The number of insolvencies increased by 16.6% y/y to 688 in July, according to data of the National Trade Registry (ONRC). That was the third consecutive increase of the indicator, which is partially generated by the low base, but also by the economic activity slowdown recorded as of the beginning of this year, in our view. In addition, the domestic companies are poorly capitalized and have weak ability to adapt to economic developments, as some previous NBR studies showed.
The largest contributor to the rise was the retail segment, where the number of insolvencies increased by 25.3% y/y to 233 in July. The indicator rose with notably stronger paces in other segments, but retail has the biggest share in total, so its influence on the overall dynamics is the most important. Hence, there were significant growths of the indicator in other services segment (250%), cultural activities (100%) and mining (50%). On the other hand, the number of insolvencies dropped in agriculture, construction, transport and storages.
We note that the number of insolvencies has been on a strong downward trend in the past several years, after the authorities changed the insolvency regulations, aiming to reduce tax evasion and to discourage companies to file for insolvency only for avoiding tax payments to the state budget. In addition, the economic activity improvement also helped firms improve their capital adequacy ratio. The increases of the indicator in May, June and July might indicate some deterioration of the economic activity or the firms’ capacity to find new ways to enter insolvency in order to avoid taxes. In fact, some government representatives already commented that the insolvency law might be changed again from this point of view.