6 minute read
War in Ukraine may exacerbate post-Covid economic challenges
By Daniel de Búrca
When writing about the pandemic in the June 2021 Insider, I suggested that we were perhaps somewhat unlucky that two “once-in-a-generation events” had arisen so closely together in the form of the 2007/8 Global Financial Crisis and the Covid-19 pandemic.
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Probabilistically, there’s nothing that says rare events can’t happen soon after to each other, but that doesn’t make dealing with them any easier. Although it appears that this time, most of us can breathe a sigh of relief emerging from the pandemic, the global economy still faces significant challenges to overcome. Supply chain issues, rising commodity prices, and increasing inflation were all likely to persist for some time. However, with the tragedy of war in Ukraine unfolding before our eyes, we also now see an unimaginable humanitarian disaster, increasing geopolitical tensions, increasing energy insecurity, and a deepening of many of the issues created by the pandemic. And one of the major challenges with the unfolding events of 2022 is how quickly things change.
For some of these issues, we can hope that in the medium to long term, the experience of them will spur actions which make systems more resilient – particularly regarding energy production and distribution. Equally, while it is not an immediate fix for rising energy prices – perhaps this is also a point of no return in the shift to more sustainable energy. But in the short term, we have both the challenges themselves and the causes of them to overcome. Each being as complex as the other.
The initial view following the unprecedented level of government intervention seen around the world during the pandemic was that rising inflation resulting from these actions would be temporary as things generally returned to normal. However, it seems apparent that this period of high inflation we’ve entered will be more persistent and severe than initially expected. This view initially emerged well before the outbreak of war in Ukraine and the impacts that has on various aspects of the global economy. The implications of that conflict on the global economy will be undoubtedly be negative even at this stage.
A recent report from Allianz Trade on the likely impact of the war in Ukraine on the global economy demonstrated the difficult times ahead as the world seeks to grow out of the pandemic-induced crisis. Their report notes the following: As the world reopens from Covid-19 with higher inflation, disrupted energy and supply chains, and sensitive financial markets, our scenario “Conflict escalation” highlight impacts on Europe’s inflation (+100bps), growth (-0.5pp), equity markets (-10%), sovereign and corporate spreads (+2060bps), and policy outlook (dovish pivot, fiscal support reloaded to offset impact). Severity of sanctions is a clear gradient for economic and financial markets outcomes.
Fears related to Europe being cut off from the Russian gas supplies that it currently relies heavily on may not materialize due to the mutual benefit of continuing this trade, although as noted above, there is a growing call for greater energy security from within the EU. What that looks like beyond the short term is unclear. As the Euler Hermes report notes, even during the most frigid periods of the Cold War, gas supply from Russia continued to flow to Europe. Whether the situation is different now remains to be seen.
Another challenge related to the geo-political environment facing us is responding to the rapidly expanding sanctions lists. Remaining compliant with sanctions regimes is part of the daily work of most ICISA members, however, the challenge remains for insurers to have access to regular, accurate and consistent information. Again, this should not pose too great a challenge for credit insurers and sureties familiar with these processes, but the circumstances perhaps require extra caution and care than during more normal times.
In the wider global context, while rising oil and gas prices are likely to have an impact on a regional basis (depending on consumer or producer status), a March 2022 note from IHS Markit on the geopolitical implications of the conflict suggested that a global recession should be avoided in 2022. Overall, their forecast indicates global real GDP growth in 2022 of 3.3%.
Equally, S&P highlights that while the Ukrainian and Russian economies combine for only 1.9% of world GDP, they play an outsized role in certain commodities aside from oil and gas, including several important cereal crops, as well as certain minerals, metals and wood, among others. Their role in fertilizer production is also likely to exacerbate existing high costs and low availability of in agriculture in Europe and beyond. The economic impacts noted above will also have impacts on the surety and credit insurance sectors. Rising inflation will naturally have a continuing impact on building materials and other commodities noted above, and any increase in insolvencies due to the economic hit stemming from the war will also have a noticeable impact, although the scale of that is unclear. More generally, however, there are indications that demand for protection continues to grow. This is unsurprising given the circumstances, but in spite of the strangeness of the year so far, we may in fact be looking at a more “normal” year from a loss ratio perspective. That is just a reflection on the emergence from the circumstances of two pandemic years, rather than a comment on war returning to the European continent.
Of course, all of this depends on a multitude of variables, including the duration of the war, the responses of different parties, and the economic impact of these aspects. How these issues evolve will remain at the front of our minds – both in our daily lives and our professional lives too. The abstraction of thinking about the potential economic impact does not however, dim the tragedy of the dire humanitarian impact of the war in Ukraine. We’re seeing that things can change rapidly. This article may well be out of date in a few months or even when you’re reading it - and that is in part what the challenge of 2022 looks like!
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A practical and accessible industry-wide reference on Trade Credit Insurance, written by a team of industry experts.
This compact volume is a practical guide for anyone interested in Trade Credit Insurance. The International Credit Insurance & Surety Association (ICISA) presents an approachable but detailed guide written collaboratively by carefully selected industry experts. The guide describes the ‘lifeline’ of the credit insurance product, from the initial application stage to the expiration phase of the policy, including practical use aspects for credit managers. The volume offers compact information on the history of trade, the need for protection against trade credit risks, and solutions offered by credit insurance providers. The focus is on short term credit, including whole turnover policies and single risk policies.
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Key selling points
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Content
Foreword; Introduction; Disclaimer; 1.What is trade?; 2. What is trade credit insurance?; 3. Product types; 4. Risk types; 5. Typical set-up of a trade credit insurance contract; 6. Premium, the price for cover; 7. Day-to-day policy management; 8. Buyer risk underwriting in trade credit insurance; 9. Debt collection; 10. Imminent loss and indemnification; 11. Renewal, expiry, termination of a policy; 12. Single risk business; 13. The single risk insurance market: Private and public players; 14. Reinsurance of Trade Credit Insurance; Trade Credit Insurance resources; Glossary of trade credit terminology
About the Author(s) / Editor(s)
The International Credit Insurance & Surety Association (ICISA) brings together the world’s leading companies providing trade credit insurance and surety bonds. ICISA promotes technical excellence, industry innovation and product integrity, as well as addressing business challenges generated by new legislation.
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