Rising demand for credit insurance as economic concerns rise in Asia-Pacific

There is rising demand for credit insurance in the Asia-Pacific region, as a growing number of economic forecasts warn of slowing growth and rising insolvencies in the region. Businesses in the area are also taking a more strategic approach to credit management as they wake up to the macroeconomic threat, according to credit insurance experts. The latest analysis from credit insurer Euler Hermes shows that emerging markets (EM), not least in Asia, are under rising pressure. The economic cycle of EM is currently deteriorating fast, as shown by its aggregate EM manufacturing PMI falling to 49.6 points in May, back below 50 (recession area) for the first time since August 2016, said the insurer. The May figure is -1.1 points below the March number. “Hopes raised from Chinese stimulus measures are no longer supportive as even China’s official PMI fell back below 50 (49.4). As trade barriers have increased – US tariffs on China, Mexico and India as well as retaliatory measures – the PMI of open EM is the weakest sub-index at 48.6, below 50 for the ninth straight month,” states Euler Hermes. Indonesia is a case in point. Manfred Stamer, senior economist for emerging Europe and the Middle East at Euler Hermes, pointed out that in the first quarter, real GDP growth edged down to +5.1% year on year, from +5.2% in the fourth quarter of 2018. Mr Stamer said external trade activity made a positive contribution to first-quarter growth, but he added that this is a “deceptive signal” because a disappointing export performance (-2.1% year on year) was outpaced by an even stronger drop in imports (-7.8%). Rival credit insurer Atradius says the worrying signs are leading to an uptick in interest in credit insurance. In a recent regional report, the insurer states that, 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 [by] B2B customers. This has become more complex, requiring a more strategic approach to credit management,” it points out. Atradius says that 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,” states the insurer. The May 2019 Atradius Payment Practices Barometer Survey for Asia-Pacific reveals that the total value of B2B sales on credit in the region increased to 55.5%, up from 48.1% last year. The biggest increase was in Australia, rising to 71.5% from 47.7% last year. Overall, the more frequent use of trade credit raises the risk of customer payment default, states Atradius. 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%), it adds. Assessing the buyer’s creditworthiness, prior to giving credit terms, is essential to the credit sales process, Atradius states. Respondents to its analysis in Singapore (53%) and China (51%) are the most likely to perform this. Reserving against bad debts, should the assessments turn into a non-payment, is practised by 41% of respondents in Taiwan and Indonesia, versus 33% in the region as a whole, says the insurer. “To remain financially sound and avoid liquidity issues caused by payment defaults [by] 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,” adds the credit insurer. On average, 31% of respondents in Asia-Pacific expect customers’ payment behaviour to deteriorate, and long overdue invoices (more than 90 days) 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%. Andreas Tesch, chief market officer at Atradius, commented: “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, [are] 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,” he concluded.

Rising demand for credit insurance as economic concerns rise in Asia-Pacific

Want to read this article?

Read Next

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

Absenteeism drops dramatically in France

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

Absenteeism drops dramatically in France

Want to read this article?

Read Next

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

Absenteeism drops dramatically in France

Related Articles