The Mena region, with its strong logistics infrastructure and rivers of liquidity, is capitalising on the growth in south-south trade to cement its status as a global trading hub. But do banks have what it takes to keep up? Eleanor Wragg reports.
The tide has turned in global trade.
The WTO’s World Trade Report 2014 shows that shipments from developing economies surged by 3.6% in 2013, far outstripping the 1.5% growth of exports from developed countries. On the import side, developing economies grew by 4.7%, in stark contrast to the 0.3% decline in developed economies.
In the midst of all this is Mena. Well-placed at the crossroads of international trade routes, it has seen trade with traditional partner India increase tenfold over the past decade, while trade with China reached US$300bn in 2013, a 5,000% increase versus 1993.
In fact, the Asian nation now wants to firm up a free trade agreement (FTA) with the Gulf Co-operation Council (GCC) countries, accelerating a process that started in 2004. “China hopes to work with the GCC to build the Silk Road Economic Belt and the 21st-century maritime Silk Road,” said Chinese foreign minister Wang Yi in a visit to Saudi Arabia in late 2013 as the two sides agreed to restart negotiations.
While not all of its economies make life easy for exporters – Tunisia and Algeria, for example, have various currency controls and force trade to be accompanied by a letter of credit – Mena is home to the UAE and free-trading emirate Dubai, whose efficient seaport, bustling airport and excellent transport links have turned it into a entry point for the region and a major export and re-export centre.
“We see a huge increase in south-south trade and Dubai will continue to be a gateway,” says Dr Ashraf Mahate, head of export market intelligence at the government of Dubai’s department of economic development. He points to the growing trend of Asian – and mostly Chinese – exporters using the UAE as a hub for their trade with Africa. “We see a positive growth trajectory for trade both within the Asian region and certainly with Africa. In fact, we see a lot more Middle East-Africa trade taking place.”
He is also enthusiastic about the impact of China’s announcement that it will invest in railways connecting Europe and the Far East via Middle Eastern countries. “This is going to be key to the growth of south-south trade and an absolute game changer because it’s going to allow landlocked countries to play a much more prominent role in trade.”
From east to west
But the region’s trade links are also expanding farther afield. Mena-Latin America trade has tripled over the last seven years, with Uruguayan halal beef, Brazilian chickens and Saudi Arabian fertilisers among some of the items being traded alongside the more traditional oil, chemicals and commodities.
Latin America’s plentiful food exports find a natural home in the near-barren Middle East, and its exporters are doing all they can to push for more sales. “There are companies which export refined sugar that have obtained halal certification, place the brand on their packages and even write their label information in Arabic – which is a big advantage. It is possible to notice a greater level of professionalism from Brazilian companies in terms of meeting international standards and intensifying exports,” says Michel Alaby, general manager of the Arab-Brazilian Chamber of Commerce.
Mena’s own companies are also widening their sphere of influence, opening up new trade corridors in the process, as Farrukh Siddiqui, JP Morgan’s head of global trade & loan for Middle East and Africa, highlights. “In the telecommunications sector, key local operators are expanding their businesses into wider emerging regions. As these corporations expand geographically while still investing in the constant upgrade of their local capabilities, trade finance becomes a vital piece in connecting MNC suppliers with these telecom providers,” he says.
This pattern is repeated across economic sectors and throughout the world, with Qatari investment firm Al Gharrafa boosting its stake in South American agricultural company Adecoagro, and the Gulf’s largest dairy company, Almarai, buying out Argentina’s Fondomonte.
Siddiqui adds that flows coming into the region from Asia, from foodstuff to building materials, have become another big piece of business for banks.
“In some cases this is financed by specialised products still under traditional trade instruments, although there is a large part of business which is carried out using open account terms between the buyers and suppliers.”
Trade finance solutions
Indeed, as new trading partnerships are forged with unfamiliar counterparties in far-off locations, demand is growing for structured financing solutions. But with an eye-watering number of local, regional and international players jostling for space in an already crowded banking environment, how can banks
support the flows without losing out?
“In order to capitalise on these growing trade flows, institutions need to do a couple of things, primarily focusing on what existing and potential customers want,” says Maninder Bhandari, founder of regional consulting firm Encore Group and director of Derby Group. “Banks need to look outward in terms of the specialisation they want to adopt, so that they know the geography as well as the product inside out. Clients will flock to them if they can prove specialist skills rather than the traditional letter of credit only. The second part of it is, banks usually chase larger deals but these are more finely priced. Banks need to segment the market and map it to their expertise and the returns they are seeking. Specialist skills will give them deeper insight: it will lower risk, improve returns and provide a wider cross section of transactions.”
Maintaining an edge
As competition grows, banks are working to build capacity to maintain an edge. Manoj Menon, global head of GTS and FI at Abu Dhabi’s First Gulf Bank (FGB), says his bank has started investing more in transactional banking products and services. “As the UAE has grown, so has the global transaction services business, with the UAE serving as the important trade hub between Asia, Sub-Saharan Africa and Latin America. FGB, along with other banks in the GCC, have started investing in global transaction services by building out products and services including investing in innovative technology platforms to support this growth.”
Local banks, such as Qatar National Bank, are also going to where the trade is: the bank took a stake in pan-African lender Ecobank in September 2014, its first foray into Sub-Saharan Africa. FGB has similar plans. “The next step is to see how we expand ourselves into these new markets. We are in the process of looking at playing a significant role in financing the whole east-west corridor,” says Menon. “Where do we strategically position ourselves? We are reviewing it now to look at the best place to have a presence, looking at what flows we want to finance, and building up products and solutions.”
What’s more, companies are taking advantage of the UAE’s strategic position and setting up shop there. “The Southern Silk Route is not just Asia into UAE but also Asia into Africa. That trade flow has grown significantly over the years. In fact the UAE has also become a significant re-export market. African companies operating in Dubai increased by 171% since 2008 and the UAE is the main trading partner of Africa within the GCC, with approximately 80% of UAE’s imports from Africa being primary products,” says Menon. He adds that these African companies are now being joined by Brazilian and other Latin American firms, who, somewhat counter-intuitively, use the UAE as an export base into Africa and even Asia – despite the existence of more obvious, trans-Pacific trade routes.
“Dubai has been and will continue to be a very important hub from a trade and logistics point as well as from a value-added viewpoint – even for the Americas,” explains Bhandari. “Why would somebody bring goods to Dubai from the Americas, add value and then send it on? Because Dubai has brilliant infrastructure and logistics. Things move efficiently, smoothly, and quickly. A lot of people come to do trade here and Dubai is opening up new markets, new frontiers and new methods to encourage trade from its shores.”
Today, as Indian traders use Mena to access the world, Chinese businesses use the region as a hub for Africa, and Latin America’s conglomerates use it as a launch pad into Asia, the Middle East is once again taking its historic place as the epicentre of global trade, and banks are gearing up to support the ever-growing trade flows radiating from the region.