Importers turn to banks for credit

The past 18 months have represented a turbulent period for importers, exporters and those providing funding for supply chains.

The key risk faced by exporters, he believes, is payment risk, while the anticipated normalisation of global supply chains represents a key opportunity for SAs importers and the ecosystem of suppliers supporting them. Trading counterparties are often exposed to several risks involved in cross-border trade from exchange rate risk to payment risk, transit risk and performance risk, he explains. Heightened risk awareness and a recalibration in perceived risk has encouraged a movement back towards the use of letters of credit and letters of credit confirmations to mitigate buyer payment risk, financial institution payment risk and country risk.

SWIFT data for the South African market suggests that demand for letters of credit confirmations increased by 36% in 2022 while export letter of credit transaction values have grown by 15% and SAs exports grew by 11% over the same period. This, says Milo, is evidence of the shift in risk aversion among exporters. Standard Bank, which was recently named the best bank for trade finance in SA and Africa for 2023 by Global Finance Magazine, is a leading provider of letters of credit and letters of credit confirmations. The bank has played an active role in facilitating these transactions on behalf of multinational corporations, local corporates and SMEs, bolstered by a vast network of financial institution relationships and the adoption of digital technology. Turbulent times not only mean significant risks to manage, but also greater opportunities says Milo.

Financial institutions, as a key player in the international trade ecosystem, are uniquely positioned to assist importers and exporters to take advantage of the opportunities by providing uniquely designed trade finance solutions.

There is an expectation, says Milo, that global supply chains may start to operate more fluidly this year.

Supply chain disruptions over the past three years have forced businesses to reconsider their procurement strategies. As a result, businesses are now increasingly focusing on diversifying their procurement by increasing the contribution of regional and local suppliers.

Milo says while the alleviation of these supply chain constraints should translate into increased imports into SA, local manufacturers are likely to be circumspect and will be looking to balance the risks associated with both cross-border and local procurement.

This bodes well for the ecosystem of local and regional suppliers who support SA importers and exporters, he says, adding that local suppliers often have a common need working capital. He defines working capital as short-term funding to procure production inputs, pay salaries and bridge future cash flows from debtors. Financial institutions, he points out, have a role to play in assisting local suppliers with working capital financing solutions to enable them to pursue opportunities arising from increased local procurement.

Supplier financing programmes have become increasingly popular in the South African market, providing local suppliers with the opportunity to receive early payment on their sales to an anchor buyer typically multinationals or large local corporates at financing rates aligned to the financial standing of the anchor buyer.

“Cross-border trade has had to deal with rising prices, persistent load-shedding, climate change driven events and lower GDP growth expectations, the latter which has resulted difficult economic times, says Dr Greg Cline, head of corporate accounts at Investec for Business.

He says many importers, still suffering the after-effects of constrained supply chains that occurred during the pandemic, moved to overstocked positions. Rising interest rates and higher inflation, however, have led to reduced consumer demand leaving importers in the challenging position of having significant amounts of working capital tied up in stock.

Although trade in the last two months of 2022 was reasonably good, it was less than expected. At the same time, capacity has eased as more shipping lanes have opened, freight costs have reduced and freight forwarding capacity has improved,” says Cline.

Exacerbating the situation, he says, is post the pandemic, countries such as China now require more exacting payment terms. However, because so much of their working capital is tied up in stock, importers are struggling to meet these new requirements, particularly as debtors books are being pushed out.

Overstocked positions are not unique to SA with the European manufacturing sector experiencing an oversupply. Trading cycles, says Cline, are more erratic than prior to the pandemic with many businesses experiencing a lag between the time stock arrives in the country to when that stock translates into a sale. As a result, importers are increasingly turning to banks for lines of credit to finance working capital. The trade environment is highly dependent on the macroeconomic climate. In SA, the biggest challenge to most businesses is persistently high levels of load-shedding. Anything beyond stage 5 is highly limiting for local manufacturers, says Cline.

‘Greatest challenge is rising costs’: suppliers

Trade, which is a major driver of global economic growth and commerce, accounts for 52% of global GDP, according to the World Bank.

A Citi report says recent geopolitical events have demonstrated the fragility of supply chains with companies now looking for resiliency wherever they can get it.

46% of suppliers in a global survey revealed that they are passing on costs directly to customers

Businesses are now focusing on inventory management strategy, diverse and longerterm partnerships with producers and a deeper investment in digital tools. While physical supply chain disruptions have eased, the Citi report says this has given way to a new challenge: high inflation and rising interest rates which isputting pressure on physical supply chains and exacerbating concern for the health of supply chain finance. In a global survey of corporate suppliers participating in Citi-managed supply chain finance programmes, respondents identified rising costs as their greatest challenge with 46% of suppliers globally revealing that they are passing on costs directly to customers. Higher costs are taking a toll on suppliers profit margins as they are financing inventory at their own cost of capital and in an inflationary environment.

34% of respondents in the same survey said they were looking at longer lead times to produce goods

To counter supply chain disruptions, suppliers said they were pursuing a number of strategies. More than 60% said they were expanding secondtier supplier networks to increase their resilience; 41% said they were looking for financing earlier in the commercial cycle; and 34% said they were looking at longer lead times to produce goods. Many have increased the amount of inventory they hold, switching from a just-in-time to a just-incase approach. The challenge, however, is that carrying higher stocks of inventory comes at a cost, tying up working capital and reducing capital efficiency.

Citi says it expects that businesses will move to make their supply chains more efficient, easier to monitor and manage, and more robust to disruptions in any one part of the production process. They will also aim to become more geographically diverse with increased redundancy of supply.