Don’t Neglect Trade Credit Risks in a Time of Economic Uncertainty
Business confidence was dented in 2016, as the general economy struggled with slowing growth in the majority of emerging markets and elsewhere. It will therefore come as little surprise that the past 12 months also bore witness to an increase in insolvencies, which we believe will continue, and perhaps even accelerate, in 2017.
Against this backdrop, experts surveyed for this year’s Global Risks Report 2017, prepared by the World Economic Forum with the help of Marsh & McLennan Companies and other partners, rated economic woes as an issue of the highest concern in the short term, along with related geopolitical and societal risks.
Until last year, the global economy had experienced six years of improving economic conditions and reducing levels of global losses as it recovered from the financial crisis of 2007-2008. However, last year the sands shifted, and saw the first annual increase in insolvencies in six years, driven by a prominent rise in Asia (specifically China), the Middle East (specifically Saudi Arabia and Dubai), as well as those countries everyone is aware of, such as Brazil. All this creates a very challenging context for business.
Looking to 2017, slowing growth in Asia – particularly China and India – will likely have a knock-on effect to other parts of the world. Meanwhile, President Trump’s election has the potential to subdue trading in Latin America, because countries like Mexico and Brazil are quite dependent upon the US for their majority of their exports. A change to US trade policy with these countries could have a very dramatic and adverse effect on their economies.
There’s also a host of other factors to consider. Some people talk about an inflationary period setting in in 2017, but would that inflation sustain growth? At present, I’m skeptical. Then there’s the uncertainty surrounding Brexit, newly-elected President Trump, and upcoming elections in France, the Netherlands, and Germany – there will continue to be a considerable amount of speculation around how all of these could affect the world.
So what can businesses do to remain resilient in this challenging environment?
- Mitigate your trade credit risks by placing even greater scrutiny on customers. Evaluate the financial robustness and delivery capabilities of buyers and suppliers. You may also want to diversify, as far as possible, the locations in which you trade.
- Consider transferring trade credit risks to the insurance market. Now is a good time to look at this because there is significant capacity in the marketplace, so rates are artificially low after six years of soft market. However, we expect more losses, which could dictate potentially harder rates and higher premiums in 2017, and beyond.
The impact of a bad debt on a business can be catastrophic; don’t let it happen to yours.