Ben Poole reports on some of the Mena region’s key players in the trade finance arena – each with its own personalities and traits.
Out of all of the players in the Mena, Dubai stands out because of its relevance to global trade.
“Dubai plays an important role in the Mena region, having become a vital transit trade hub between the major global trading routes,” says Martin Knott, head of trade, GTS Emea at Bank of America Merrill Lynch (BofAML). “Dubai accounts for some US$20bn of the re-export market, after Singapore and Hong Kong.”
One of the more striking images from the global financial crisis was the empty cranes and unfinished building projects that became a symbol of Dubai. To Dubai’s credit it has quickly moved from the idea of property as being a driver for the economy and gone back to its basics – trade, transport and tourism.
“Dubai has taken the lead in terms of increasing efficiency and reducing costs for people who want to trade through a regional hub,” explains Chris Jameson, head of sales, CEEMEA ex-Russia, GTS Emea at BofAML. “The capacity of the airports and ports, as well as the creation of free zones, has really made Dubai a successful centre for trade.” Above all, the re-export market is vital for Dubai.
“The fact that you can have goods arrive and leave via the free trade zone means that the paperwork is very simple,” says Tim Evans, regional head of global trade and receivables finance, Middle East & North Africa at HSBC. “For example, if you are exporting from China, it doesn’t make sense to have one ship going to Dubai, one ship going to Qatar, and so on. Instead, send one larger ship to Dubai and re-export from there.”
Letters of credit (LCs) are popular trade instruments in Dubai, while LC confirmations are also increasingly common.“There is a lot of interest in receivables finance as a financing tool, particularly where you can wrap it with credit risk insurance,” says HSBC’s Evans.
“Cash conversion has become far more important after the financial crisis. People are looking very closely at their working capital cycle and are trying to speed it up. By doing this, companies are also removing it from their balance sheets. This is a product that has existed in Europe and North America for a long time, but is only now being pioneered in the Mena region. It is a very strong proposition in Dubai.”
With so much regional focus on Dubai, it can sometimes be possible to overlook the rest of the UAE. But there are important trends to be found here, and there is a lot of investment taking place in terms of infrastructure, and transportation in particular.
Beyond this, the UAE is also taking the lead in looking for power generation alternatives, specifically in terms of searching beyond the region’s traditional powerhouses, oil and gas.
“Power generation is a big area where we are seeing developments, both in the UAE and Saudi Arabia,” says BofAML’s Jameson. “There is between 8 to 12% predicted growth in electricity demand from these markets over the next decade. To keep up with this demand, there are a number of nuclear projects in development. The first will be just west of Abu Dhabi, so the UAE is leading the way.”
The suppliers for the power projects are to a large extent Asian and Western European power generation companies. As the projects are ongoing, there are all of the usual trade requirements that go with that. In addition to this, intra-regional trade flows are also providing cause for optimism. “If you look at something like LCs, just in volume terms, approximately 45% is received from other countries in the region,” says BofAML’s Knott.
The big news in Qatar is the country’s successful bid to host the 2022 Fifa World Cup, which is already having a significant impact on investment in and trade with the country.
“For the World Cup, there is around US$120bn being invested in the stadia and infrastructure in Qatar, US$40bn of which is for railways,” explains Knott.
The World Cup will also provide a platform for a great deal of innovation in Qatar. After completion of the tournament, there are plans to dismantle some of the stadiums and send them to developing countries.
In terms of trade, Qatar is a mainly oil-based commodities exporting country. “The main destinations for Qatari exports are Japan, Korea, India, Singapore and the UAE,” says Farhan Zaidi, head of trade and receivable finance at HSBC Qatar. “When it comes to imports, these are mainly coming from the UAE, Korea, the US, Japan and Saudi. Products imported include wire cable, machinery, cars and pharmaceutical products.”
A mix of LC and open account is used in Qatar. “In the oil and gas sector, open account is used,” says Zaidi. “Countries in Europe, such as the UK, are importing gas from Qatargas, and these are being done on open account. With Asia, specifically countries such as India, trade uses LCs for risk mitigation.”
Saudi Arabia is another country in the region that is spending heavily on infrastructure. “There is around US$71bn being spent on infrastructure projects in 2013 in Saudi Arabia,” says BofAML’s Knott. “Saudi Arabia represents 17% of the region’s GDP and it has the world’s largest stock of proven oil reserves. These two factors have helped drive trade growth in the region.”
Infrastructure spending in Saudi Arabia is based on a five-year development budget of US$385bn that the Saudi council of ministers approved in 2010. Broad-ranging in scope, this budget is being applied to sectors as varied as energy, transportation and utilities, through to education and healthcare, as well as tourism. Saudi Arabia is also following the UAE when it comes to implementing nuclear solutions to power needs.
In terms of imports, there is also a greater consumer need in Saudi Arabia compared to most other Mena countries, thanks to its population size. The provisional statistics for imports to Saudi Arabia in 2012 from the central department of statistics and information in Saudi Arabia’s ministry of economy and planning show that machinery and transport equipment were the most popular import categories, together accounting for SR257.6bn of the total imports figure of SR583.4bn. Asia and the European Union are the most popular sources of imports for Saudi Arabia.
Energy exports are big business for the world’s largest exporter of petroleum products, both to Asia and also growing economies such as Turkey. In Asia, it is not just China that is the big target. There are also countries where the manufacturing sector is gaining traction, such as Vietnam and Bangladesh, which are providing opportunities for Saudi exporters. The central department of statistics and information statistics confirm Asia as the most popular direction of exports.
The political turmoil in Egypt for the past few years has been well documented and the country’s trade profile today presents a mixed picture.
“Egypt’s main export earners are to experience slow growth during FY13,” says Alia Mamdouh, economist at CI Capital. “The drop in oil prices will rein in oil exports (49% of total goods exports), while weak demand from our key markets will keep growth in goods exports in the low single-digit rate.”
Key export destinations for Egypt are the EU (representing 41% of all exports in 2012), Arab nations (20%) and the US (13%). As a net importer, the slow growth of private spending and the expected drop in oil prices (oil represents 20% of total goods imports) will reduce the pace of a widening trade balance. It is worth noting that Egypt’s key import markets are the EU (33% of imports in 2012), Asia (20%) and Arab countries (17%). “These imports, coupled with strong transfers growth, should narrow current account deficit to US$6.4bn,” says Mamdouh. “This is down from US$7.9bn a year earlier, representing 2.5% of GDP.”
Favourable changes in the region’s political stance toward Egypt are very meaningful in the short term. “Saudi Arabia, the UAE, Kuwait, and Jordan have all since given their assent to the new interim president,” says Mamdouh.
Together, Saudi Arabia, the UAE, and Kuwait represent approximately 80% of regional foreign direct investment to the country. “This could in the medium to long-term help bolster FDI once again,” says Mamdouh.
“It is worth highlighting that the EU showed steadfast commitment to stand by the Egyptian people in their endeavour to democratic transition. The EU’s support is important for Egypt, given that its FDI inflow contribution has averaged 40% over the past decade.”
Lebanon’s economy is dealing with the loss of one of its most important trade partners: the country has stopped trading with Syria as a result of the ongoing civil war.
Most exports from Lebanon still stay within the Middle East, with countries such as the UAE and Saudi Arabia being particularly popular destinations.
“Jewellery is one of the key exports for Lebanon, due to the value of the products and the skilled handcraft workers in the country,” says Karim Nasrallah, managing director at The Lebanese Credit Insurer (LCI). “A lot of jewels will come in to Lebanon – for setting of precious stones or for transformation, for example – and will then be re-exported.”
The past few years have seen the emergence of alternative trade instruments in Lebanon. Companies such as LCI have been offering factoring and reverse factoring services for both domestic and international corporates.
“Although the banking sector is very liquid, there is a big mismatch between the supply of, and the demand for, credit,” says Nasrallah. “The banks are not lending. There is a lot of demand for loans, but the sector that is predominantly made up of SMEs cannot afford to borrow. The banks are still lending in a very traditional way, such as against guarantees, for example.”
In a conservative banking environment such as this, the drive towards innovative trade financing solutions may be lead by the non-bank sector.