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The last couple of years were engulfed in uncertainties, from battling a novel virus to coming to terms with inflation, rate hikes, coping with new terms like ‘near-shoring/friend-shoring’, disruptions in global trade flow due to war, and ongoing geo-political issues.
There is a strong sentiment that this uncertainty shall remain for most of 2023 and beyond, causing an impact on global trade growth, which the WTO expects to remain positive, albeit at a much slower pace.
In this trillion-dollar trade market, trade finance plays a crucial role; perhaps the most important link that makes global trade accessible is ensuring that importers receive their goods and exporters receive their payments.
However, the core ecosystem i.e., the hub of exporters, importers, and lenders, is complicated, with multiple parties involved in a single trade chain. Not all move in tandem, either in response to external factors and/or dealing with change.
Some of the key areas that have a direct bearing on the future of a healthy global trade ecosystem needs to be monitored closely by all stakeholders.
Global supply chain ‘re’-configuration
From basking in the comfort of ‘Just in Time’ efficiency in 2019, to adjusting to challenges posed by the pandemic to a war in Europe has forced countries to revisit their trade & stock priorities.
De-globalisation, friend-shoring, de-risking concentration, and shifting from ‘just in time’ to just in case’ became common over the last 12- 18 months.
Not to forget, the logistical upheaval caused by the Suez Canal disruption in 2021 that saw freight prices soar for weeks beyond March 2021.
Added to that are inflationary pressures, high costs and workplace dynamics such as ‘quiet quitting’ that have slowed down the pace of adaptation post pandemic. Amidst all these issues, the global supply chain health is expected to remain stressed.
SMEs continue to be orphaned
Caginess by banks towards the trade finance sector (with some even scaling back operations in commodity trade finance) coupled with a string of fraud scandals among trading houses (particularly in Dubai and Singapore) have impacted smaller traders adversely, posing more struggle to gain access to that ever-important liquidity.
The recent Trafigura nickel trade fraud has led to questions of the size of facilities sanctioned to large trading houses, which possibly are being tapped or further lent to smaller traders due to the latter’s lack of direct facilities.
While SMEs are already grappling with rising interest rates & higher transactional fixed costs (e.g. compliance, CMA, insurance etc.) to wrap a tight security for lenders, there is yet another perceptional issue to deal; avoiding getting slotted in the ‘potential fraud’ category.
Further, rising Environmental, Social and Governance (ESG) requirements and reporting standards have added to the barriers for SMEs, particularly in emerging markets, to access working capital facilities.
Digitisation is the future, but when do we get there?
The entire trade finance industry continues to rely heavily on paper, with manual processes still being followed.
We have seen some progress in adoption of blockchain. But for these to grow visibly and return benefits, involving the entire ecosystem is key. It is crucial across the supply chain, from customs authorities to governments to third party certification agencies, to accept and embrace digitisation.
The closure of TradeLens in 2022 and more recently, Marco Polo in 2023 highlights the challenges of collaboration between large corporations and the industry. According to McKinsey, an electronic bill of lading (eBL) would save $6.5 billion in direct costs and enable $40 billion in global trade.
However, only a small percentage of BLs are currently digital, which represents a huge opportunity. While there exists a principal acceptance that digitisation is possibly the only visible future, some amount of inertia continues to persist.
It does not seem much of a technological concern but more on local law and regulatory adaptation. Hopefully, in 2023, with UK’s acceptance and legal recognition of electronic documents, we should see some progress in this space.
It is perhaps essential to kickstart somewhere and fine tune along the way.
Inflation and interest rate spikes – more expensive to move cargo
High interest rates, volatile prices, and the war in Ukraine have made it significantly more expensive to finance commodity trade, forcing the industry to look for alternative sources of working capital to keep their goods on waters.
On top of this, Russia’s invasion of Ukraine has trigged a profound shift in global trade flows resulting in longer, less efficient shipping routes. Changing trade patterns have made global flow less efficient and more costly, thereby pushing prices up for consumers.
Large trading houses have increased their borrowings, Trafigura increased its credit lines by $7 billion to around $73 billion.
At the same time, Glencore disclosed that margin requirements on commodities exchanges have led to an increase in their working capital borrowings.
Governments have also had to provide emergency support for credit lines to utilities, particularly in Europe, where power and gas prices have been highly volatile over the past year.
We saw export credit agencies back credit lines for large trading houses, power producers and suppliers. The IMF expects global inflation to ease from 8.8% in 2022 to 6.6% this year and 4.3% in 2024, but not to its pre-pandemic level of 3.5%.
As the trade finance industry moves ahead with its efforts on digitisation, collaboration between banks and fintech will be crucial to transforming the future.
Many banks seem to be at the starting point of their digital journey when it comes to trade finance. Some don’t have the resources, be it time or money, to experiment with technologies. During tough economic times, the focus often is on core, traditional business.
While retail banking has swiftly transitioned to digital tools for larger consumer acceptance, the same is not the case in trade finance.
One of the major impediments are costs linked to the adoption of technology, lack of expertise and outdated legacy systems, which are incompatible with latest technologies. Consequently, most banks have adopted the ‘wait and watch’ approach.