GTR asks senior trade finance industry figures about what changed in 2015, and how they expect it to evolve in 2016.
2015 review: “The most striking element characterising trade finance in 2015 was the dichotomy between large and small players. While larger players were able to pick and choose between options and funding rounds were oversubscribed, smaller players were typically forced to piece together a patchwork of options to meet their funding needs. The result was a funding gap in which the majority of traders and producers found funding harder to access than previously.”
2016 preview: “We predict there will be a continued reluctance on the part of banks to venture back into the commodities business in anything like the numbers previously seen. As demand rebuilds, however, the time could be right for banks to redress their over-exposure to synthetic trades and return to traditional trade finance linked to actual underlying transactions. In that scenario we might see more club deals offering a way for the banking community to once again fully engage in the trade finance sphere, by establishing relationship banking based upon the availability and structured supply of commodities, rather than on corporate credit.”
Percy Batiwalla, head of global trade and supply chain finance, Bank of America Merrill Lynch
“Four market headwinds stand out”
2015 review: For the second consecutive year, global trade grew more slowly than the global economy, which, I believe, is a first since record-keeping began. Four market headwinds impacting trade flows stand out. They were, in no particular order, the China economic slowdown, increasing dislocation between the US dollar and other trading currencies, declining commodity prices, and increasing political and economic volatility in key trade markets.
Specific to deal flows, the market headwinds noted above continue to create an oversupply of US dollar liquidity in the marketplace, impacting pricing. Adding to the oversupply was a slowing in commodity trade and US exports, both in the number of transactions and average dollar value. While the China slowdown has adversely impacted pan-Asian markets and south-south trade flows, there continues to be steady growth in emerging market flows.
From a structure standpoint, despite market volatility, we continue to see the migration of letters of credit to open account trading. Open account processing and financing continues to experience double-digit growth. Clients are increasingly adopting and implementing broad-based open account processing, ePayment and FX programs, taking pilot programmes global.
Finally, as both banks and corporates seek further value from both the trade and underlying financing, we have seen transaction tenors lengthen, and more trades based in local, non-US dollar currency, or including an FX conversion. Specific to supply chain finance, corporates are increasingly launching global programmes at the outset, instead of starting with regional pilots; and therefore proof of concept is no longer in question.
2016 preview: Perhaps the most interesting is innovation and digitisation, and the pace of progress specific to blockchain and trade finance. The pace of change resulting from the many proof of concept projects underway can, over time, potentially redefine how trade is delivered.
Secondly we are closely following the changing credit cycle, both in specific countries and industries, and how that will impact the supply of capital. Will there be an increase in trade-related credit losses, and, and how will the marketplace react? A related trend is the announcement by certain FIs in 2015 to reduce global footprints to focus on their core markets, and how this has shifted the competitive landscape. Implementation of these changes is underway, and we are focusing on how we can best serve our global clients to continue to manage an efficient global supply chain.
Finally, we are tracking the impact of expanding multilateral trade agreements and free-trade zones (FTZ). The ASEAN and China FTZ, and newly signed Trans-Pacific Partnership agreement are also anticipated to increase trade flows.
2015 review: We’ve seen a rise in supply chain finance and within that factoring and receivables. Factoring is a micro world of the bigger world of receivables and the terminology the market is using is a moveable feast. Some people might be doing factoring without calling it that.
Commodities have taken a hit so the commodity teams have had to be a bit more flexible in how they’re looking for business. So a team that previously would’ve just been doing hard commodities may now be looking at other products to fill that gap.
There are also not as many syndications and more bilaterals and club deals. I’m not saying there aren’t any, there clearly have been, but deals are smaller in scale.
General cross-border loan markets from Hong Kong into China are down by 30% to 40% on last year. When you can tap the markets there is capital available, but it’s more about general economic uncertainty surrounding China. People are wondering if this is this a sniff or a cold.
2016 preview: There is more reliance on ECA support and insurance backed products. I guess the growth of the private insurer in certain parts of the market is picking back up. That’s where I think the growth will be: I expect insurers will become more established in Asia. That might have more traction for deals, even if they get more expensive as a result, at least they’ll be able to get done.
If you look at the likes of Glencore and others, they may have looked vulnerable but all they’re doing is what they’ve always done. This is part of the normal risk of a trading company. They’ve had ups and downs and had reviews of their accounting and debt structures: that goes back to the educational part of the market, which has realised that these companies need to be viewed in a certain way, not like other producing or manufacturing companies. It’s a situation we’re very familiar with but the trading companies’ cycles can be more extreme.
2015 review: World trade growth has slowed relentlessly during 2015, with import volumes in leading emerging markets being especially weak. FMO’s performance throughout the year has been very strong and we are on track to achieve our financial and impact goals. This benefited from the fact that we are not active any longer (since 2008) in two of these leading emerging markets, ie Brazil and Russia.
Generally, most analysts have focused on the negative effects of declining commodity prices, the reduced capital flows to emerging markets and pressure on emerging markets currencies. However, many emerging markets in fact benefited from some of these developments, for example India.
2016 preview: India will continue to benefit from a sustained fall in crude oil prices translating into considerable savings on imports, falling inflation and a decreasing subsidy burden. While India is not immune to capital outflows as it relies heavily on external funding, recent history has shown that the country seems to have a greater degree of persistence than the average emerging market when it comes to portfolio flows.
This does not mean that I see no challenges for a development bank like FMO in the country. While India has steadily opened up its economy during the past decennia I would still consider it a relatively protectionist economy. India is not only the number one country for FMO in terms of investments, it is also the country where we have an above-average number of non-performing loans due to its very challenging environment, for example in terms of enforcing contracts.
For the year ahead, I generally do not believe in projections or prophecies, being a firm believer in the Black Swan Theory and seeing how difficult it is to predict (just take a look at the incorrect forecasts of almost all major investment banks regarding exchange rates, growth rates or stock market indices). Nevertheless, it is probably fair to say that the modest recovery in advanced economies will continue into 2016 with slower growth expected in emerging and developing economies. However, growth prospects will vary enormously across countries and regions!
Wim Raymaekers, head of banking markets at Swift
“The serious work will begin in 2016”
2015 review: 2015 was certainly the year the terms ‘fintech’ and ‘blockchain’ became used in the mainstream, and not only by new entrants and start-ups, but by the incumbent banking community. Through the year, bank after bank announced that they were testing blockchain and distributed ledger technologies, and this culminated in the latter part of the year with a number of bank-led blockchain consortia being announced.
2016 preview: The serious work will begin in 2016. Companies like Swift, Digital Asset Holdings and the R3 group have already announced that they will join the Linux Foundation open ledger project, so there may be some consolidation of these initiatives as the banks start to work more closely together to investigate these new technologies. Swift itself has already announced its own global payments innovation initiative and will announce the banks involved in January – however, the difference with this initiative is that it is that it is built on the existing payment platforms used by banks every day around the world, enhancing corporates’ customer experience by increasing the speed, transparency and predictability of cross-border payments.