Trade reporting is particularly poor in the Mena region. A range of factors have contributed to the opacity that could increase risk over the long term, writes Nigel Wilson.
When Rebecca Harding began studying trade data for Mena in 2010, she was surprised to ﬁnd that for many countries, the most recently published statistics were three or four years outdated.
Today, Harding, the co-founder and CEO of Equant Analytics, has sought to reveal a clearer picture of regional trade ﬂows by reconstructing trade data for the region, based on what is being reported around the world.
The company developed the Equant Analytics Divergence Ratio (EADR), a tool to measure the difference between what a country reports in its trade data and the amount of trade that occurs in a given year, by mirroring the data given by each country and calculating a weighted average of the two.
Equant found, for example, that in 2014, Saudi Arabia’s exports differed by 87% compared to the source data provided to Comtrade, while Kuwait’s exports recorded a 96% divergence in data for the same year. Imports diverged by 18% and 25% respectively. The UAE’s exports in the same year differed by 39% from its reported data, while its imports diverged 14%, according to Equant. For 2014, the average EADR across the Mena region was around 35%.
While Harding stresses that nobody really knows what the “missing” trade consists of, she notes that historically, countries in the region have a poor record of providing timely and accurate data to the relevant international bodies and that some countries have lacked the infrastructure to do so, which likely accounts for part of the divergences found by Equant.
John McQuiston, senior vice-president, regional head of international trade services for Emea at Wells Fargo, says it is important to note that tracking some trade transactions is easier than others.
“Open account trade is a little bit more difﬁcult to track than documentary trade, because it’s harder to determine what is, and is not, trade-related open account payment. So oftentimes, businesses turn to the World Trade Organisation (WTO) who keeps reliable macroeconomic statistics,” he says.
He also notes that globalised manufacturing processes can lead to distortions when it comes to reporting trade data, as the origins of some component parts can become lost.
“I think one of the challenges you face when you report trade is the whole idea of the de-localisation of manufacturing and component assembly. Certain parts are moved and re-assembled and moved again,” he says.
“So, for example, some German exports to Saudi Arabia may pass through the port of Jebal Ali in the UAE and there might be a certain amount of assembly. Therefore, if you see the German statistics for exports to Saudi Arabia, they could be higher than what Saudi Arabia shows for imports from the Germanic region, and the disparity may arise because some of those exports from Germany may be going through intermediate ports or transit points. Furthermore, Saudi Arabia may report those trades as imports from UAE or Oman, which may contribute to unreliable trade reporting,” McQuiston explains.
Assessing the relatively high EADR for much of the Mena region, Harding says that “there is something unexplained here and it is not entirely for innocent reasons”.
“There is a reason why that region is poorly reported, because it’s actually very consistent,” she says. “There are random elements to trade reporting that are consistent with sanctions avoidance. Those random effects can actually alter the way trade ﬂows around the world. Where we see these effects being greatest are uniformly across the Middle East.”
Harding also points to a decade-long rise in dual-use goods trade in Mena as part of this “missing” trade.
Goods are deﬁned as dual-use if they are normally used for civilian, commercial applications but can simultaneously have a military capability. Equant found that the value of trade in dual-use goods has escalated since 2004 in Mena, with a notable acceleration between 2012 and 2014.
“In the Middle East there is a very high prevalence of, and big increase in, imports and exports of dual-use goods trade over the last 10 years. And we’ve also seen the EADR be consistently very high,” she says. “Some of it [missing trade] is dual-use goods, some of it is commodities not elsewhere speciﬁed, and some of it is just the region not reporting itself properly.”
The wave of regulations and compliance guidelines relating to dual-use goods trade published in London, Singapore and Hong Kong in recent years has prompted banks involved in trade ﬁnance in the Mena region to improve their compliance policies, to keep up with new international standards.
Heather Lee, product lead, trade and compliance at Accuity, a risk and compliance advisor, notes that an increasing number of customers have sought assistance over the past 18 months to keep up with best compliance practice in relation to dual-use goods.
“What we have seen in the Mena region is that there is a particular need to look at the de-risking culture that’s happening in banking and ensure that the compliance policies or programmes of the banks there mean that they are seen as a safe trading partner,” says Lee.
“Particularly for the banks that have trade as their main line of business, they have and want counterparts in these more highly regulated places like Hong Kong and Singapore, or if they trade in US dollar and they have counterparties in the US and they want to maintain their correspondent relationships, then there’s been a particular interest in making sure they are up to date and seen as able to have a robust compliance approach to some of these topics,” she says.
Harding argues that in the long term, opacity around trade data reporting in Mena may have a negative impact on how international banks and trade ﬁnanciers approach the region.
“If you’re looking at the amount of trade ﬁnance that comes in from the global banks, it will have an impact, because you’re seeing a lot of the largest banks pull back from smaller projects, particularly specialist structured ﬁnance or specialist trade ﬁnance projects, because risks, as you go through a supply chain, are highly relative to costs. If the cost of data gathering and information gathering are very high then over time that is going to pull back global trade ﬁnance to the region,” she says.