Covid-19 has quickened the pace of regional cooperation in Asean, while digitisation initiatives look set to achieve their promise of more sustainable, inclusive trade. Standard Chartered looks at how the market has responded.

 

The Association of Southeast Asian Nations (Asean) realised quicker than many the importance of keeping trade moving in order to mitigate the economic impact of Covid-19. The day before the World Health Organization officially declared the virus to have reached pandemic proportions, the Asean Economic Ministers (AEM) released a statement titled Strengthening Asean’s economic resilience in response to the outbreak of Covid-19, reaffirming the bloc’s commitment to maintaining its economic and integration policies.

Almost eight months later, the region has made great progress in optimising the role of trade in the post-pandemic economic recovery, with the private and public sector alike keen to strengthen supply chains and restore trade connectivity.

“Covid-19 has contributed to the acceleration of supply chain shifts across the region,” says Pradeep Nair, head of structured solutions at Standard Chartered. “There are new opportunities in both investment and trade, but as corporates shift from ‘just in time’ to ‘just in case’, they increasingly want to make sure that their supply chain is resilient.”

For corporate treasurers across Asean, this has led to a rethink of how they manage their supply chains, explains Maisie Chong, head of trade, Asean, at Standard Chartered. “Treasurers are now asking the right questions. They want to ensure their payment terms are sufficient, and that they are supporting their critical suppliers enough, and that is where we are seeing more enquiries as a bank. Increasingly, corporates are turning their focus to making sure that their suppliers are surviving this crisis as well.”

 

Supporting suppliers

According to Asean’s service centre for small and medium-sized enterprises (SMEs), small firms make up more than 95% of all businesses in the region, accounting for as much as 30% of total exports. Their tightly connected web of production networks has played an important role in Asean’s growth over the years, but providing them with the finance they need to keep growing has been a perennial challenge.

“Getting finance into the long tail of the supply chain has historically been complicated, due in large part to the perceived risks as well as the increased processing resources required,” says Nair. However, he points out that new ways of thinking are emerging to solve this issue. “If a tier two or tier three supplier is supplying through the chain up to a corporate whose risk is acceptable in the market, then you should be able to take that risk and then pass the benefit of pricing and funding availability down to the last part of the chain. Now, it’s easy to think through, but implementing it requires legal and regulatory acceptance,” he says.

Last year, Standard Chartered demonstrated that this could be achieved, with a deep-tier supply chain financing transaction for Digital Guangdong and its upstream suppliers, carried out in partnership with Linklogis, a Chinese-based supply chain financing service provider.

“We successfully financed those suppliers by taking the risk of their key buyer on the other side,” says Nair, who adds that the bank now seeks to replicate this success in Asean. “Once more people start to see the benefit of this approach, more countries will accept it, and we will be able to get more financing to those who need it most across the region,” he says.

 

Digitalisation moves forwards

As lockdown measures made sending paper documents a challenge, Asean’s trade ecosystem had something of a head start when it came to leveraging digital technologies. The region is home to numerous trade digitisation initiatives, from Singapore’s Networked Trade Platform (NTP) to Thailand’s National Digital Trade Platform (NDTP), while further afield, Hong Kong’s eTradeConnect has also played an important role in taking paper out of the equation.

“The regulators are taking the lead in ensuring that the infrastructure is there for trade and payments,” says Nair. “This is for two reasons. The first is to drive efficiencies, and the second is to control risks. That is becoming very important when we start working remotely. We are used to working in a non-digital economy where people work in an office and you have signatures as the main point of authorisation. When you suddenly move away from that and you now have people sitting in three different places exchanging emails, the issue of trust comes to the fore. There are multiple parties in trade, so how do you create that trust among them? Digitisation is the only way.”

Making this digitisation a reality requires the involvement of more than just regulators and government bodies, but rather a concerted effort between every player along the chain.

“If Covid-19 has taught us anything it is that banks, clients, buyers and sellers need to be agile, and we need to be digital,” says Nair. “There has been a lot of drive recently to take paper out of trade, but it has been in pockets of success, and most of it was in proof of concepts. The pandemic has brought us all down to one common understanding, that we need to be connected now.” He adds that Standard Chartered has received a huge uptick in take-up of its digital channels by clients, which shows no sign of abating. “It’s a mindset change. This shift to digital is not temporary. It is going to be permanent. It has sparked something that will continue,” he adds.

Now, the focus is on building bridges between all of the disparate initiatives to weave together a fully digitised ecosystem. “Asean is a very complex region, and every country has its own regulations and agenda,” says Chong. “It is extremely positive that each of the regulators and central banks have got out their sandboxes and have been investing in technologies locally, but ultimately, it is about connecting everything together, which is what we are starting to see.”

Work is already underway. The Global Trade Connectivity Network (GTCN), a DLT-based cross-border open trade finance network, initially connects Hong Kong’s eTradeConnect and Singapore’s NTP.

And because the GTCN is built on an open architecture, other countries across Asean are now gearing up to interconnect with their neighbours to make cross-border trade and trade financing safer, more efficient and cost-effective.

“This will be the game changer,” says Nair.

 

A more sustainable, resilient future

Another major trend emerging in Asean is that of sustainability in trade. Once seen as a nice to have, there is a growing realisation that, without sustainable practices, supply chains will not be resilient enough to withstand future shocks.

“We see sustainability ramping up in the next year or so,” says Chong. “Clients who are coming to us now are not simply asking for a sustainable supply chain finance programme, but they want to go as far as knowing how to reach out to where the source is, even down to the farmers. Every large organisation now has ESG goals to meet, and regulators in the region are really starting to drive this conversation further.”

The trade outlook for Asean – and indeed for the world – is far from positive over the near term. Over the longer term, however, there are many reasons for optimism. In spite of recent challenges, the region’s total trade with China has increased from 8.8% in 2010 to 13.4% in H1 2020, and bilateral trade between Asean and the major economies in Asia, Europe and the US is also expected to continue on a positive trajectory. With a solid commitment from banks, corporates and regulators alike to modernise trade, harness technology to build efficiencies, and operate sustainably, the region is well-prepared to take advantage of new opportunities in the months and years to come.