Insolvency trends in Asia: A mixed bag

The global post-pandemic economic recovery is losing momentum, hampered by stubbornly high inflation and cautious central banks reluctant to prematurely lower interest rates. Additionally, with banks tightening lending standards and cash buffers running low, businesses are finding it a challenge to return to a period of normal growth. While some are adjusting well to changing economic conditions, others are struggling to survive, and this is reflected in insolvency trends around the world, not least in Asia Pacific (APAC).

According to the Atradius Insolvency Outlook, insolvencies surged 32% globally in 2023. The picture was even worse for APAC businesses, which faced a rise of over 40%. While our research indicates that most of the deterioration is part of a post-crisis normalisation process with a trend towards stability, businesses are not yet out of the woods.  

Asia’s ‘adverse new normal’

There are two main factors raising the likelihood of insolvency in the current economic environment. The first is that governments are gradually withdrawing fiscal support introduced to aid businesses during the pandemic. This move could well prove to be an existential threat to businesses that came to solely rely on this lifeline to stay afloat. 

Most countries witnessed low insolvency rates in 2022 as pandemic-era stimulus propped up companies. However, as that support began to be withdrawn, we saw an increase in insolvency rates in 2023, including in markets like Australia, Japan, and Hong Kong. 

Companies in South Korea and Japan are particularly at risk of becoming zombie companies - defined as those that would have defaulted in normal times but were saved by pandemic-era government support - as that support is taken away. Indeed, our study shows that businesses in these markets experienced persistently high default rates in 2022 and 2023, compared to pre-pandemic levels. 

In Japan, especially, insolvencies surged in 2023 compared to 2019 levels. This trend can be attributed to the government making borrowing easy for many small- and medium-sized enterprises (SMEs) during the pandemic, with ‘zero-zero’ loans – where SMEs could borrow with no collateral and the government would cover the interest for three years,  but is now shifting away from providing financial aid.  However, insolvencies seem to be peaking and a downward normalisation is expected to take place in 2024-2025. 

Singapore too should expect to see a significant increase in insolvencies in 2024 and 2025, albeit from a low base, as the trend normalises to pre-pandemic levels. We expect the impact of default-prone companies to be limited after 2024 as companies of all sizes, including SMEs, adjust to the new conditions.

Of course, the withdrawal of Covid-era government support is not the only factor to blame for rising default levels. Current economic conditions, including supply chain bottlenecks, tight monetary policy, and ongoing geopolitical strife could lead to insolvency rates stabilising at high levels. While the IMF is forecasting faster economic expansion for Asia in 2024, protectionist trade policies risk harming the region’s export-oriented economies. Inflation, fueled by higher commodity prices, will also weaken domestic demand - another engine of regional growth.

A rosier outlook?

On balance, however, the growth outlook across Asia Pacific remains positive going forward. While we expect a 16% year-on-year increase in insolvencies globally in 2024 – half of the 2023 jump – APAC’s insolvency rate is expected to decrease by 2%. While the region as a whole will be more stable, we expect the normalisation trend to continue even though it may take longer than in some markets in Europe and the UK.

Over the next few years, we expect to be left with more healthy companies capable not only of riding out the prevailing economic challenges and future crises but also capitalising on the opportunities that will come knocking as the global balance of economic power shifts to the East.

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