Technology playing a more active role
• Companies need to address cyber security and their response to managing risks around digitisation
Last year was a relatively good year for SA in terms of exports with a relatively healthy trade surplus, according to William Artingstall, treasury and trade solutions (TTS) head for Citi South Africa.
However, he says deeper analysis shows that exports to Africa seem to be flat, which may be a result of slower growth across the continent’s economies compared to previous years.
“The main growth in exports is in trade with Asia, which was a strong driver in 2017 and is likely to grow in importance.”
Artingstall goes on to point out that trade growth faces a challenge: the gap between the need for trade finance and the available trade finance, which could inhibit expansion.
That said he believes there is still significant opportunity in some of the financing of trade flows, especially for multinational corporations, which is a function of the lower-growth environment in which they are operating.
“There is a large focus around the efficient deployment of working capital and financing of trade flows. Depending on what happens with the oil price this year, it could support some growth of financing requirements for commodity trade flows.
“From a domestic perspective trade finance demand is coming through on multiple levels. There seems to be a lot of focus on working capital as a lever for growth for large corporates.
“We have seen a trend among large corporates to try to secure their supply chain without creating any loss of intrinsic value for their suppliers through the process, as many of their suppliers are SMEs. They want to create solutions with their banking partners to ensure that facilities are available for their suppliers, that these facilities are well priced and easily accessible.
“These symbiotic-type programmes are playing an integral role in securing supply chains,” says Artingstall.
He says the role of trade finance in growing international trade is critical, especially in the SME sector.
“Structuring trade finance to support a lower-cost financing solution to accelerate the receivables of SMEs is the crux of trade finance support for SME growth. Trade finance has one of the most important roles to play in ensuring that SMEs have sufficient access to funds at the right cost and at the right time, which translates to critical support for economic growth given that SMEs are recognised as one of the backbones of the global economy and play a huge role in promoting employment and social cohesion.”
Looking at trade prospects for 2018, he says there is still significant upside in both the trade services and financing spaces, whether it be providing letters of credit and guarantees or in the financing space.
Artingstall believes that two developments to watch are steps taken by the current US administration on their Pacific-side trade; and the UK’s Brexit negotiations.
“A harder UK exit from the eurozone is more likely to play into the hands of the growth of trading relationships for countries like SA with the UK.”
Another trend to watch is the growth in the popularity of counter globalisation sentiment that could further negatively impact the sluggish growth in global trade.
Artingstall says there is a growth in import financing requests on intercompany flows, which historically has not been a strong area of demand for financing, because the corporates have preferred internal funding.
“However, because of this sluggish growth companies are focusing on increasing efficiencies and accelerating cash flow through import financing, which is an excellent way of improving efficiency.”
An important driver of international trade finance is a company’s risk tolerance.
“Understanding the risk is essential in deciding whether it is worth mitigating. Defining who you are dealing with and which partner you are dealing with is a critical component.
“Second, knowledge of the country you are trading with and understanding the underlying relationship between the two countries is important. For example, does SA have a trading agreement with the country, and what are the country’s trading norms?
“Third, an understanding of liquidity and settlement risk is something that we are seeing more and more, which is not around the fact that you mitigated a risk of trust through a letter of credit or some other instrument, but is the actual risk of settlement when the letter of credit matures or the requirements are fulfilled.
“You are potentially trying to solve two issues. The one is the risk of settlement for the trade and the second is the risk of supply, because if you don’t get settled then do you want to continue to supply?
“The two risks, though close, are different in nature.”
A good way to mitigate for risk and uncertainty is scenario planning, he says.
“I can’t think of a way that will promote the understanding and mitigation of risk and uncertainty in quite the same way that scenario planning does, because the rule of thumb is to make sure you respond rather than react.”
Technological development, digitisation and the growth of e-commerce are also issues that importers and exporters need to be aware of and respond to, as they are sure to continue impacting global trade and trade finance.
“Technology has the ability to support both scale and efficiency in trade. For example, we are seeing a lot of growth in manufacturers opting to investigate selling direct to market through e-commerce solutions rather than through wholesalers, which is impacting on the historical business-to-business flows.
“Likewise, the role of blockchain is an interesting one to watch in the creation of an alternative environment for payment between parties in the global trade environment, provided it can overcome regulatory and industry hurdles.
“Integrated technological solutions in trade that promote host-to-host platforms are in demand among our corporate clients, which opens up new ways for banks to partner and participate with clients involved in international trade.”
However, he warns that technological and digital developments are making cyber security management and strategies a prerequisite.
“In the past year or so cyber security has become one of the hottest topics when you talk about technology in any form.
“While the ability of companies to leverage technology is going to play a more important role in the financing of trade, the biggest challenge to their success is the management of cyber security and how they respond to managing the risks around digitisation, technological innovation and e-commerce.”
THE MAIN GROWTH IN EXPORTS IS IN TRADE WITH ASIA, WHICH WAS A STRONG DRIVER IN 2017 AND IS LIKELY TO GROW IN IMPORTANCE