Banking News

Insolvency Rate Set to Jump Higher – CreditorWatch

(14 February 2022 – Australia) Business insolvencies are expected to increase substantially in 2022 according to CreditorWatch as court actions ratcheted up in response to the economy absorbing the worst of the latest COVID Omicron variant.

Australian enterprises are not yet out of the woods as COVID continues to reverberate up and down supply chains and cause severe staff shortages and hiring stress. Among CreditorWatch’s disturbing results were court actions increasing 58 percent in Q4 2021 year-on-year, retracing pre-COVID activity and a leading indicator that major creditors such as the Australian Tax Office (ATO) and Banks have returned to pre-crisis collection operations. The national probability of default remains flat at 5.7 percent, compared to 5.8 per cent in December.

Lockdowns in 2020 and 2021, particularly in Victoria and New South Wales, saw many businesses struggle and the spread of Omicron compounded the strain many firms had been feeling. CreditorWatch’s data indicated that trade receivables continue to decline dramatically, down 45 percent in Q4 2021 compared to Q4 2020 and almost 50 percent lower than pre-COVID levels. January trade activity was weak following poor Christmas retail activity with a sustained decline in cashflow emerging as a key driver of insolvency risk across the economy throughout 2022.

“The continuing slide in the value of trade receivables is a worrying trend. The RBA’s view last week was that Omicron hadn’t derailed the economic recovery and when case numbers go down, the floodgates will open and consumers will rush out and start spending this $200 billion hoard of cash” commented CreditorWatch CEO Patrick Coghlan on the latest results of the CreditorWatch Business Risk Index.

“I’d love that to happen so businesses can get back on their feet more quickly, but there are a lot of ‘ifs’ about that assumption. Pressure is mounting for interest rates to rise. If that happens, it will be another hit to small businesses. CreditorWatch is expecting business insolvencies to grow steadily this year, even if the RBA doesn’t hike interest rates” Coghlan added.

“The summer of 2021/22 was so full of promise, but Omicron came along in the first week of December and it all evaporated. There are some signs of economic and credit normalisation in the latest CreditorWatch results, external administrations being one example. Ultimately, though, CreditWatch’s data points to Australia’s economic activity running at a much slower rate than desired. We are in for a bumpy ride, which creates the biggest challenge for SMEs which is uncertainty.”