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While global GDP growth is forecast to slow from 3.2% in 2018 to 2.7% this year, global insolvencies are expected to rise 2%. As an integral part of the global supply chain, Asia-Pacific businesses that trade on credit need to perform a sound assessment of the risk of payment default of B2B customers. This has become more complex, requiring a more strategic approach to credit management.
Asia Pacific economies continue to be the main growth engine of the world economy. Although domestic demand in the region remains robust, several downside risks appear to cloud the growth outlook. Slowing trade growth in many countries prompts Asia Pacific businesses to increase their use of trade credit in B2B transactions to stay competitive and gain market share.
As revealed by the May 2019 Atradius Payment Practices Barometer survey for Asia Pacific, the total value of B2B sales on credit in the region increased to 55.5%, up from 48.1% last year. The biggest increase in Australia rising to 71.5% from 47.7% last year. Overall, the more frequent use of trade credit raises the risk of customers’ payment default. On average, 29.8% of the total value of B2B invoices issued by respondents in Asia Pacific was overdue. This percentage is highest in India (39.0%) and lowest in Japan (13.2%).
Assessing the buyer’s creditworthiness, prior to giving credit terms, is essential to the credit sales process. Respondents in Singapore (53%) and China (51%) are the most likely to perform this. Reserving against bad debts, should the assessments turn into a nonpayment, is practiced by 41% of respondents in Taiwan and Indonesia, versus 33% in the region.
To remain financially sound and avoid liquidity issues caused by payment defaults of customers, 41% of respondents had to pay their own suppliers late. This was most often expressed by respondents in India (51%) and Indonesia (46%). Ultimately, an average of 2.1% of the total value of respondents B2B sales on credit (up from 1.9% last year) was written off as uncollectable. This suggests that businesses are less successful in collecting invoices than last year.
On average, 31% of respondents in Asia Pacific expect customers’ payment behaviour to deteriorate, and long overdue invoices (more than 90 days overdue) to increase. Most concerned are respondents from India (52%), followed by Indonesia (35%). To protect their business against the rising trade credit risk, 42% of respondents in the region said they will increase the use of credit insurance. This percentage rises to 51% in China and Hong Kong. Australia follows suit with 47%.
The level of risk, instability and volatility in the current economic climate is increasing daily. Payment defaults across the globe are rising and with them, we anticipate a steady rise in insolvencies in the coming years. The economic slowdown in China, the main export destination for many economies in the region, along with the still unsolved and potentially escalating Sino-US trade dispute, being the risks that could further deteriorate international payment practices and the global insolvency outlook.
In this scenario, it becomes much more complex for businesses to perform a solid assessment of the risks connected with trading on credit. This requires a strategic approach to credit management, towards which we see growing interest in Asia Pacific.
Eric den Boogert, Managing Director of Atradius Asia commented “Overall, economic conditions in 2019 are expected to be more challenging than last year. But Atradius in Asia is well prepared to manage the downside risks that businesses are facing. Our understanding of the global economy, as well as of local markets across Asia, is central to helping our customers’ grow their businesses. Our customers can be confident that we have the underwriting knowledge that can help them avoid unpaid invoices as much as possible and steer them towards healthy businesses and opportunities”.
The May 2019 Atradius Payment Practices Barometer for Asia Pacific is conducted in Australia, China, Hong Kong, India, Indonesia, Japan, Singapore and Taiwan. The reports can be downloaded from the Atradius website at https://group.atradius.com (Publications section).