Baihas Baghdadi, Managing Director – Global Head of Trade & Working Capital at Barclays, explains how the banking sector can play its part in global trade in uncertain times.
Every exporter or importer has a dream – a dream to grow their business by expanding into new markets or sourcing new products or services from overseas. I know this dream well because I talk to clients about it and my own family exported Spanish goods to the Middle East.
Exporters and importers will not necessarily see today’s global trade landscape as being dreamlike, however. While it would be too dramatic to describe the current environment as a nightmare, it does present signiﬁcant challenges to trading businesses – challenges that are only likely to intensify in the coming years.
We live in an age of great uncertainty following the two most signiﬁcant political votes of 2016 – the UK’s vote to leave the EU and the election of political outsider Donald Trump as president of the US. And there are also major elections coming up in France and Germany. Depending on the outcomes of those elections, we may end up with a European political landscape that is completely unrecognisable from what we have now.
In tandem with political change, the pendulum of public opinion is swinging against free trade, which has been a popular economic policy since the 1970s. Now protectionism has come back into favour, with the result that the UK wants to manage its own trading relationships. Separately, Trump’s election means the US is turning its back on both the proposed Transatlantic Trade and Investment Partnership with the EU and the Trans-Paciﬁc Partnership trade deal involving 12 Paciﬁc Rim countries. China’s anti-dumping laws are also a reﬂection of a challenging political environment.
Global macroeconomic forces are also at play. Interest rates are languishing at historic lows and the world’s GDP growth is steadily falling – the McKinsey Global Institute predicts that global economic growth will halve between 2014 and 2064 unless productivity improves dramatically. Meanwhile, the World Trade Organisation has estimated that world trade will have expanded by just 1.7% in 2016, the slowest pace since the ﬁnancial crisis.
The basics of trade
If Barclays and other banks are to provide effective support to trading businesses in this complex and uncertain environment, they need to go back to basics and
ask themselves this simple question: What is the purpose of trade?
At its most basic level, trade is about a company buying and selling. So our job, as working capital experts, is to facilitate the processing of that company’s payables and receivables. If the company’s cycle of payables and receivables generates excess liquidity, we can expect it to deposit the money with us. If there is a deﬁcit, we step in to fund the company.
It is critical that the payable and receivable processes are fast and smooth. If they are long and complex, and hampered by rules and excessive governance, they delay the generation of cash for the company. Not only does this impact the company itself, it impacts the wealth of the nation in which the company is based. Ultimately, cash generation determines whether or not jobs are created and whether economies grow.
Innovating to make a difference
It is clear that trade ﬁnance plays an important social role. So the question for Barclays and other banks is how can we support the global trade business and GDP growth in an uncertain world that
is becoming less global?
To start, trade ﬁnance bankers must stop talking about products and growing market share and focus instead on propositions, solutions and helping clients to ﬁx real needs. At Barclays, we see this as an opportunity to differentiate ourselves from our competitors by excelling at structuring, syndicating and executing trade transactions and supporting technological innovation.
By working with start-up company Wave, we have become the ﬁrst bank to execute a real, live trade transaction using secure and transparent blockchain technology. The transaction – a letter of credit – was completed in around four hours. This is a huge breakthrough for a process that, for decades, has typically taken between seven and 15 days. It has the potential to free up the billions of dollars of trade ﬂows that are trapped in the banking system every day, thereby boosting the proﬁtability of businesses and driving GDP growth.
Of course, in our complex, fast-moving and interconnected world, no bank – including Barclays – can act on its own when it comes to ﬁnding trade ﬁnance solutions for clients. Technology solutions such as the use of the Wave platform, are a case in point, with shipper, buyer, insurer and buyer and seller’s banks all having visibility of the process during the transaction.
For a solution to be effective, it must be widely adopted. Therefore banks need to collaborate with a wide group of interested parties, including other banks, industry bodies, insurance companies and shipping companies to create not just the technology solution, but the global standards and regulations that support it. Only through industry adoption and standardisation (both regulatory and market practices) will there be general acceptance of electronic documentation such as certiﬁcates of origin or bills of lading.
It is true that the current trade environment presents many challenges to businesses, including the rise of protectionism. Don’t forget, however, that if we go back 30 to 40 years, free trade was not prevalent and yet trade still existed and banks were ﬁnancing trade transactions. In fact, Barclays has been ﬁnancing overseas trade ﬂows for more than 325 years – during periods of deep economic crisis, periods of free trade and periods of protectionism and while major international wars were taking place.
So despite the current upheaval, we expect businesses to keep trading proﬁtably over the next few years. Obviously the landscape will change in response to new regulations that affect the banking industry, including the proposed standard on capital reserves for banks (‘Basel IV’) as well as geopolitical developments – Brexit, the outcome of the European elections and the domestic and foreign policies followed by the US, China and Russia.
Since most of the big trade banks are retrenching from a strategy of having operations in multiple jurisdictions and adopting a regional approach instead, we will see them become specialists in particular markets. If uncertainty continues, we can also expect to see trading businesses make more use of letters of credit and BGIs rather than open account payment terms. Furthermore, letters of credit and BGIs will probably become more expensive if greater country risk has to be factored into the premium; a step back and not an ideal scenario to accelerate cashﬂows, given that banks can help solve the documentary process but not the regulatory challenges or a country’s risk proﬁle.
Finally, not all developments will necessarily turn out to be bad news. In theory, Brexit could beneﬁt many trading businesses in the UK, for example, which is why their banks should be asking them what they want to achieve and what help they need to meet their goals. Regardless of what happens in the world, it is still the role of banks to help businesses to realise their dreams.