Euler Hermes: Asia will start feeling the heat as soon as 2018

Credit conditions in Asia Pacific could start to tighten this year despite an expected +4.8% GDP growth in 2018 and +4.7% in 2019 in the region, said trade credit insurance firm Euler Hermes on Wednesday.

“2018 will be a good year for Asian businesses. Yet trade easiness, payment delay issue, and financing conditions will be the three big-ticket items the private sector should keep in mind for 2018 and 2019,” said Ludovic Subran, Chief Economist at Euler Hermes .

Barriers to exports

While Asia Pacific will benefit from its leading position in electronics exports—as one of the top exporters of printed and integrated circuits in 2016 and making up 69% of the global market, protectionism grows and new defensive polices including tax, regulation, and currency ones could change the rules of the game for the region and push China to expedite its financial liberalization, said Subran.

Payment delay to result in more bankruptcy cases

In addition, payment delays have increased throughout the region and particularly in China where clients pay at 89 days on average against 72 days five years ago, said Euler Hermes.

As a result, bankruptcies are expected to increase by +14% this year in the region, and large bankruptcies are on the rise, especially in retail and construction, said Mahamoud Islam, Senior Economist for Asia at Euler Hermes.

Financing gets harder

Policymakers are expected to tighten financing conditions, due to higher inflation and excessive leverage. China’s new macro prudential policies and 3-4 rate hikes by the Fed could be a drag on external financing. Good corporate profits and investors’ risk appetite will be key.

“High leverage in the region calls for caution,” Islam noted.  It now takes three units of credit to create one unit of growth in China and households and companies in Hong Kong and Singapore are very indebted without investment picking up.”