Survey Highlights

Several factors like sharply rising energy prices, and the severe instability caused by geopolitical unrest, have sent the global inflation figure soaring to a level not seen for decades. This has prompted immense concern for businesses worldwide amid fears it will increase the risk of B2B customers defaulting on payment of invoices. This is expected to pose a significant threat to profitability and, in the worst-case scenario, a danger of being pushed out of business completely.

The Atradius Payment Practices Barometer survey shows that companies in the USMCA region addressed this concern by greatly enhancing their management of credit risk arising from trading on credit with their B2B customers. USMCA companies that opted for managing the issue in-house told us that the primary method used was to make more regular credit checks of customers to detect any warning sign of likely default on payments. This was reported by 53% of USMCA businesses, spiking to 61% in Mexico.

Companies polled also told us they very often tried to speed up cash flow by offering B2B customers discounts for early payment of invoices, or allowed customer shorter time to settle payments for their purchases on credit to customers. This was particularly reported both in Canada and Mexico. However, with interest rates rising due to inflation, the powerful motivation of USMCA companies was also to get easier access to external funding in case they should cover potential liquidity shortfalls due to customer payment default.

A clear finding of the survey was that USMCA businesses have grasped the relevance of strategic credit management to navigate the current times of soaring inflation potentially pushing up customer credit risk. In particular, two in five companies polled in the USMCA region acknowledged the value of credit insurance as a strengthening device of their borrowing power. This due to increased bank security coming from having transferred the payment default risk of their B2B buyers on a specialized credit insurance company.

“While inflationary pressures are broad-based worldwide, a strong upward push to the figure in the USMCA region is a result of the spill-over effects of soaring energy and commodity prices at global level,” said Gordon Cessford, Atradius regional director for North America. “We see that USMCA companies struggle to alleviate such pressure, thus increasing their liquidity needs to run their business operations and driving up costs. For many companies, strategic credit management has represented the most logical step to protect profits and cash flow, while at the same time mitigating customer credit risk during this period of dramatic surge in inflation and unsettled economic times.”

The Atradius Payment Practices Barometer survey discovered that 70% of the US businesses that already have insured their B2B trade receivables said they will continue to rely on this tool during the next twelve months, with many saying they will also complement this with other solutions like letters of credit and trade receivables securitization. The comparable figures were 67% in Mexico and 58% in Canada.

Key findings in the 2022 study include:

• Sweden, Germany and Finland are the three best countries to recover international debt in the world, while Saudi Arabia, Malaysia and the United Arab Emirates are the most challenging.
• In the past four years, 20 out of the 49 countries in the Allianz Trade sample have seen their collection complexity score improving, in part because the COVID-19 crisis led many to accelerate reforms of insolvency frameworks.
• On average, the Middle East, Asia and Africa are the top three most complex regions.
• The largest economies, most dynamic markets or less vulnerable countries (in terms of country risk) do not necessarily offer a more conducive business environment.
• Allianz Trade estimates that trade receivables in countries with a severe level of collection complexity exceeds $4.2 trillion, compared to $3.5 trillion for countries with a very high level of collection complexity, and $1.9 trillion and $2.4 trillion for countries with high and notable collection complexity, respectively.

View the complete study and national commercial collection complexity rankings.

Companies now face multiple global headwinds once again, from extended supply-chain disruptions and transportation bottlenecks to high input costs and shortages, notably for energy and commodities but also labor. To add to this, they also face higher funding costs as the global surge in inflation accelerates monetary tightening.

Yet, Allianz Trade identifies three key signs of resilience:

• The total cash holdings of listed firms was 30% higher at the start of 2022 than in 2019 at the global level.
• Allianz Trade’s proprietary data show that the number of fragile firms (i.e. those likely to default in the next four years, based on profitability, capitalization and interest coverage as of 2021) remained contained in Europe, particularly in Italy (to 7% in 2021 from 11% in 2020) and France (to 12% from 15%).
• Finally, the Q1 2022 earnings season has confirmed that listed companies have been far more capable of passing on higher costs to prices.

“These factors suggest that the global economy should be able to avoid a big surge in insolvencies – at least in the short term. Nonetheless, companies will have to be vigilant: The normalization of global insolvencies has already started. For some countries, catching up with 2019 figures will take a few years, but we are back to a high level of non-payment risk, both globally and locally,” said Clarisse Kopff, CEO of Allianz Trade.

Allianz Trade identifies some pockets of fragility which may result in a strong rise in insolvency levels in 2022 and 2023. First, in 2021, working capital requirements increased particularly in Asia (+2 days), Central and Eastern Europe (+2 days) and Latin America (+2 days), and for sectors such as household equipment (+8 days), electronics (+3 days) and machinery equipment (+2 days).

In addition, the Eurozone posted a noticeable deterioration of its NFC debt-to-GDP ratio (+5.2pp compared to +3.5pp for the US).

Last but not least, the current international context has sparked a decline in real purchasing power for consumers, which could create another downside risk for companies in the form of slowing demand. In response, governments in France, Germany and Italy have already extended existing partial unemployment programs and introduced new forms of state-guaranteed loans, with more measures likely the longer the current crisis lasts.

In the U.S (+8% in 2022 and +23% in 2023), companies should benefit from the buffers accumulated since the pandemic, helped by the Paycheck Protection Program being massively transformed into subsidies and the recovery in profits. China should also be able to maintain insolvencies in check (+1% in 2022, +11% in 2023), thanks to a low starting point and despite a rebound of difficulties for companies most exposed to international trade. In these countries, the number of insolvencies will not return to pre-pandemic levels in 2022 nor 2023.

View the complete Allianz Trade global insolvency report.

Cyber incidents tops the Allianz Risk Barometer for only the second time in the survey’s history (44% of responses), business interruption drops to a close second (42%) and natural catastrophes ranks third (25%), up from sixth in 2021. Climate change climbs to its highest-ever ranking of sixth (17%, up from ninth), while pandemic outbreak drops to fourth (22%). The annual survey from Allianz Global Corporate & Specialty (AGCS) incorporates the views of 2,650 experts in 89 countries and territories, including CEOs, risk managers, brokers and insurance experts. 

Cyber incidents ranks as a top three peril in most countries surveyed. The main driver is the recent surge in ransomware attacks, the top cyber threat for the year ahead by survey respondents (57%). Recent attacks have shown worrying trends such as “double extortion” tactics combining the encryption of systems with data breaches; exploiting software vulnerabilities which potentially affect thousands of companies or targeting physical critical infrastructure.

Cybersecurity also ranks as companies’ major environmental, social and governance (ESG) concern with respondents acknowledging the need to build resilience and plan for future outages or face the growing consequences from regulators, investors and other stakeholders.

Business interruption (BI) ranks as the second most concerning risk. In a year marked by widespread disruption, the extent of vulnerabilities in modern supply chains and production networks is more obvious than ever. According to the survey, the most feared cause of BI is cyber incidents, reflecting the rise in ransomware attacks but also the impact of companies’ growing reliance on digitalization and the shift to remote working. Natural catastrophes and pandemic are the two other important triggers for BI in the view of respondents.

In the past year post-lockdown surges in demand have combined with disruption to production and logistics, as COVID-19 outbreaks in Asia closed factories and caused record congestion levels in container shipping ports. Pandemic-related delays compounded other supply chain issues, such as the Suez Canal blockage or the global shortage of semiconductors after plant closures in Taiwan, Japan and Texas from weather events and fires.

Pandemic outbreak remains a major concern for companies but drops from second to fourth position (although the survey predated the emergence of the Omicron variant). While the COVID-19 crisis continues to overshadow the economic outlook in many industries, encouragingly, businesses do feel they have adapted well. The majority of respondents (80%) think they are adequately or well-prepared for a future incident. Improving business continuity management is the main action companies are taking to make them more resilient.

The rise of natural catastrophes and climate change to third and sixth position respectively is telling, with both upwards trends closely related. Recent years have shown the frequency and severity of weather events are increasing due to global warming.

Allianz Risk Barometer respondents are most concerned about climate-change related weather events causing damage to corporate property (57%), followed by BI and supply chain impact (41%). However, they are also worried about managing the transition of their businesses to a low-carbon economy (36%), fulfilling complex regulation and reporting requirements and avoiding potential litigation risks for not adequately taking action to address climate change (34%).

Other risers and fallers in this year’s Allianz Risk Barometer:

• Shortage of skilled workforce (13%) is a new entry in the top 10 risks at number nine. Attracting and retaining workers has rarely been more challenging. Respondents rank this as a top five risk in the engineering, construction, real estate, public service and healthcare sectors, and as the top risk for transportation.
• Changes in legislation and regulation remains fifth (19%). Prominent regulatory initiatives on companies’ radars in 2022 include anti-competitive practices targeting big tech, as well as sustainability initiatives with the EU taxonomy scheme.
• Fire and explosion (17%) is a perennial risk for companies, ranking seventh as in last year’s survey, while Market developments (15%) falls from fourth to eighth year-on-year and Macroeconomic developments (11%) falls from eighth to 10th.

View the complete report.

Global supply-chain disruptions will remain high until the second half of 2022

After exceptionally strong performance since the second half of 2020, global trade of goods contracted in Q3, especially in advanced and emerging economies. However, advanced economies are suffering more from supply-chain bottlenecks rather than trouble with demand: Euler Hermes finds that production shortfalls are behind 75% of the current contraction in global volume of trade, with the rest explained by transport delays. Looking ahead, rapidly growing orders for new transportation capacity (6.4% of the existing fleet) should turn operational towards the end of 2022 while increased spending on port infrastructure in the U.S. should significantly ease global shipping bottlenecks.

When it comes to inputs from China, Europe is losing the tug-of-war against the U.S.

Europe is more at risk compared to the U.S. when it comes to the heavy reliance on intermediate inputs from abroad. Without production capacity increases and investments in port infrastructure, the normalization of supply bottlenecks in Europe could be delayed beyond 2022 if demand remains above potential. Euler Hermes finds that the household equipment, consumer electronics, automotive and machinery and equipment sectors are most vulnerable to input shortages.

“China is a key downside risk for Europe: we estimate that a 10% drop in European Union imports from China could be a drag of more than -6% on the metal sector, more than -3% on the automotive sector (incl. transport equipment) and more than -1% on computer and electronics,” said Ano Kuhanathan, senior sector advisor at Euler Hermes.

Yet, reshoring and nearshoring will remain more talk than walk

Despite the ongoing global supply-chain disruption, Euler Hermes finds no clear trend of reshoring or nearshoring of industrial activities so far. The only exception is the U.K., which is likely to have faced disruptions due to Brexit. However, protectionism reached a record high in 2021 and should remain elevated, mainly in the form of non-tariff trade barriers (e.g. subsidies, industrial policies).

Overall, global trade will grow by +5.4% in 2022 and +4.0% in 2023

While there is a risk of a double-dip in Q1 2022, Euler Hermes expects a normalization of international trade flows in volume from the second half of 2022, driven by three factors:

1. A cooling down of consumer spending on durable goods, given their longer replacement cycle and the shift towards more sustainable consumption behaviors.
2. Less acute input shortages as inventories have returned to or even exceeded pre-crisis levels in most sectors, and capex has increased (mainly in the U.S.).
3. Reduced shipping congestions (global orders for new container ships have reached record highs over the past few months, amounting to 6.4% of the existing fleet) and the planned USD17bn spending on port infrastructure in the U.S.

“Overall, we expect global trade in volume to grow by +5.4% in 2022 and +4.0% in 2023, and then gradually return to its pre-crisis average levels. However, this comes at the expense increased global imbalances. The U.S. will register record-high trade deficits (around USD1.3trn in 2022-2023), mirrored by a record-high trade surplus in China (USD760bn on average). Meanwhile the Eurozone will also see higher-than-average surplus of around USD330bn”, said Françoise Huang, senior economist for Asia-Pacific at Euler Hermes.

And the winners are…

Euler Hermes estimates that the energy, electronics and machinery & equipment sectors should continue to outperform in 2022. But the main export winner globally in 2023 should be automotive, thanks to the backlog of work and lower capex in 2021. At the regional level, Asia-Pacific should continue to be the main export winner in the coming few years (over USD3trn in export gains in 2021-23).

The economic cost of the pandemic will likely be felt at some point, but the pace of the recovery is generally surprising to the upside, certainly among advanced markets with high vaccination rates.

The Delta variant is a larger threat for emerging markets with lower vaccination rates. Emerging markets in Asia had the pandemic relatively well under control, until the Delta variant started to spread in recent months. They have to prevent infections from spreading further, but growth prospects for the region remain relatively strong. Latin America has among the highest infection rates in the world but benefits from looser restrictions and a robust U.S. recovery.

Current forecasts assume governments maintain their grips on the pandemic and will be able to effectively contain new surges of the virus. Moreover, vaccine rollouts will continue, unhampered by supply constraints. However, if vaccines are less effective against virus variants like Delta than expected, governments may have to re-impose restrictions later this year. This would reduce consumption opportunities and drag on GDP growth in 2021 and 2022.

At the same time, the pandemic continues to weigh on the outlook. Fiscal and monetary support remains essential to support economies, and the economic cost of the pandemic will be felt more strongly in 2021 compared to last year, given its impact on labor markets, business failures and the medium-term fiscal position of countries.

“This 2020 recession has been unique in that GDP and trade have been severely impacted, but insolvencies remained low due to the fiscal stimulus and temporary freezing of bankruptcy proceedings in many markets,” said Andreas Tesch, Atradius chief market officer. “This however could change dramatically as stimulus is phased out. Cautious credit management including attention to the financial stability of your business and that of your buyers remain paramount to success.”

Advanced economies are forecast to grow 3.9% in 2021, undoing most of the cumulative drop in GDP in 2020. Some of the uncertainty that hung over the market in 2020 has disappeared. In the United States, President Joe Biden is expected to follow a more consistent policy than his predecessor did. The trade deal between the United Kingdom and the European Union is removing the uncertainty of a hard Brexit. While damage is still inflicted by higher trade barriers, it is considerably smaller compared to a no-deal scenario.

COVID-19 infections however continue to spread in a number of major advanced markets, and lockdown measures remain strict. Due to these factors, Atradius projects most markets will not see GDP recovering to their pre-pandemic levels in 2021. Emerging markets in Asia have mostly fared better in managing the virus with China avoiding recession and expecting 8.8% growth in GDP in 2021 due to pent up demand. Latin America has the worst performance. Mexico received limited government support and faces a protracted recovery, while Brazil received a sizable fiscal package that limited the depth of the recession in 2020.

Current forecasts anticipate the current pace of vaccinations will result in permanent reduction in restrictions by mid-year. However, if vaccination processes are slower than expected and social distancing measures continue into the second half of the year, businesses may postpone or cancel investment amid uncertainty over the resulting government restrictions and future demand for goods and services. This would slow the economic recovery.

Compared to last year's survey, in four of the markets surveyed, credit-based sales grew an average of 14% while at the same time the value of overdue invoices spiked 56%. In two markets credit sales fell, but overdue invoices still spiked an average 49%. India's decline in credit use might even be the result of its dramatic rise in overdues.

“With the global economy dipping into recession payment default risks are growing,” said Andreas Tesch, Chief Market Officer of Atradius. “We expect bad debts and insolvencies to continue rising into 2021. Suppliers need to manage reduced demand and financial stress. Minimizing these burdens with thorough credit worthiness assessments and ensuring adequate financial sustainability will be key to survival for many of these businesses.”

Although the Atradius PPB survey indicates a varied approach to trade credit across the region with marked differences between markets, it also reveals a consistent commitment to credit control. Without exception, businesses in every market expressed their dedication to credit management processes, with many seeking to increase their focus on minimizing risk.

Interestingly, despite the gloomy outlook, most of the businesses surveyed across Asia expressed optimism that government support or bank finance would be available to help support their industries and the economy. While this may be true to a certain extent, the results of the PPB survey indicate that many buyers rely on trade credit from their suppliers to finance their operations, and extend that even more by delaying payment of invoices. 

This survey was carried out in March 2020, at a relatively early stage in the COVID-19 pandemic and ensuing economic crisis. It represents an important snapshot of business confidence in Q1 2020. Looking forward, it will provide valuable information about the developing payment practices for this key economic region during the early days of the unfolding crisis.

Euler Hermes’ experts believe this worrying trend is due to the combination of a low-for-longer pace of economic momentum, notably in advanced economies, in the industrial sector, and the lagging effects of trade disputes, political uncertainties and social tensions.
In 2020, even if monetary policies should remain supportive, it will not be enough to counterbalance softer demand, tougher price competition and an increase in production costs, notably wages. 

As a result, insolvencies should rise again by 6% globally this year for the fourth time in a row, with Asia still as the key contributor (+8% y/y) notably due to China (+10%) and India (+11%). In Western Europe, economic growth will remain below the historical threshold which usually stabilizes the number of insolvencies (+1.7%), leading to an increase in most countries. All in all, four out of five countries will post a rise in insolvencies in 2020, with Brazil (-3% y/y) and France (0%) as the key exceptions. 

In 2019, the overall increase was higher, but only two out of three countries were impacted by rising insolvencies. This means that export risks are on the rise almost everywhere: there is hardly a safe haven anymore. 

The number of major insolvencies from Q1 to Q3 2019 remained relatively stable year-on-year (249 major insolvencies) but their severity worsened in terms of cumulative turnover (+EUR39.1bn to EUR145.2bn), which could have serious domino effects on providers along supply chains. The greater the turnover of the bankruptcy candidates, the greater the damage to individual suppliers. The hot spots were construction in Asia, energy and retail in North America, and retail and services in Western Europe. 

“There’s no denying that cross-border payment processing are on the rise and that they are more complex than domestic transactions,” explained Anna Barnett, director of research for Levvel Research, which conducted the survey for payables automation company Tipalti. “Businesses are realizing that they are exposed to fraud risk unless they put in place new controls.”

Surveying more than 450 professionals from North American organizations across a variety of industries and market segments, Levvel found that 33% of businesses are worried about fraud. Other notable concerns include data security (26%), local tax and regulatory requirements (26%), the challenge of monitoring supplier information for regulatory compliance (23%) and the growing volume of international payments (19%).

“The more international payments a business processes, the more likely it is to endure increasing pain points, including significant increases in AP workload, higher payment error rates, and increased tax and fraud risk exposure,” said Chen Amit, CEO of Tipalti. “Strong international payments policies and processes not only address these challenges but also help to protect an organization from various issues, including financial, data security and reputational risks.”

Additional research findings include:

• Most Popular Payment Methods: Most organizations make their international payments through wire transfers (69%), which remain attractive despite having very high transaction costs and fast growing fraud risks. This is followed by PayPal (38%), local ACH transfers/global ACH (29%), checks (29%) and prepaid debit cards (17%), the latter of which incurs a high number of errors.
• Domestic vs. Cross-Border: Nearly one-fourth (24%) of businesses recognize that they have a knowledge gap regarding international payments processes, while 26% say they have a challenge meeting local tax and regulatory requirements.

“Many AP departments are struggling to keep up with a globalizing market and the changing state of their supply chain,” Amit said. “To survive, organizations need a more modern, efficient approach that eliminates wasted time, manual labor and errors while putting controls in place that minimize risk exposure."

Based on the findings of the Atradius Payment Practices Barometer survey conducted among more than 1,500 suppliers in seven countries in Eastern Europe (Czech Republic, Hungary, Poland, Slovakia, Turkey, Bulgaria and Romania), 24.4% of the average total value of the domestic and foreign invoices issued by suppliers interviewed remained unpaid at the due date. This percentage is highest in Turkey (41.5%).

Dimming growth prospects for Eastern Europe are expected to worsen the insolvency outlook. Higher bankruptcy levels this year are expected in Turkey (+10%), Poland (+4%) and Romania (+3%). The manufacturing sector is the most exposed, due to its high integration in the global value supply chain.

Payment defaults by customers negatively affect cash flow and imply the need to make up for liquidity shortfalls to carry on business operations. If access to bank financing tightens in the short to medium term, suppliers surveyed in the region would offset the expected increase in capital costs chiefly by reducing investment in business growth and workforce, this latter through layoffs or hiring freezes.

“The global economy continues to reveal its frailties, and is now on a notably slower growth path,” said Thomas Langen, Senior Regional Director Germany, Central and Eastern Europe of Atradius. “Amid rising geopolitical tensions and ongoing uncertainties, the risk that global trade remains sluggish is growing. This is forecast to weaken economic growth in many Eastern European countries, raising the insolvency outlook over the coming months. Against this backdrop, strategically managing the risk of payment defaults by customers is essential to avoid severe cash flow problems and to pave the way for safe, sustainable business growth.”

Growth in this industry should gradually cool down to +3.0 percent in 2019, from +3.5 percent  in 2018. Over the past decade, most of the growth came from emerging markets (+57 percent since 2008), while developed markets have not even fully regained their pre-crisis volumes. 

Going forward, slowing GDP growth and tighter financial and monetary conditions will explain the deceleration in the residential sector (+3 percent year over year in 2019, after +3.5 percent year over year in 2018, and +4 percent year over year in 2017). Necessary fiscal discipline and the impetus of e-commerce respectively explain the limited boost expected from the infrastructure and commercial segments.

According to the company’s local experts, who report their sentiment every quarter regarding demand, profitability, liquidity and business environment, the construction sector has been incapable of building buffers and fully recovering from the 2008 crisis despite the healthy expansionary global business cycle:

• Liquidity has historically been, and will remain, the largest pain point for the industry on a global scale with the average construction sector DSO remaining at 85 days, suggesting that construction remains among the top three worst preforming sectors in regard to payment delays.
• Demand has barely recovered in some of the largest construction markets. The volume of growth on the construction markets in developed economies was negative (-0.4 percent CAGR) during the current global construction cycle (2008–now). In some of the largest construction markets, such as France, Germany, Italy and the US the demand has still not recovered to the pre-crisis volumes.
• Profitability has also been under increasing pressure from rising input costs, most notably labor costs.

The construction sector is definitely a good candidate for being the biggest victim of the next crisis. This is essential since construction is an important part of all economies (advanced and emerging) and plays a role in magnifying or reducing the impact of a cyclical slump.

See the latest construction report from Euler Hermes for more information.

Respondents cited the most influential event affecting finance operations since 2016 as:

• 2018 tax reform (33 percent)
• Federal interest rate hikes (22 percent)
• Internal technology adoption (15 percent)
• International tariffs and trade agreements (13 percent)
• Market corrections (9 percent)
• FASB’s new revenue recognition standard, ASC 606 (8 percent)

With technology adoption having the third largest impact on corporate finance, respondents were asked about their predictions for the future of payments technology. Nearly half (44 percent) of professionals believe that B2B payments will be dominated by online payment platforms or e-checks by 2028; this is followed by 26 percent choosing the hotly discussed blockchain technology and smart contracts. Credit cards fell behind these newer options, but 17 percent of those surveyed have faith that cards will continue to rein supreme in B2B payments a decade from now.

As follow-up, Dun & Bradstreet asked professionals if their company had already adopted the technology they selected as the most common B2B payment method in 10 years. Half (49 percent) said yes, and 22 percent say their companies do have a plan to adopt the technology. But, respondents who selected blockchain as the future dominant payment method fell far behind these numbers; only 20 percent work for companies who already use blockchain for B2B payments. The remaining responses were about evenly divided on whether their companies had a plan to adopt blockchain for B2B payments in the future (34 percent) or not (32 percent).

In the October 2018 edition of the Atradius Payment Practices Barometer for Western Europe, a survey based on feedback from approximately 3,000 domestic and export suppliers from 13 countries (Austria, Belgium, Denmark, France, Germany, Great Britain, Greece, Ireland, Italy, Spain, Sweden, Switzerland and the Netherlands) more respondents than last year (58 percent, up from 56 percent one year ago) reported having experienced financial distress on their business due to late payment by their B2B customers.

On average, nearly 42 percent of the total value of B2B receivables of the Western European businesses surveyed was paid late. This compares to 41 percent one year ago. Domestically, suppliers surveyed in Italy and Greece were the hardest hit (on average, nearly half of the total value of their B2B invoices were overdue). 

The hardest hit by late payment from foreign customers were respondents in Great Britain and France (53 percent of the total value of British, and 51 percent of French export sales on credit were reported to have been unpaid by the due date). Late payment from B2B customers is reflected in a longer DSO, which may adversely impact businesses’ liquidity, increasing B2B trade credit risk. Based on the Atradius survey, over the past year the biggest increases in DSO were recorded in the Netherlands (46 days, up from 41 days) and Great Britain (35 days, up from 31 days).

The Atradius Payment Practices Barometer for Western Europe also reports businesses’ opinions about the biggest risks to global economic growth in the coming six months. 45 percent said that US protectionism turning into a trade war is the most likely to dampen economic growth in the upcoming six months. By country, the highest percentage of respondents believing that US protectionism may trigger a global trade war that hampers global growth was recorded in Denmark (60 percent).

The September 2018 edition of the Atradius Payment Practices Barometer for Eastern Europe, a survey based on feedback from more than 1,400 domestic and export suppliers across Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia and Turkey, reveals that 25 percent of respondents in Eastern Europe expect their Days Sales Outstanding (DSO) to increase over the coming 12 months. This compares to 13 percent of respondents expecting a decrease over the same time frame. 

A longer DSO may adversely impact businesses’ liquidity position, thus increasing B2B trade credit risk. The most worried about this are respondents in Turkey (43 percent) and Romania (30 percent).

Payment delays due to insufficient availability of funds by domestic B2B customers in Eastern Europe increased markedly (68.8 percent of respondents reported this, up from 58.4 percent last year). Nearly 31 percent of respondents reported that domestic B2B customers pay invoices late as they use outstanding invoices as a form of financing. 

Moreover, domestic B2B receivables were reported to be uncollectable most often due to the customer being bankrupt or out of business (64.2 percent of respondents, up from 55.8 percent last year). However, many Eastern European respondents invoicing electronically have noticed an improvement in speed of payment. Nearly 66 percent of respondents invoiced their B2B customers online over the past year.

The survey also reports businesses’ opinions about the biggest risks to global economic growth in the coming six months. Global economic growth continues to strengthen and is forecast to accelerate 3.2 percent in 2018. At the same time, risks to the outlook have increased with U.S. protectionism, U.S. Fed policy, China’s “hard landing” and geopolitical risk growing significantly. The risk that protectionism escalates into a trade war in the coming six months rose the most concern amongst survey respondents (37.7 percent). The was most evident in Turkey (53.1 percent of respondents).

Despite a general rise in global debt, the average net gearing ratio for businesses fell to 53 percent in 2017, down 3.2 percent year-on-year. The trade credit insurer says the positive picture has been supported by strengthening balance sheet structures, which in turn are supported by sustained earnings growth. 

Risk is concentrated in sectors that face structural change, notably disruption from climate change, digitalization, changing customer needs or challenging economic performance, according to Euler Hermes. The sectors most at risk include paper, transportation and textile, and businesses are increasing leverage to see themselves through challenging conditions and respond to these changes. 

From a regional perspective, the research found that Southern Europe was particularly vulnerable to over-leveraged corporates. Portugal (96 percent), Turkey (72 percent), Spain (68 percent) and Greece (69 percent) all recorded the highest net gearing ratios. This is compared to the lowest average levels found in South Africa (38 percent), Australia (41 percent), Hong Kong (42 percent), Poland (43 percent) and the UK (43 percent). 

High risk sectors 

The paper industry is a highly capital-intensive industry and requires considerable leverage. As it tackles structural challenges of digitalization, the issue is compounded and has led to the sector recording the highest average net gearing ratio, at 172 percent for the top 25 percent (top quartile) comprising the highest leveraged constituents. According to the research, net gearing reduced by 7.6pp for 2017 against 2016 levels. 

While leverage is high and energy input price pressures remain, margins should still improve by 20 bps in 2018 as demographics and consumption patterns boost growth in tissue and packaging production.

The transport industry is exposed to considerable structural change and has little financial cushioning to weather the risk. With 144 percent average net gearing for the top 25 percent of companies, leverage is high, while cashflow is weak. The industry is facing the challenges of rising oil prices, a need to invest in new technology and fleets to drive fuel economy and meet climate change regulations. 

Textile is a high-risk sector with a combination of significant leverage, 144 percent in the highest quartile of indebted companies and weak cash generation. Intense competition is the mainstay of structural headwinds, notably for industries in US, Japan, Singapore and India. 

Information is power, but getting current and accurate information on customers halfway around the world can be extremely difficult. Fortunately, the Finance, Credit & International Business Association, a division of NACM, offers in-depth credit reports using data from the best sources of information from agencies and local, “on the ground” suppliers who have been carefully vetted. 

FCIB’s credit reports typically contain:

• Verified trade name vs. registered name
• Historical information, address, shareholders/directors, capital and business activities
• Number of employees
• Credit risk rating
• Trade and bank information
• Credit limit recommendations
• Other subsidiaries
• Financial information
• Private company vs. public company
• Verification against international crime watch lists, convictions and fraud

To ensure the quality of international reports, FCIB validates all information by conducting interviews with the subject companies; verifies trade licenses and registrations by calling local government sources; and contacts trade and bank reference supplied on the order.

FCIB offers discounts to NACM members and even greater savings to FCIB members. Learn more.

• Average payment duration increased from 61 days in 2017 to 63 days in 2018.
• On average, 90.3 percent of respondents frequently experience late payments
  (the average is highest in Mexico (94.4 percent) and the U.S. (90.9 percent).
• On average 50 percent of invoices are unpaid by the due date.

“It is interesting that in a healthy, growing economy, bad debt continues to plague the B2B markets,” said David Huey, Atradius president and regional director of U.S., Canada and Mexico. “To think that 51 percent of respondents have had a customer suffer bankruptcy or simply close their doors is eye opening.”

The average proportion of uncollectable B2B receivables in the Americas declined, though slightly, from 2.1 percent in 2017 to 1.8 percrent this year. At 2.5 percent, Brazil is the country with the highest percentage of uncollectable receivables in 2018, mainly because customers filed bankrupty as reported by 54.7 percent of respondents in Brazil.

The level of intra-regional exports seems to be stable, particularly among the NAFTA countries. This, despite the threat of a protectionist turn by the U.S. and pending the revision of the free trade agreement. Nearly half of the suppliers interviewed in NAFTA countries say that more than 50 percent of their commercial activities occur within the region, with 16.5 percent trading exclusively within the current free trade area. 

Trade with the U.S. either increased or remained stable for 81.5 percent of the suppliers interviewed in Mexico. In Canada the positive trade picture is even more pronounced with total of 90.3 percent maintaining the same or better trade levels with the US.

The monthly Political Risk Newsletter summarizes the latest forecasts for economic and political changes affecting international business. Each newsletter includes the Political and Economic Forecasts Table, which has 18-month and five-year forecasts for turmoil, investment, transfer, and export risk in 100 countries. It also provides forecasts of real GDP growth, inflation and current account. Rating changes are included in each issue, giving subscribers an excellent method of tracking changes in the ratings and risk of the countries where they do business.

FCIB also offers country reports for 100 nations, assessing potential political, financial and economic risks to business investments and trade. The reportsprovide risk forecasts and analysis based on the world-renowned Coplin-O'Leary Rating System, the original political risk rating system, including alternative regime scenarios.

Learn more about FCIB’s Political Risk Newsletter and other resources for international credit and trade finance professionals. 

FCIB offers specialized training and education in a variety of formats, including live and on-demand webinars, the annual International Credit and Risk Management Summit and a comprehensive 14-week global credit risk online course. During the NACM Credit Congress in Phoenix on June 10-13, 2018, FCIB will also present several global sessions. 

In the Antitrust Hot Topics session, Wanda Borges will explore whether U.S. antitrust statutes apply to international business transactions. NACM economist Chris Kuehl will provide insight into the 10 riskiest places to manage credit during the Global Risk Tour session. Economist Byron Shoulton will discuss doing business in challenging countries during the Global Hotspots session. 

Additional sessions will cover strategies for secured transactions in Mexico, understanding international financial statements, communicating across cultures and dealing with cross-border insolvencies. 

Learn more about FCIB’s global sessions at Credit Congress and other educational opportunities for international credit and trade finance professionals. 

The Electronics, Machinery and Construction sectors show the highest DSO (all above 85 days). On the other end of the spectrum are sectors in connection with Household consumption (Agri-food, Transportation and Leisure goods) where companies are paid a lot faster than global average.

China stands out once more with a three-day rise, reaching a 10-year high at 92 days.

The economic and financial crisis of 2007/08 had led companies to closely monitor or accelerate payment delays (60 days in 2008 on average). After five years of stability at 64 days, DSO reached a 10-year high. Moreover, the spread of DSO around its mean increased in 2017, with one company out of four being paid by its clients within less than 31 days, but one out of four being paid after 90 days.

The lengthening of DSO reflects a relaxation of payment standards between companies. This study of global payment behaviors shows that as the global economic health is improving, DSO tends to lengthen: there is a clear correlation between DSO and global economic activity such as measured GDP. In other words, now that the world economy is doing better, companies tend to trust their clients to pay them - despite the increase in insolvencies of large companies.

Euler Hermes forecasts a similar dynamic in 2018, with global DSO rising by one more day, to 67 days.

The increase in average DSO in 2017 stems from a global trend observed in most countries: it has occurred in two countries out of three. Three main groups of countries emerge with respect to the global average:

• The seven strongest countries have an average DSO inferior or equal to 51 days, the country with the lowest DSO globally being New-Zealand with 43 days. Other countries with short averages are the Nordic countries (Denmark and Finland), Austria and Switzerland, the US and the Netherlands.

• The next group of 7 other countries for which DSO remains below the global average, comprises amongst others Germany (54 days), Canada (54), Brazil (62), and the UK (53). It is worth noting that Russia is part of this group, with DSO decreasing by +2 days to 56 days, with one quarter of companies being paid under 22 days.

• Finally, there is a remaining group of 12 countries with an average DSO superior to the global average of 66 days, such as France (74), Italy (83) and China, with the highest average DSO (92 days).

In China, where the average DSO exceeds already by far the global average, DSO rose by a further three days in 2017. In early 2018, it reached 92 days. It is worth noting that DSO increased in 12 sectors out of eighteen in China, compounded by the share of Chinese companies with DSO that exceeded 90 or even 120 days. In this country, 25 percent of companies wait 136 days to be paid.

Four sectors particularly stand out: Aeronautics (+four days in 2017, +12 days since 2012), Automotive (respectively +three and +seven), Construction (+three) and Electronics (+three), the sector with the highest DSO. 

DSO is once again far higher in B2B than B2C activities. The longest DSOs are in sectors with long manufacturing processes. At the other end of the spectrum are sectors closer to the end consumer, such as Food (46 days), Transportation (49 days) and Household equipment (49 days).

Not only does this tool allow UK businesses to evaluate the payment practices of current and potential suppliers, but it also allows the media to publicly name those companies with a consistent history of slow payments.

This is Your Money recently published a list of the 10 slowest paying large companies based on the new data. Topping the list is Grainger & Worrall Engineering Limited with a staggering 96 percent late payment rate. The publication also listed 12 companies with a perfect on-time payment record.

On Jan. 31, the UK government also published guidance outlining responsibilities for companies required to report their B2B payment data.