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New sources of funding are being created to provide much-needed liquidity to Latin America’s ambitious but cash-poor SMEs, reports Eleanor Wragg.

Latin America’s small-to-medium sized enterprises (SMEs) are ambitious, and setting their sights on opportunities far beyond their borders.

According to the UPS Business Monitor Latin America (BMLA) published in November 2010, six out of every 10 SMEs are currently engaged in international trade or have plans to do so. Four out of every 10 SMEs in Mexico and Central America plan to engage in international trade in the coming year.

These global ambitions are partly fuelled by the increased opportunity to trade. The region’s SMEs have the chance to do business with not just one, but three major trade hubs around the world.

Throughout the 1980s, the US was the region’s major trading partner. The 1990s saw huge European investment in Latin America. China is now rapidly becoming the trading partner of choice for Latin American countries, with India, South Korea and other Asian countries not far behind.

Yet many of Latin America’s SMEs are commodity and agricultural producers, heavily reliant on trade finance lines, and have been particularly vulnerable to disruptions in the liquidity flows in trade finance markets seen over the past few years.

According to the BMLA, many Latin American SMEs still find it difficult to trade and invest at an international level. A quarter of those surveyed cited difficulty in gaining access to capital as one of the primary obstacles impeding progress.

To help rectify this situation, new sources of funding and new venues for raising capital are being energetically sought out by the region’s banks.

New funding mechanisms

In January, the Inter-American Development Bank (IADB) and Standard Chartered disbursed the first co-loan of the recently-signed Latin American trade co-lending partnership (TCLP) signed in December 2010. The US$10mn, 360-day trade finance loan to Banco Industrial e Comercial (Bicbanco) will facilitate the flow of consumer goods from Brazil. This is the first of many trade finance loans expected to be disbursed under the partnership.

The impact of this partnership will be substantial and will bolster continued trade flows.”

“The impact of this partnership will be substantial and will bolster continued trade flows, which remain vital to the region’s success,” says IADB president Luis Alberto Moreno.

“The loans will support domestic businesses, job creation and private sector development,” adds Anthony Walton, vice-chairman of Standard Chartered.

The TCLP will address the trade finance deficit in Latin America by supporting the financing needs of small, medium and large importers and exporters, closing the trade financing gap and enabling further trade in Latin America and the Caribbean by ensuring stable and reliable sources of financing for the region’s many trade finance clients.

Tapping Asian liquidity

The multinational Banco Latinoamericano de Comercio Exterior (Bladex), a provider of financing to Latin American exporters, turned to the Asian market to find necessary liquidity to on-lend to its clients.

Mizuho Corporate Bank and Taiwan Cooperative Bank successfully closed a three-year, US$130mn cross-border syndication in favour of the multinational.

In some countries which have a very high intermediation rate such as Brazil, it’s very attractive for Asian lenders to look for business opportunities.”

“With European interbank liquidity still tenuous during 2009, it became apparent that securing alternative funding sources was important,” says Gregory Testerman, executive vice-president, treasury and capital markets at Bladex. “With liquidity very tight in the global markets, to be able to raise funding through loan syndications in Asia was very helpful in diversifying our funding base.”

Interest from Asian banks in building partnerships to provide syndicated loans for larger corporations, as well as setting up representative offices in Latin America to fund trade projects, is increasing.

“The Asian banks have a high amount of available liquidity, so they are trying to move forward to markets in which they can provide funding at a competitive rate. In some countries which have a very high intermediation rate such as Brazil, it’s very attractive for Asian lenders to look for business opportunities,” says Carlos Suarez, senior analyst at IHS Global Insight.

This is unsurprising, given that Latin America’s trade with its top five Asian partners reached US$238.9bn in 2010. This is more than last year’s total trade between Latin America and the European Union (US$193.1bn) and nearly half of total trade between the US and Latin America (US$501.8bn).

All the banks in Latin America want to establish a direct relationship with financial institutions in Asia.”

“There is really an increasing interest between these two regions – Asia and Latin America,” says Antonio Alves, senior regional head of trade finance, Latin America and Caribbean Region, IFC. “All the banks in Latin America want to establish a direct relationship with financial institutions in Asia.”

Another interesting development is the shift away from the US dollar as an intermediary currency. Argentina is currently negotiating a US$10bn arrangement with China, which would allow Argentina reliable access to Chinese currency to help pay for imports from China. It may also help pave the way for China’s currency to eventually be used as an alternate reserve currency.

“In terms of funding, governments are making an immense effort to provide all the required funding to the export-oriented companies,” says Suarez at IHS Global Insight. “If governments have their income in local currency it makes more sense to issue bonds in the international markets in their own currency. This hedges the foreign exchange risk. Then, export-oriented companies can get the funds from banks that provide these loans in foreign currency.”

Inter-regional ties

As well as the increase in trade with Asia, intra-regional trade has been an important driver towards this shift to disintermediation.

“Intra-regional trade is going to keep growing, despite certain difficult relationships which may affect trade between specific nations. Exporters are diversifying what they are producing, so we will see an increase in the trade both within the region and with other regions,” says Suarez.

In fact, development banks and multinationals, such as Bladex, have already established programmes to issue bonds in soles in Peru, in pesos in Chile, and are looking to establish bond issuance programmes to access the local currency markets of Mexico and Colombia.

I would expect that over the next five years we will see even more disintermediation.”

“Bladex can use these local currency bond issuances either to on-lend the local currency to local trade clients, or do a cross-currency swap and convert that bond issuance from local currency into dollars, for our US dollar funding needs,” says Bladex’s Testerman.

“Local capital markets in Latin America are generally quite liquid, so they have a lot of local currency available to invest into their local markets. I would expect that over the next five years we will see even more disintermediation. Latin American banks will depend less on the interbank markets or their dollar funding, and go more often directly to the capital markets.

We’ve seen some important capital markets issuances by Latin American borrowers in the North American, Asian and European markets over the past year, and that certainly will continue to grow.”

Boosting capacity

Multilateral involvement in trade finance transactions is helping cement trade lines from international banks to local banks, and in turn into the SME sector.

The US$3bn IFC global trade finance programme is one such scheme that provides risk mitigation to banks, and helps make Latin America trade deals seem more appealing.

“The problem today in Latin America is the excess of liquidity in local currency in a lot of different countries. Trade finance pricing is very thin nowadays, so we need to find the right source that can provide funding at the right pricing to these Latin American banks,” says the IFC’s Alves.

“When you add the IFC AAA credit risk mitigation the transaction can become more attractive, as the lenders strategically choose new borrowers and/or new markets so they can cross-sell other banking products to increase and diversify their source of revenues.”

One example of this programme in action is in Guyana. In February this year, the Guyana Bank for Trade and Industry joined the IFC programme.

“On February 15, our guarantee was used to access trade-related funding of US$750,000 to finance an import of trucks from the US to Guyana,” says Alves. “Our main focus is the SME sector, but in some cases we also provide, through this guaranteed facility, access to funding for large corporates.”

Other banks in the region are boosting their support for companies across a whole range of sectors.

“Since the beginning of the international financial crisis, we have been increasing our efforts to provide credit to all types of corporates,” says a spokesperson for the Brazilian Development Bank BNDES.

“From July 2009 until today, BNDES has provided R$22bn in export financing. This funding has been complemented by loans from the Brazilian treasury in the last three years, in order to support the increasing demand for credit due to the international financial crisis.”

The current economic setting in most Latin American countries suggests that if the SME sector does not perform well during the next couple of decades, overall economic performance will suffer, especially in the areas of employment creation and income distribution. GTR