Slow, mature markets in the region mean Nordic banks and businesses will need to explore new regions and new funding solutions. Aleya Begum reports.
The Nordic region is faring well in a global trade environment that is currently full of uncertainties. In line with the global economy, the economies of the region have been growing – at signiﬁcantly low levels – but growing nonetheless. However, as a region where intra-regional trade makes up a signiﬁcant portion of exporting activity, and a majority of businesses are SMEs, slow growth in already mature markets is likely to pose some challenges for its exporters and its banks.
“[Businesses in the Nordics] have to ﬁnd new buyers and new markets to export to. Neighbouring countries are mature and saturated and everybody needs to go further out. How they get there is a challenge for most companies,” explained Coface’s chief executive in Sweden, Corine Troncy, on the sidelines of the GTR Nordic Region Trade & Export Finance conference in November.
For most Nordic companies, trading within the Nordics is practically considered domestic, and with the transparency and stability that the region enjoys, risks are easy to calculate and underwrite. Outside of the Nordic countries, Europe is the region’s biggest trade zone. With slow growth here too, it is likely that companies will have to go further aﬁeld to ﬁnd new business.
“Resources and databases in the Nordics are great for the Nordics but suddenly they’ve got to ﬁnd buyers in Brazil, in China; they’ve got to take a risk in the Middle East and that’s something the local players do not necessarily know how to do because they have not done it in the past,” said Troncy.
But a more pressing question that relates to this is whether the bigger Nordic banks will be willing to ﬁnance these new ventures in more exotic locations.
“Most companies [in the region] are SMEs. Everybody is talking about the big Nordic groups but apart from a few of them, most of the companies are small and they need ﬁnance. There is a big question mark on whether the big Nordic banks will ﬁnance those SMEs,” said Troncy.
Today, Nordic companies can choose between two main sources of ﬁnancing, namely traditional export loans from the big banks or factoring and receivables ﬁnancing from mostly alternative ﬁnancial institutions. Factoring institutions have been growing in the region due to their willingness to take on greater risks with SMEs.
Globally, the factoring market logged record turnover in 2015 at €2.4tn, according to Factors Chain International. The organisation found that despite the continuous challenges in the global economy, international cross-border factoring increased by 8%.
“Today the factoring organisations are the ones growing massively. They are able to take on SMEs’ ﬁnancing of export receivables by up to 98% of their value, which the big banks do not do today,” said Troncy. “The big banks will have to decide whether they want to lead the change [whereby exporters look further aﬁeld] or whether they are happy ﬁnancing 60% to 65% of receivables and mostly in the Nordic countries. I believe in tomorrow’s world the second-tier banks and factoring companies are going to become the leaders in the cross-border export ﬁnancing markets.”
One reason why the factoring companies are able to take on the bigger risk is because they often partner with credit insurance companies to cover the risk of non-payment. Credit and political risk insurance in trade transactions have been growing in global markets, particularly in commodity trade ﬁnance, but is still relatively under-represented in the Nordics.
Presenting at the GTR conference, Magnus Lindgren, partner at JLT, highlighted that the Nordic banks are not utilising the credit insurance facilities to the same extent that their European colleagues do, and that it could help boost exports and support for SMEs. “The banks – but also the exporters – can be more active in seeking this kind of protection. I think it’s crucial in today’s environment where everything is unpredictable.”
While credit risk insurance is yet to pick up momentum, political risk insurance (PRI) is considered to be on the rise following a year of unpredictable political outcomes.
“We see much more demand for PRI solutions. so we are more involved in those,” says Helen Seemann, head of product management, trade ﬁnance at SEB. “I would say export credit agency (ECA) [support] is of course important, but PRI is becoming more actively involved and has been for the last two or three years.”
Head of trade and export ﬁnance at Saab, Jonas Lundeberg, says the company has started to consider the more ﬂexible options provided by private insurers as an alternative to ECA support.
“We haven’t done a lot of PRI transactions in the past but we are looking into a couple at the moment. There is a difference. The ﬂexibility of terms varies widely,” he says. “The documentation in the PRI market is slightly slimmer and thinner, which is always nice, with less conditions in there. From that point of view, it’s easier to set up and structure the transaction.”