COVID-19 has thrown the global economy into turmoil, interrupting normal operations everywhere, wreaking havoc on supply chains, and causing a severe drop in global trade.
Asia, of course, is not immune. The difficulties facing businesses across the region are captured in annual study by trade credit insurer Atradius. The Payment Practices Barometer survey of firms in China, Hong Kong, India, Indonesia, Singapore, Taiwan and the United Arab Emirates conducted annually, paints a bleak picture: major liquidity constraints amid increasing default risks, bad debts and insolvencies. Payment practices, in other words, are rapidly deteriorating.
The survey was conducted in spring 2020, and while much has changed in the months following, we can state with confidence that conditions have only worsened. Since then, a high percentage of the global economy has been shuttered, and supply chains are slow to sputter back to life. The liquidity pressures captured in the survey have undoubtedly intensified, compounding difficulties that cash-strapped companies might have obtaining bank funding.
As quickly as situations continue to evolve, the survey does offer a few valuable takeaways key to understanding and navigating business conditions across Asia. These include:
Late payments are increasing across Asia. When the outbreak was just beginning to spread outside China, late payments already affected 52% of the total value of B2B invoices issued in Asia. The main reason? Liquidity restraints. China and Singapore come in slightly better than average, while the UAE (72%) and India (66%) are experiencing alarmingly high rates of late payments.
If a company is paid late, it has a bad ripple effect. Late payments lock up working capital for the individual business, which is often then forced to pay its own suppliers late, or attempt to obtain domestic supplier credit as a short-term Band-Aid. Basically, rampant late payments act like their own kind of pandemic, spreading from business to business and industry to industry.
Businesses beware in the UAE and India. Firms operating in the UAE and India need to pay heed to the trend of seriously deteriorating payment practices in these countries, as well as their extremely difficult and long collections processes. Should you need to recover outstanding receivables through legal means, you could end up fighting a long, not necessarily successful, battle in court.
In the UAE, not only do late payments affect the vast majority of B2B invoices, but the payment terms there are also significantly longer than other countries surveyed — 57 days on average, compared with the regional average of 43 days.
The average payment terms in India is 41 days. While below the regional average, this is a two-week jump from the average recorded in 2019, suggesting a crumbling business environment. In addition, the 66% rate of overdue invoices in India looks even worse compared with the 39% recorded last year.
Asian companies are attempting tighter credit management. If there’s ever a time for tighter credit management, this is it. Asian companies are increasingly using a variety of credit tools and tactics to protect their accounts receivables: self-insurance, credit insurance, cash payment, letters of credit and payment guarantees, to name just a few.
While self-insurance remains the preferred credit management tool across Asia, the popularity of other methods varies by country. In Hong Kong, self insurance and trade credit insurance are popular, while Chinese firms rely heavily on payment guarantees to secure credit-based sales, and UAE companies prefer bank guarantees and letters of credit.
Open credit account is slowly becoming more popular. The Payment Practices Barometer survey shows that Asian firms increasingly use open account credit for B2B transactions. Across the region, 56% of the value of B2B sales are made on credit, up slightly from the 55% recorded in 2019; the UAE has the highest rate, with 64%.
The increasing use of open account credit is likely due to a variety of factors: Businesses wishing to offer more competitive sales terms or obtain a better negotiating position during the turmoil of 2020, for instance. This is likely behind the increase in Taiwan, where open account credit makes up 54% of the total value of B2B sales, up from 43% last year. The story is similar in China, where previously cash was the preferred payment form — now, open account credit represents 53% of the value of B2B sales, up from 44% last year.
Asian businesses face major challenges, but remain hopeful. Firms in Asia and elsewhere are up against a lot in 2020. But even against worsening payment practices and dire economic conditions, Asian firms express belief that sales and profits will improve in the near term. Has their outlook grown dimmer in the months since the survey? Likely.
The global pandemic rages on, and it may be some time before anyone can say with clarity what the total economic fallout will be. There’s not much that can be said for sure these days, except that smart, coherent credit management strategies are more important than ever.
Gordon Cessford is president and regional director of North America for Atradius Trade Credit Insurance, Inc.
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