Atradius: Asia braces for insolvency storm amid COVID-19 fallout

Photo by Andrea Ang

COVID-19 containment measures around the world have impacted both national and international supply chains and trade. Responses to the 2020 Atradius Payment Practices Barometer (PPB) survey in Asia suggest the resulting delays in payments are largely being financed by suppliers as the use of trade credit and, along with it, payment delays, have climbed in most markets surveyed.

The survey was conducted in China, Hong Kong, India, Indonesia, Singapore, Taiwan, as well as the United Arab Emirates (UAE), who was featured in the survey for the first time.

This survey was carried out in March 2020, at a relatively early stage in the COVID-19 pandemic and ensuing economic crisis. It represents an important snapshot of business confidence in Q1 2020.

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Compared to last year’s survey, in four of the markets surveyed, credit-based sales grew by an average of 14% while at the same time the percentage of overdue invoices increased by an average of 56%.

In India and Singapore where credit sales fell, overdue invoices still surged by 69% and 29% respectively. India’s decline in credit use might even be the result of its dramatic rise in overdues.

Andreas Tesch, Chief Market Officer of Atradius, said: “With the global economy dipping into recession payment default risks are growing. We expect bad debts and insolvencies to continue rising into 2021.

“Suppliers need to manage reduced demand and financial stress. Minimising these burdens with thorough credit worthiness assessments and ensuring adequate financial sustainability will be key to survival for many of these businesses,” he continued

Insights on Singapore

According to Maria Sandhu, Country Manager for Singapore, Atradius, while Singapore is currently taking its first steps to reopen its economy, “an assessment over the depth of the contraction will mainly depend on how long and how deep the domestic economy of Singapore, and the economies of its major trading partners, will be affected before a rebound starts.

“As a small city-state, which is the main transport and financial service hub for Southeast Asia, Singapore’s economy is strongly dependent on international trade and highly integrated in the Asian supply chain. This makes it highly vulnerable to changes in the global trading environment,” she continued.

Although many more respondents to the Payment Practices Barometer survey in Singapore reported late payments than last year, and a significant percentage of these were long overdue, both performance indicators are better than the regional average.

Heightened perception of credit risk reported

That said, Singapore businesses report a heightened perception of credit risk and almost all of the businesses surveyed are taking steps to minimise these.

Credit risk reduction techniques favoured by respondents to the Singapore survey include reducing single-buyer concentrations, letters of credit, payment guarantees, self-insurance and trade credit insurance.

There was an increased preference for cash sales over trade credit, but the fact that as much as two thirds of the sales to B2B customers were made on credit, including within the domestic market, may suggest B2B buy-ers need suppliers’ help to provide short-term trade financing.

Against this virus-tinged backdrop of reduced business confidence is the widely expressed opinion that the government stimulus packages will help support the economy and business liquidity.

Significant focus on strengthening B2B credit risk management processes

95% of survey respondents in Singapore reported that they strengthened their customer credit risk management processes to minimise the risk of liquidity shortages caused by payment default from their B2B customers.

The tools most frequently used by respondents include letters of credit (68%) and guarantees of payment (65%). 60% reported they managed customer credit risk internally (self-insurance) and almost the same percentage of respondents said they have insured their receivables with a credit insurer.

This is particularly the case for respondents from large enterprises and in the wholesale trade sector. Additional credit risk management techniques cited by Singapore respondents include reducing reliance on a single buyer to avoid concentrating credit risk.

Sharp increase in business insolvencies expected this year

According to survey findings, respondents in Singapore experienced a significant increase in late payments from B2B customers. An average of 40% of the total value of B2B invoices were overdue (far above the 31% recorded last year). However, this is notably below the 52% average for the region.

Long-term overdue invoices (still outstanding after 90 days past due, with a high likelihood of turning into bad debts) amount to 11% of the total value of B2B invoices issued by respondents (over three times higher than the 3% average of last year). However, this is below the 15% average for the region.

When asked about the reasons for payment delays from their B2B customers, 44% of Singapore respondents stated that B2B customers delay payments mainly as they use outstanding invoices as a form of financing (regional average: 49%).

For 42% of respondents, late payments from B2B customers are attributable to inefficiencies of their internal payment process (42%, below the 50% regional average), while 40% said that customers pay invoices late due to disputes over the quality of goods or services provided.

In order to manage the risk of liquidity constraints caused by delayed B2B payments, 38% of the respondents said they needed to increase time, resources and costs to chase overdue invoices, and 37% postponed payment of invoices to their own suppliers.

Positive opinion on stimulus packages

Pointing to current economic challenges, including the uncertainties stemming from the impact of the coronavirus pandemic on Singapore’s domestic economy, survey respondents (particularly from mid-sized and in the wholesale trade sector), expressed concern over their liquidity levels. For 49% of respondents, this will increase business dependence on bank finance.

However, most of the respondents in Singapore expressed a positive opinion that the several massive stimulus packages introduced by the government will help sustain the economy and support businesses with cash flow problems.

Moreover, 7 in 10 respondents believe that their business will benefit from the impact of the fiscal stimulus this year. On a positive note, more respondents (52%) anticipate an improvement in the business performance of their industry over the next 12 months than those expecting a decline in performance (26%).

Going Forward

43% of respondents in Singapore anticipate no significant change in the payment practices of their B2B customers over the next 12 months, 22% anticipate improvement, while 37% believe payment practices will deteriorate, severely affecting their DSO.

However, to further strengthen their credit management going forward, 27% of survey respondents said their will either increase measures aimed at reducing reliance on a single buyer, or ask for guarantees of payment more often. Nearly one quarter of respondents said that they offer discounts for early settlement of invoices, or increase their dunning activities (sending of outstanding invoice reminders).

According to Sandhu, “to manage customer credit risk in these challenging times, it is essential that companies have a strategic approach to credit management.

“Protecting the business against payment defaults from B2B customers helps avoid liquidity shortfalls and ensures financial soundness, particularly when economic headwinds are strong and unpredictable,” she concluded.