Credit cover now an economic imperative

Credit cover is now more crucial than ever for South African exporters moving goods in the current volatile financial times. This was the message from Credit Guarantee Insurance’s Luke Doig, who says the risk of non- payment from markets facing slower and negative growth is escalating in proportion with the increase in the global corporate insolvencies rate. According to the insurance group, global corporate insolvencies rose a cumulative 64% over 2008 and 2009. “Geographically, the Americas increased 172% over the same period and the Eurozone jumped 90% over 2008 and 2009,” said CGIC’s economist and senior manager: investment and economic services. “Following the 5% improvement seen in 2010, the question is whether expectations of further reductions of 7% in 2011 and 5% in 2012 are overoptimistic.” He said should global corporate insolvencies continue to rise at this rate, exporters would face some tough challenges. “The risk of not being paid for your goods is increasing dramatically in these economic times,” said Roger Munitich, general manager: marketing and research and development with Credit Guarantee. With less than 5% of South African exporters covering their debtors with an insurance policy, now more than ever this is a risky and even irresponsible practice, say the experts. Credit Guarantee issues cover against payment default by a debtor. According to Moody’s KMV Credit Monitor, expected default frequencies (EDF) soared in early 2009, and while the number of largescale defaults has decreased, in many instances, the EDFs remain above pre-crisis levels. Despite the overall improvement, however, the pool of large firms in the listed corporate universe is associated with significantly higher default risk compared to five years ago According to Theo Reddi, general manager of Credit Guarantee, the company paid out claims in excess of R500 million in 2009, with the first ever claim paid in Japan. “That is a real wake-up call as Japan has a culture of payment and very high integrity in meeting its obligations.” He said according to an international global payment practices survey it was found that credit sales accounted for 57% of B2B transactions with the longest payment delays from Greece, Spain and Italy. “At least 30% of total invoices are past their due date while another 25% are past the due between 31-90 days date.” He said the slowest payments were being made by the manufacturing sector with insufficient liquidity being the main cause of payment delays in most cases. Doig said South African exporters needed to be aware of the risk when moving goods not just to Europe but anywhere in the world. “Even China is slowing down extensively, going from a 10% growth in 2009 to an expected 8% in 2012.”