The Mena region looks set to become one of the biggest beneﬁciaries of anticipated growth in trade ﬂows with the fast-developing Asian economies of China and India.
For businesses across the Mena region, prospects to grow their trade business with China and India are accelerating as they seek to diversify their economies away from oil.
At the same time, these trade opportunities are helping them to deal with a more unpredictable world trade environment, emanating from the greater protectionist stance of the US, following the election of President Donald Trump, and the uncertainties facing both the UK and Europe in the aftermath of Brexit.
HSBC’s Global Trade Forecasts already indicate that China and India will bring some of the greatest opportunities for the region. In the UAE from 2016-20, India ranks as the second-largest market for UAE goods exports, with China expected to take over as the second-largest export market in 2021-30. For Egypt, India is predicted to be the third-fastest growing export destination from 2016-30 and from 2021-30 China is predicted to be the fastest with India second.
A leading trading hub
The UAE in particular is now poised to become a leading hub for trade ﬂows between Asia, the Middle East and Africa due to its prime location, strong investment in its ports infrastructure in areas such as the Jebel Ali Port; and the rapid expansion of its airlines, such as Emirates and Etihad, to accommodate ﬂights to countries worldwide.
Today, it is already serving as a leading hub for Indian and Chinese companies as they trade with the rest of the world.
“Chinese consumer goods are now being exported to Dubai from where they are redistributed to the rest of the region and other parts of the world,” says Sunil Veetil, the new regional head of global trade and receivables ﬁnance for the Middle East, North Africa and Turkey at HSBC, who notes that although China’s growth has slowed down, its economy is still growing by 6-7%: one of the healthiest rates in the world.
“Meanwhile, gold and gems are being exported to India, where value is added by their transformation into jewelry products. These end-products are then shipped back to the Middle East for export to different markets across this region and into Africa too.”
Veetil, who has been based in Mena for the last three years, having previously headed up the bank’s regional liquidity and cash management business for the region, is well-qualiﬁed to comment. Prior to this, he held positions with HSBC in South Korea and Indonesia for a total of eight years, giving him a strong perspective on the trade ﬂows of both Asia and Middle East.
He believes that for HSBC’s operations in Mena, one of its major objectives is to support this strong potential for growth in trade ﬂows.
Such opportunities are being boosted by investment in economic diversiﬁcation across the Mena region, where, to date, petroleum and petroleum-related products have been the predominant exports for many of the region’s countries.
In Saudi Arabia, Vision 2030 reforms will see non-oil revenues grow to SR1tn as the country increases investment in renewable energy and tourism.
Meanwhile, Egypt’s Sustainable Development Strategy – Vision 2030 – focuses on increased spending on infrastructure such as the New Suez Canal Zone projects as well as investment in renewable energy and growing the tourism sector.
In UAE, several reforms are also planned for 2021-30, including the injection of Dh16.bn into infrastructure and transport projects; a further US$7bn of investments in Abu Dhabi’s tram and metro system; and plans to increase research and development spending to drive a knowledge-based economy.
This economic diversiﬁcation has already led China to step up its economic activities in the Mena region.
“As the region seeks to diversify the economy away from oil, a lot of infrastructure development is now taking place and large contracts have been awarded to several major Chinese companies. This provision of Chinese services into the Middle East will continue into the foreseeable future,” says Veetil, pointing out that more than 4,200 Chinese companies now have a presence in the UAE alone.
“Many of the larger construction companies have come here to work on infrastructure projects and they have brought smaller companies/suppliers with them such as architectural and fabrication ﬁrms. This is not just the case in UAE, where there is a focus on infrastructure development, but also larger Mena markets such as Saudi Arabia and Egypt.”
Further opportunities for Mena companies are expected to emanate from China’s One Belt, One Road Initiative.
“China’s One Belt, One Road initiative involves the physical building of a road – and China clearly has ambitious plans to reach out to more than half of the world’s population using this route,” continues Veetil. “As the Mena region sits right in the middle of east/west trade ﬂows, we can expect to capitalise on this initiative too.”
Trade ﬁnance solutions
Despite the fact that trade globally is increasingly moving away from reliance on trade ﬁnance instruments to open account, there is huge gap in the amount of trade ﬁnancing still required worldwide, which is estimated at about US$1.6bn.
The Mena region is no different, with banks continuing to witness strong demand for an array of trade ﬁnance solutions.
HSBC is well positioned to provide the support and solutions required by Mena companies with its range of open account ﬁnancing solutions spanning pre-export ﬁnance and supply chain ﬁnance. It is also investing globally in the latest digital trade ﬁnance solutions, which look set to play a critical role in improving the speed and efﬁciency of trade ﬁnance while also reducing costs.
HSBC is at the forefront of emerging transformational technologies such as blockchain – the use of a distributed ledgers which all authorised counterparties to a trade ﬁnance transaction, the buyer, the seller, the buyer’s bank, seller’s banks and transporter, can use to input and access information on a trade transaction in real-time, thereby again bringing speed, lower costs and greater transparency to the whole transaction.
The bank is also working on implementing bank payment obligation (BPO) structures, an electronic trade ﬁnance and risk mitigation instrument, which when transmitted between two banks – the buyer’s bank and the seller’s bank – performs a similar function to a letter of credit, while eliminating the lengthy timescales involved in sending original trade paperwork by courier.
“We have already been involved in blockchain experiments and are also looking to take advantage of solutions such as the BPO and SWIFT for Corporates in the Middle East,” says Veetil, who notes that the latter brings huge beneﬁts for corporates who work with multiple banks, enabling them to use just one single, secure bank-agnostic channel for all their cash, trade and treasury activities.
“Our aim is to develop an advanced and successful platform offering for the future which will establish us as thought leaders in this space.”
For HSBC, its long-term commitment to Mena, and its huge footprint across the region, combined with its global presence, have put it in a strong position to support trade with China and India, as well as the rest of the world.
“We were the ﬁrst major global bank to establish a presence in the Middle East and now have a strong foothold in nine countries across the region, with 250 ofﬁces and around 11,000 employees,” says Veetil. “A footprint like this is required to play such a key role in promoting the global trading prospects of companies in this region.”
He adds that this strong presence in the Mena region is mirrored in other parts of the world.
“We also have a presence in over 70 countries globally that account for about 90% of world trade,” continues Veetil, emphasising that HSBC also has the strong balance sheet needed to support global trade.
He also believes that HSBC is also well placed to react to recent global political changes that could impact the future structure of global trade such as a greater movement towards bi-lateral trade deals.
“China and India are most likely to ﬁll any trade gaps in Asia emanating from the lesser focus of the US and we are well positioned in China to capture this business,” says Veetil. “In China speciﬁcally, we are one of the largest international banks with an established network spanning not only major cities such as Beijing and Shanghai but also cities along the Pearl River Delta.”