289
1 674
1 863
1 798
1 025
1 000
1 000
Hungary
4 998
5 895
6 189
7 693
7 756
7 800
7 800
Czech Republic
2 491
2 473
2 155
1 728
1 460
1 380
1 330
Slovakia
1 212
1 263
1 510
1 262
990
1 645
1 780
Brazil
20 999
19 956
25 707
22 493
17 318
13 950
11 980
China
5 279
7 500
7 500
6 167
5 278
3 500
3 500
Hong Kong
910
1 066
1 292
1 248
1 147
850
900
