At the end of November, Xavier Durand, CEO of Coface, gave a comprehensive interview to the newspaper L'Agefi. In this first part, he explains the consequences of conflicts around the world for companies, and what this means for Coface.
The wars in Ukraine and Israel have put political risk back in the spotlight. How will this affect our ability to read shifts in the economy?
Political risk wasn’t really something we thought much about until 2019 or even as late as 2022. We took it for granted that the dominant model of Western democracies would carry on making steady progress – at least as a model to aspire to. With 70 years of peace behind us, the world seemed to be on a more stable footing than actually turned out to be the case.
The main factors in this new order include the threat to the influence of the United States, which went from bad to worse under Donald Trump, and the withdrawal from the world stage that he spearheaded. At the same time, Russia has reappeared on the international scene with the war in Ukraine or across Africa. Then the Iran question is rearing its head in the context of the war in Israel. China is also beginning to flex its muscle, as we can see in the China Sea and with its neighbours. And there’s another bloc that is intent on challenging the established order: the BRICS. Even though these countries – Brazil, Russia, India, China and South Africa[1] – have divergent interests, this only goes to show that we are moving towards a more fragmented, multi-polar world. These different sources of upheaval are creating a volatility that we’d forgotten about, but which make it hard to pin down the new balances of power.
The economic impact of these wars generates winners and losers depending on how much the stakeholders are exposed to the surge in the price of raw materials. It seems as though Europe is the loser: it’s on the front line of the energy crisis, while the United States is benefiting from it quite a lot together with the rearmament that is giving their exports a boost.
Supply chains will be steadily restructured, with Western countries keen to find a way out of offshoring and to prioritise nearshoring and, just recently, friendshoring. This shift will inevitably be gradual because you can’t relocate labour and infrastructure overnight. And then you have to accept that production will cost more. That’s the price that comes with being in control.
If we put country risk to one side, what are the new threats facing businesses?
After years of monetary expansion and cheap money introduced in the wake of Covid, the strength and speed of the unprecedented government interventions that resulted in monetary tightening – following the return of inflation – came as a surprise. This tightening will eventually have two effects: it will make liquidity scarcer and will raise the cost of credit for economic stakeholders across the board, and companies specifically. On the other hand, since states are more highly indebted, they have less wiggle room to step in than before. At the same time, businesses are seeing their costs soar as a consequence of the geopolitical tensions. But they’re not all in a position to pass these rising costs on in their selling prices, meaning they are finding that their margins are under pressure.
“Coface had a turnover of 960 million euros (up 11%) in the first half of 2023 for a net profit of 129 million (down 5.1%)”
All this is against a backdrop where businesses also have to factor in demographic changes. In Western countries and China, the aging population is shrinking the proportion of working-age adults, resulting in unemployment rates that remain stubbornly low and, if follows, wage costs that are staying high. In parallel, climate change is becoming increasingly obvious, calling for investment that then drives up energy costs, and this is really only the beginning, in my opinion. All these negative factors coming together means businesses don’t have much going in their favour when taken as a whole.
What does this mean for companies operating in France?
The low point in corporate insolvencies was in June 2021, and we’ve subsequently been in a dynamic for the last two years that I’d describe as a normalisation compared to the past. Since the start of the year, the level of insolvencies has been higher than it was in 2019[2] (up 3.5%). In the beginning, the shift affected the smallest businesses, i.e. companies exposed to certain sectors – construction, for instance – since the jump in rates dried up property development. As businesses begin to have less surplus cash, bankruptcies start to affect larger companies.
In addition to the construction industry, retail is also under pressure. The sector has been hit for some time now by competition from online and physical commerce. What’s more, in a context of high inflation, all stakeholders are trying to pass on the price hikes, only stopping when consumers start to look for alternatives: the drop in sales of organic products is a case in point.
What effect will the latest conflicts have on your commitments?
To start with, we review our country risk analyses three times a year, when we take account of new emerging risks or other risks that aren’t so high. And we are constantly adjusting our exposures using a pro-active risk management and prevention policy. Last year, our exposure for Russia dropped from five billion euros to the bare minimum in a matter of months. It’s still too early to predict the effects of the conflict that was triggered in early October in the Middle East. We have very little exposure in these countries, although Israel is by far the most substantial, and it’s still very hard to predict how long the conflict will go on for.
What lessons can we learn from the Covid crisis and the government support for credit insurance that it sparked off?
Governments intervened in a situation that was entirely new and relatively dramatic. There was no choice except the “do what it takes, no matter the cost” approach so that we could avoid the same shock as in 2007-2008, since the crisis seemed to be temporary. Supporting credit insurance was one way of offering reassurance about the implications of a potentially even bigger deterioration. In this instance, the credit insurers ended up paying out to the government because the loss ratio was very low and, it follows, these policies were net debtors for the insurers.
But this crisis doesn’t serve as a reliable guide to the next one, what it will be like or how big it will be, or how governments will react to it. And yet, it seems clear that we can’t always expect the system to be bailed out by public money; there’s a limit to this exercise.
Coface has always been committed to having action plans that are agreed in consultation with our clients and that are proportional to events. Having said that, states can’t insure stakeholders against a recession, and private insurers even less so. This is self-evident if you think about our size compared to the economic challenges we’re talking about. The intangible logic of credit insurance is grounded in our ability to adjust risks to the specific conditions of the risk facing us.
How do you continue to make a statement about your specific skills for export?
Export – meaning insuring transactions between countries – accounts for 40% of our business today and is still our historical strength. The group has offices in 100 countries and provides insurance in 200. We make it possible for companies to monitor their risks across the globe.
Government mechanisms are welcome for helping businesses to export, especially small firms, because they face many unknowns in this context. The public guarantees that Coface handled are now the sole prerogative of Bpifrance. And they cover major strategic export agreements that the private market rarely – or never – insures: nuclear power, weapons, aviation, technology, etc.
France has a French export agency that is well-known and powerful. The major challenge is to make the break through from international firms to small and medium-sized businesses, which is no easy task given the great diversity: you need a culture and intermediaries. As a credit insurer, we can help by making our data on targeted foreign markets available.
[1] Editor's note: Saudi Arabia, Argentina, Egypt, the United Arab Emirates, Ethiopia and Iran will join the five founding states on January 1.
[2] Corporate insolvencies have climbed above the 2019 figures on several occasions in 2023: in March, May, June, July and August. 33,794 bankruptcies were posted over the first eight months of the year, up 37% compared to 2022 and 3.5% compared to 2019 (Source: France Corporate Payment Behavior Survey in 2023 – Coface, November 2023).
