Asian suppliers brace for ‘insolvency storm’ from cash-strapped buyers amid rise in overdue payments

Georgina Lee

Suppliers and exporters in Asia are bracing for an increase in defaults among their buyers as coronavirus lockdown measures led to a surge in overdue payments by companies that trade with each other on credit, according to a recent survey.

The survey of over 1,400 companies in China, India, Taiwan, Singapore, Indonesia and Hong Kong found 52 per cent of the value of invoices they had issued to their buyers had passed the payment-due date, a huge increase from 29.8 per cent in 2019.

The annual “payment practices barometer” compiled by trade credit insurer Atradius was based on interviews with companies – 70 per cent of them small and medium-sized – in March when the Covid-19 outbreak was starting to peak in China but gathering pace in Europe and the US.

Hence, the findings have yet to show the worst of Asia’s “insolvency storm” arising from the coronavirus fallout, according to Vincent Ku, general manager for Hong Kong and Taiwan at Atradius.

“While some of the lockdown measures in North Asia have been lifted, the impact on business activities is not completely visible today because business travelling is still restricted. We are not optimistic towards the outlook for the rest of this year,” said Ku.

By country, India showed the highest year-on-year increase in overdue invoices as a percentage of total value of business volume done on trade credit, at 69 per cent. Then came Taiwan, up 67 per cent, and Indonesia, with a 47 per cent rise. The average year-on-year increase for China, Taiwan, Indonesia and Hong Kong combined was 56 per cent.

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The increases in overdue invoices for China and Hong Kong were lower, at 31 per cent and 37 per cent respectively, with Singapore being the lowest among the six, at 29 per cent.

According to the World Trade Organisation, about 80 per cent of the global exchange of goods relies on financing, in the form of trade credit, insurance or guarantee. Banks account for 80 per cent of trade finance, with one of the most common forms being a letter of credit.

Trade credit, on the other hand, refers to an arrangement between suppliers and buyers, or exporters and importers, in what are commonly known as open account transactions whereby the buyer pays the supplier 30 to 90 days after the goods are delivered.

“With the global economy dipping into recession, payment default risks are growing. We expect bad debts and insolvencies to continue rising into 2021,” said Atradius’ chief market officer Andreas Tesch.

The World Bank said in a forecast earlier this month that the global economy will shrink by 5.2 per cent this year, the worst recession since the second world war, because of the shock from the pandemic and shutdown measures to contain the virus.

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Already, the value of international trade in 2019 had dropped 2 per cent from 2018 to US$18.1 trillion, due in part to the appreciation of the US dollar and the US-China trade war, according to the International Chamber of Commerce in its 2019 Trade Register Report.

With supply chains disrupted and consumer demand plummeting under the coronavirus, the chamber said the value of global trade for 2020 could drop anywhere between 11 per cent and 30 per cent.

Industry observers say for many cash-strapped Asian buyers, rather than applying for a bank loan to pay their suppliers, they are now relying on trade credit from their suppliers to prop up their cash flow, while they wait for their own customers to pay up. Such heightened payment risks have led more suppliers to seek out trade credit insurance, which protects suppliers against losses arising from non-payment, according to Ku.

The cash crunch and weak repayment ability of small and medium companies in Asia are being compounded by banks which are shunning smaller firms’ request for trade finance, said Jolyon Ellwood-Russell, a partner at law firm Simmons & Simmons.

“There is a flight to quality as banks globally are facing their own liquidity pressure. Going forward there will be less bank liquidity to Asian small and medium enterprises,” said Ellwood-Russell, adding that banks prefer borrowers with better financial health over small businesses.

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