With inflation continually posing a threat around the world, the APAC region is heading into 2024 with punishingly high interest rates. Derived from the various conflicts around the world, reduced supply of oil, among other supply shocks, supply-led inflation has been the main theme of the global economy in 2023. As it stands, New Zealand, Bangladesh, Vietnam, and Pakistan all have interest rates above 5%, whilst Australia and the Philippines suffer from 4%+ interest.
The focus of many headlines is on the inevitable squeeze that high interest rates have for consumers; they’re faced with rising prices (inflation), yet have to now deal with drastically more expensive mortgage repayments, along with higher car financing and other debts.
But, higher rates also have an impact on businesses, too. Gearing a company by taking on debt is an important scaling up strategy, with bootstrapping being a slow, drawn out affair. But what about the lending businesses themselves?
APAC financial service struggles
Debt issuance in the APAC region struggled throughout last year. High yield issuance declined by 73%, from $86 billion to $23 billion, highlighting a reduction in riskier debt. This was for a number of reasons, in particular a struggling Asian economy.
Higher interest has also made the idea of borrowing less appealing to businesses, who are struggling to make repayments. When taking an extreme example, Chinese real estate, which plays a large part in the Chinese economy, has seen billion dollar problems recently. The rising US dollar bond repayments have been a challenge, and around 33 developers missed payments in 2022.
Financial service firms in the APAC region are no longer able to serve low interest growth products for businesses. Instead, they have been forced to find new drivers of growth, where lending is with a stronger purpose as opposed to being merely cheap.
However, despite the global economic headwinds, cross-border commerce continues to grow in the APAC region, highlighting that greater interdependence and activity is offsetting some of the impacts from contractionary policies. China and India propose newer systems, and the APAC cross-border payments market is set to replace the SWIFT system in many areas.
Payables increase for APAC SMEs
SMEs in the APAC region have felt the brunt of rising rates in 2023. A big concern has been the rising payables for SMEs, which are becoming critical despite the post-pandemic economic rebound. It’s not just Chinese real estate suppliers that aren’t getting paid, but suppliers to SMEs around the entire region.
Over half of the SMEs surveyed in SEA report that they’re experiencing difficulties paying suppliers, and that this was a bigger issue than receiving payments from customers. Therefore, it seems that the impact of rising rates appears to be greater for businesses than consumers, according to this metric.
Less than a third of SMEs in the same region reported that they benefit from credit terms from suppliers, meaning over two thirds do not. This is, again, due to the higher cost of handing out credit, meaning it remains elusive for small firms. In Vietnam, only 10% of businesses can pay on credit.
Consumer borrowing is also down
Earlier in the year, the Reserve Bank of Australia predicted that 15% of borrowers will struggle due to the higher repayments. Given that in Australia, interest rates have been rocketing ever since that statement was made, it’s clear that the impact of inflation has been greater than most have predicted. GDP Growth is under 1% in Australasia, though growth (and inflation) remain very high in Vietnam, Pakistan, and Bangladesh. This highlights that the causes of inflation have been different across regions.
A recent technique for determining the causes of inflation was discussed by economist Adam Shapiro. By using units sold and sales volumes, it’s been possible to reconcile whether inflation was from demand (unit sales increase), or supply (unit sales decrease or stay the same). For the US, inflation was determined to be demand-led, whilst in Europe it was supply-led.
This difference is likely similar compared to Australasia and SEA, where the former has received serious supply shocks, whilst the latter continues to have high GDP growth. As a result, consumer borrowing has likely taken a greater hit in Australia, where household debt is already 111% of GDP, compared to India’s 36%.
Final word
In 2023, the APAC region has been facing serious credit issues. Deriving from global supply shocks and out-of-control inflation, interest rates have been rising around the globe. Suppliers are not being paid, and now SMEs are struggling to attain any credit at all in the SEA region. The lending landscape is undergoing a big shift away from low-cost credit and towards more purposeful – but sparse – credit products.
