Banks and government agencies are supporting the UK export push in a variety of ways, although awareness of these initiatives remains low and the eurozone crisis reduces demand. Kevin Godier reports.
The hopes held by British chancellor George Osborne that an increase in exports can counterbalance the government’s austerity measures were borne out in 2011, when the UK’s goods exports rose by £50bn, up 11% over 2010. This gave some good initial momentum to the government’s well-trumpeted National Export Challenge, which targets an increase in UK exports from some £450bn a year to £1tn by 2020 by bringing the exporting potential of small and medium-sized enterprises (SMEs) into play.
As 2012 has unfolded, these ambitious targets have of course run into the eurozone’s debt woes. HSBC’s Global Connections trade forecast is predicting that 2012 “is set to be a challenging year for the UK, as the close trade ties of the UK with countries within the eurozone mean that progress is slower than expected”. UK trade activity will actually shrink by an average of 0.43% a year during the next five years, the forecast says.
The most recent quarterly business factors index produced by Bibby Financial Services certainly indicates there is major work ahead if SMEs are to fulfil Osborne’s aims. Just 15% of SMEs were trading overseas in the first quarter of 2012, while 62% of business owners were looking to cut costs and overheads in order to combat difficult trading conditions. Jon Coleman, the chairman of the British Exporters Association (BExA), stresses that patience will be required to achieve the government’s target of another 100,000 SMEs exporting by 2020. “The export-led recovery cannot realistically be achieved overnight,” he observes. There are nevertheless sufficient green shoots to warrant optimism. Research published by HSBC in April signalled an expansive mindset among those SMEs that are currently trading overseas; 38% were looking to increase the number of countries in which they operate or have connections, and an impressive 90% of young businesses that already possess an overseas presence were seeking to increase the number of countries with which they trade.
So, where should British companies look for export growth, given the recessionary problems in traditional ‘safe’ markets? “We need many more firms to take up the export challenge, particularly to those fast-growing markets in Asia and Latin America,” says a UK Trade & Investment (UKTI) statement to GTR.
The Office for National Statistics (ONS) statistics for March showed a 12% jump in exports outside the European Union (EU), with China and India cited as key growth markets for UK companies by a number of financiers familiar with British trade flows. “Our traditional export markets were in countries such as Ireland, Spain, Portugal and Italy, whereas China and other Brics countries are now stirring demand,” says John Bevan, Barclays Bank’s head of trade and working capital for the UK and Ireland. Trevor Williams, chief economist at Lloyds Bank, observes: “Between 2006 and 2011, exports to EU countries fell by 5% in cash terms, excluding oil and erratic items. Over the same period, exports to non-EU countries rose by 51%. The industries where we’ve seen the greatest growth in the export of goods between 2006 and 2011 are raw materials, food and drink and chemicals. What’s encouraging is that machinery and manufacturing components and materials are industries also reporting significant growth over the same period.”
RBS is seeing an increase in its letter of credit (LC) business for trade with China and India, notes Louis Robinson, managing director, Emea, trade and network origination, and head of global transaction services. “With China still growing at 7-8% annually despite the slowdown, we have opened a China desk in London, which is helping UK SMEs do business in China, and facilitating the opening of renminbi accounts in London. India is also still growing fast, as is Qatar, where we are already seeing companies bidding for World Cup contracts,” he says.
Robinson adds that RBS views Indonesia as “the next China”, and is well positioned via a strong local presence with the former ABN Amro network. At HSBC, Steve Box, head of trade, receivables and equipment finance for the UK, highlights that Germany, Switzerland and Turkey remain strong European economies to which rising export sales can continue to be made, and that UK exporters generated 21% and 37% increases in their sales to China and India respectively in 2011. “Companies of all sizes can also look to other emerging markets with significant potential, including Brazil, Cambodia, Chile, Paraguay and Vietnam,” he comments. At Lloyd’s Banking Group, Mike Gilham, director and global head, FI trade finance notes. “The markets where our SME clients are most actively looking for export support remain Asia and the Middle East. Like many larger companies, they are also more inclined to look beyond the traditional developed markets.”
The Middle East and North Africa remains the core focus for ABC International Bank (ABCIB), but many customers in the UK nonetheless have a global export reach, points out Paul Harle, London-based head of receivables financing. “This has led us to establish receivable financing solutions for their business streams in Brazil, China, South Africa and Asia covering the export of a wide range of goods, including motor vehicles, construction equipment, beverages and much more,” he says. “We are not seeing an obvious shift of exporting jurisdictions in the SME sector – whilst the EU and US markets may be in decline, they remain the easiest to do business with in relative terms,” stresses Martin Hodges, head of trade, Santander corporate, commercial and business banking. “We are certainly seeing an increased focus on Latin America, particularly Brazil, in the large corporate arena but this is to be expected from organisations that have the resource and ability to do so.”
A lack of sufficient financing support for their exports was pinpointed by 21% of the respondents in the Bibby quarterly index, a theme supported by UKTI, which explains to GTR that “businesses have told us that this is an issue for them”. One banker, talking anonymously, says trade finance banks appear to be increasingly looking to focus resources on a core group of client relationships and are generally less interested in one-off or smaller deals. “On the import finance side, SMEs are more reliant on their house banks for facilities and my impression is that the house banks are taking an increasingly prudent position and charging more,” he remarks.
However HSBC’s Box argues that demand for borrowing is still weak, citing an average overdraft utilisation of just £40 of every £100 available via UK business accounts, and £52 for each £100 of invoice finance availability. “We have put the liquidity out there, but people are drawing less. It feels as if there is still a lack of confidence there, which is not helped by eurozone events,” he says.
So what extra help can the banks provide to SMEs? Gilham emphasises that “banks, government agencies and other industry bodies have worked hard to increase the level of support to SMEs”. He points to “a 4% growth in Lloyds Bank’s net lending to SMEs in a contracting market, and investments in our trade & supply chain business so that we can further increase the export support that we can provide to SMEs”. Box comments: “It’s not just about big business – the SME market is also a powerhouse for HSBC. We made a big commitment to manufacturing last year, and managed to raise our trade lending to SMEs by 15% to £11.9bn. We are very much open for business, as demonstrated by a 111% rise in our export business from April 2011 to April 2012, and a 37% increase in import business over the same period.”
With regard to the £4bn international SME fund launched by HSBC last year to help fund expansion in key emerging markets, £1.3bn of the fund was allocated to UK SMEs in the first quarter of 2012. “We have also launched an export overdraft, where if a company exports to or imports from three new countries, we cut the fee to a 3% maximum,” Box says. Barclays has focused on providing solutions to customers’ working capital requirements, often combining products backed by technology that enables funding to occur across various stages of the chain, Bevan highlights. “We are seeing large corporates take on supply chain finance, which will then cascade down to the SME markets.” Bevan adds that exporters are more cautious of using balance sheet and using less LCs and bond lines. Robinson flags up new export support from RBS in the form of an increase in funded assets that will help exporters to discount their short-term receivables and accelerate cash flow. “We have come out of several investment bank functions, and one of the results is more support for trade, especially for longstanding clients,” he says.
Santander’s Hodges explains that the bank has just launched a free, no obligation international health check for UK exporters, which aims to provide practical information and insight across a range of international trade and funding-related topics. Under Santander UK’s breakthrough programme, the bank has already taken many SMEs on trade missions to Latin America and the US and more are planned for later in the year.
Support from government
The ongoing UK government support for exporters was demonstrated on May 22, when the new All Party Parliamentary Group (APPG) for trade and investment held its first meeting. The APPG was created to research and inform debate over how best to support British exporters, particularly SMEs, and encourage foreign direct investment. “It is worth noting the increased resources the government is committing to the international trade cause,” says David Beeley, ABCIB’s head of UK marketing. “Certainly ECGD, now rebranded UK Export Finance, has adopted a changed attitude since the export drive began – via a more welcoming ‘open for business’ approach. We are seeing a significant increase in the number of enquiries seeking ECA support – driven by the reduced tenors available in the commercial markets and increased costs.”
Beeley also notes that UK Export Finance is in the process of appointing special international trade advisors in each of the UKTI regions of the UK, to point exporters in the direction of banks, credit insurers and brokers, and to promote the financing support available from the ECA. So far advisors have been appointed in the North West of England and Yorkshire/Humberside. “The government support is certainly welcome and we do believe that it will be an important element in making the UK more competitive,” says Gilham. “There continues to be increasing demand for guarantees and financing solutions to support working capital requirements, and there are now four short-term government schemes established to support UK exports. We see UK Export Finance’s bonding and working capital schemes as an important tool to deepen support availability, and we’re seeing particular interest from clients in those schemes. They are very effective in the space that they have been created for.”
Barclay’s Bevan describes the widened ECA offering as an “attractive product set that banks can use”, but stresses that market education must be increased. “We run seminars and business clubs where we talk about the product sets, and awareness gets better by the month,” he says. BExA’s Coleman argues that the take-up on the new products is “disappointing” to date. “This has come to £143mn in the first year, split across bonds, working capital and insurance support, so there is still a job to be done by UKTI, BExA and other bodies.” Coleman continues: “We are expecting a review of the new products, which we have welcomed as useful for everybody. But we’d like UK Export Finance to listen and talk more to exporters, rather than banks. The real need is direct lending, due to Basel III and bank liquidity issues, which have taken away past certainties over funding and pricing. However, direct lending would go on to the public sector borrowing requirement, so the political will is lacking.”
Market reaction to UKTI initiatives is broadly positive. “There is some good work going on,” notes Box. He points to the UKTI Exporting for Growth initiative, comprising a series of national events up and down the country that help to raise awareness of financing options and eradicate “fears over elements of cross-border operations such as time zones, languages and jurisdictional issues”. UKTI’s statement to GTR underscored that it is working with a range of business networks to “spread the word on the power of exporting and the government help available to companies – big and small.” As well as UK Export Finance this also includes help with grants for trade missions and overseas trade shows. Businesses can also sign up for free emails listing the business opportunities abroad in specific sectors or markets. “We know on average that businesses working with UKTI go on to win overseas sales of around £100,000 within 18 months, so we strongly advise firms to make contact,” UKTI said. GTR