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A High level Of Uncertainty: What Can We Expect for International Trade?

Throughout 2018 the international trade environment has been volatile to say the least. Whether this instability will have any substantial effect is yet to be seen, however, the uncertainty around trade and potential tariff increases is very much of current concern.

As threats abound regarding trading tariffs there is a related drop in confidence among businesses and consumers. When dealing internationally, there should be increased attention put to surrounding trade, especially in specific countries and industries that are affected by these changes in risk.

Tariffs have been widely talked about as China and the US, the exports of which account for USD$2.2 and USD$1.5 trillion[1] respectively, lock horns over the US’s attempts to protect its domestic producers. In the short term, it is unlikely that we would see an overall drop in trade, however, due to a forecasted reduction in GDP growth in 2019, the global economy may be set to slow. The escalating threat of tariffs is damaging to confidence and world trade in general.

Of course, those trading internationally, will want to know whether these tariffs and barriers will increase their risk of non-payment. While this would not necessarily be the case, it creates uncertainty in the market.  What will undoubtedly have an impact on payment ability are fluctuations in foreign exchange rates. A reduction in the value of a country’s currency means traders will face increased difficulties when importing and selling in the local market.

During 2018, Turkey’s currency has dropped by 40%. A reduction such as this has an immediate effect with imported goods becoming much more expensive than local alternatives. This reduction in currency value can result in a slowing of economic activity for a country such as Turkey, a hard thing to reverse and leading to an increased risk of non-payment.

In terms of the domestic market, these international trade barriers will probably not have much of an impact in the short term but the reduction in business and consumer confidence can be draining.

Specific sectors that have been impacted recently are steel and electronics. Steel has fallen foul of a global drop in demand leading to a decrease in price. Consumer electronics distributors traditionally find their sales strongly tied to movements in the housing market and a slowdown in house sales will almost certainly affect high street retailers already having to deal with increased on-line competition from the likes of Amazon. More globally, Samsung has warned of a slowdown in sales of smartphones, a warning widely supported by analysts reporting that last year ended with the first ever year on year quarterly decline in sales[2].

Australia has for some years relied on its trading relationship with China to insulate it from, otherwise, global declines in trade, yet China’s growth is continuing to slow., Retail sales in China rose by just 8.5 per cent year on year in May, its slowest rate since 2003”[3], this will clearly have a flow on effect for many traders and importers to the country and long-term sustainability cannot be ignored.

So, what to look out for and consider when trading internationally?

  • Know who you are dealing with (even check long-term customers have not changed structures)
  • Consider the macro and long-term events but know what can immediately affect your business
  • Look for alternate growth opportunities
  • Without the right protection, remain risk averse

Consider talking to a professional for advice prior to exporting

[1] https://www.statista.com/statistics/264623/leading-export-countries-worldwide/
[2] https://www.crn.com.au/news/samsungs-quarterly-revenue-expected-to-drop-as-smartphone-sales-slow-down-497390
[3] https://www.scmp.com/news/china/economy/article/2150814/chinas-economy-cools-may-beijings-efforts-reduce-debt-levels

A proactive approach to a better trade environment

Time and again we write about insolvencies, businesses losing money and unfortunately the times where businesses are unable to continue due to a bad debt. We have recently witnessed a number of insolvencies around Australia and the globe that have had a major impact on Australian businesses.

There is not one common denominator among all failures, but we can pinpoint specific occurrences in industries that develop a domino effect within that sector. For example, in Food and Retail we have observed Toys R Us (Australia and US), Jamie Olivers, Sumo Salad and Zumbo’s fall into administration recently.

These smaller shopfronts are often placed in prominent positions that attract high rent costs, there are multiple pros and cons for a prominent position like this but with thin margins, even the slightest change can impact the profitability of smaller businesses. This beginning of the domino effect places pressures further up the supply chain, on businesses such as distributors and wholesalers.

One of 2018’s (so far) most well recognised insolvencies is that of Toy’s R Us, a global conglomerate that has been facing uncertainties for a number of years. With an everchanging retail landscape many would argue that their inability to adapt to market demands and conditions resulted in losing market share at rapid rates. Toys R Us struggled to compete with the online retail sector, again facing the challenges that are associated with bricks and mortar stores.

Although we talk of the downfall of these businesses, what impact does this have on everyday Australian businesses? Failures like these can impact consumer confidence at a retail level, this adds to the cycle that, as confidence drops, so does spending which inevitably puts more pressure back on the retailers. There are macroeconomic events which can help break this cycle, but it also starts with smart business management from those that are at the forefront.

While these are some issues we can pinpoint for the retail sector, they won’t affect building, construction or other industries. Strains on the building and construction industry are rampant with margins continually squeezed to extremely low levels, meaning that the slightest quotation or error can result in a net loss for the project. Ultimately, this puts strains on the company, it’s sub-contractors and suppliers; again, this is all part of the domino effect that occurs, see below:

As you can see from the flowchart, the main contractor has many stakeholders that are reliant upon them. If they face issues and fall, there are many other stakeholders that will inevitably have issues, from the suppliers to the buyers. Besides prudent credit management there are many steps a business can take to reduce their exposure to certain risks.

If any of the links in this supply chain (excluding the end user) has a trade credit insurance policy, then the flow on effects stop with them. It allows those potential losses to be recouped in a timely manner, in turn allowing them to continue to pay suppliers and creditors while resuming work, keeping the project underway.

At times, every business will face cash-flow problems, but it is those businesses who learn from these lessons and seek advice that will trade confidently through the next tough time. Throughout a 3-month period (June-August 2018) NCI have paid out over 330 claims worth more than $18,000,000 (see below where they occurred). These are the businesses who are proactive in their credit management, that see the risks and that are not afraid to ensure that the domino stops with them.

It is clear that no matter what the industry, any business that trades on credit must observe strict credit management processes, however, even the strictest of credit managers can get caught by a bad debt.

Claims received by NCI, Q2 2018:

A Word from the Managing Director: Kirk Cheesman

What a busy quarter we have had at NCI! Not only have we been busy talking about our online credit application, Credential and new customer monitoring service, NCIRadar, but we have had many staff members supporting charities as part of our renewed Corporate Social Responsibility program.

This has extended to all states around Australia, New Zealand and Singapore. Local teams are encouraged to identify a charity they would like to spend their time with and then work with them for a day. I’d like to congratulate all the teams for their continued support and I look forward to seeing how this develops.

As we move closer to January 2019, we expect to see an increase in PPSR renewals due to the 7-year anniversary of the PPSR commencement. If you need assistance or would like more information on this, please reach out to us directly.

Finally, Christmas is just around the corner. If you have any overdue debts that you would like collected before then, please contact our collections team who will be more than happy to assist.

Kind regards,
Kirk

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