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Treasury & Capital Markets
Credit risks rise despite shorter payment delays
Asia-Pacific firms optimistic but margins increasingly under pressure, inflation concerns
The Asset 29 Jun 2022

Improved economic conditions in 2021 contributed to a notable fall in the duration of payment delays for companies across the Asia-Pacific region, dropping from 68 days on average in 2020 to 54 days in 2021, the lowest level in five years, according to a recent report.

The share of companies experiencing overdue payment remained stable at 64% versus 65% in the previous year, states the report detailing the results of a survey, published by Coface and conducted between November 2021 and February 2022, which examined the evolution of payment behaviour and credit management practices of about 2,800 companies in 13 sectors in nine Asia-Pacific markets – Australia, China, Hong Kong, India, Japan, Malaysia, Singapore, Thailand and Taiwan.

Among the markets, payment delays shortened the most in Malaysia and Singapore. By contrast, China was the only market that recorded a rise in payment delays, and also had the longest average payment delay.

The report also highlights some other concerns:

  • The share of respondents that mentioned an increase in the amount of overdue went up to 35% in 2021, against 31% in the preceding year.
  • More companies reported ultra-long payment delays (ULPDs) of more than 10% of annual turnover, with this increase driven largely by China where the already high share of 27% in 2020 grew to 40% in 2021.
  • The proportion of ULPDs slightly rose in Australia and India, while it stabilized or declined in the other six economies, with a significant drop in Hong Kong.
  • The large majority of ULPDs are never paid; and, therefore, cash-flow risks tend to increase when these ULPDs account for over 2% of a company’s annual turnover.

Sector-wise, the increase in companies experiencing ULPDs of more than 10% was particularly marked in the metals sector, for which ULPDs increased by 14 percentage points (pp) to nearly 23%, the largest registered among the 13 sectors. Other sectors, such as construction, information and communications technology, transport and textiles, also face significant cash flow risks, with more than 30% of companies that experienced ULPDs reporting that such delays represented more than 2% of annual turnover.

Sustained optimism but high concern on rising material prices

Overall, optimism remains intact, with 71% of respondents expecting economic growth to improve in 2022, the report notes. This optimism was, however, unequal across the region. Singapore is more optimistic compared with the Asia average, with 83% (+17pp) anticipating higher growth.

Companies in Japan and Thailand, where the recovery was relatively subdued in 2021, and therefore, with a greater scope for a stronger recovery in 2022, showed more confidence as well, both rising by 14pp to 75% and 80%, respectively. By contrast, this share was only 44% in Malaysia, showing a significant decline (-29pp) as compared with last year, amid rising political uncertainty and the possibility of a snap general election in 2022.

Rising raw material prices are increasingly mentioned by respondents when asked about the effect of Covid-19 on their sales performance and cash flow. Over half (54%) of the companies mentioned rising raw material prices as a key factor, up considerably from 31% in 2020. Raw material prices rose sharply in 2021, especially in crude oil, and were lifted significantly higher following the conflict in Ukraine. This intensified cost pressures for companies worldwide, including in Asia-Pacific, which heightened the risk of developing cash flow problems.

Businesses margins increasingly under pressure

Nowadays, businesses are dealing with a complex environment characterized by supply-chain disruptions, geopolitical tensions and surging inflation, the report points out. Supply constraints persisted in 2021, partly due to fresh Covid-19 outbreaks and new lockdowns. Nonetheless, the world gradually reopened and private demand rebounded. This widened the gap between demand and supply of many products and raw materials, leading to a significant increase in prices.

Global supply-chain pressures slightly abated at the start of 2022, but were reignited by the Russia-Ukraine conflict. Given both countries’ predominant role in global commodity markets, the conflict has led to a further surge in raw material prices, pushing inflation higher and, in turn, wages as well. Consequently, it weighed on business profitability by increasing production costs.

After enjoying subdued inflationary pressures through 2021, Asian countries are now recording rapidly rising inflation, especially in food and energy items, the report states. In some Asian economies, the consumer price index (CPI) growth rate has exceeded central bank targets.

This was the case in Thailand, where CPI posted an annual increase higher than the upper value of the central bank’s target band of 3% for the fifth consecutive month in May. Inflation targets were also breached in Australia, India and the Philippines. After having experienced deflation during 10 months over 2020/2021, Japanese inflation went above the Bank of Japan’s target with 2.5% in April.

Facing this surge in living costs, some countries decided to increase wages to help consumers to deal with the situation. In Japan, South Korea and Singapore, data revealed that average wage growth has accelerated since 2021. In Southeast Asia, Malaysia introduced a large minimum wage hike of 35% in May 2022. A rise in minimum wage is also set to be implemented in the Philippines in June and in Vietnam the following month. 

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associate managing director, corporate finance group
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