Switzerland and global risks

Political blind flights between Paris and Moscow, the unstable economy in Asia, crises in emerging markets such as Brazil or Chile, a sudden Brexit: the volatile economic situation and the increasing number of insolvencies, for example, are increasing the risk that companies will be left sitting on their bills. Actually, credit insurance protects against this. Undoubtedly, the official Brexit that has been jolting the European Union since June 23, 2016, remains a foggy journey into the unknown as far as the future economy and development of world markets are concerned. Even without the special political status of the Commonwealth, the British pound and the euro are sinking again and again.

Studies by credit experts underscore: For the first time in seven years, global insolvencies are on the rise again. This not only affects emerging markets such as Brazil and Taiwan, but also the most important trading partners of Swiss exporters. In 2015, the credit insurer Euler Hermes recorded three percent more corporate insolvencies in the USA, a rise of as much as twenty percent in China, and one percent in the UK.

So what is the situation like for Swiss SMEs? The risk of currency losses is now so high that insurers are cutting their limits. While other countries have long since reacted to this with non-cancellable limits, this type of protection is not yet an alternative with the established credit insurers in Switzerland and Germany.

Structural problems
It is not just the Brexit that is taking its toll. Price collapses are circulating worldwide. Euler Hermes underlines in its 2016 Export Risk Monitor that rapid price changes "also affect companies whose creditworthiness is actually in good shape." For example, falling oil prices or steel overproduction in China are undermining entire industries - and thus automatically lowering the rating of individual steel traders or energy companies.

Nevertheless, Switzerland may not be as economically affected as Germany in the near future. Swiss sectors that will have the most difficult time in the near future for regulatory reasons: Machinery, electrical and metal industry, domestic agro-culture, food and chemistry.

So it is no coincidence that jobs were already cut last year: Thousands of jobs were cut in Switzerland or affected by short-time working. Companies from the industrial sector were particularly hard hit. After the Swiss National Bank abandoned the minimum exchange rate at the beginning of 2015, export-oriented companies came under pressure from the stronger franc.

However, this also means for an insurer: lower or fix the insurance limits.

So it was turbulent for export companies even before Brexit. Production in Switzerland has been thwarted in recent years by new technology requirements and energy legislation. For example, the Schindler Group had to cut 120 jobs at its headquarters in Ebikon, Lucerne, because the production of elevator components, equipment and maintenance of elevators is reaching new dimensions.

It is not only many small technology and research companies that are having to redefine their business models, cut entire departments or relocate to cheaper production countries. As larger agencies report, even successful sectors are now increasingly facing price risks.

Alternative to insurance?
Vaucher Manufacture Fleurier (VMF), the Neuchâtel-based luxury watch movement manufacturer, is cutting more than a third of its jobs. The group sees mass redundancies as the only way to secure its future in the longer term. Even luxury goods groups like Richemont are no longer shining so brightly. The Swiss group wants to cut up to 350 jobs in the French-speaking part of Switzerland this year. The major corporation justifies these cuts with the strong franc as well as the slump in European tourism.

Such examples should be clear signals to adjust the risk assessment. As potential company closures increase, so does the volume of unpaid invoices. "In the current turbulent markets, Euler Hermes sees a number of necessary measures to protect profitability," says the credit insurer in its first quarterly report.

Euler Hermes is not alone in this: in recent months, the liquidity company GFL has noticed that other insurers such as Atradius or Coface are also increasingly lowering their limits or refusing cover from the outset.

"The credit insurer thus fulfils an early warning function," says GFL managing director Marcus Sarafin. "The client notices that the business risk has increased and can react to it." However, he says the system is not fair: "The customer has always paid in good times, but as soon as the situation becomes difficult, he is left out in the cold."

Non-cancellable covers alone could offer a solution which, as the name suggests, is regulated from the insurer's side (over a fixed duration, usually twelve months). Thus, the insured entrepreneur should be able to cope well with volume and risk for the coming months. Various insurers abroad already offer such solutions, but this type of limit is not so popular with the long-established providers in Germany and Switzerland. Perhaps also for this reason: a corresponding volume - limit size from around five million US dollars upwards - is a prerequisite here.

How could small and medium-sized Swiss businesses nevertheless protect themselves against the nebulous, Europe-wide economic situation after Brexit for the coming months? There is currently neither comprehensive protection nor a solution. Regional businesses could perhaps control their administrative costs even better. It is advisable to invest in manageable countries and business areas.