Credit Manager Magazine 9/2021

44 CREDIT MANAGER MAGAZINE WRZESIEŃ / SEPTEMBER 2021 Working Capital Requirements trend in 2020 across the world With kind authorization of Euler Hermes, we, L’Association Fracaise des Credit Managers (AFDCC), are pleased to share with you their recent study on the Working Capital Requirements trend in 2020 across the world. We here in France totally share their main conclusion that 2020 year has not been that bad owing to the treasury held by the companies following the liquidity support measures granted by the French Government. 2021 might be different. AFDCC (L’Association Fracaise des Credit Managers) The financial need of large companies in 2021 could sum up to EUR 453 bn. Finan- cial weight for inventories is more accurate in second half of 2020 and for 2021 for main priority of security inventory instead of ap- proach “just in time“. The key moment will be when all governmental financial support for firms will be stopped and need active reim- bursement and not differed, probably before the end of this year. Consequences on Work- ing Capital trend will be significative. Large corporates may need half a trillion eu- ros of additional Working Capital Require- ment financing in 2021. After more than a year of sanitary and economic crisis, firms are currently dealing with the grand reopen- ing: an environment of economic recovery, defined by a strong demand rebound along- side severe shortages in inputs, labor and final goods. In this context, how will corpo- rates’ Working Capital Requirements (WCR) change globally and across sectors in 2021? Euler Hermes’ economists investigate in their latest report. In 2020, Working Capital Requirements in the West increased (+5 days in North Amer- ica and +1 day across Western Europe) while it dropped in regions such as Latin Ameri- ca (-3 days), Eastern Europe (-2 days) and APAC (-1 day). Inventory management and government support explain most of this divide. In the US and EU, severe lockdowns pushed companies into a “forced” stockpiling mode, which was fortunately tempered by the “invisible bank”, i.e. the very accommodat- ing management of payment terms between customers and suppliers, partly financed by liquidity support measures. 2020 saw a surge in WCR across industrial sectors: +13 days for metals to 95 days, +9 days to 117 days for machinery, +4 days to 84 days for paper and +3 days to 87 days for automotive. Looking ahead, Euler Hermes estimates that large companies will face a record increase of EUR 453 bn in WCR in 2021, equivalent to +4 days of turnover, up to EUR 8.4t n. This comes in a context of the strong demand rebound triggered by the grand reopening, alongside severe shortages in inputs, labor and final goods. The surge in WCR already observed in most developed economies will ramp up in 2021, while WCR would remain well under control in a few emerging coun- tries, notably in China (-6 days). In both the US and the Eurozone, we expect WCR to rise by +4 days. While all sectors will see a rise in WCR, con- sumer goods sectors could see the biggest jump. Last year was a year of divergence. Euler Hermes expects many global sector WCR levels to resynchronize on the upside in 2021, with retail (+9 days up to 52 days) and agri-food (+8 days up to 81 days) seeing the largest rises, followed by industrial sec- tors such as metals (+7 days up to 103 days), transport equipment (+5 days) and machin- ery (+4 days). Along with the “just in case” model of in- ventory management, and the end of “just in time” for most sectors, rebuilding stocks in an environment of supply shortages will be the key driver of the increase in global WCR, notably across Western European countries. In 2020, Days Inventory Outstanding surged by +5 days in North America and by +1 day in Western countries, while the drop in in- ventories across Emerging Markets made up for the stockpiling in developed economies. In 2021, the authors of the report expect pent-up demand and the massive restocking policies of Western companies in the midst of global supply-chain disruptions to weigh notably on their WCR levels. However, in 2022, reduced supply bottlenecks should mitigate the soaring inventory fallout on de- veloped countries’ WCR. In the Eurozone, companies’ available cash surpluses generated by massive state support policies (notably direct liquidity support and state-guaranteed loans) appear to be signifi- cantly higher than the looming additional amounts of WCR. Euler Hermes’ estimations for the Eurozone show that the net cash po- sitions (deposits new loans up to EUR 1 mn) of non-financial corporates increased by EUR 547 bn in 2020, almost three times more com- pared to 2019. This compares to EUR 102 bn of expected additional WCR needed to be fi- nanced In 2021, i.e. 17% of the 2020 net cash positions. Since the end of 2020, net cash positions have continued to increase in the Eurozone (EUR 38 bn as of May 2021), with Germany (+EUR 18 bn) and Italy (+EUR 7 bn), on top of the list, while in France net cash positions fell by EUR 9 bn, which sug- gests non-financial corporates have started to use their deposits in addition to new loans for operating activities (see Figure 1). Figure 1: Available cash positions in 2020 and additional amount of WCR to bee funded in 2021 Sources: Bloomberg, Euler Hermes, Allianz Research FECMA