Investors take note: 2018 could shape up to be a year of contrasts for Asia-Pacific as growing demand for Asian goods, as well as a positive investment cycle in the region, could be offset by growing indebtedness and the momentum from financial reforms. Key to riding this out will be good corporate profits and strong investor risk appetite, says global trade credit insurer Euler Hermes.
In its January report, 2018: Enjoy the Ride While it Lasts, senior economist for Asia Mahamoud Islam says the key to reducing credit risk will be improving payment conditions, banking and insolvency rules in the region. “Payment delays have increased throughout the region, particularly in China, where clients now have 89 days of credit compared with 72 days five years ago. As a result, bankruptcies are expected to increase 14% this year in the region and large bankruptcies are on the rise, especially in retail and construction.”
Further compounding this issue is a tighter financing environment, with policymakers in the region expected to rein in financing conditions on the back of growing inflation and excessive leverage. Mahamoud says, “High leverage in the region calls for caution. It now takes three units of credit to create one unit of growth in China. Meanwhile, households and companies in Hong Kong and Singapore are very indebted without investments picking up.”
Risk factors notwithstanding, the electrical and electronics (E&E) sector is anticipated to see some growth this year, although it is not expected to grow as much as it did in 2017, he adds. The report finds that the 2018 estimates for Asia-Pacific are still above the global average.
According to him, China’s move up the value chain means the country is now more involved in producing high end products such as high-tech electronic and electric products. “On the demand side, this is supported by solid growth in private consumption.
“Meanwhile, I would say that competitive emerging markets in Asia, such as Vietnam could take the lead for low tech, low value added electronics thanks to competitive labour costs and efficient specialisation,” Mahamoud adds.
Indeed, the report finds that the emerging markets are in the midst of a positive investment cycle, in addition to enjoying dynamic domestic markets and a strong competitive advantage.
China and Japan, referred to as the Stabilisers, are expected to grow at a healthy pace, albeit a slower one. Tighter financing conditions will help reduce financial risks while favourable fiscal policies and strong domestic consumption will continue to support growth. In Japan, strong corporate profit margins will encourage private domestic demand, according to the report.
As for the region’s more developed economies — Singapore, South Korea, Hong Kong, Taiwan, Australia and New Zealand (the Connectors) — economic growth for 2018 is expected to be between 2% and 3%.