Business Day Trade Finance Insights (February 24 2022)

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BusinessDay www.businessday.co.za Thursday 24 February 2022

INSIGHTS

TRADE FINANCE

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Four trends shaping the global trade landscape itisation •andDigworking

capital among them, writes Lynette Dicey

T

here are four emerging trends shaping the international trade landscape, says Justin Milo, head of trade for SA at Standard Bank.

The first is working capital.

While trading counterparties continue to need to mitigate key risks such as payment risk, performance risk and exchange rate risk, there is a growing need for working capital and supply chain finance solutions.

“As markets become more competitive, payment terms and working capital optimisation have become topical — with buyers (importers) seeking to pay as late as possible and sellers (exporters) looking to get paid as soon as possible,” he says. “Asymmetries in the payment terms received from creditors and those offered to customers may create a cash

Justin Milo … cost savings. flow gap which may constrain a company’s ability to operate.”

This dynamic, he explains, creates a place for supply chain finance and working capital financing solutions where, for example, an exporter may require an invoice financing facility to procure inputs, a working capital facility to pay for salaries, shipping costs and other costs related to the export sale and a discounting solution to accelerate the collection of export proceeds on crossborder sales facilitated via confirmed letter of credit.

On the other hand, an importer may require the use of an invoice financing facility or

working capital facility to finance their procurement until sales proceeds are received from their debtors to settle the financing.

“These working capital and supply chain finance solutions can be structured for crossborder trade and domestic trade applications,” he says, adding that Standard Bank has invested heavily in the development and rollout of these solutions.

The second emerging trend is digitisation with digital adoption accelerated by the Covid-19 pandemic.

Milo says the bank’s clients are increasingly looking for opportunities to automate their environments to create internal efficiencies and cost savings.

“There is an emerging trend towards adoption of new technologies such as artificial intelligence, machine learning and robotics in the international trade environment,” he says. In addition, Standard Bank is partnering with third-party platform providers and fintech companies to develop best-ofbreed trade finance solutions for the local market.

The third emerging trend is the focus on environmental, social and governance (ESG)

considerations. As well as ensuring suppliers abide by key ESG criteria, there is increased awareness of sustainability issues related to the firm’s operation, the promotion of supply chain continuity and the attainment of specific ESG related KPIs set by executive management, reveals Milo.

“The promotion of supply chain continuity has various dimensions, including environmental resource utilisation, the use of sustainable materials and the carbon footprint of the supply chain but, also importantly, preferential procurement, the extent of domestic (or regional) trade and payment terms offered to SME suppliers.”

All too often the needs of a large corporate and their SME suppliers are at odds: SMEs want to be paid as soon as possible while large corporates want to enhance their balance sheet through longer creditor repayment terms.

Standard Bank’s supplier financing solution addresses this challenge, says Milo.

“The solution enables a large corporate buyer to negotiate extended terms with the SME supplier, with the understanding

the SME supplier will be able to discount the associated receivable via Standard Bank prior to the maturity date of the invoice to obtain cash flow, utilising the credit facilities of the corporate buyer and at a preferential rate aligned to the financial standing of the corporate buyer rather than the SME supplier. The bank’s Sustainable Finance team can structure bespoke financing solutions to meet a client’s specific ESG requirements.

The fourth trend is country risk mitigation. Milo explains that exporters can mitigate their payment risk exposure by transacting via a letter of credit (LC). “An LC is an undertaking issued by a bank on behalf of an importer in favour of the exporter, whereby the issuing bank agrees to make payment to the exporter, provided all of the terms and conditions of the letter of credit have been met.”

An added benefit of LC confirmation, Milo says, is that the exporter is also able to request the confirming bank to discount compliant LC drawings to receive early payment on the LC, providing the exporter with a source of working capital and liquidity support.

Terms and conditions apply. Authorised financial services and registered credit provider (NCRCP15).

The Standard Bank of South Africa Limited (Reg. No. 1962/000738/06). GMS-19806 10/21

Port and supply chain issues a top priority Political stability is critical in attracting investments and encouraging more cross-border trade, says Dr Greg Cline, head of corporate accounts at Investec for Business.

What President Cyril Ramaphosa’s recent state of the nation address (Sona) revealed is SA is on the verge of exciting developments, he says, pointing out that traders have started to incorporate Covid-19 risks into their thinking.

“Prior to the pandemic cash was king. However, in a Covid world, stock has become king as supply chain disruptions continue to have a negative impact globally,” says Cline.

Consumer demand in the US remains robust with the US’s GDP forecasted to grow at 5.8% this year.

LONGER LEAD TIMES

“As the global economy starts to recover from the impact of the pandemic, consumer demand in many countries has recovered more quickly than supply. However, supply chain disruptions as a result of a shortage of container vessels on major routes, as well as a shortage of truck drivers to transport containers, is resulting in longer than expected lead times,” he explains.

Locally, the situation is exacerbated by the dismally

Greg Cline … better operators. inefficient state of SA’s ports.

Ranked among the lowest globally in terms of performance, they are characterised by long turnaround times which is driving up costs for both importers and exporters.

In his recent Sona President Ramaphosa acknowledged the impact of SA’s inefficient ports on importers and exporters and said Transnet was working to reduce congestion at ports by improving operational efficiencies. He also indicated that Transnet was looking to partner with private entities at the Durban and Ngquru Container Terminals.

“SA needs competent and well-functioning ports and more investment into both our ports and railway network to

ensure more efficient crossborder trade,” says Cline. “The announcements made by the president now need to be acted on as swiftly as possible.”

Disrupted supply chains and the accompanying logistics constraints have created something of a challenge for both importers and exporters.

For importers, prolonged lead times means blue chip retailers frequently push out payment terms, negatively impacting their cash flow cycles. This means they need to ensure adequate working capital for longer periods than has traditionally been required.

“To mitigate the risks of the current importing environment, many importers are carrying more inventory and have evolved their inventory tracking and forward planning intelligence to recognise where bottlenecks are occurring and to adapt to the global trade environment. Essentially, they’ve had to become better operators,” he says.

Cline is upbeat about the local economy’s prospects. “A commodity-led trade surplus and a predicted tax overcollection at Sars is being accompanied by economic activity taking place — all of which augers well for the local economy. Now all we need is for freight costs to come down.”

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BusinessDay www.businessday.co.za Thursday 24 February 2022

INSIGHTS: TRADE FINANCE

Headwinds and tailwinds for trade in 2022 Africa: access to finance ‘a challenge’ of mechanisms created to •helpNumber eliminate continent’s financial borders and accelerate payments

SA’s international trade rebounded strongly in 2021 with exports increasing by 31% year on year and imports growing by 21% year on year, according to statistics from the South African Revenue Services (Sars). The country’s trade surplus remained robust with exports outpacing imports by R174bn (+73% year on year) as at November 2021 (YTD).

SA’s exports have been driven by the cross-border sale of precious metals, products of iron and steel, chemicals, motor vehicles and mineral products.

The value of these exports has increased in response to increasing commodity prices and an uptick in economic activity in the economies of its trading partners, explains Justin

Milo, head of trade for SA at Standard Bank.

“Imports have been driven by the importation of oil and refined petroleum products, base metals, machinery and equipment,” he says, adding that the values of these imports have jumped in relation to increased commodity prices — especially the oil price — and depreciation of the rand.

STRONG GROWTH

“Trade with key trading partner blocks was robust across all major regions with Europe, Asia and North America showing trade growth rates in excess of 20% year on year, but with SA’s exports to the rest of Africa only expanding by 18% year on year, and imports from the region

increasing by 11% year on year, the hope is that we will start to see strong growth in SA’s trade with the rest of Africa as the African Continental Free Trade Area (AfCFTA) gains traction in the region.”

Overall, the macroeconomic environment was more conducive to export activity on account of the depreciating rand, increasing commodity prices and an increase in economic activity, which has provided a much-needed boost to local export industries in the mining, agriculture and manufacturing sectors.

“The continuation of this trend may well boost employment and growth in the SA economy,” says Milo.

He cautions, however, that

there are a number of anticipated headwinds and tailwinds that are likely to impact SA’s international trade landscape during 2022.

“Some of the tailwinds include high commodity prices, 4.4% year-on-year global output growth (according to the IMF’s World Economic Outlook publication) and the prospect of a ‘new normal’ emerging from more pragmatic approaches to the management of the Covid19 pandemic, both of which should encourage sustained demand for SA’s export commodities,” says Milo.

Potential headwinds include the modest growth pencilled in for the SA economy — the IMF forecasts growth of just 1.9% year on year — rising global

inflation and consequent monetary tightening and rising interest rates.

Global supply chain challenges have promoted greater regional and local trade as a means of diversifying supply chains. This has two potential spin-off opportunities, says Milo.

OPPORTUNITIES

“First, new opportunities for trade with markets in Africa which are in closer proximity than traditional markets and, second, increased local trade may promote industrialisation and capacity for new export industries,” he says.

However, the impact of the uneven progression of the Covid-19 pandemic, liquidity

challenges, geopolitical events and macroeconomic factors such as rising inflation and exchange rate volatility are likely to affect SA’s trading partners differently, he explains, adding that this may result in increased payment risk and country risks faced by South African exporters.

“Financial institutions such as Standard Bank play a crucial role in international trade — through the provision of trade finance to importers and exporters — but also, importantly, through the provision of risk mitigation solutions to assist with the management of key trade risks such as payment risk, performance risk, country risk and exchange rate volatility.”

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he demand for trade finance and working capital is growing across the continent as economies start to recover from the ravages of the Covid-19 pandemic.

However, access to trade finance remains a challenge for many African businesses. The estimated value of unmet demand for trade finance in Africa was more than $81bn in 2019, says the African Development Bank and Afrexibank.

The pandemic worsened Africa’s trade finance gap with tightening global financial conditions leading to large capital outflows from Africa, exacerbating liquidity constraints and making it harder for banks to finance African trade.

A number of development finance institutions, including the African Development Bank, have tried to ease funding requirements for clients to help support trade on the continent.

The African Development Bank has called for the high level of capital requirements for trade finance transactions to be reassessed, pointing out that letters of credit — the most common trade finance instrument — are usually low risk and short term in nature.

At the same time the secretariat for the African Continental Free Trade Area (AfCFTA) has been in discussions with commercial banks in Africa to expedite the establishment of a trade finance facility to support small and medium-sized enterprises to improve access to finance.

Another mechanism intended to boost intra-African trade is the Pan-African

THE PANDEMIC WORSENED AFRICA’S TRADE FINANCE GAP WITH TIGHTENING GLOBAL FINANCIAL CONDITIONS LEADING TO LARGE CAPITAL OUTFLOWS Payment and Settlement System (PAPSS) platform which was launched in January this year.

The brainchild of the African Export-Import Bank (Afreximbank) and the AfCFTA secretariat, the platform aims to accelerate cross-border transactions, saving the continent an estimated $5bn in payment transaction costs.

The platform enables instant cross-border payments in African currencies and tries to eliminate the continent’s financial borders while at the same time integrating different payment systems, avoiding the payment delays, operational inefficiencies and concerns around compliance that were the result of cross-border payment transactions that had to be routed offshore for clearing and settlement.

“The launch of PAPSS is exciting,” says Esther Chibesa, Sub-Sahara Africa head of Treasury and Trade Solutions at Citi. “It is platforms like this that may well help to solve some of the common problems found in intra-African trade.”

Pointing out that intraAfrican trade has always existed but in subregions, she says AfCFTA is an opportunity to consolidate subregional trade so East Africa can trade with West

Esther Chibesa … innovation.

Africa and north with south.

“However, growing trade in Africa requires an investment in infrastructure, opening more current accounts and incorporating different legal aspects, among other factors.

How to move money between countries is also an important consideration which PAPSS looks to address.”

For its part Citi has been looking at how it can create frictionless cross-border payments. The latter have traditionally been a timeconsuming exercise for both importers and exporters as well as their banks.

Chibesa explains that when initiating a cross-border payment, traders are required to submit supporting documents to their banks to meet their country’s foreign exchange control and regulatory reporting requirements. “Until recently, these documents were received and processed separately from corresponding payment instructions, requiring manual interventions to link them.”

In 2021 Citi launched a new electronic platform to its institutional clients to speed up the process of cross-border payments and associated documentation by digitising supporting documents. The platform provides users with details about the documentation required and data requirements for different payment types The service, which was rolled out in SA first and is now ready to be launched in central and west African markets, has streamlined and eased the process of cross-border payments by bringing together all the necessary documentation on a single electronic platform.

Citi has been making significant investments in digital technologies and platforms to simplify, integrate and automate clients’ payments and forex related activities. Its objective is to create frictionless payments that can be delivered electronically to any country, via any channel, in any currency.

Digitising documentation, explains Chibesa, helps clients to do more in less time and with fewer resources. “It has reduced a process that used to take two to eight days to just one day.”

By partnering with development finance institutions to develop cofinancing structures, Citi has been able to increase its risk appetite, while partnerships with fintechs allow it to assist clients to facilitate finance and explore payments in the payment intermediary space.

She reports a growing link between trade finance and sustainability, with supply chain finance increasingly including a sustainability offer.

“Digitising cross-border payments documentation processes is setting the stage for further innovation, including how to achieve better sustainability outcomes as environmental, social and governance takes centre stage.”

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