Non-payment risk rises in APAC

Non-payment risk within the Asia Pacific escalated in 2016 due to financial stress and a more relaxed approach to payment controls, a recent Coface report found.

Late payments were experienced by 64% of companies surveyed in 2016, the credit insurer found after surveying 2,795 corporates.

The percentage of overdue payments hit the highest level in four years, as overdues exceeding 120 days rose to 12.5% – up 4.3% from 2015 figures.

Deteriorations were noted in China, India and Thailand, while other countries remained stable in terms of payment experience.

The riskiest industries were construction, industrial machinery and electronics, IT-telecoms and metals, according to Coface.

“Roughly 80% of ultra-long overdues will not be paid at all.”

“2017 is set to be another challenging year, riddled with increasing global uncertainties linked to China’s deceleration. This will be compounded by the fiscal challenges experienced by commodity exporting countries and monetary policy tightening in the US,” said Carlos Casanova, Asia Pacific economist at Coface.

“Taking all of these factors into consideration, overall company payment experience in the eight selected regional economies is likely to remain weak” predicts Casanova.

The survey, titled ‘Asia Corporate payment Survey 2016’, focused on corporates in Australia, China, Hong Kong, India, Japan, Singapore, Taiwan and Thailand.

Across these eight economies, the number of respondents offering sales on credit lowered slightly compared to 2015, but those that did ramped up their credit terms from 55 to 59 days.

Only half of the respondent companies checked and monitored buyer credit worthiness in 2016, while one-third monitored buyer track records.

There was a notable decline in respondents requesting secured forms of payment. This shows a looser approach to credit risks, according to Coface, meaning that aggravated tail risks are only to be expected.

In fact, tail risks are already on the rise, according to Coface. “In 2016, a larger number of respondents (25.8% versus 24.2% in 2015) experienced ultra-long [exceeding 120 days] overdue amounts exceeding 2% of their total annual turnover,” said the report.

The data shows that the situation has been steadily deteriorating for companies with “ultra-long” late payments equivalent to, or exceeding 10% of their annual turnover. This is up from 3.4% in 2014 and 5.1% in 2015, to 5.4% in 2016. This situation is significantly reducing cash flows, says Coface.

“Roughly 80% of ultra-long overdues will not be paid at all. When over 2% of total annual turnover is tied up in ultra-long overdues, a company may encounter cash-flow shortfalls,” says Coface.

Notably, while the situation deteriorated across the region, there were some geographical differences.

“The most noticeable deterioration of non-payment risks was in China, followed by Thailand and, to a lesser extent, Australia,” says the report.

However, the risk stabilised in India (from a low base) and Japan. “Taiwan, Singapore and Hong Kong all benefitted from overall improvements in non-payment risks,” the report says.

China’s economic slowdown

China’s deterioration is likely to be connected with its economic slowdown that continued throughout 2016, despite being at a slower pace than in 2015. is likely to be connected with its economic slowdown that continued throughout 2016, despite being at a slower pace than in 2015.

The county’s GDP growth is expected to slow down to about 6.4% in 2017 as private consumption and industrial production growth slow even further, trade credit insurer Atradius has predicted.

Interestingly Chinese suppliers are the least likely to pay on credit amongst their Asian peers, Atradius found its report titled  ‘Payment Practices Barometer China 2016’.

Atradius found an average of 38.2% of the total value of B2B sales transacted on credit terms in China in 2016. This compares to the regional average of 46%.

“This behaviour can be read as an expression of the overall payment culture in China, which prioritises cash over other methods of payment, as for example credit cards,” said Atradius.

“This highly conservative stance towards granting trade credit in business to business (B2B) transactions was also observed in Taiwan, where slightly less than 40% of the total value of B2B sales was transacted on credit, below the 46% average for Asia Pacific,” said the insurer.

However, Chinese businesses are much more likely to offer credit terms to Chinese customers than foreign companies. In 2016, Atradius data reports that 42% of domestic and 34.4% of foreign B2B sales in China were transacted on credit.

This appears to be consistent with the regional averages for the Asia Pacific, where 50.3% of credit transactions are to domestic firms and 42% foreign.

“This higher percentage of sales on credit to domestic customers may be reflective of a greater familiarity with domestic business practices, but it may also suggest a higher level of trust when dealing with compatriots,” says Atradius.