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Supply chain and inflation headwinds hamper the global recovery – What should CFOs do to mitigate the risks?

6 mins read

5 November 2021

Bernard Aw

Economist for Asia Pacific, Coface

As year-end approaches, the global economy is in better shape than it did at the end of last year. The recovery trend owes much to the progress in vaccination rates, which allows countries to relax mobility restrictions and reopen part of their economies. But the situation remains uneven across the world, especially among emerging economies, including Southeast Asia. The rebound has disproportionately benefitted export-oriented economies, while services-dependent ones continue lagging.

Supply constraints and rising costs are now threatening to undermine the global recovery. For the past year, a lack of containers and ships, port congestions, overstretched production capacities, semiconductor shortages, and Delta-variant outbreaks have disrupted manufacturing. Labour shortages and inflation add to the list of risks and uncertainties, while an economic slowdown in China and its energy crunch also contributed to a less favourable recovery momentum.   

The biggest worry in Asia is a marked slowdown in trade if all these headwinds escalate. Strong trade flows have been a key support for economic growth in Asia Pacific, with robust demand for electronics and commodities benefiting a number of markets in the region. Powerhouse exporting markets for electronic products such as South Korea and Taiwan continued to record robust annual export growth rates of 26.5% and 30.1% in the third quarter of 2021. Meanwhile, key commodity exporters, Australia and Indonesia, registered annual export growth rates of 25.9% and 37.8% for the January-August period respectively. The strong reliance on international trade and regional supply chains to drive growth suggests that there is a non-trivial downside risk of Asian economic activity being constrained if tight supply conditions and escalating costs are prolonged.

Margin pressure and cash-flow risks

Companies face increasing margin pressures as limited pricing power means their ability to pass on higher operating costs (linked to rising raw materials and energy prices) to customers is restrained. Reduced profitability or worse, suffering losses would raise credit risks. According to Coface’s Asia corporate payment survey, the longest payment delays were seen in construction, transport and retail during 2020, sectors most hard-hit by the pandemic. The survey also showed that overdue payments lengthened in the automotive and chemical industries.

When assessing cash-flow risks, we monitor bills that are more than six months overdue (ultra-long payment delays – ULPDs) because in our experience, 80% of ULPDs are never paid. The same survey indicated that sectors most impacted by the pandemic also experienced an increase in cash-flow risks, with retail, construction and transport reporting the largest increase in the share of companies recording ULPDs that are over 2% of their annual turnover. Other sectors with ULPDs over 10% of their annual turnover were energy, retail, construction, ICT and transport. To mitigate these credit and cash-flow risks, more firms turned to credit management tools, with the share of companies rising from 50% in 2019 to 54% in 2020, according to our survey. Credit reports and assessments remained the most commonly-used, followed by credit insurance.  

China’s slowdown

Another serious concern is that the economic slowdown in China could spill over to Southeast Asia through a weakening in trade, with the region already hit hard by the Delta-variant wave. Southeast Asia became China’s largest trading partner in 2020, overtaking the European Union. Despite global merchandise trade shrinking due to the pandemic, bilateral trade between China and ASEAN rose by 7.0 per cent from 2019 to US$731.9 billion at the expense of China’s trade with its other major trading partners. 

Coface estimates that every percentage point drop in China’s GDP growth rate will see a half-a-percentage point decrease in ASEAN’s GDP growth rate. Among ASEAN member states, Singapore may be the most affected by China’s slowdown in the ASEAN region, followed by Thailand and Malaysia, primarily due to relatively greater trade flows between these countries and China.

We forecast China’s economy to grow by 7.5% this year, expecting a notably slower GDP growth in the second half after a first-half expansion of 12.6%. Several factors are behind the deceleration in Chinese economic activity, some of which are long-term drivers. These include policy tightening in credit growth – particularly in the real estate market, softening domestic consumption reflecting a drag from Delta-variant outbreaks, and energy rationing for industries. Another factor is related to China’s “Dual carbon” goals to (1) ensure the country’s carbon emissions peak by 2030 and (2) that it achieves carbon neutrality by 2060.

Furthermore, as China enters into its heating season, the country faces a power shortage in several provinces, prompting electricity rationing to safeguard fuel stocks. Nearly 20 provinces have been curbing power for industrial and, in some cases, residential users, since late August. 

The combined share of industry value-added in affected provinces is about 17% of China’s GDP, including key manufacturing hubs (Guangdong, Jiangsu, Shandong and Zhejiang), suggesting that temporary closures of factories will weigh on economic growth. Energy-intensive industries were the most affected. Furthermore, flooding in northeast China, which are key coal mining regions, hindered efforts to boost domestic coal production to ease the energy crunch. 

Considering the role of China in international trade and in regional supply chains, an economic slowdown would pose significant downside risks to Asian economic activity, but also in other emerging markets in Latin America, Middle East and Africa.

As we move towards 2022, the overall economic outlook remains positive but significant headwinds remain. While further progress towards widespread immunity from the coronavirus should provide economies with greater confidence to transition into endemicity, there are still uncertainties over the course of the pandemic in the coming year. 

What should CFOs do to mitigate the risks?

CFOs usually consider these macro-economic trends in the business forecast for the company. Understanding and evaluating how these risks impact their customers’ financial strength and payment capability is also important. However, not every company has the expertise and resources to monitor the financial stability of every customer, supplier and trading partner.

Traditionally, CFOs will buy business information reports from credit agencies to assess the financial strength of new customers or review the financial performance of existing customers. The major disadvantage is that the pieces of information collected only capture the data in the past year. It will not tell you what may happen to the company in the next 12 months. Besides, CFOs also need to spend additional time to further analyze the data to make a correct credit decision. It could be very challenging if they have hundreds of customers from different countries.

Nowadays, some online solutions in the market could provide different product options for CFOs to choose to mitigate the risks. Under the ICON online platform developed by Coface, CFOs can select the ‘Credit Opinion’ to get a quick answer on how much credit they could grant to a new customer. Credit opinions is the credit limit exposure based on the insurer’s payment history and credit insurance underwriting knowledge. Accessing a 200 million company database worldwide and supported by the risk underwriting expertise of a trade credit insurer, ‘Credit Opinion’ is a reliable tool for immediate credit decisions for new customers. 

For a regular review of existing customers, ‘Debtor Risk Assessment’ is a good option. It is a simple score that reflects the probability of payment default of a company in the next 12 months or a company capacity to honour its short-term financial commitment. The assessment score is based on the analysis of the latest country risk, sector risk, company financial performance, payment experience, historical trend, and the credit insurer’s globally linked payment data. CFOs could have a full review of the financial quality of their customer portfolio at one click.

Moreover, the ICON platform could also provide a monitoring function to alert CFOs when there are any changes in their customers’ situation. Whenever there is a non-payment incident, a downward trend of the sector, or a political incident that may lead to a change in the financial assessment of a company, there will be an alert message in the system to remind CFOs to take timely business decisions.

To get a full bad debt protection, trade credit insurance is the one-stop solution in which CFOs can outsource the credit management function to the credit insurer. CFOs can access an online policy management tool anytime to consult the credit worthiness of new or existing customers and request a credit guarantee before a transaction. The credit insurer will then monitor the financial capability of the company and communicate with CFOs of any changes. In default payments or bankruptcies, the credit insurer will indemnify the loss according to policy terms. Talk to an expert and find out the best credit solution that can serve your needs.


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