Optimism for Growth in 2021 is Uneven in the USMCA Region
The past year and the ensuing Covid-19 recession has created a time of uncertainty and instability for economies throughout the world, and especially in the USMCA region, according to a recent Payment Practices Barometer survey from trade credit insurer Atradius.
The most telling data gathered in the region concerns business confidence, where survey results were drastically different in Mexico, Canada and the U.S. The majority of survey respondents in Mexico expect to see an improvement in business performance over the coming months, while in Canada, this picture is reversed with only a minority expressing optimism. The U.S. falls somewhere in the middle.
More than half of all sales transacted on credit
Of the total value of all B2B sales in the USMCA region, 53% were made using trade credit last year. This represents growth, as 44% of businesses told us that they increased the use of trade credit in the months following the pandemic.
Temporary fiscal packages in the U.S. and Canada have helped struggling businesses in the short term. As these are withdrawn in the coming months, we are likely to see a rise in insolvencies.
In this environment of heightened risk, it is important that businesses continually monitor the financial health of their customers and note any early warning signs of insolvency. Some of those signs may include slower payments or late payments. However, it should be taken into consideration that the pandemic has presented additional strain on the supply chain that is often out of any one company’s control, leading to slower payments.
Credit management costs rise sharply
Businesses throughout the USMCA region have reported a rise in the cost of managing their accounts receivable in the months following the Covid-19 outbreak. The sharpest rises were reported by businesses that managed credit and collections in-house.
In part, this rise can be attributed to an increase in the percentage of sales made on credit; simply a greater number of credit sales requires more resources to manage them. However, this may also be an indicator of a deteriorating risk environment, as the longer an invoice remains unpaid, the more resources it takes to collect on it.
For businesses that do not use trade credit insurance or an invoice collection service such as factoring, rising payment delays equate to rising costs. Businesses that do outsource credit management to such services enjoy the certainty that their invoice will be paid and that management costs will not escalate.
Businesses favor domestic markets for credit sales
The USMCA region saw many more domestic credit sales than foreign credit sales in the year following the outbreak of the pandemic, with a 60/40 split in favor of domestic customers. This could have been caused by the supply chain challenges that followed the Covid-19 pandemic, leading to concerns over offering credit to foreign customers.
Businesses outside of the USMCA region should approach trade in the region with optimism. While it is clear that the Covid-19 pandemic is not over, the region is rebounding as expected. If there’s one thing that businesses around the world have learned is that offering more flexibility within their supply chains can help tremendously in the face of unexpected events like the Suez Canal blockage, where its effects were compounded by the pandemic’s supply chain disruptions. Companies that diversify their customer base will be better prepared to capitalize on opportunities should their competitors face unexpected disruptions to their supply chain.
Uneven outlooks for growth
On average, most businesses across the region are positive in their outlook and expect to see improvement in the second half of 2021. Upon a closer examination, a country-by-country comparison reveals a vastly different picture. In Mexico, 81% of businesses surveyed anticipate growth, while 36% of businesses in Canada hold the same view. Businesses in the U.S. fall about halfway between these poles. However, it should be taken into consideration that each country in the USMCA all started from very different places before the pandemic, making their perceptions of recovery different.
Businesses in Mexico were experiencing a recession long before the COVID-19 pandemic and received limited financial support from their government over the past year and a half. In contrast, both the U.S. and Canada started from a stronger economic position going into the pandemic and have received substantial financial help from their governments to stay afloat.
Businesses in both Canada and the U.S. may be bracing themselves for the removal of government fiscal support as well, which will have a much greater impact on their business than those in Mexico who are used to the lack of government support and ready for a rebound.
Post-recession growth is predicted for all of the countries in the USMCA region. It will be interesting to see which businesses thrive and grow during this period and whether the optimism and pessimism expressed by the survey respondents comes to pass over the next year.
Aaron Rutstein is the Vice President – Regional Director, Risk Services – Americas at Atradius
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