Higher costs seeping into supply chains with virus outbreak: OCBC

Singapore

DISRUPTIONS to regional supply chains amid the Covid-19 outbreak have bumped costs up by almost 20 per cent for some traders and distributors as they scramble to find alternative suppliers outside of China, a senior executive at OCBC told The Business Times (BT).

This comes as China's dominance in global trade has led to considerable spillover of reduced shipments in the region, with several Chinese cities in lockdown and businesses closed.

A key trading partner for most Asean countries, China has a "very significant" impact on supply chain in the region, said Linus Goh, OCBC head of global commercial banking.

"What you're seeing now is the second order effect, where sectors such as manufacturing, distribution and even healthcare are facing a supply chain crunch because of the virus outbreak," he told BT.

While Mr Goh declined to comment for now on OCBC's direct exposure to vulnerable sectors, the bank is traditionally known to have a sizeable SME exposure in the region.

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Around 20 per cent of the 600 SMEs that OCBC recently reached out to have indicated they may need some buffer. SMEs in sectors such as wholesale trade, manufacturing, distribution, logistics and construction have cited higher costs as they source for new suppliers.

Mr Goh expects the impact on supply chain disruptions to be more severe, compared with the Sars (severe acute respiratory syndrome) epidemic in 2003 where China was arguably less integrated with the global supply chain.

"The impact on businesses is already becoming quite widespread, beyond just the more frontline industries (such as tourism). It's not just about footfall coming into Singapore, it's now also about trade and supply chain," he said.

To help alleviate cashflow pressures, OCBC will offer some SMEs "a bit more capacity" in their trade facilities. In the event of shipment delays, there will be "some flexibility" on the original trade terms to "give SMEs a bit more breathing space" to account for the delays, said Mr Goh.

OCBC is also tapping its regional presence to connect SMEs with suppliers beyond China - particularly in the healthcare sector where supplies such as masks and disinfectants are running low amid surging demands.

"The raw materials for many of these things, including masks, come from China. There is a need to diversify sources out of China and we've been quite busy trying to make these connections," Mr Goh told BT.

These initiatives are part of OCBC's relief package to help customers across its core markets tide over the Covid-19 situation. Other measures include the extension of bridging loans - in the form of additional working capital financing - to affected businesses for up to five years in the range of S$3 to S$5 million.

"There are many (challenges) that may hit a company at this time and a bridging loan offers flexibility. It gives SMEs peace of mind, knowing they have (funds) in their back pocket that can be used for many things," said Mr Goh.

As an example, he noted that some companies have been experiencing a manpower crunch, with workers unable to return from China.

"These companies need to hire locals. Locals cost more, and they need to be able to (afford higher wages) and, at the same time, still keep a commitment to their Chinese workers who may come back," said Mr Goh.

OCBC will also provide a six to 12-month moratorium on principal repayment for loans, which include home mortgages and bridging loans.

Loan restructures are also allowed for customers with "legitimate reasons and have a reasonable track record", said Mr Goh, though it is "still too early" to tell if additional provisions have to be set aside as a result.

DBS and UOB too have rolled out relief measures of their own. Notably, UOB has set aside S$3 billion for its affected corporate clients in Singapore.

While OCBC did not put an absolute value to its measures, Mr Goh said "numbers will not be small", and are expected to increase should the virus outbreak drag beyond the first half of 2020.

That being said, he noted that SMEs may take up relief assistance merely as a precautionary measure.

"If you look at the global financial crisis in 2009, everyone rushed out with bridging loans for their customers. In the end, it turned out to be a (fast recovery for the economy)," said Mr Goh.

"This meant that some had taken loans as a form of caution, but didn't have to use them in the end. It's very hard to tell how the (Covid-19 situation) will develop, but we will keep the relief measures available for as long as they are relevant."