The business climate for firms in Southeast Asia is anything but “business as usual.”
Atradius analysts predict a 25 percent jump in insolvencies for the region in 2020. India (up 34 percent), Hong Kong (approximately 30 percent), and China (28 percent) will likely see the worst of it. Even Singapore, among the most stable economies in the region, will likely see insolvencies grow by more than 10 percent this year.
Tourism and export-dependent industries—such as automotive, information and communications technology (ICT), energy, food, and transportation—will be most affected. Several factors are driving the region’s deteriorating business conditions:
1. Crippled production in Chinese manufacturing facilities. Many companies throughout Southeast Asia depend on parts or materials from Chinese manufacturing plants. When Covid-19 caused a halt in production in these plants, suddenly these businesses were unable to obtain what they needed to continue full-steam operations.
The good news is that plants are up and running again in China, putting an end to the worst of the supply chain woes in the region. Many plants, however, are not yet running at full capacity, so the door is not completely closed on this operational challenge. The bad news is that should China see a resurgence in coronavirus cases, plants could shut down again, causing a whole new wave of supply chain heartburn.
2. Widespread decline in external demand and business investment. Markets across the world are facing recessions as a result of Covid-19—including Europe and the United States, which are major export markets for Southeast Asian businesses. The global business crisis has led to a rapid and steep decline in demand for products exported from Southeast Asia. Singapore, South Korea, Vietnam, and Taiwan have been heavily impacted by this development.
Of all Southeast Asian countries, Indonesia may be least impacted by plummeting foreign demand. That’s because exports make up just 22 percent of Indonesia’s gross domestic product (GDP). In Taiwan, by contrast, exports account for 70 percent of GDP.
Exacerbating the problem, investors in early 2020 began withdrawing from emerging markets in the region—especially Thailand, Indonesia, India, and Malaysia. The trend resulted in depreciation of local currencies in the first quarter. Southeast Asian businesses with high foreign debt levels felt an immediate cash flow squeeze at a time when many sorely needed excess liquidity.
3. SMEs in crisis. The combination of declining business investment and falling external demand adds up to liquidity issues, especially for small to midsize enterprises (SMEs), which traditionally lack large cash reserves. Southeast Asian governments are offering massive stimulus programs, but the measures won’t be enough to help every SME make it through the crisis.
4. A looming trade war. Covid-19 is posing plenty of challenges for businesses in the region. Things will probably get worse if the U.S.–China trade war escalates. What happens next between the two global economic powerhouses will impact businesses across the entire Asia-Pacific region.
Supply Chains Shifting away from China
Motivated by escalating trade tensions, the threat of tariffs, and China’s decline in cost competitiveness, some companies had already begun relocating their supply chains in 2019, before Covid-19 hit. Pandemic-driven production shutdowns in China revealed challenges around allowing sourcing to become too heavily concentrated with suppliers in the region. That revelation has accelerated the relocation process. Many foreign companies with facilities in China are looking at their options to either bring production closer to home or move into even lower-cost markets.
One such market is Vietnam, which in recent years has become a popular alternative to China. Lower labor costs have motivated a massive shift toward Vietnam among businesses in the textiles, auto, ICT, and consumer goods sectors, for example. Bangladesh and Cambodia are also popular locations for textile manufacturing. These industries, however, remain dependent on Chinese parts and materials, so they would also suffer negative spillover from rising Sino-U.S. trade conflicts.
This trend of supply chains relocating out of China may continue post-Covid, as companies weigh security concerns versus cost benefits of operating in the country. Plus, the United States is actively trying to influence allies—including Australia and Japan—to join an “economic prosperity network” initiative to move supply chains away from China. If successful, this initiative would strain the entire Southeast Asia region.
Senior management teams considering moving operations out of China need input from the treasury group, and foreign exchange (FX) risk is an important consideration. The Chinese yuan is among the least volatile emerging-market currencies. Moving parts of the supply chain to locales with higher FX volatility could create headaches for treasury down the road.
For many businesses, these issues may currently represent a moot point because companies suffering from cash-flow issues as a result of Covid-19 will probably not be in a hurry to make big moves in the near term.
Know Your Customers and Suppliers, Lower Your Risks
These factors are complex and interrelated, and Atradius expects them to drive a sharp increase in insolvencies among businesses of all sizes. At this time, it’s impossible to predict the extent of the economic devastation that will be wrought before the Covid-19 crisis has ended. However, as insolvencies begin to rise—especially in highly impacted market sectors and for those companies unable to maintain healthy liquidity—firms must be vigilant about choosing trading partners wisely.
The number-one concern for companies selling products into Southeast Asia should be protecting cash flow by mitigating credit risk related to accounts receivable (A/R). Other risks include product availability concerns when suppliers are affected by insolvencies across Southeast Asia and cash flow concerns related to bad debt provisions following a bankruptcy.
Closely monitoring customers’ financial standing will be key, as will tracking operational challenges customers are up against. In situations where financial statements are not directly available, credit managers should look to other available resources, including trade data and trade references, to establish an understanding of the financial strength of their partners. Regular trade-sector reviews are useful tools. It also makes sense to stay up to date on the local business environment and regulatory developments.
To further prepare for the coming spike in insolvencies, treasury and finance groups in organizations doing business abroad should:
- Communicate frequently with customers to understand the impact of the pandemic on their business operations, their liquidity, and their customer base.
- Develop visibility into customers’ payment trends across all suppliers.
- Tighten credit controls by regularly reviewing aging reports and quickly contacting customers that fall outside of normal payment behaviors.
- Identify financially at-risk customers and increase the frequency of credit reviews. In the United States, be aware of the potential for preferential claims in the event of a bankruptcy.
Christian Bürger leads country and industry report publications at Atradius, a global trade credit insurer. He holds a Ph.D. in international politics; the topic of his thesis was Southeast Asian affairs.