The sharp increase in energy prices only affects the profitability of Dutch companies to a limited extent. And then there is no reason for the government to compensate companies for energy costs, according to De Nederlandsche Bank.
The supervisory authority has looked at several scenarios to map the consequences of the increased energy prices for companies’ earnings. DNB also assumed that the companies cannot pass on increased energy costs to customers, or are unable to implement energy-saving measures. “These assumptions will have a greater impact of energy price increases on corporate profitability.” On the other hand, indirect cost increases have not been included in the analysis, such as the fact that semi-finished products have become more expensive. Greenhouse horticulture is not included in the analysis due to insufficient data and cost increases in connection with the use of means of transport are also not included.
DNB has calculated the consequences of three price scenarios: A base scenario, in which the average transaction prices for gas (+ 61 percent) and electricity (+ 26 percent) in the first quarter of 2022 rise at the same rate as in the last half of 2021, and a negative and severe scenario where energy prices rise even faster. For the rest of the year, DNB assumes that prices will stabilise. Conclusion: At the macro level, little is happening. In the base scenario, the share of loss-making companies goes from 22.3 percent to 25.5 percent. ‘Even in the worst case scenario, the proportion of loss-making companies only increases by 5.6 percentage points.’ DNB cites the credit crisis, where (in 2009) the proportion of loss-making companies rose to 34.6 percent. In the worst-case scenario, a quarter of employees (1.2 million) will work for a loss-making company, and the outstanding debt of these companies will go from €349 billion to €443 billion.
The paper and flour industry takes the biggest hits
This does not change the fact that there are industries that run into problems: “For example, the proportion of loss-making companies in the metal sector rises from less than 20 percent to more than 60 percent in the worst-case scenario. The chemical sector is also relatively hard hit.’ More than half of the companies in the severe scenario end up in the red. Potentially, the flour industry will be the heaviest: there will be more than 90 percent in losses in a severe scenario, as will the paper and cardboard industry.
Higher spending is inconsistent with policy
But DNB looks at it on a macro level, and so it seems that the effect of the energy cost increase on the profitability of companies is overestimated, ‘even in the extreme scenario’. “In addition, increased public expenditure does not fit into the current macroeconomic picture. This is because there is high inflation, a tight labor market and few bankruptcies. In addition, the companies achieved high profits in 2021 and the first quarter of 2022, which should leave room to absorb setbacks.’
DNB recognizes that if energy prices remain high for a longer period of time, some companies will run into problems. ‘State support for non-viable companies is not effective and financially inadvisable. However, there will also be loss-making companies that will experience liquidity problems due to high energy prices, even if they are fundamentally sound. These companies can initially request additional funding from private individuals. This also applies to the hard-hit sectors.’
Warranties as an option
If the government offers compensation, the regulator will advise targeted liquidity support so that market dynamics are not disrupted. “It is also important to design any support in such a way that private financiers retain as much incentive as possible to adequately assess credit risks. This can be done, for example, by providing a partial state guarantee on loans. By the way, already existing instruments can be used for this’.
The higher energy prices make the Netherlands collectively poorer because a lot of energy is imported. ‘Providing state aid cannot prevent this, but can only redistribute the pain. If the support is not accompanied by simultaneous savings of the same magnitude, the burden will be passed on to future generations.’ It sometimes fits within a balanced policy, says DNB, ‘for example when future generations can simultaneously count on benefits, such as a better environment’. But in this case, that is not the case.