Despite the pressure on commodity prices in the recent past, the United Arab Emirates (UAE) is a dynamic trading hub that is uniquely positioned to benefit from the growth in ‘south-south’ trade, writes Huny Garg, Head of Trade, Middle East, North Africa and Pakistan, Transaction Banking, at Standard Chartered.
More than just its strategic location on the world map, the UAE offers a stable economy, sound policies, world-class infrastructure, logistics and connectivity to global businesses. This infrastructure has turned the free-trading emirate of Dubai into a major export and re-export centre over the years. Dubai’s Jebel Ali port is ranked among the top 10 ports in the world and Dubai International Airport had the highest footfalls of any international airport with over 70 million passengers in 2015.
In addition to being a final destination for finished goods, the UAE’s role as a transshipment epicentre and a gateway to the Middle East and even Africa is also likely to gain prominence in the years to come. The UAE has set itself a target of increasing its non-oil share of GDP from 70 to 80% by 2021. As it diversifies its economy and augments financial stability, the UAE will be looking to expand relationships with its key trading partners such as India and China and leverage emerging trends in frontier markets such as Africa to cement its status as a global trading hub. Growth in trade flows in the region is likely to present global and local banks with the opportunity to differentiate and add value. However, these flows could be between counterparties that are relatively unknown to each other. While banks have the tools to facilitate trade flows in such a situation, the ever-increasing need for lower cost and higher efficiency means that banks will have to develop sophisticated and structured financing solutions that go beyond the conventional letters of credit and cater to rapidly-changing client needs.
UAE-India: Old friends look to turbo-charge trade ties
While the relationship between UAE and India dates back over 100 years when skilled Indians first migrated in search of employment opportunities, trade between the two countries has boomed over the past few decades, growing from a modest US$180mn in 1971 to over US$59bn in 2015. India is today the UAE’s largest trading partner, with the UAE ranking only behind the US and China among India’s top trading partners. The synergy between the two countries is there for everyone to see – strong cultural, industrial and political ties have paved the way for increased trade that has resulted from a heady combination of the UAE’s wealth of resources and India’s access to a highly-skilled workforce. The recent state visits by Indian Prime Minster Narendra Modi to the UAE in 2015 and His Highness Sheikh Mohammed Bin Zayed to India in February 2016 have brought further impetus to this burgeoning relationship and it is widely expected that UAE-India trade will hit US$100bn by 2020.
So far, bilateral trade between the two countries has been dominated by three sectors – precious stones, metals and petroleum products. Despite gold and oil losing their lustre, this trade corridor is likely to gain in strength due to the emergence of new trade patterns. Information Technology (IT) represents a sizeable opportunity, particularly in the area of IT infrastructure services and associated applications. The demand for IT services is expected to grow, resulting from the UAE’s recent and proposed investments in infrastructure, government, healthcare, transport and the banking, financial services and insurance (BFSI) sectors of the economy. The rapid rise in consumerism in the UAE also offers an opportunity for established Indian players in both the fast-moving consumer goods (FMCG) and apparel segments.
Several Indian corporates also use the UAE as a gateway for their Mena and Africa operations, especially to win key infrastructure development contracts in the region. As the bulk of the growth in UAE-India trade is on open-account terms and with new counterparties that they do not know very well, these corporates appreciate support from a bank that has a strong presence in the region. Standard Chartered Bank has been at the forefront of facilitating the growth of India-UAE trade flows through its value-added solutions.
As an international bank with a footprint mirroring that of our client’s expansion plans, Standard Chartered is able to advise and provide value-added trade solutions that facilitate and embolden our clients to do business in new markets. These solutions also improve returns for the bank by addressing the associated risks with appropriate mitigants.
UAE-China: a growth story like no other
Since formal diplomatic relations between the UAE and China were established in 1984, trade between the two countries has grown from US$63mn to over US$55bn over the past three decades, and is set to exceed US$60bn in 2016. Growing at double digits over the past six years despite the challenges presented by the global economy, China is the UAE’s fastest-growing trade partner. While a large part of this growth has been fuelled by oil trade, some of the most traded items between China and the UAE include mobile phones, personal computers, satellite receivers, automobiles and aluminium.
The Dubai International Financial Centre (DIFC) is already home to four of China’s biggest banks that have been set up to administer capital flows associated with the growth in trade. With more than 4,000 Chinese companies registered in the UAE and over 200,000 Chinese expats who call the UAE their home, UAE-China trade is here to stay. As China’s trade with the UAE continues to grow, it is critical for banks to support the needs of clients with links to China.
Standard Chartered is well-positioned to support clients who have a requirement to transact in renminbi (Rmb). Corporates and FIs that transact in Rmb today can access end-to-end Rmb trade settlement services that will help them shorten the settlement cycle for goods and services, increase control and improve transparency in pricing. We can also advise clients looking to switch to the Rmb, as trade settlement in the currency gains more traction.
Emerging trade trends to further boost the UAE’s position
By virtue of being located within four hours of over a third of the world’s population, the UAE is uniquely positioned as a financial and operational hub for western multinational corporations looking to enter Asia and Africa. It is also seen as a key location in facilitating ‘south -south’ trade between Asia and the rest of the Middle East and Africa.
Africa’s fortunes are highly correlated with commodity prices, and while its key economies are currently under stress, the opportunity is unquestionable. There are areas of growth such as telecommunications, transportation and finance that are expected to contribute to Africa’s economic diversification. While the UAE cements its position as a major transshipment and re-export hub, it is also looking to directly participate in the opportunity available in Africa by investing in telecommunications and logistics, among other sectors.
Present across 15 markets in Africa, Standard Chartered brings an in-depth understanding of the challenges and opportunities of doing business in Africa. The requirements are not significantly different, just a lot more complex given the diversity in the region. Standard Chartered offers a variety of trade finance solutions from confirming and discounting letters of credit under documentary trade to receivables financing like factoring, which help corporates accelerate cashflows by converting debtors into cash while mitigating the risk of buyer insolvency and protracted default.
As UAE corporates expand geographically, access to trade finance is critical to secure supplies from global equipment manufacturers. The Asian Development Bank recently quantified the trade finance gap at US$1.4tn and in particular, access to trade credit for firms looking to do business in Africa has been a genuine challenge.
One of the key challenges faced by corporates looking to do business in Africa is the ability to finance these deals while managing associated risks such as country, counterparty and geopolitical risk. Standard Chartered is like a local or regional bank in much of Africa and the Middle East and has consistently supported the complex requirements of its network clients with bespoke solutions.
Through its visionary policies and creation of a business-friendly environment, the UAE is taking its rightful place in the sun as one of the key players in global trade. Given the complexity and heightened risks associated with world trade against the backdrop of declining commodity prices, banks will play a crucial role in facilitating trade growth in this region.