Outlook for Asian trade hubs is darkening

Why credit insurer Euler Hermes believes insolvencies will jump significantly

Greg Langley

As China’s economy splutters, Asian trading hubs must expect a tough business year, Euler Hermes warns. The leading credit insurance group recently downgraded its short-term country outlook for Hong Kong, Singapore and Taiwan to one of a medium risk.

China, one of the world’s largest growth engines, is experiencing its deepest economic slowdown since. Companies are deep in the red and non-state banks reported a sharp rise in loan defaults in the second half of. With such a blowout on payments, Euler Hermes is forecasting a 20% jump in corporate insolvencies for China this year. Altogether, when added to the actual increase from, the two-year rise in insolvencies could reach 50%.

The spillover is expected to hit trade-sensitive Asian hubs with a higher risk of late and non-payments. Euler Hermes projects that insolvencies could rise this year by more than 15% in neighboring Hong Kong and Singapore, two transport hubs that are highly exposed to the global slowdown in trade (exports represent more than 150% of GDP).

“The country grades for Singapore (AA), Hong Kong (A) and Taiwan (A) remain unaltered,” says Fabrice Desnos, head of region, Euler Hermes Asia Pacific, “as we see no significant change in the strong macroeconomic and structural business environment. All three places have robust external balances and economic flexibility, and maintain high levels of current account balance.”

However, he cautions, “growing numbers of businesses are likely to be forced to choose between the unpleasant alternatives of extending credit to potentially insolvent customers, or to turn off the tap but watch sales sink.” This is why the company downgraded the short-term country risk level to two (medium) from one (lowest) after assessing the likelihood of non-payments.

Insolvencies to increase worldwide

Globally this could be the first year since the global financial crisis that insolvencies will stop decreasing. Euler Hermes forecasts that 300,000 corporations worldwide will go bust this year and expects 13% more companies in Asia Pacific to go bankrupt, after the region saw its first rise in insolvency (+14%) since last year.

Hong Kong, which saw a 13% increase in insolvencies and is projected to experience +15% in, Singapore (+17% in, +15%) and Taiwan (+23% and +17% respectively) are highly exposed to global trade, with exports representing more than 60% of their GDP. The fortune of all three is closely entwined with Chinese demand.

They’ll have to choose between extending credit to potentially insolvent customers, or to turn off the tap but watch sales sink

As the economic behemoth continues to restructure industries to move away from low-cost manufacturing towards an economy shaped by services, the three markets will feel negative effects through lower exports, weak retail sales and volatile financial sentiment. Increasing domestic private demand growth will not be sufficient to compensate for lower export growth.

Altogether, more than 7,000 companies could be wiped out in China over the period, with the construction, materials, manufacturing and electronics industries particularly vulnerable. Technology, telecommunications and industrials are also precarious as they experienced the most rapid day sales outstanding (a measure of health according to the ability of firms to collect cash for sales completed) increases in, while commodities are still struggling against a prolonged global price collapse.

“To protect themselves from potential defaults, market players should step up risk monitoring both within and beyond their supply chain,” says Fabrice Desnos. “They should also look to diversify their source of market, supplier and buyer intelligence, and understand the price drivers and their implications for market participants.” He added: “Finally, they should use hedging or risk transfer strategies with banks, insurers or financial partners.”

Outlook for Asian trade hubs is darkening

Why credit insurer Euler Hermes believes insolvencies will jump significantly

Greg Langley

Outlook for Asian trade hubs is darkening

Why credit insurer Euler Hermes believes insolvencies will jump significantly

Greg Langley

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