Southeast Asia has been severely hit by the coronavirus, posing significant challenges to businesses in the region. In the face of plummeting external demand and widespread disruptions to supply chains, we predict a sharp increase in insolvency growth for the region — as much as 30% for Hong Kong, India and China, with the region as a whole expected to see a 25% increase in 2020. The tourism, transport, information and communications technology (ICT), automotive, textile, energy and food sectors will likely see the biggest impact.

Although China has restarted production, somewhat ameliorating supply chain issues for regional businesses dependent on Chinese goods and materials, plants are not yet running at capacity.

More disruption could follow, should China see a second wave of new cases. In addition, we could see a trend of companies relocating their supply chains closer to home, as security eclipses cost in importance — a continuation of the trend put in motion by the U.S.-China trade war. That said, cash flow issues caused by COVID-19 could also put the brakes on major (and costly) shifts in supply chains for some time, as most companies in the current environment are looking to conserve cash.

COVID-19 and subsequent looming recessions in the U.S., Europe and other major export markets have caused a steep decline in external demand. This development is especially troubling for economies heavily dependent on exports, such as Singapore, Taiwan, South Korea and Vietnam. Indonesia, however, is slightly less susceptible to global trade downturns than other Southeast Asian markets, with exports accounting for just 22% of GDP. By comparison, exports account for more than 70% of Taiwan’s GDP.

At the same time, as of early 2020, investors have already partly withdrawn from Southeast Asia, especially from emerging markets such as Thailand, Malaysia, Indonesia and India. This triggered local currency depreciation from February to April, spelling trouble for highly indebted businesses, especially those with loans in foreign currencies. While the situation has stabilized a bit, this all adds up to a perfect storm of less-than-ideal business conditions, which promises to create serious cash flow issues for many companies.

Local small to medium-sized enterprises will likely bear the brunt of these factors, as smaller businesses simply do not have the same financial resilience and reserves as larger firms. Even with massive government stimulus packages, many SMEs will be hard-pressed to survive this crisis. The negative outlook for insolvency growth in the region reflects this. Even Singapore, among the most stable economies in Southeast Asia, is predicted to see an insolvency increase of more than 10% in 2020.

On top of the challenges posed by COVID-19, business conditions in Southeast Asia could deteriorate further should the U.S. escalate its trade war with China. The U.S. Administration is currently pushing select allies (such as Australia and Japan) to join a so-called “economic prosperity network” initiative to restructure supply chains away from China. Should the U.S. succeed, this rising protectionism in the Asian supply chain would most certainly put a strain on the entire region, including Japan, Vietnam, Singapore, Malaysia, South Korea and Taiwan. In short, the way the U.S. and China shape their relationship going forward will influence the entire Asia-Pacific order, and could have far-reaching consequences for businesses in surrounding countries.

Before the pandemic hit, businesses were already withdrawing from China in an attempt to diversify their supply chains in the region, with many choosing to relocate to neighboring Vietnam (the main low-cost regional alternative to China for export-oriented manufacturing) or Malaysia.

In addition to the simmering trade conflict, companies are also relocating because China simply doesn’t provide the same cost benefits as it did 10 or 15 years ago. Textiles, for instance, have already made a mass exodus to Vietnam, Cambodia and Bangladesh because of lower labor costs. Manufacturing of consumer goods, automotive and ICT products has also seen a shift to Vietnam in recent years.

Even though the textile, ICT and auto sectors have already seen a shift out of China, they are still heavily dependent on essential parts and materials from the Middle Kingdom. In other words, these industries are not immune to negative spillover from escalating trade conflict between the U.S. and China. Vietnam’s manufacturing sector, for example, depends heavily on raw materials imported from China, which supplies more than 40% of the core intermediate goods used as inputs for Vietnam-manufactured products.

The extent and duration of the economic impact of the COVID-19 pandemic remains uncertain. Clearly, highly leveraged companies and those unable to secure additional liquidity and operating in highly impacted trade sectors will be disproportionately affected. It’s more important than ever for businesses to truly understand the financial standing of their trade partners, and to be involved in active discussions surrounding the operational challenges recognized as a result of the current crisis. With insolvencies expected to materially rise, mitigating credit risk related to accounts receivable collections will be key for companies looking to protect cash flow.

Christian Bürger leads country and industry report publications at Atradius, a global trade credit insurer.