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In the first six months of 2021, 3,033 new insolvency proceedings were opened, +23% more than in the same period of the previous year. The number of insolvencies opened in the first half of this year has returned close to the level before the Covid-19 pandemic and is expected to increase by at least 10% year-on-year. The number of employees reported by insolvent firms in the period under review is 11,294, a Coface Romania study shows.
Evolution of insolvent firms
Financial losses caused by insolvent firms in the first half of 2021 were almost 2 billion lei, 5 times below the corresponding level in 2015 and the lowest in the last decade. There is a gradual decrease in the number of insolvent companies with revenues above €0.5 million (medium and large) to only 130, the minimum of the last decade. At the same time, Romania has recorded in the last 3 years less than 20 insolvent companies for every 1,000 companies with revenues above €1,000/month. It is thus close to the regional average in terms of insolvencies per 1,000 active companies, namely 11, after having consistently led this regional top for the last decade.
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“The subsidy and company rescue measures worked during 2020, but they did not definitively solve the problems of vulnerable businesses, but bought time for them. Thus, the past year has left important consequences on the published financial situation of companies operating in Romania: investments have decreased, leverage has increased and working capital has remained negative and vulnerable. If we also take into account the increasing interdependence of businesses through the intensification of commercial credit and the extension of payment terms of invoices to suppliers, the risk of insolvency of companies is increasing in the coming period, as evidenced by the increase in the number of companies that ceased activity by 31% in the first half of this year, and of those insolvent by 23%”, said Iancu Guda, Services Director, Coface Romania.
Sectoral distribution of insolvencies
Most insolvencies opened in the first half of this year were recorded in the construction sector (542), followed by retail (455) and wholesale and distribution (409). The share of the top 3 sectors with the most insolvency cases pending has varied over the last 5 years between 50% – 54% and for the top 5 sectors between 65% – 70%.
The top 5 sectors with the highest number of insolvencies also cover a similar share in terms of total active firms. From this perspective, the most affected sector is the manufacture of textiles, clothing and footwear, which recorded an insolvency rate of 24 companies per 1,000 active firms, almost 3 times higher than the national average. This is followed by the construction sector and HoReCa, a sector heavily affected by Covid-19 restrictions. According to the data, sales of companies active in the HoReCa sector fell by 39% during 2020, while profits contracted by 77%.
“The support schemes provided to the population and active companies during 2020 were the main factor in mitigating the negative financial effects of the Covid-19 pandemic in the economy. The first half of 2021, however, marks a materialisation of ‘hidden insolvencies’, both as an underlying effect and as a result of actual losses in certain sectors of activity. Looking ahead to the second half of 2021, we should not ignore a number of challenges putting pressure on the business environment: imbalances in global production and logistics flows, reduced predictability in the evolution of raw material and commodity prices, inflation, political risks, etc. To complete this explosive mix, the imminence of a fourth wave of infections and the gradual withdrawal of support measures will test companies’ resilience to shocks and their ability to manage their resources efficiently. It is essential to remain realistic and pragmatic about new developments. As a provider of credit risk management services, Coface will continue to be actively involved in supporting the business environment”, added Eugen Anicescu, Country Manager, Coface Romania.
According to the data published by CIP (Central Payment Incidents Database) provided by the National Bank of Romania, the amounts refused for payment with debit instruments during the first half of 2021 totalled only 0.55 bn. RON, down 49% from the previous year. While the number of payment incidents during the same period under review decreased more slowly, i.e. by -32%, the average value of payment incidents recorded in the first half of the year was RON 39 thousand, less than half compared to the peak of the last decade recorded in 2015. The historical minimum of payment incidents in the economy is favoured by the knock-on effects propagated by the support measures implemented during 2020. However, the financial statements for 2020 confirm an increase in the level of indebtedness of companies, which covered most of their financing needs through supplier credit, thus amplifying the risk of contagion through non-payment of invoices.
X-ray of the business environment
Analysing the evolution of the business environment for the first half of 2021, compared to previous years, a favorable situation for the maturing of the business environment can be observed. The ratio of companies that have ceased activity to newly established companies has reached for the first time in the last decade close to 1.
The number of companies that ceased activity in the first half of this year was 55,906, up 31% compared to the same period last year. At the same time, newly registered firms rose to 79,734, of which LLCs accounted for 53,844, up 58% from the same six-month period a year earlier, the highest in a decade. This dynamic shows that the economy’s rapid recovery is encouraging new businesses to emerge and try to seize opportunities despite the uncertain business environment.