Published: January 01, 2013
Five or six years ago, trade finance was becoming increasingly unfashionable. Articles discussed the decline of trade finance in favour of open account while most conversations around emerging markets focused on BRIC (Brazil, Russia, India, China) primarily for low-cost sourcing and commodities. The idea of the financial supply chain was largely conceptual and alternative financing techniques were often relegated to smaller companies. In only five years, we have seen a transformation in the global business environment and consequently, the way that corporations do business. Treasurers have become increasingly proactive and pragmatic in the way that they manage credit and liquidity risk and support the business in building its international footprint. As part of this transformation, trade finance has become an essential tool for treasurers, a trend that is set to continue in 2013 and beyond.
Latin America, particularly Brazil as the largest economy in the region, has experienced a volatile few years. In 2007 and 2008, Brazil’s economy was growing rapidly, the country had become a net creditor and its rating was increased. The 2008-9 financial crisis hit the region hard, not least due to its reliance on commodity-based trade with North America and Europe, which declined sharply. Brazil was one of the first economies to experience recovery in 2010, but something had changed.
South-south trade routes that had been narrow and bumpy before the crisis are now becoming the trade superhighways
While traditional trading partners remain important, and commodities continued to be the backbone of international trade, south-south trade routes that had been narrow and bumpy before the crisis are now becoming the trade superhighways. China, for example, has become Latin America’s second largest trading partner after the US. In June 2012, this link was strengthened further by a China – Brazil trade agreement intended to encourage bilateral trade flows and mutual investment in industries such as manufacturing, aviation, mining and infrastructure. Over the next five years, we expect Brazil to become one of Asia-Pacific’s fastest-growing export and import partners, with rapid growth in trade with India, Indonesia, China and Singapore. Strongly emerging south-south trade routes are not restricted to Asia, however: in 2010, trade between Latin America and Africa totalled USD 7bn according to the International Monetary Fund (Direction of Trade Statistics 2000 – 2011). In 2011, this increased by more than fivefold to reach USD 39bn, and 2013 is likely to see a continuation of this upward trend.
Changing trade patterns, industrial diversification and strong growth momentum create new challenges, not least the need to manage risk and optimise efficiency when dealing with diverse counterparties in less familiar economies. Companies based in Latin America looking internationally should be focusing on how they manage their counterparty risk, ensure appropriate levels of liquidity, and enhance their operational efficiency as they extend their horizons to new regions. Consequently, they require international banking partners with the geographic footprint that meets their own aspirations, the relevant portfolio of trade finance instruments, and the technology and advisory services to enable them to maximise process efficiency and control.
One example of how Deutsche Bank is supporting these companies is through our stand-by letter of credit (stand-by LC) solution. Documentary trade instruments such as letters of credit (LCs), stand-by LCs and short-term trade finance tools are playing an increasingly important role in managing risks associated with new trade flows. In Latin America, not only do trade finance instruments have credit risk mitigation benefits, but there are also benefits under tax and insolvency laws in some countries. However, as many companies’ credit facilities have reduced in size, there is less contingency funding available for standby LCs. Consequently, banks such as Deutsche Bank are providing bilateral facilities to customers specifically for standby LCs. This frees up working capital, allowing companies to simplify their exposures by working with a single bank, and enhancing efficiency by enabling a single point of entry for standby LC business.
Supply chain transparency is also critical for Brazil and other Latin American economies in order to manage the security implications of more extended, and increasingly diverse trade routes. An effective way of achieving improved transparency and control is the use of end-to-end supply chain automation through Deutsche Bank’s innovative electronic platform. While automated supply chain and trade finance tools are provided by some global banks for their customers operating with customers and suppliers in emerging markets, some domestic providers may rely on larger partner banks to provide this capability.[[[PAGE]]]
For western corporates investing in Latin American economies, the priority is often liquidity rather than automation, as many have already achieved a high level of operational efficiency. Although credit may be more easily obtainable by larger corporates than their smaller peers, these companies are often seeking to reduce their reliance on bank credit and wish to use their bank financing for strategic purposes instead of funding working capital requirements.
Trade finance and financial supply chain tools have a major role to play in optimising liquidity, by reducing working capital requirements and aligning each of the components that comprise the financial supply chain more closely. For example, supply chain finance (or reverse factoring) is particularly valuable in regions such as Latin America, and provides a ‘win win’ for buyers and suppliers alike. Larger buyers can optimise working capital by standardising and potentially extending payment terms. At the same time, they increase the resilience of the supply chain by supporting suppliers’ liquidity requirements. These are often smaller companies with more constrained access to credit, so they can leverage the higher credit rating of the customer to receive earlier payment of invoices at an attractive rate.
The successful implementation of financial supply chain solutions that both meet global requirements and comply with local regulatory and cultural requirements relies on three key elements, which underpin Deutsche Bank’s solutions and services in Latin America:
Credit Expertise. Banks providing financial supply chain solutions need detailed credit expertise and in-depth local knowledge to understand economic credit cycles, liquidity optimisation opportunities and the impact of market and regulatory developments. Regulations such as Basel III are likely to change the market environment considerably, so companies need to be confident in their bank’s ability to navigate through complexities and alleviate constraints.
Today’s trade finance and financial supply chain solutions rely on a high level of automation, security and integration
Technology. One reason that trade finance fell out of favour in the past was the amount of documentation and manual processing that was required. Today’s trade finance and financial supply chain solutions rely on a high level of automation, security and integration to support companies’ need for scalability, control and efficiency in their cross-border trade requirements. For example, Deutsche Bank’s innovative electronic platform for end-to-end supply chain automation is becoming a pivotal tool in our clients’ financial technology infrastructure.
Integration. Not only is technology integration an essential element of efficient financial supply chain solutions, but there also needs to be a cohesive approach to the way that solutions are constructed to meet companies’ global requirements whilst ensuring local compliance and support. This cohesive approach is an essential element of Deutsche Bank’s culture and approach, constructing collaborative solutions, engaging in market-wide debates and leveraging bank-corporate partnerships to resolve mutual challenges and drive innovation.
Techniques such as supply chain financing are becoming an important complement to traditional trade finance instruments in Latin America. As we move into 2013, we expect to see greater sophistication in countries with a strong trade finance background, such as Brazil, Argentina, Venezuela and Colombia. Regulatory change such as the adoption of Basel III could have a major impact on the trade finance landscape. Companies headquartered in, or operating in these countries have increasing opportunities to leverage innovations from banks such as Deutsche Bank to enhance working capital management, risk mitigation and processing efficiency. Local banks that are experienced in supporting domestic banking requirements are less equipped to support the international ambitions of corporates operating across and beyond Latin America. Consequently, companies are looking to their global banking partners such as Deutsche Bank for trade finance and financial supply chain support, leveraging specialised platforms, products, services and expertise.
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