A trade shift towards more value-added products will increase demand for open-account and other types of trade financing, according to HSBC.
In its latest Commercial Banking Trade Forecast, the bank explains that rapid industrialisation, increasing wages and maturing consumer demand in developing countries have changed the types of goods imported, manufactured and exported along the south-south corridor.
Jean-Francois Lambert, global head commodity and structured trade finance, explains to GTR that the changes in the types of products traded will lead to a change in trade finance as well.
“When financing trade flows, the higher the product’s value, the higher the amount of financing required at the end of the chain. However, this is not immediately apparent when looking at the import financing of semi-products, which are now a prevalent part of the manufacture process of final products. This is because the added value can come from the process itself, beyond the value of the products needed to manufacture the finished product. But the reality is that we are seeing added value throughout the chain in many more cases as the import components in exported products continue to increase.
“Looking ahead, we believe that as further supply chain efficiencies are sought, there will be increased demand for open account. However, this will not replace demand for traditional trade instruments, such as letters of credit, which will continue to bridge the ‘trust-gap’ especially in emerging markets. In addition, the development of alternate pre-shipment financing capabilities for suppliers will also continue to be important,” he predicts.
Lambert expects the higher need for financing to be filled by a variety of financial institutions, including local and international banks.
“The difference is that local banks will finance small parts of the global supply chains (focusing on domestic or regional legs) while international banks have the capability to finance large parts, if not the whole of the key global supply chains.”
Lambert also believes that alternative financiers such as hedge funds have a role to play in that evolution, but warns that more added value in trade means more intricate supply chains, making trade financing very complex for institutions without specialised knowledge.
“We are already seeing a stronger interest from investors to find alternative sources of income (interest rates are low and liquidity high) and trade finance proves quite attractive. However, financing trade supply chains incurs risks and most investors are not equipped to assess them, therefore many investors might not be willing to service or finance the supply chain. This means in practice the role of banks (which both understand the risks and are able to service the trade) cannot be disintermediated.”
The report shows that in Vietnam and Bangladesh for example, production has shifted from basic commodities such as cereals or sugar, to revolve around refined or branded goods based on these raw materials. Other countries making the move up the supply chain are Malaysia and Argentina, which have gradually shifted from animal products to industrial machinery.
Meanwhile, developed countries are increasingly specialising in sectors such as chemicals and pharmaceutical products as companies seek opportunities for higher returns. For example, export growth in the UK is increasingly driven by high-technology manufactured goods, as low-cost producers in the emerging markets satisfy a growing share of demand for less sophisticated products. In the USA, export growth is driven by industrial machinery, transport equipment and scientific apparatus.
HSBC expects industrial machinery to remain the world’s top export sector, accounting for around 25% of goods exported among the top 25 trading nations by 2030.