Commodities boom hides pressure on SME exporters
14 August 2008
| A gulf is emerging between Australian exporters whose fortunes are tied to the commodities boom and those less able to withstand the impact of global inflationary pressures and declining US consumer demand with SMEs showing the highest risk of financial distress according to newly released risk data. The risk analysis of Australian exporters conducted by leading credit reporting agency Dun & Bradstreet (D&B) reveals that declining exports to the United States, global inflationary pressure and the re-pricing of credit are driving the new risk ratings. |
|
| Small and young exporters face the highest likelihood of financial distress or failure in the coming year, a trend which could pose significant difficulties for the exporting community which is largely dominated by SMEs. D&B data indicates that more than 80% of the nation's exporters sell less than $10 million worth of goods and services per year and the vast majority employ less than 200 staff. Two of Australia's key exporting sectors - manufacturing and wholesaling - which combined account for close to 70% of the exporting community, are in for a bumpy ride. One in ten manufacturing companies in their first decade of operation are rated a high risk of experiencing financial distress or failure in the coming year while the same high risk categorisation has been assigned to seven percent of wholesaling companies in their first five years of operation. The agriculture sector is also set to face challenges with more than one in ten small companies (up to 50 employees) categorised as high risk. |
|
| And while the continued demand for Australian commodities paints a positive picture for the mining sector, small mining companies have not escaped the risk inherent in an industry that requires large amounts of cash up-front for capital investment. Nine per cent of small mining companies are rated a high risk of financial distress however the risk rating drops by more than half for companies with 100+ employees. These figures indicate that even in the export booming mining sector SMEs are experiencing higher levels of stress than their larger counterparts. Dun & Bradstreet's CEO, Christine Christian believes the risk profiles are a sign that policy-makers and businesses need to look beyond the headline data for Australian exporters. "There is undoubtedly a positive story to tell regarding global demand for commodities and its positive impact on Australian exporters. However risk profiles reveal a clear gulf between the companies tied to the commodities boom and those susceptible to inflationary pressures, US demand and the price of credit," said Ms Christian. "This gulf indicates that any assessment of Australian exporters must go beyond headline data and account for industry and country analysis of relevant events and outcomes." |
|
| According to Dun & Bradstreet the risk ratings reflect the fact that smaller organisations are less able to withstand economic headwinds than their larger counterparts because they are often reliant on a very small number of customers in a single export destination. This impacts their ability to diversify risk leaving them significantly more exposed to changes in economic conditions. Australia's exporters are being hit by a double whammy with high oil prices and inflationary pressures having a direct impact, while the deteriorating economic conditions of key trading partners are indirectly impact exporting volumes and revenue. The world is now in the midst of an extended period of higher structural inflation and economic and risk data from D&B reveals that many of Australia's key trading partners are battling severe inflationary pressure. Oil-dominated energy prices and food and agro-product prices are driving double digit inflation in many countries around the world, with populous areas such as Pakistan and Vietnam facing CPI inflation of close to 20%. Others including China, Argentina and Turkey are on the verge of reaching double digit figures. In an environment of higher oil prices, lower consumer spending and tighter lending standards, the global inflation challenge is forcing exporters to choose between raising prices and risking customer backlash or absorbing the additional costs their business is facing. And as central banks around the world move to reign in inflation, businesses face the prospect of even higher funding costs. "The external environment certainly poses some big, and very immediate, challenges for exporters," said Ms Christian. "In much of the developing world inflation appears to be the biggest problem, with the near or actual recession of the United States and the credit crunch also significantly impacting the economy. Industrial countries are facing similar issues. |
|
| "This means exporters are faced with tough decisions about how best to manage their continually escalating costs and the risks associated with business transactions conducted in more volatile economic climates." On the back of the global inflation challenge Australia's exporters are being buffeted by declining economic conditions in key trading nations, with conditions in Asia particularly concerning. D&B data shows that 40% of the nation's exporters sell to the region. The pullback in spending on Australian imports is explained by the deteriorating outlook in China, Vietnam, India and the UK. And although the outlook for the US and Japan is stable both countries are facing significant challenges that are undoubtedly hurting imports. Inflation is a central theme across the UK, China and Vietnam, with the UK battling inflation amidst a sluggish economy, China trying to keep inflation in check without weakening growth and Vietnam battling inflation amidst labour unrest, widening trade and current account deficits and a weak currency. India is also facing inflation challenges - the Wholesale Price Index recently hit its highest rate in more than three years - and it is feeling the impacts of its exposure to high oil prices due to its reliance on imports for 70% of its oil needs. Meanwhile consumer sentiment in the US hit a 16 year low in May. |
||
| The economic stability of these nations is further highlighted in D&B's latest Global Risk Indicator (GRI). The GRI allocates the highest possible rating to countries that display the lowest degree of uncertainty associated with expected returns such as export payments, and foreign debt and equity servicing. The US and UK have both been re-rated since the beginning of the year to fall outside of the top ten safest countries in which to do business while Japan, China, India and Vietnam are ranked 17th, 52nd, 62nd and 78th respectively on the global scale. Conversely, businesses looking to export to or invest in Australia face a considerably more promising outlook. Australia continues to be a safe haven, holding steady in the number three position behind Austria and Switzerland for the third consecutive quarter. Payments performance data, which influences the GRI ratings, further magnifies the risk to Australian exporters. |
|
|
| A number of countries in the Asia-Pacific region pay a significant portion of payments well past due. India has the worst payment habits with more than half of payments made at 30 days or more past terms. Japan, whilst the best payer in the region, has let payments performance slip as the strengthening yen has encouraged firms to pay later. And while payment performance of Vietnamese firms' improved in the year ending Q1 2008, the acute risk of a financial crisis means the payments performance outlook is negative. "The outlook for financiers and exporters looking to invest in or trade with Australia is very good. Despite some challenges Australia's risk remains low and the business environment strong" said Ms Christian. |
|
|
|
"For our exporters the outlook is less certain. With the world changing every day the importance of understanding the global economy and the risk associated with overseas customers cannot be overstated."
|
||
