Eddie Middleton, Head of Restructuring for Asia Pacific at KPMG, commented: “The protracted Eurozone crisis is beginning to create major problems for companies across Asia: the twin perils of European banks pulling funding out of the region and austerity measures threatening to dampen demand in Asia’s Eurozone export markets are looming ever larger on the business radars of Asia’s entrepreneurs.
As European banks continue to repair their balance sheets and meet Basel III capital requirements, they’re pulling out of so-called ‘non-core’ geographies, thus creating a funding gap. And, whilst there are numerous other funders – such as regional banks, private equity houses and hedge funds – which are keen to take up the reins, it remains to be seen whether these alternative sources of funding will be able to fill the gap.
The regional banks, although well capitalised and with less risky balance sheets than their international counterparts, do not have the same access to US dollars, whilst the fund community tends to have higher return requirements, making such funding more expensive and, being either straight debt or equity providers, cannot always provide the extensive array of services, such as trade finance, which Asia’s exporters need.
“Perhaps the most critical Eurozone issue for companies, particularly in China, is the damage to their export market. China’s trade surplus is on a downward trend, fuelled in large part by increases in the cost of imports, but also by volatility in its export markets: in the first 5 months of this calendar year, China’s exports to the Eurozone – its largest trading partner – fell by just under 1 per cent, although at the same time China saw comforting growth in its exports to the USA.
“So, whilst China may well be hurtling through its own industrial revolution, which will expand the middle classes and drive demand, it is still only part way on this trajectory. We are already seeing factory closures as margins are squeezed: domestically, there is very significant upward wage pressure, and increases in wage rates of as much as 25% are commonplace. At the same time foreign buyers – such as large European retailers – are playing hard ball on price.
“At a macro level, it is a very different enterprise environment in China: the government has shown that they will turn on the taps to release their $3.2 trillion in reserves in times of crisis (for example, post Lehman), which is a striking contrast to European austerity.”
Philip Davidson, Global Head of Restructuring at KPMG, added: “Clients in the Middle East and Australia are echoing the concerns felt in China and Asia more broadly. Banks, law firms and companies across Australia are taking a keen interest in what the implications of the Eurozone crisis mean for them. The same is true of companies and investors in the Middle East, who have taken big stakes in Eurozone companies in the past few years.”