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		1 November 2018
		

Economic forecast'2019 from Euler Hermes

Экономический прогноз 2019 от Euler Hermes
Economists of the company associate this with a reasonable monetary policy of the Central Bank of Russia, diversification of export-import relations, as well as strengthening the position of the manufacturing sector. At the same time, analysts at Euler Hermes caution Russian and international business, pointing to the growing insolvency risks of enterprises in 2019 and the complexity of debt collection in Russia. 
The macroeconomic forecast of Euler Hermes was prepared in the third quarter of 2018 and is based on the results of an analysis of the activities of large multinational enterprises from more than 50 countries of the world, constituting 92% of world GDP, and also based on analytics of the company's Economic Research Department. The forecast provides for three possible scenarios: “new” moderate growth (probability 75%), deterioration of the situation (20%) and improvement of the situation (5%).

Sanctions vs dedollarization
According to the chief economist of Euler Hermes, Louis Subran, the sanctions in 2018 for the first time really influenced the ruble exchange rate, which has lost 15% against the dollar since the beginning of the year. In addition, the negative impact of sanctions on the inflow of foreign investment can exacerbate capital outflows if the United States imposes sanctions on Russian government debt.
Against the background of these factors, Russia's financial policy remains reasonable, while maintaining a moderate level of expenditure compared with other countries. The slowdown in the issuance of debt obligations (310 billion rubles compared with the previously planned amount of 450 billion rubles), combined with shorter repayment periods, will level out some uncertainty due to sanctions. In addition, after the introduction of sanctions by the West in 2014, the fall in exports to the EU was replaced by an increase in exports to China and the Middle East, which also applies to imports. Thus, the independence of the positions of the Central Bank of Russia and prudent monetary policy helped to cope with the difficult macroeconomic situation.
Further possible consequences of Euler Hermes include the containment of trade relations between the United States and Russia as a whole, the restriction of bank loans to Russian residents, and the ban on transactions with property and related interests of Russian state-owned banks.
“Dedollarization can be a countermeasure: an increase in gold in a country's currency reserves may be part of a plan to minimize dollar payments. Encouraging and facilitating the use of alternative currencies in international trade can be another measure - for example, transactions with the EU and China, Russia's main trading partners, which account for almost 60% of foreign trade, can be converted into euros and yuan, while trade with the CIS countries could be conducted in rubles. Delisting companies from international exchanges could be another tool, ”said Louis Subin, chief economist at Euler Hermes.
Experts at Euler Hermes point out a trend to reduce the turnover ratio of accounts receivable in Russia, due to the fact that companies have become more cautious in providing generous credit conditions and long maturities. In 2017, it decreased by 2 days and amounted to 56 days (in 2016, the average for Russia was 58 days). For comparison, the lowest rate of accounts receivable in our country was observed in the pre-crisis years 2007-2008 and was 47 days, and, conversely, in 2014 it reached 60 days.
At the same time, according to the results of the first 8 months of 2018, the risk of insolvency of Russian companies decreased (-8% for the 12 months ended in August 2018). However, Euler Hermes expects a trend reversal and predicts insolvency growth of 6% in 2019. The relatively low figure for 2018 looks somewhat biased, since its calculations took into account the high base of 2017. In 2017, the rate was the highest since 2010, and since the 4th quarter of 2017 it has remained unchanged. In addition, three key sectors (construction, manufacturing and transport) were aloof from the national trend, but already in 2018 they were faced with an increase in non-payment.
The process of debt collection in Russia is very complicated: in the ranking of countries presented by Euler Hermes at the beginning of 2018, the country ranks 5th after Saudi Arabia, the United Arab Emirates, Malaysia and China. This position is due to the peculiarities of domestic legislation and low payment discipline. For comparison, the collection process is most debugged in countries such as Sweden, Germany and Finland.
The current Russian legislation in terms of bankruptcies provides a wide range of tools for delaying the recovery process and reducing the likelihood of its positive outcome. The most common examples of manipulation by debtors are the launching of “managed” bankruptcies with the prior creation of imaginary payables, the initiation of counterclaims, the application of interim measures by “friendly” creditors, the provision of incorrect expert data to court, etc. According to Euler Hermes, in bankruptcy procedures, Russian lenders can expect to receive no more than 3% of the stated claims.
“It is important to note that the national indicator masks a very uneven situation in various sectors of the economy,” comments Daria Yakovleva, CEO of Euler Hermes in Russia. - In particular, the construction sector and the retail trade in non-food products continue to remain in the risk zone in the near future, which is caused by changes in the structure of demand and incomes of end consumers. Growing competition, limited consumer demand, a general downward trend in profitability and liquidity, as well as limited access to credit resources are observed everywhere. The influence of these factors leads to a deterioration of the situation with payment discipline.”
For example, the retail trade turnover for the first 8 months of 2018 increased by 2.7%, and non-food sales are growing faster than food products. At the same time, real disposable incomes of Russians are still recovering very slowly: in the first half of 2018, they increased by only 1.6%. In June, in annual terms, they rose by 0.2%, and in May - by 0.1%. The growth of retail sales is mainly due to the availability of consumer loans and purchases on credit. Thus, there are no grounds for conclusions about the onset of consumer recovery. “In addition, the adopted law on VAT increase from January 1, 2019 and the acceleration of inflation may adversely affect consumer demand. In general, in recent months there has been a deterioration in consumer expectations of customers, which will lead to a slowdown in the economy next year, ”said Daria Yakovleva.

Non-payment risks for Russian companies
It is equally important to pay attention to the risks of non-payment to Russian companies doing business in foreign markets. So, according to Euler Hermes, out of 20 countries that account for the maximum share in Russian exports, non-payments by Chinese companies are the most likely (share in Russian exports is 10%), Indian (share in Russian exports is 2%), Turkish ( share in Russian exports - 5%), Kazakh (share in Russian exports - 3%), as well as companies from the US (share in Russian exports - 3%). The main cause of non-payments is the financial insolvency (bankruptcy) of companies in the listed countries (see the chart “Risks of non-payments in the countries with the largest share in Russian exports”).
“It is expected that in 2019 the global insolvency index will continue to grow for the third year in a row and grow by 5% (after + 8% in 2018 and + 6% in 2017), although it varies greatly depending on different countries and sectors of the economy, - emphasizes Daria Yakovleva. “Insolvency in China, a key trading partner of Russia, will grow by 50% in 2018.”

Credit insurance market
However, since the largest share of the company's assets is concentrated in accounts receivable, the demand for credit insurance in Russia is growing. “Over the past 2 years, the trade credit insurance market has grown by more than 140%. As of the end of 2017, the amount of insurance premiums collected by insurers on the Russian market amounted to 4.35 billion rubles, ”Darya Yakovleva shares.
The peculiarity of the Russian credit insurance market is its low penetration and the presence of potential for growth. Thus, in the world, the share of credit insurance fees in relation to GDP is 0.018%, in Western Europe it reaches 0.034%, and in Russia this figure is only 0.002%. A positive factor is the planned changes of the Government of the Russian Federation to the Law “On Currency Regulation and Currency Control”, which will soften the requirements to return foreign currency earnings on foreign trade contracts in the event that foreign partners do not fulfill their obligations.
“Exporters will be able to avoid a penalty for not returning foreign exchange earnings if the insurance company, including private insurers such as Euler Hermes, transferred money to a bank account for them,” notes Daria Yakovleva. - This will allow entrepreneurs to more effectively manage export credit risks. The export risks insurance policy will allow you to fulfill the requirements for the repatriation of foreign exchange earnings and avoid regulator sanctions.”

Statistics Euler Hermes for the return of accounts receivable
Debt collection services are part of a comprehensive receivables management service that Euler Hermes offers to its customers. In 2017, Euler Hermes provided a refund of more than 303 thousand applications in 160 countries for a total of more than 1.75 billion euros.
The largest amount of receivables returned by Euler Hermes at the request of one of the clients was 3.7 million euros. The smallest amount of penalties was 47.6 euros.
Source: International Industrial Portal
 


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