MANAGING PAYMENT RISKS IN INTERNATIONAL TRADE DURING ECONOMIC TURMOIL

The biggest reason people get involved in international trade business is so that at the end of it, they will get payment for their goods. This is an area that has given greatest head-ache (not to mention heart-ache) throughout the years as payments can sometimes be very difficult to receive. So I thought it is apt that I begin my blog by posting something about payment risk, which is at the heart of every businessman, local or otherwise.

This is the first part of a 3-part series about payment risks in international trade, especially in the time of economic turmoil:

MANAGING PAYMENT RISKS IN INTERNATIONAL TRADE DURING ECONOMIC TURMOIL

Economic uncertainty is upon us again, not long after the last credit squeeze crisis that impacted most of the Western world, rich Asian nations and other nearby regions. Lucky for Malaysia, we only suffered on the periphery of the crisis and largely emerged unscathed despite some slowdown in the export markets and some workers retrenched.

Many economists are predicting that the next global downturn is very much around the corner, including Nouriel Roubini, whose previous prediction about the credit squeeze crisis was largely ignored but proven correct, is again saying that the year 2012 will precipitate another economic meltdown if correct measures are not taken now to alleviate it. And this time, because of the near perfect conditions for the disaster to come, with European debt crisis affecting Greece, Italy, Portugal, Ireland, Spain and may be also France, plus the unmanageable national debt crisis faced by the US, which was down-graded a notch by S & P recently, and the spending cuts by the UK's Coalition government, the expected disaster looming around the horizon is feared my many to be more severe this time around.

This time Malaysia may not have the luxury of escaping the meltdown so easily, being a relatively small, open economy and dependant on external demand for our goods and services, when most of our major markets are going to go through a tough period of economic downturn, we may face the difficulties as well. Malaysian companies, especially exporters, have to be prepared for the worst.

Payment risks

Even during good time, payment risks are always a major headache to exporters. The risks range from the worst case scenario of non-payment of goods already delivered and taken up by overseas buyers to the less severe form of buyers asking for discounts, delay in making payments and creating disputes over the quality and specification of goods bought. Furthermore, if the buyer really means malice and want to defraud the exporter, they will make all sorts of excuses from making payment when the goods have been received.

The problems associated with payment risks will only increase when an economic downturn is taking place, where most buyers will be hard-pressed to make good of their obligations to pay for the goods and services that they have bought. Therefore, it is imperative that Malaysian exporters know what these risks are and plan ahead with strategies that would make them ready to face and mitigate those risks.

Apart from the risk of non-payment by the buyer, Malaysian exporters also face all sorts of other risks, which, if not properly mitigated and managed, would also result in losses of money for the goods sold.

Since most of Malaysian exports are conducted in foreign currency, the next big risk faced by our exporter is the foreign exchange risk, where the amount of money received in our currency is lesser than the amount the exporter expects, due to fluctuation of foreign exchange rate. If not properly managed and mitigated, the amount received may well be insufficient to cover the cost of goods sold, production costs and other overhead costs.

Then there is also transfer risk, where the money from the buyer's country may not be allowed to be transferred to Malaysia, due to whatever reasons, mostly political, especially if the exporter is selling to sanction countries. Although the transfer risk has nothing to do with the buyer's ability to pay, it also has got to be tightly managed to ensure that the payment for the goods and services sold is received.

In cases where the banks' services are used to facilitate or "guarantee" payments, the exporter, although slightly more secure, still faces the possibility of non-payment due to the banks themselves facing financial difficulties, as shown in recent financial meltdowns. So, even the use of financial institutions to assist exporters, non-payment risks remains high. It is important that the exporters are aware of these risks and the necessary precautionary measures accordingly.

Another growing risk that only recently manifests itself is the political risk, where countries may simply ungovernable or disturbed enough to prevent payments from those countries being effected to our exporters. This scenario is very much alive now in the most parts of the Middle-East, where the end-game is still unclear. This risk is very potent that unprepared exporters would have to meet heavy losses dealing with these countries, if it not carefully managed.