Loading up cash against uncertainty, problematic loans in Middle Kingdom, downward pressure on yields and Middle-East/African country reports

This week, I’d like to talk about the cash buffers some companies in Europe have on their balance sheets (and the weight economic policy decisions over the next months are carrying), about the credit easing in China resulting in Covid-19 problematic loans and Eurozone bond-issuance behavior.

European Corporates: Loading up cash against uncertainty

At the end of H1 2020, we estimate the net savings of EU non-financial corporates, i.e. cash from operating activities, to have doubled to over EUR 700bn, or more than 4.5% of GDP. In crisis times, companies’ revenues decline but there are also significant cuts in investment plans, lower payroll costs, lower taxes and dividend cuts. All these factors enable non-financial corporates to increase their net savings positions, which we call cash provided by operating activities. With the Covid-19 crisis, we find that companies are doing the same. Excess cash – i.e. net savings plus new bank loans to non-financial corporations less gross fixed investment – increased in 2009 and has declined only slightly since, a consequence of slow domestic demand growth but also a sign of caution from non-financial corporations. The lower commodity prices, lower corporate taxes and slow wage growth since 2009, have allowed EU non-financial corporates to keep relatively high net savings over the past years. If we combine both – i.e. net savings and new bank loans but subtract gross fixed investments – we derive what we would call excess cash: non-financial corporations, first and foremost German ones, have built sizeable cash buffers on their balance sheets. In H2 2020, we expect companies’ net savings to reduce along with the withdrawal of state support and higher fixed costs, but to continue to remain above the 2019 average at EUR 280bn (+EUR 180bn or 1.2% of EU GDP). The improvement in their cash positions, along with very accommodative monetary policy well into 2021, should allow corporates to increase their total liquidity. For that, (economic) policy decisions over the next few months will be decisive and will carry more weight than usual. Please click here to read our full analysis.

Chinese banks put to the test of RMB8tn of Covid19 problematic loans

In China, financial and monetary conditions are clearly easing, as measured by our credit impulse index: as of May 2020, it stood at 6.0pp, up from 1.9pp at the end of 2019. However, the stance of the People’s Bank of China (PBOC) appears to be much more prudent compared to other major economies. Monetary stimulus in China currently is one third of that in October 2009. According to our forecasts, more than three quarters of monetary easing for this year has already been implemented. As the economic recovery is on track, the PBOC is likely shifting from a proactive to a wait-and-see stance. The ongoing credit easing amid the Covid-19 shock will worsen banks’ asset quality. We estimate that by the end of 2021, ‘problematic’ loans could increase by +124% (+RMB7.7tn) compared to the end of 2019. Find out what this means for companies here.

The ECB is also here to close sovereign financing gaps

In response to the Covid-19 crisis, gross financing needs could amount to EUR800-900bn for the Eurozone in 2020. Only part of it will be covered by the issuance of long-term bonds though. The ECB purchase programs (PSPP and PEPP) will actually neutralize the additional debt supply. As a result, no upward pressure on yields — quite the contrary. You can find here our latest analysis on Eurozone government bond issuance and its impact on yields.

Updated Country Reports 

Our latest reports for a number of countries in the Middle-East and Africa:

Oman: From B2 to C3, as the economy will experience a strong recession (-6.5%) and their twin deficits will widen due to the oil shock. 

UAE: Rating BB2 (medium risk profile): Deep recession in 2020, but we believe economic fundamentals to remain resilient thanks to Sovereign Wealth Funds (SWFs).

Kuwait: Rating B1 (low risk profile): We see a deep recession lying ahead.

Egypt: Rated C2 (medium risk): Covid-19 hit the economy while reform and balancing efforts had started to pay off, but prudent policies and improved fundamentals will help to weather the storm.

Ghana: From B2 to C3, on the back of stronger economic imbalances after leaving the IMF program in 2020. Covid19 caused the fiscal deficit to surge to 10% of GDP, and the current account widened on the back of extremely low commodity prices.

C?te d’Ivoire: Rated C2 (medium risk), Ivory Coast remains on a strong growth path.