Tricks of the Trade
by Dino Sani, Head of Treasury Services for Latin America, BNY Mellon
Intra-emerging market (or ‘south-south’) trade – having grown at a compound annual growth rate (CAGR) of 19.4% since 2002 to account for 23% of world trade in 2010 – has stepped firmly into the spotlight. And of the growing network of trade between emerging economies, it is the relationship between Brazil and China that has risen to pre-eminence, with bilateral trade between the two economies now worth approximately US$100bn.
The importance of this trade corridor in particular – and its reputation as the flag-bearer of south-south trade – was underlined in June this year by the signing of a landmark trade agreement between the two economies. This agreement detailed an agenda of mutual investment and established a currency swap facility designed to facilitate future trade – thereby not only demonstrating the significance of the trade connection but also taking steps to safeguard its continued success.
As intra-emerging market trade continues its advance – indeed, recent reports suggest trade to the value of US$2.82tr is now bypassing the west – it is vital that corporates in emerging markets are equally proactive in preparing for the future. Safeguarding their business – and optimising cash and trade flows – will entail both a comprehensive understanding of the economic developments and trade finance trends occurring on a macro level, and a detailed awareness of the capabilities and technological tools that they will increasingly rely on.
Open account trend to continue
First and foremost, corporates are likely to follow the trend – well-established in developed markets – for trading on open account terms. Already over 80% of global trade is processed via open account, and the flexibility, efficiency and cost-effectiveness of this form of trade will inevitably see it gain greater traction in emerging markets.
That said, more traditional document-based forms of trade settlement – such as Letters of Credit (LCs) – will be no less important in the short term. Indeed, as corporates in economies such as Brazil widen their trade networks and deal with an increasingly dispersed and diverse range of trade counterparts, the risk-mitigation properties of LCs may outweigh the benefits offered by more innovative trade terms for some time yet.
But as trade relationships between emerging markets become more established, and there is greater familiarity with the regulatory, economic and cultural frameworks of counterpart economies, corporates in these markets will undoubtedly join the global shift towards open account.
This trend reflects a wider increase in the expectations of corporates for greater flexibility and efficiency. As trade patterns evolve and the demands of modern cross-border trade are felt, corporates will require enhanced trade processing and sophisticated yet flexible working capital management solutions. This, in turn, will increase the pressure on local and regional providers to ensure their trade services provision can continue to meet the developing needs and heightened expectations of their customers.
Key to this will be the ability to develop advanced technology and – specifically – innovative electronic platforms. Not only are electronic capabilities vital to increasing processing speeds and enhancing supply chain transparency, but such technology can also assist in meeting the rising demand for working capital management tools. As corporates display greater interest in discounting receivables into the forfaiting market, for example – and this is certainly the case in Brazil, where corporates are reacting to the Asian demand for longer payment terms – the capabilities that support such techniques will become increasingly important.
Rise of the renminbi
A further consideration for both corporates and their local providers is the growing power of the Chinese renminbi (RMB). China already lies at the centre of intra-emerging market trade – last year the Asian powerhouse accounted for 40% of south-south commerce – and as its currency grows in prominence the need for RMB processing capabilities will likewise increase. Full convertibility of the RMB may not be achieved for another decade yet. But in light of June’s trade agreement, such capabilities will – in time – be particularly attractive to corporates in Brazil, enabling the removal of all foreign exchange risk and cost from transactions with Chinese counterparts.
Of course, providers – particularly local and regional banks – may find the development of such capabilities easier said than done. In meeting the increasing trade, working cash management and currency needs of their customers, many will seek partnership with a global provider in order to leverage the latest technology and specialist expertise. Such partnerships – as with the newly-strengthened trade relationship between Brazil and China – can only fortify the trade community as a whole, and ensure the future remains rosy for emerging markets.