Western banks need to find ways to participate in global trade flows that increasingly bypass developed countries, according to new research.
In its ‘Project Blue’ report, PwC investigates how the accelerating growth and increased intra-trading across South America, Africa, Asia and the Middle East (SAAAME) is affecting the financial sector.
PwC partner and global leader of financial services Nigel Vooght says: “The real story is not so much the speed of growth within SAAAME, but how interconnected the trade flows between these markets have become.”
“As intra-SAAAME trade proliferates, an even greater proportion of global commerce is set to bypass the West altogether, leaving Western financial institutions at risk of being cut out of the loop. Financial institutions need to find ways to tap into this emerging-to-emerging market commerce if they are to sustain competitive relevance.”
The research points to the opportunities presented by the development of emerging-to-emerging trade for finance providers, but says that success for banks in the developed world as well as in SAAAME will depend on their ability to anticipate and respond quickly to changes in customer expectations, behaviour and use of technology.
HSBC also stresses that point in its ‘Global Connections’ report, which forecasts a rebalancing of world trade in the next 25 years, as emerging countries’ import growth overtakes their export growth.
Rakesh Bhatia, global head of trade and supply chain at HSBC, tells GTR: “Countries traditionally dependent on export-led growth like China, Brazil, Germany and India are now becoming a lot more mature trade hubs, and actually balancing out the import side as well by consuming more, and buying more from other nations.
“What that will allow is that, as demand slows down in North America, which has been the key consumption hub for the last two decades, new demand will emerge from these countries, and that will allow trade to continue to grow in the next 15 years.”
He adds that trade finance providers need to prepare for the shift expected in world trade, by increasing their credit appetite and getting comfortable with the new hubs’ credit characteristics. Banks should also keep an eye on currency diversification for trade settlements, which Bhatia says is likely to shift away from the US dollars.
Global trade is expected to grow 4.7% annually to 2016, largely led by Asia with a growth rate of 5.4% for the same period.
China’s imports and exports will increase by 5.1% and 4.7% respectively, as its own demand for goods and commodities continues to grow and demand for its exports goes down in the developed markets, the report adds.
India will register Asia’s fastest growing exports and imports, with an average 5% and 7% per year respectively. Trade relationships between India and China will strengthen, with Chinese imports into India expected to grow by 11%, while Indian exports to China will increase by 8% annually to 2016.
Bhatia adds: “The report shows the continued development of the emerging-to-emerging trade corridors between countries like Brazil, China, India, Turkey, the UAE, and Indonesia. For example, 10 out of the 15 top trading partners of Asia are within Asia, in Latin America nine out of the top 15 are outside the region and in Asia.
“India-Africa is becoming another corridor, and China and Africa continue to trade more so that’s a very important aspect. What used to be developing-to-developed world trade is becoming developing-to-developing trade as well.”
According to him, the emergence of these new corridors will prompt more demand for trade finance products, as the level of comfort between two new players trading with each other is lower than between long-term partners. “The perception of risk is very different from established corridors and therefore, the use of trade finance products will continue to increase,” he says.
The weakest trade growth is expected in Europe at just 2.1%, with France, the UK and Italy all expected to see increases of 2.5% or less. Spain’s import growth will be weak at just 1.3%, but exports should grow by 3.3%.
A similar rebalancing is expected in the US with exports up 3.5% and imports up 1.6%.
In terms of sectors, the report expects cars, energy and electronics to lead trade growth, especially in the Asia Pacific region.
HSBC’s report also includes a trade confidence index, which reveals increased optimism from companies, especially in emerging markets. The most confident countries include Saudi Arabia, Indonesia, Turkey, India and the UAE, with Canada being the only developed country in the top 10.
“It’s not as if confidence has fallen off a cliff. Companies still remain confident; the overall index has in fact improved by one point over the last six months,” says Bhatia.