BD Export & Import Insights (Nov 10 2022)

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BusinessDay www.businessday.co.za Thursday 10 November 2022

INSIGHTS

IMPORT & EXPORT Sponsored content

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Solutions to promote economic growth

• Institutions offer trade finance products designed to help companies meet their sustainable development goals and ESG targets, writes Lynette Dicey

P

ost the pandemic, businesses are being faced with global economic headwinds, supply chain disruptions and increased requirements to align with environmental, social and governance (ESG) considerations.

Financial institutions can help businesses better manage these challenges with specifically designed trade finance products, according Justin Milo, executive, head of Trade South Africa for Standard Bank Group.

“These solutions are not a means to an end in themselves, but part of a broader solution to promote economic growth and sustainable development in emerging market economies and especially closer to home in Africa.”

Rising global inflation, increasing interest rates, exchange rate volatility and the threat of recessionary conditions in major economies has resulted in a recalibration in

Justin Milo … framework. the perceived risks faced by trading counterparties, with businesses becoming more risk averse, particularly regarding the mitigation of payment risk.

This heightened risk awareness, says Milo, has encouraged a movement back towards the use of letters of credit (LCs) and LC confirmations to mitigate buyer payment risk, financial institution payment risk and

country risk.

“SWIFT data for the South African market suggests the demand for LC confirmations has risen by 47% year on year in the first six months of 2022 and export letter of credit transaction values have grown by 28% year on year while SA’s exports have grown by 10.1% year on year over the same period, according to Sars.”

Standard Bank, a leading provider of letters of credit and LC confirmations in the African market, plays an active role in facilitating these transactions on behalf of businesses. Its large network of institutional relationships and the adoption of digital technologies have enhanced the speed and accuracy of the documentchecking process required to complete these transactions.

Milo says the bank was the first in SA to implement the Traydstream platform, which uses optical character recognition (OCR) and machine learning (ML) technologies to review documentation

presented under letters of credit and other trade finance transaction types.

To help businesses meet their ESG targets, financial institutions have rolled out a number of ESG solutions including green bonds, funds underpinned by ESG principles and ESG linked loans.

These solutions, explains Milo, typically adopt one of two approaches: first, use of proceeds, where the ESG merits of the transaction are evaluated based on the counterparties and the nature of the underlying project or type of goods purchased. Examples include project financing loans, guarantees for renewable energy projects or LCs issued to support the importation of solar panels. The second approach is an ESG overlay — known as a sustainability linked solution — where businesses specify their ESG key performance indicators and have their loan financing rates linked to the attainment of these KPIs after an independent verification.

Hampering ESG adoption in Africa are challenges such as supply chain disruptions, a lack of foreign exchange reserves, electricity supply issues and infrastructural constraints. At the same time, supply chains are under scrutiny from regulators, investors and customers: regulators are requiring companies to monitor and mitigate environmental and social risks in their supply chains; investors are asking companies to address social justice and sustainability through their operations; and customers — and employees — have bigger expectations of companies to address ESG concerns.

“Balancing this equation is critical,” says Milo.

ESG concepts have also made their way into the world of trade finance, with the natural application of these solutions linking to buyers and suppliers, supply chain sustainability and continuity, the type of goods procured, the nature of projects undertaken

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and the optimisation of the businesses’ own ESG KPIs. Standard Bank recently launched the first solutions in its ESG Trade Finance portfolio, sustainability linked working capital and supply chain finance facilities, to complement its established sustainability linked term lending product offering.

Another spin-off opportunity for economic growth and sustainable development comes from an unlikely source — supply chain disruption.

Businesses have been forced to reconsider their procurement strategies and are increasingly focusing on diversifying their procurement by increasing the contribution of regional and local suppliers.

Says Milo: “This dynamic bodes well for employment, economic growth and the development of SMEs in Africa,

and has positive spin-offs for sustainability as regional and domestic transit routes are likely to be more environmentally friendly.”

The challenges that remains, however, are supplier development and supply chain continuity as they relate to domestic and regional players, especially SMEs, which are subjected to long payment terms.

“One way this can be addressed is through the adoption of domestic supplier financing programmes to allow domestic and regional suppliers to receive early payment on their sales to the anchor buyer at financing rates aligned to the financial standing of the anchor buyer,” says Milo.

Standard Bank, which has partnered with technology providers and fintech

companies to provide supplier financing and other supply chain financing solutions, was named the best bank for Supply Chain Finance in Africa in 2022 and the Best Bank for Trade & Supply Chain Finance Solutions in South African in 2022, according to Global Finance Magazine.

“Traditional trade finance solutions may not necessarily be new, but they continue to have an evergreen value proposition, and are relevant to current challenges including the mitigation of payment risks stemming from recent economic headwinds, the promotion of supply chain continuity in the context of supply chain disruption and the promotion of sustainable development through alignment with an ESG framework,” says Milo.

Protecting supply chains from further disruption The pandemic caused huge disruptions to supply chains globally including route congestion and blockages, manufacturing shutdowns, a deficit of skilled labour, a global shortage of key logistics components including shipping containers, shortage of warehouse space, a spike in transportation costs and, post the lockdown, increased demand for goods.

The World Trade Organisation has noted these supply chain challenges are likely to last longer than originally anticipated, possibly into 2023, and that developing economies would be persistently marginalised by weak links in supply chains.

In SA, the Transnet strike further impacted already weakened supply chains. The Minerals Council estimated bulk minerals exporters lost R815m worth of exports a day due to their inability to load iron ore, coal, chrome, ferrochrome and manganese onto ships daily.

The 11-day strike in October meant SA lost the opportunity to move R65.3bn worth of goods, according to the South African Association of Freight Forwarders. The association has warned it could take until 2023 for backlogs to clear and normal functioning to be restored.

Virusha Subban, a partner specialising in customs and trade at Baker McKenzie Johannesburg, reveals that businesses are looking at ways to best protect their supply chains from further disruption.

“Measures to strengthen and heal ailing supply chains include digitising parts of the supply chain, increasing manufacturing capacity in low-cost markets, reducing reliance on singlesource suppliers, implementing new business strategies such as increasing capacity to hold more stock, improving supply chain infrastructure, integrating sustainable practices into supply chain management and carefully monitoring changes in government policy across multiple jurisdictions,” she says.

A Baker McKenzie report titled Supply Chains Reimagined says digitalisation will impact how companies facilitate and manage supplier relationships as well as logistics and shipping processes, across all sectors. The report outlines how automation and the internet of things are now playing an important part in supply chain shock-proofing against future disruption and how companies are increasingly combining datadriven solutions with artificial intelligence to identity potential

risks, bottlenecks and underperformance in their supply chains.

It also details how, in the longer term, businesses are expected to begin integrating pre-emptive risk management and geospatial analytics into their supply chains.

“Private companies are expected to invest in their own facilities to build more robust supply chains although this is expected to take time to materialise given the economic climate,” says Subban.

LOCAL COMPONENTS

At the same time many African governments have started to look at ways to improve their manufacturing capacity so that they can produce local components that don’t need to be imported and can be trade on the continent which will simplify supply chains dramatically.

There is no question that exporters face many risks including payment defaults. In SA, the Export Credit Insurance Corporation — wholly owned by the department of trade, industry & competition — has been mandated by government to promote the export of local goods and services by underwriting export credit loans and investments.

Citrus industry faces hurdles About 7,800 containers of citrus fruit destined for export from the Western Cape and Eastern Cape were affected by the Transnet strike.

The southern African citrus industry has grown to become the second largest exporter of citrus globally which is reflected in record-breaking export figures over the past three years. This growth has positioned the industry as a major economic contributor sustaining close to 140,000 jobs and generating R30bn in revenue in 2021.

The industry offers further potential as a key exporter, says Citrus Growers Association (CGA) CEO Justin Chadwick.

“Current forecasts predict exports will continue to grow by 10-million cartons per year, on average, for the next decade, hitting 200-million tons being shipped overseas in the next five years and up to 260-million in the next decade. This means the industry could potentially sustain a further 100,000 jobs and generate an additional

R20bn in annual revenue.”

But to achieve these forecasts requires addressing the export challenges facing citrus exporters. “In terms of market access, blockages in some countries are restricting our citrus fruit from securing the wider access it requires to help absorb our increasing production figures,” says Chadwick. “In most cases, these barriers can be resolved at a diplomatic level. A more serious threat is the protectionist phytosanitary measures enforced by the EU when it comes to citrus black spot and false coddling moth, an arguably misinformed policy which has been effected against local orange exports.”

INCREASING COSTS

Rapidly increasing freight costs — 128% increase between early 2020 and 2022 — has also had an impact, as has a shortage of shipping containers and a global average delay when it comes to vessel arrivals, which has impacted fruit quality.

Chadwick says government need to work with its diplomatic counterparts in the US, India, Vietnam, Japan, Phillipines and Thailand to unblock obstacles as key markets are the only way citrus growers will be able to offset increasing input costs squeezing their profit margin.

In partnership with other exporting fruit sectors, the CGA has commissioned a project to investigate alternatives that could create more stable shipping costs in the future.

Citrus growers are concerned that if there is no improvement in operations local ports will not be able to manage the forecasted increase in citrus exports over the next few years. The CGA welcomes government’s move to bring in public-private partnerships into Durban and Ngqura ports as well the announcement in the mediumterm budget policy statement that funding will be allocated to upgrade and repair port infrastructure, says Chadwick.

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BusinessDay www.businessday.co.za Thursday 10 November 2022

INTERNATIONAL

Britain and the US are being split apart by growing extremism

• Both countries are in a prolonged period of disorder Adrian Wooldridge

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n 2016, the Anglo-Saxon world became the global centre of populism with the Brexit vote, the Trump election and the disputes that followed.

Both countries had a hardwon reputation for political stability: Britain had avoided the continental affliction of revolutions since 1660 and the US had withstood the economic hurricane of the Great Depression with its democratic foundations enhanced. Yet both countries are now in a prolonged period of disorder: Britain has burnt through prime ministers with an Italian relish (Theresa May followed by Boris Johnson followed by Liz Truss followed by Rishi Sunak), and Donald Trump — acting like a Latin American dictator — trashed every institution he touched, including the military, the CIA and Congress itself.

Which country has suffered the most from all this disorder?

This is a particularly good time to offer an answer to the question partly because the US midterm elections come six years after Trump’s election shocked the world and partly because Britain has just endured a change of prime minister.

At first glance, the answer seems obvious. Not only is Trump likely to declare that he is running for the presidency

again, but many of the most prominent Republican candidates for office in Tuesday’s elections are Trumpists in both style and substance — celebrities and political neophytes who want to burn the establishment down.

The Washington Post calculates that 291 Republican candidates, more than half of the total, have questioned the result of the 2020 presidential election, with the majority of them favoured to win.

Britain looks relatively stable by comparison. Sunak is a technocrat (and former banker) who believes in sound finance and balancing the books. At the COP27 meeting in Sharm ElSheikh, Egypt, for example, he seems to have established a cordial relationship with his fellow technocrat (and former banker), French President Emmanuel Macron.

Thanks partly to Trump’s intemperance, and partly to the radical left’s growing strength and self-confidence, the Democratic Party under Joe Biden has abandoned the middle ground, pursuing an expansionary economic policy despite rising inflation and misinterpreting civil-rights protests as a signal to go soft on crime.

In the UK, by contrast, Labour Party leader Keir Starmer has expelled his extremist predecessor, Jeremy

Corbyn, and is doing his best to choose moderate candidates for the next election. He is focused on winning back the white working class rather than tickling the erogenous zones of woke activists.

TRUMPIST POLITICS

But look again and British politics is not quite so reassuring. The “Trump” wing of the Conservative Party is both bigger and more entrenched than Sunak’s rise might suggest.

He lost badly to Truss in the last leadership election though his track record as a minister was more impressive than hers.

Truss enacted a wishlist of policies that had been cooked up in think-tanks such as the Institute of Economic Affairs (IEA) and the Taxpayer’s Alliance, and discussed at Tory Party socials. Tory papers such as the Daily Mail and the Daily Telegraph first backed her campaign against Sunak, ridiculing his warnings about the consequences of her policies, and then greeted her budget as if it were the economic equivalent of the Second Coming of Christ.

Sunak has included several people in his cabinet who have a distinctly Trumpist feel to them. Suella Braverman, the home secretary, has dubbed the arrival of refugees on small boats an “invasion” and proclaimed that her dearest

Uncertain futures: Donald Trump divided the US, while Brexiteers threaten the UK and the ‘Trump’ wing of the Conservative Party is more entrenched than Rishi Sunak’s rise might suggest. /Reuters wish is to see refugees transported to Rwanda.

Kemi Badenoch is waging a war on woke. Leading Conservative ministers seem to have a Trump-like contempt for both “good practice” and the civil service: Gavin Williamson, who was once sacked as secretary of defence for leaking, has now resigned from his new job as minister without portfolio over, among other things, an accusation that he told a public servant to “slit his throat”.

INSIGHTS: IMPORT & EXPORT

Importers still facing significant challenges It’s a changed •trading

environment for businesses, amid rising interest rates and inflation

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n the aftermath of the Covid-19 pandemic consumer demand for products has grown.

Supply chains globally, however, remained in disarray with a significant shortage of container vessels on many major routes. As a result, sea freight prices skyrocketed. The majority of importers took a view where stock is king and elected to move to an overstock position based on the assumption that coupled with post pandemic surging consumer demand, supply chain disruptions and high freight charges would continue.

However, rising interest rates and higher inflation have resulted in softer consumer demand leaving retailers in an overstocked position with a significant amount of their working capital tied up in inventory, reveals Dr Greg Cline, head of corporate accounts at Investec for Business.

Greg Cline … strategies. they were providing to importers and are instead now requiring payment by the time a ship sales, instead of the usual 30 or 60 days.”

This, he adds, has increased the demand for working capital to fund stock. At the same time, debtors days are starting to creep, finance costs are rising

and stock days are moving out.

In this environment, companies need to increase their funding levels with a banking partner that allows for a higher collaterised position.

The good news for importers is that sailing schedules and on-time reliability globally is improving, port congestions are easing and sea freight rates are coming down. In SA, more than half of Transnet’s workers are back at work after an 11-day strike in October.

Cline says that while it will take some weeks still for port operations to completely normalise, there are ways to prioritise and fast-track urgent imports, including by redirecting to alternative ports in neighbouring countries, albeit this may prove a more expensive route.

While festive season trade is not expected to be impacted by

DIFFERENT FACTORS

“This trend is not unique to SA,” he says. “We’re in a fundamentally different environment now compared to 2021. Around the world GDP indices are slowing, the war in Ukraine has impacted the cost of energy, the cost of money has become more expensive and many suppliers are pulling back on the open payment terms

/123RF — KHUNASPIX

Transnet’s October strike, it may be a different story for Black Friday trade unless logistics are able to normalise quickly.

Another challenge for importers is rising inflation and interest rate hikes. “Importing has become an exponentially more expensive exercise in recent years and importers are either having to compress their margins or pass on these higher costs to the end consumer,” concedes Cline.

RAND VOLATILITY

Currency fluctuations and rand volatility don’t help. Some importers try to hedge the rand with forward contracts for supplier payments. The other consideration for high duty categories is the option to hedge the customs duty portion where the rate of exchange for custom duties is only determined at ship on-board date. This is often weeks after the order is placed with the supplier due to production lead times.

The current rand-dollar exchange rate adds to the cost of importing and, given that inflation is not yet under control, importers need to brace for further rate increases.

“There are numerous risks a business takes when they are importing products and it’s almost impossible to factor in all the unknowns,” says Cline. “The supply chain is made up of many components including ports, roads and transporters, among others. As has become clearly evident, weather can significantly disrupt business operations. The political climate also has a material impact on currency fluctuations.”

There are strategies to mitigate currency volatility, says Cline, advising importers to talk to their banks.

This might read like small beer compared with Trump and the Trumpists. Former prime minister Boris Johnson’s presence at Sharm el-Sheik demonstrates that he is a very different figure from Trump.

Johnson merely flirted with the idea of ignoring the 1922 Committee’s decision to unseat him. Trump instigated a violent assault on Congress that included several people who ran for office this November.

But in two important ways,

Brexit has caused more longterm damage. The most obvious is economic. Trump’s combination of tax cuts and deregulation were widely welcomed by business, whatever it felt about his cultural policies. Brexit was solidly opposed by the British business establishment, and for good reasons.

There seems to be no doubt that Brexit has caused significant damage despite the difficulties of disentangling the

effects of Covid-19 and the Ukraine war from the effects of leaving the EU. Brexiteers have all but given up arguing that the divorce is an economic boom and resorted instead to saying it is too early to tell.

In June 2022, the Centre for European Reform (CER) estimated that quitting the single market and customs union reduced UK goods trade by about 15%. In the same month, the Resolution Foundation warned that workers can expect to be almost £500 a year worse off in real terms by 2030, thanks to the productivitysapping impact of Brexit, with the worst effects experienced by advanced manufacturing and the north of England.

A recent report from the Economic and Social Research Institute (ESRI) claims that trade from the UK to the EU has declined by 16% since January 1 2021, and trade from the EU to the UK by 20%. Truss’s budget was driven by the recognition that the only way to turn Brexit into a positive was to administer life-threatening shock therapy.

It is, of course, possible that Britain will rejoin the EU in the longer run. The proportion of Britons who think that leaving the EU was a good thing is falling, and the next general election is shaping up to be Remainers’ Revenge: where the emerging anti-Brexit majority avenge the turmoil that unleashed since 2016. But rejoining the EU — if it will have Britain back — will take some

time. And the messy business of leaving has wrought long-term damage, while also distracting the country’s collective attention from directly addressing questions of productivity.

The second long-term consequence has to do with the UK’s future. In September 2014, it looked as if this question might have been solved for a generation when the Scots voted 55% to 45% to remain part of the country. Brexit reopened the question by first dragging Scotland out of the EU against its will and then creating turmoil in Westminster, as a predominantly English party, the Tories, tore itself apart over what Brexit meant.

In Scotland’s May 2021 election, the Scottish Nationalists won 64 seats to the Conservatives’ 31, the party’s fourth victory in a row. Its leader, Nicola Sturgeon, claims to be more intent than ever on holding another referendum.

In Northern Ireland, where the majority of people also voted to remain in the EU, Brexit has paralysed politics for six years and revived difficult questions about the Irish border.

The pro-unification Sinn Fein is now the biggest party on both sides of the frontier.

It takes a great deal to outwreck the great wrecking ball that is Donald Trump. The US may have a record crop of Republican election-deniers, but the Brexiteers still have the edge in breaking a country apart. /Bloomberg