Eastern Europe: A challenging business environment!

In 2014, Eastern Europe is forecast to see a slight deterioration in economic growth prospects, compared to last year.

Credit insurers have seen a rise in insolvencies in Central Eastern Europe (+6%) whereas the insolvency level remains relatively moderate in other countries (e.g. 0.05% in Poland, 0.09% in Slovakia etc…).

The continued deterioration of the economic situation, with some governments introducing fiscal measures to tackle rising budget deficits, has impacted households’ ability and propensity to spend money on daily and occasional shopping. Access to credit was further constrained in line with reduced supply and demand for new loans. This situation affected companies directly and forced them to revise downward their sales targets. Moreover, the previous contributor to the GDP growth – exports, suffered from the Eurozone slowdown where Eastern European economies traditionally send most of their foreign trade.

Experts say that it was not only the financial underperformance that caused companies to reduce their activity but more the lack of capitalisation.

Besides, the entry of the CEE countries into the European Union (EU) led to changes in their legislation on insolvency proceedings in order to meet European criteria and, as a consequence, there has also been a significant increase in applications to initiate insolvency proceedings.

The objective is to encourage Member States to put in place a framework that enables the efficient restructuring of viable enterprises in financial difficulty and give honest entrepreneurs a 2nd chance.

The European Insolvency Regulation (EIR) applies to all member countries joining the EU with the exception of Denmark.The main aim of the EIR is to provide a common basis for legislation on insolvency proceedings, to have a universal (cross-border) approach to the law whilst recognising the application of domestic law.

Four rules have to be complied with:

  • The debtor must be insolvent;
  • The collective nature of the proceedings (review of all creditors at the same time) ;
  • The debtor must, when proceedings are initiated, divest itself of a portion of its powers;
  • Appointment of an administrator authorised to manage proceedings and to dispose of the assets of the company.

Since their entry into the EU, Hungary, Romania, Poland, Slovakia and the Czech Republic have wanted the duration of their insolvency proceedings to be reduced.

The most marked example is the Czech Republic where the duration was down to 3.2 years in 2013 compared to 9.2 in 2003.

From our experience, we note a higher commercial risk as a result of extended payment terms. These increase the risk of payment default and negatively impact cash flows.

These extended payment terms are linked to a new informal trend of “pay when paid” especially in the distribution sector when dealers tend to pay suppliers as soon as they have the cash.

As a consequence, large suppliers have been called “bankers”…

Whereas the CEE countries are less homogeneous than ever, most of the companies within this region perceived last year as one of the hardest periods in their business activity.

The predicted recovery in the advanced economies should have a positive knock on effect for the region!

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