Over the last few years, Brazil has become an increasingly significant global player and emerged as a strategic regional leader for Latin America. BNY Mellon and GTR hosted a roundtable discussion in São Paulo with leading names from across the banking sector to discuss the importance of trade in one of the fastest growing economies of the world.
- Carlos Ferreira de Araújo, funding and correspondent banking, Itau
- Vitor de Assis, superintendente executivo, Banco Safra
- Carlos José Guerra Moreno, executive director, global transaction banking, IFI solutions, Santander Brasil
- Dino Sani Jr, managing director, Treasury Services regional head of Latin America and the Caribbean, BNY Mellon (chair)
Sani Jr: Let’s being by discussing the international geopolitical climate. To what extent do you see the current tensions between the US and China having an impact in Brazil? Is there a possibility these tensions will benefit trade between Brazil and China?
de Assis: Brazil is an exporter of commodities, both soft and hard. Therefore, I think we should somehow benefit, if we are able to channel more efforts into building a closer relationship with both China and the US. Planning needs to be done to frame this situation as an opportunity for Brazilian exporters. The recent Embraer and Boeing financing is an example of the type of opportunity that opens up to Brazil as a result of this tension.
Moreno: I believe we could see both direct and indirect impacts on Brazil as a result of this trade war. At the moment we see only small impacts through the trade channel as Brazil has a relatively closed economy. However, the biggest risk would come from a slowdown in China. Roughly 60% of our exports are commodities, and the biggest buyer is China. An even bigger risk would rise if other countries adopt a similar stance to the US. This could lead to more volatility, more uncertainty, and higher risk premium, which could then channel through the financial markets. According to our economists, the direct and indirect impact on the Brazilian economy could reach 1% of GDP in 12 months’ time if there is an escalation in trade tensions. If tensions remain only between China and the US, we think there should be a relatively small impact.
Araújo: I believe the impact for Brazil will be small. Brazil should take advantage of this trade war to try to sign agreements with Europe, the US and Canada, in order to increase its exports to these countries. We are in a complex situation in Brazil at the moment because we have elections in October and we don’t know who is going to be elected – the right wing, the centre or the left. The current government has been trying to sign these agreements with these countries, in order to take advantage of this trade war, in my view.
Sani Jr: What about Brexit? Will there be any benefits for Brazil when the UK leaves the European Union? What kind of impact do you see for clients and exporters?
de Assis: Just as we see the US trying to protect itself, and generate more jobs, that’s perhaps what the UK is trying to do. I don’t see many benefits right now. If other countries were to follow the UK’s example and try to leave the European Union, there will be a new scenario for a number of players.
Moreno: If you have this policy of America first, Britain first, and other countries decide to do the same, at the end of the day everybody will lose as we´re going to see a smaller global GDP growth. These kinds of policies benefit the less competitive guys within their own countries. It is not very good for the globalisation trend that we were seeing over the past few years. I believe that we are going backwards. Let’s see how this is going to evolve, and if this is sustainable. I don’t think it is.
For now, the impacts on our clients’ flows are relatively muted.
Araújo: Brexit will bring advantages for Brazil, because the UK will become weaker in terms of trade negotiations. In this sense, Brazil will be stronger to negotiate better trade terms with the UK.
Sani Jr: With the US imposing tariffs on China, and the Trump administration pulling the US from important global trade agreements, we are seeing that some countries, especially China, are taking advantage of that and taking the lead in global trade. Brazil and China have strong links. What impact do you see on the Brazilian economy of this global move?
de Assis: Again, I think Brazil may see some benefits, but there needs to have some diplomatic efforts. It may be time for us to get closer to China, Europe and Canada. Other countries that have had the opportunity to make these type of agreements are now growing faster, or have a bigger participation of trade in general in their GDP. So, there are benefits; we just need to understand our role in this community, and try to get closer to and negotiate with each one of these countries or regions.
Moreno: I believe it could create some opportunities for Brazilian exports that compete with the US, going to China. If China reciprocates these tariffs, the US will be less competitive, and one product that they sell a lot to China is soybeans. That could create opportunities for us to sell more to China.
Looking at the data, 10 years ago Asia made up just 16% of our exports. This figure is now 36%. It has been growing at 12% CAGR in the last 10 years. This is a very important corridor for Brazil, and has been pushing the growth in our exports.
Sani Jr: Brazil is a significant player, not only in Latin America but globally. You have the resources, the infrastructure, you have everything. Are you seeing a recovery in local trade following the downturn during the last year and a half? Are trade flows picking back up?
Moreno: We are starting to see some recovery in our trade finance portfolio this year. The market is down about 15% compared to two years ago. Our portfolio, as well as that of other banks, was surely impacted. As you have the same banks fighting for the same assets, margins have fallen substantially. As an alternative, we are also seeing a shift from traditional trade lines to working capital solutions, which is short-term and cheaper. We have seen, at least from our side, our supply chain finance portfolio grow steadily, compensating the slowdown in other products.
de Assis: I agree. We see more supply chain finance, but we also see a shift from the traditional bilateral lines to capital markets. We see more and more Brazilian companies accessing the international capital markets and raising funds in dollars through bonds. There is no sense in a company raising funds for five or 10 years and then borrowing a one-year finance. I agree that we need to reinvent ourselves. We need to create structures where we can finance our customers for a longer tenor.
Sani Jr: Capital markets finance is very active in all segments of the economy. What is your view about capital markets financing for exports and imports?
de Assis: The local capital markets are improving with new instruments. We see transactions for long tenors – five or seven years or even longer – and these are either bilateral or public deals. But we need to remember that Brazil is still a closed economy. We need to understand that the local market is improving: there are more investors and asset managers in Brazil that are investing in this longer-tenor type of financing – but this is in local currency. We don’t see that much yet in foreign currency. There are some products that try to compete with traditional trade finance, but it’s different because the client then needs to do the swaps.
Araújo: We have seen a very small recovery in terms of trade. I believe that many exporters and importers are waiting for the results of the elections, as the result is very unpredictable. We have seen exporters closing some ACCs [advances on export exchange contracts] and ACEs [advance on export shipment documents] for very short terms, fewer than 180 days. Some of them are accessing export credit notes for longer tenors, up to one year sometimes, but this is a very small recovery.
We have many instruments in Brazil for exporters and importers to access funding, but we need to better develop the secondary market. We have a very closed market. We need to develop some other instruments in order to increase our business.
Moreno: At Santander, we are using capital markets structures to deliver working capital solutions on the receivable sides. Santander in Spain has been doing this for some time, buying receivables from companies with first loss protection, which is borne partially by the seller and partially by an insurance company. We are trying to import the know-how from our headquarters, and build that within a fund, similar to what we have in Spain. I believe that could be a good solution for clients and for banks as well, as it will consume less capital due to the enhancement provided by the insurance company. This is a project that is ongoing, and hopefully we will be able to book the first transaction by the end of this year.
Sani Jr: What is your impression of the export credit agency (ECA) market in Brazil?
Araújo: After BNDES decreased its availability for funding in the medium and long-term, our clients have been asking many more questions about the ECAs and about solutions to finance for four years and up. However, clients believe that the process of working with the ECAs is very bureaucratic and that it takes a long time to get funding. That’s why these companies are trying to access other instruments to finance their production.
Some ECAs have been approaching us in order to offer their products and services, and we have been trying to put them in contact with our clients in order to find some solutions, but as of yet we don’t have any transaction closed with the ECAs.
Sani Jr: Another big topic in trade is innovation. Where are companies and financial institutions in Brazil in terms of innovation?
Moreno: We have seen a fall in the use of traditional lines of finance and a move towards working capital solutions. At Santander, we were very well-positioned to attend our clients’ demands on that front as we can see on our supply chain portfolio, which has been growing 10-15% per annum in the last two years.
In terms of innovation, as mentioned earlier, we are building a solution to tackle the receivables side, and we expect to book the first transaction very soon.
de Assis: If you look at Brazil over the past 20 years, we have progressed away from all of this bureaucratic documentation. I remember in the 1990s, you used to have to get government stamps for authorisations, whereas now, everything is automatic. It may not yet be at the level as some other countries, but it is going in that direction. It is going to affect all of the industries, and all of the banks.
Sani Jr: What types of technology do you see as being critical to trade?
Moreno: We have started to do the first payments through our Santander One Pay FX solution. This is a project done together with Santander UK using the partnership with Ripple. We started with sterling, and the idea is to expand that to other currencies and other countries. Today, the UK is the hub, and Poland, Mexico and Chile will soon come onto that platform. The idea is to test and improve the technology, and as we become more confident, maybe we can move to other currencies which have much bigger flows.
Sani Jr: There is a current proof of concept around the utility settlement coin. BNY Mellon is testing this technology for the future, in terms of using crypto assets to transfer funds. In your view, what is the future of trade finance, and what do you expect to see in this regard in the coming five years?
Moreno: Global trade is slowing. The banks are facing higher capital constraints, reducing the risk appetite. Corporates may be shifting towards open account. Regulatory compliance is very important, but we need to make sure it is done in an efficient manner, otherwise it is going to be very costly, which may hurt the business. Margins are falling, partly because of the recession, and partly because companies have to be more efficient as well in order to compete.
I believe the future of trade finance will mean tackling all of these points. Some will be addressed through collaboration among ourselves and with the fintechs. The ultimate goal is to serve our clients in a faster, more transparent and paperless way.
Araújo: I see trade finance of the future in a totally digital environment. It will be paperless, and we are going to see more trade finance on a blockchain platform, where everyone will be able to track the flows of the transaction.
de Assis: I agree. We are competing among ourselves, and we also have more companies accessing the international capital markets. So, we need to be efficient, we need to have competitive pricing and longer-term tenors. In order to do that, with all this innovation and this new environment, I think it might be a combination of paperless, investments, and innovation that will make us more competitive in this environment.
The Brazilian financial system is one of the most modern systems in the world. As long ago as 2002, we were already doing same-day payments, and this is what is happening in the world right now.
Sani Jr: On that high and optimistic note, I am going to bring our discussion to a close. On behalf of GTR and BNY Mellon, I want to thank each of you for your participation and contributions. It’s been interesting, informative and lively. And it has been an honour and a pleasure for me to serve as chair.