In a roundtable discussion held at GTR Mena 2022 in Dubai, GTR gathered some of the region’s leading figures in trade to discuss the ongoing impact of the pandemic on supply chain disruption, the uptick in demand for supply chain finance among buyers and suppliers alike, and the growing pressure on banks to boost sustainable finance.
- John Basquill, senior reporter, GTR (chair)
- Maninder Bhandari, director, Derby Group
- Mark Emmerson, head of global transaction banking, ADIB
- Deepak Gujral, head of solutioning and advisory, transaction banking, CIB, Emirates NBD
- Motasim Iqbal, managing director, head of transaction banking sales, Africa and Middle East, Standard Chartered
- Sinan Ozcan, senior executive officer and board director, DP World
- Yusuf Khan, managing director, head of trade and working capital solutions Middle East, North Africa & Pakistan, Citi
- Anirudha Panse, managing director and head of trade product management, First Abu Dhabi Bank
- Farrukh Siddiqui, founding partner, Emerging Capital Management Partners
- Sunil Veetil, regional head of global trade and receivables finance, Middle East, North Africa & Turkey, HSBC
GTR: As we enter the third year of the Covid-19 pandemic, is trade in the region still being impacted? We have seen steady increase in trade volumes since the disruption of 2020, but also warnings that the recovery could be uneven or fragile. What does this recovery look like from your perspective, and have trade flows and financing patterns changed?
Panse: Given where the oil price has been, it is no surprise that exports – both in terms of volumes and values – have gone up, particularly in this part of the world. However, an interesting point on the statistics is that the volume of letters of credit (LCs) has gone up but the values have come down. That likely means there has been a pickup in SME business.
Veetil: From our perspective, it is promising to see trade volumes picking up, but the recovery has been a bit uneven. Part of that is because of the supply chain and logistics issues we’ve seen globally. If you look at the spot prices shipping from Asia to the US it looks like the situation has stabilised, which suggests things are getting better, but we don’t expect those issues to sort themselves out quickly. This will probably normalise by the end of the year as lockdown restrictions lift, production backlogs clear and demand for pandemic-related products dwindles, while the easing of movement restrictions should help to support the recovery in services trade.
Bhandari: The pandemic has changed how companies look at the supply chain, and in particular, how they assess the risks associated with it. Those risks are being priced in. At the same time, markets have been volatile, and banks are looking to increase their margins relative to the time and cost spent managing these risks. Another aspect is that the risk associated with receivables has increased, and I have already retracted business because of the risks on the sell side. It’s a real challenge at the moment.
Khan: Even before the onset of Covid-19, we had seen a shift away from multilateralism and towards bilateralism, with the competition between the US and China coming to the forefront. Those trends and tensions are now very much in plain view, which has resulted in a shift in supply chains. We have seen a lot of US and Chinese companies starting to change their buying patterns and reducing dependence on each other, thereby diversifying their supplier base. As a result, Latin America-to-US flows and Africa-to-US flows have picked up.
We’ve also seen, certainly in the last decade, that there has been an increased amount of leverage that Chinese and Indian suppliers have gained in Sub-Saharan Africa. We’re not just talking about commodities, but massive spends on infrastructure projects.
GTR: Those shifts in supply chains are happening against a backdrop of port congestion, shipping delays and high freight rates. How are banks, traders and other companies in the Mena region responding to those challenges, and are supply chains becoming more resilient?
Ozcan: It is clear that supply chains are still sensitive, and there are weaknesses. These weaknesses have been quite evident not just throughout the pandemic, but also from other unrelated events, such as the Suez Canal blockage. On the positive side, this has brought forward initiatives that were held back, such as digitalisation, or alternative lending structures with logistics and forwarding coming into the picture to help companies manage their inventory and working capital. It has pushed companies to be far more agile than before, to look for alternative sources of procurement and to engineer supply chains end to end. However, it has thrown up another issue. Once the system is broken, it becomes very difficult to get back to normal. Now, containers are available, but they’re not necessarily available where you need them. Thankfully, we are seeing a pick-up in global trade, and it’s highly promising for the next few years. Stabilisation will happen step by step.
Siddiqui: One problem is the situation is still so uncertain. We have to hope there is not another Covid variant that affects the market, for example. We can say the supply chain disruption is not going to be fixed in the short term, but on the container side, even when the disruption returns to normality and shipping companies have added more container capacity, there are still challenges around inventory. We’ve seen two scenarios – either you have a huge stock available, or you don’t have any stock – and both can be painful. If you have no stock available but you are in a lockdown situation, you will be asking why you don’t have a just-in-time system. On the other hand, we have heard of companies that have had stock worth millions of dollars just lying there, with no one to buy it. Clients want certainty but we just don’t know what’s going to happen tomorrow.
Emmerson: We have to remember that the one country that supplies so much of the world’s goods today is China, and China is still attempting a ‘zero Covid’ policy. While I would not want to repeat what many countries, many families and many individuals have gone through, China will have to face up to the fact that Covid is getting into the country. Until then we’re going to have to adapt to China locking down cities, factories or ports all over again, just as we think the rest of the world is moving in the opposite direction. That is a major challenge, especially for companies thinking about whether to stay concentrated on the Chinese market, or to replace these long offshore supply chains with something much shorter, onshore or nearby.
Iqbal: Sourcing patterns are changing, which means as a whole supply chain disruption is still going on, and that is having several impacts on the financing side. One is the extension of payment terms, which means financing requirements are going up accordingly because there are a lot of requests from our customers for receivables monetisation. On the supply chain finance side, companies are diversifying towards domestic and regional sourcing with an effort towards nearshoring and onshoring. We are hence seeing a move towards multiple subsets of suppliers. I cover Pakistan, for example, where many large buyers have decided to move from Asean markets because factories remained open during lockdown. In that market, we have seen nearly a 40% increase in exports, and this trend is also causing domestic supply chain finance requirements to pick up.
Veetil: It may be worth adding that businesses increasingly understand the need to be proactive on diversifying supply chains. Our last Navigator survey shows a strong majority of UAE firms, 70%, expect supply chain disruption over the next 12 months but are pushing ahead with expansion and diversification plans. 56% are planning to increase their supplier base. We at HSBC are already seeing this unfolding.
GTR: Globally, lenders have reported a significant increase in demand for supply chain finance solutions over the past year – has that been the case for your institutions, and if so, is that demand being met? Are there other trade finance products that are growing rapidly?
Gujral: What Covid has done, through the challenges around logistics and supply chains, is change the way companies are looking at supply chain finance. Buyers are not just looking at ways of extending payment terms to make money, but also at ways of supporting key suppliers in order to maintain stability in their production cycles. Also, rather than having an anchor buyer, a very large corporate, muscling suppliers into accepting payment terms and offering discounts, you see suppliers that might be an equally large corporate preferring to use supply chain finance. Those suppliers can treat it as a non-recourse receivable discounting solution. From a cost perspective it still needs to make sense for them, but they are drawn to that as a way of minimising risk. In this region, we’ve seen real evolution in Saudi Arabia and Egypt, and I would say those are probably going to be the next big markets for supply chain finance.
Ozcan: I think we still have a long road ahead of us before we can call supply chain finance mature across the board, but I can certainly see it is picking up pace. To make a judgement on why it’s picking up pace now, you have to look at why it was not working before. It was not because of price, not because of risk, but because of complexity. If you think of the CFO at a company driving a supply chain finance programme, they have a lot of work to do to convince their colleagues in procurement who are not incentivised in the same way. Then those procurement colleagues have to speak to the commercial team at the supplier and persuade them to speak to their CFO. If you imagine that the company has 50 suppliers across the globe, it becomes a lot of work to convince everyone in the supply chain. Now things are changing, the large buyers are creating better incentives to do that.
Iqbal: We speak a lot about the US$1.7tn financing gap, and the perception of heightened risk around financing micro and SMEs. If you bring those problems together, you see that supply chain finance is probably the only way to address them. You need to get competitive financing products, and variability of financing, to suppliers that may be very small in size, and now suppliers can be enrolled on programmes without moving their account to the bank, and that is working really well. At the same time, the number of corporates that are supported by the banks is increasing all the time, and governments are actively looking at supply chain finance, in Abu Dhabi and Dubai for example. Supply chain finance can be adopted so that corporates can help their suppliers get financing at more competitive rates, eventually leading to a more sustainable supply chain for them.
Panse: FAB has witnessed a significant growth in our supply chain finance business in multiple streams, be it client demand, volumes or throughput. A welcome change is how the governments and government-related entities have started embracing supply chain finance to extend cost-effective early liquidity to SMEs and corporates in the region.
GTR: Has the appetite for supply chain finance, or the response from regulators and governments, been affected by the collapse of Greensill last year?
Iqbal: After what happened with Greensill, it is even more important for corporates to know who they are dealing with and stability of their providers. Questions are being asked, for example by standards associations in the US, about what sort of disclosure is required and how that disclosure should be made.
This could impact the kind of capital banks will be allowed to deploy by the regulators and could be an inflection point for supply chain finance.
Panse: Greensill offered structures under the guise of supply chain finance, many of which banks rightfully shy away from. There is greater focus on the product, but if you look at the work that has been done by Baft and the ICC with the regulatory and accounting bodies, there is already a lot of detail on how to define supply chain finance, and whether there is any need to change associated disclosure rules or not.
Veetil: You can’t discredit the whole product because of this one example, and based on what is happening in the market, clients realise that. They are looking for greater supply chain resilience and want to tie in their suppliers through a finance programme, so in reality the trend is actually picking up, especially in the Middle East. Supply chain finance can give a more sticky relationship with the supplier, so even if there is disruption, they can keep going. In Mena and Turkey, we have seen a rapid acceleration of the uptake of supply chain finance across segments.
GTR: Are you seeing significant progress around efforts to bring digitalisation to trade, whether through electronic document handling, automating processes or managing supply chain risks?
Veetil: The very facet of trade has changed. There was already a lot of spending on ways of digitising trade, but Covid just poured jet fuel onto it.
It just took off, and today, 90% of trade transactions for us come through digital channels. Our Navigator research shows investing in technology or innovation is the biggest measure UAE businesses plan to take in the next five years. There are technologies like blockchain we have been working on that are still, I would say, three or four years away. But today, clients have really adopted these digital channels well, and are already getting used to that way of doing business. Fintechs have helped in some areas, like onboarding and data management, but the banks are quickly catching up, and Covid really accelerated that. We also expect the Covid-19 pandemic to spur greater enterprise adoption of internet of things technology as businesses look to become more resilient and use that to manage their supply chains.
Emmerson: I’ve described Covid as the mother of invention, but in fact, it’s probably more accurate to say Covid was the mother of accelerated adoption. There was already a lot of digitisation out there, with a lot of these new channels, platforms and fintechs appearing. Banks and clients had been a little reluctant to pick those up and run with them, but once Covid appeared, those channels became an absolute necessity. Another really important aspect was around compliance. With supply chain finance, one of the things that had historically prevented adoption was that banks were nervous about the level of KYC and due diligence they would have to do, looking at every single buyer or every single supplier. It was inefficient and admin-heavy, which made it harder to be commercially practical. Now, there’s a far better understanding of the level of KYC that needs to happen, and far more ability to do that in an automated manner while still meeting all appropriate requirements, which makes it much easier to offer supply chain finance.
Gujral: To give an example, our supply chain solution uses a digital onboarding toolkit, which means the anchor buyer or the suppliers can carry out the KYC part on the channel itself. We have also seen governments seeking to digitise, for example the process around guarantees and warehousing. We used robotic technology, AI and machine learning to develop a solution where, today, all guarantees coming to government departments are digitally issued and warehoused with us. Obviously, Covid has accelerated this, but there is more work to be done, for example on digitising the entire trade LC process, on the electronic bill of lading, or on the electronic presentation of documents. Blockchain was not only supposed to be a way for one bank to send an LC to another bank; it is for all participants in that trade, whether logistics companies, insurers, port authorities or banks, to be on the same channel, involved in the same flow. We’re still a little far off that, but it will come.
Panse: Another shift we are seeing is industry-led collaborations on digitisation. One example is UAE Trade Connect, which was formed by seven consortium banks, with four more in the pipeline to support it. That effectively digitises trade in the UAE, with blockchain allowing banks to supply and distribute information in a digitised way. The platform can help carry out duplicate checks, trade-based money laundering checks, and so on. Another example is the Trade Finance Gateway from Etihad Credit Insurance (ECI). The banks that have signed up to that are looking at funding SMEs supported by insurance cover from ECI, which from the bank’s point of view works like a supply chain or receivables finance solution.
GTR: 2021 was a landmark year for sustainability in trade, with governments, ECAs and banks around the world vowing to support decarbonisation and push renewable energy sources. How much momentum do environmental, social and governance efforts have in the Mena region?
Siddiqui: This is a region heavily dominated by oil. There is a lot of awareness here of the need for progress on ESG, probably more than in a lot of emerging markets, but it will still take time. However, if you look at the UAE and Saudi Arabia, the governments’ Vision 2030 strategies are some of the most critical items in this whole discussion. These two visions are a sign of intent from the top that also translate into reality on the ground. They include measurements of success, which are being looked at carefully by governments, and as a result of that banks are also pushing the same agenda themselves. Ultimately, banks are not going to put money into something which doesn’t align with the country’s vision.
Veetil: The fact that Cop27 and 28 are coming to this region is a strong testimony to the role the Middle East will play in driving the ESG agenda. There is real commitment at the top level to net-zero emissions. Sovereign governments are coming up with net-zero strategies, with even countries like Saudi Arabia and the UAE setting targets of net-zero emissions. At HSBC, we have an ambitious plan to support a global transition to net zero and are acting now to reduce our financed emissions. This includes between US$750bn and US$1tn of financing by 2030 to help our customers transition.
Khan: On her first day as CEO, Jane Fraser announced Citi’s commitment to reach net-zero greenhouse gas emissions by 2050, including in our own operations by 2030. The question now is not just how you get there, but how you measure that success and hold people accountable to deliver against the target. Lenders and financiers will need to consider caps on certain industries while promoting and making attractive capital allocation to others, such as renewables, which are seen to be promoting ESG objectives. This will mean the development of a framework, where not only the management and employees of the bank are measured in terms of performance, but also where external stakeholder engagement is taken on board. Policy decisions will require our peers in the industry, and our clients and regulators in the markets in which we operate, to have alignment on the objectives to attain net-zero targets.
Iqbal: We believe it is possible to do away with fossil fuels, but we have to work with transition industries, so we have been looking to identify transition opportunities. We also work with our clients to see what their commitments are on this, how they are going to reduce negative impacts from a sustainability point of view. Another interesting thing we’ve seen is global buyers coming to suppliers in this region and asking about how their sustainability practices work. Exporters who would never have been expected to be interested in sustainability are now coming to us and asking if we can help, which is a fascinating phenomenon.
Bhandari: One question is that of ESG as a moral persuasion versus an economic compulsion: is this going to hurt you, or is this going to benefit you? To my mind, differentiation could come from recognition in the market if you are ESG-rated. Rather than moral recognition, that could be a business that is performing well in terms of ESG being recognised as having a specific financial benefit, and once that happens others will step up. It is amazing when this comes from the buyer side, as it means the market is dictating improvement, but this can also come from the supplier side. A supplier could say it will sell to a large buyer at a particular rate, then put in its communications or on its website that this particular buyer is ESG-rated. Again, that recognition will go a long, long way.