Financial Supply Chain

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Driving Growth and Innovation through in Latin America Techniques such as supply chain financing are becoming an important complement to traditional trade finance instruments in Latin America and other emerging markets.

Driving Growth and Innovation through in Latin America

by Shahrokh Moinian, Managing Director and Head of Trade Finance and Cash Management Corporates Americas, Global Transaction Banking, Deutsche Bank

Five or six years ago, trade finance was becoming increasingly unfashionable. Articles discussed the decline of trade finance in favour of open account while most conversations around emerging markets focused on BRIC (Brazil, Russia, India, China) primarily for low-cost sourcing and commodities. The idea of the financial supply chain was largely conceptual and alternative financing techniques were often relegated to smaller companies. In only five years, we have seen a transformation in the global business environment and consequently, the way that corporations do business. Treasurers have become increasingly proactive and pragmatic in the way that they manage credit and liquidity risk and support the business in building its international footprint. As part of this transformation, trade finance has become an essential tool for treasurers, a trend that is set to continue in 2013 and beyond.

From single track to super highway

Latin America, particularly Brazil as the largest economy in the region, has experienced a volatile few years. In 2007 and 2008, Brazil’s economy was growing rapidly, the country had become a net creditor and its rating was increased. The 2008-9 financial crisis hit the region hard, not least due to its reliance on commodity-based trade with North America and Europe, which declined sharply. Brazil was one of the first economies to experience recovery in 2010, but something had changed.

South-south trade routes that had been narrow and bumpy before the crisis are now becoming the trade superhighways

While traditional trading partners remain important, and commodities continued to be the backbone of international trade, south-south trade routes that had been narrow and bumpy before the crisis are now becoming the trade superhighways. China, for example, has become Latin America’s second largest trading partner after the US. In June 2012, this link was strengthened further by a China – Brazil trade agreement intended to encourage bilateral trade flows and mutual investment in industries such as manufacturing, aviation, mining and infrastructure. Over the next five years, we expect Brazil to become one of Asia-Pacific’s fastest-growing export and import partners, with rapid growth in trade with India, Indonesia, China and Singapore. Strongly emerging south-south trade routes are not restricted to Asia, however: in 2010, trade between Latin America and Africa totalled USD 7bn according to the International Monetary Fund (Direction of Trade Statistics 2000 – 2011). In 2011, this increased by more than fivefold to reach USD 39bn, and 2013 is likely to see a continuation of this upward trend.

Managing risk, maximising efficiency

Changing trade patterns, industrial diversification and strong growth momentum create new challenges, not least the need to manage risk and optimise efficiency when dealing with diverse counterparties in less familiar economies. Companies based in Latin America looking internationally should be focusing on how they manage their counterparty risk, ensure appropriate levels of liquidity, and enhance their operational efficiency as they extend their horizons to new regions. Consequently, they require international banking partners with the geographic footprint that meets their own aspirations, the relevant portfolio of trade finance instruments, and the technology and advisory services to enable them to maximise process efficiency and control.

Flexible solutions to support international growth

One example of how Deutsche Bank is supporting these companies is through our stand-by letter of credit (stand-by LC) solution. Documentary trade instruments such as letters of credit (LCs), stand-by LCs and short-term trade finance tools are playing an increasingly important role in managing risks associated with new trade flows. In Latin America, not only do trade finance instruments have credit risk mitigation benefits, but there are also benefits under tax and insolvency laws in some countries. However, as many companies’ credit facilities have reduced in size, there is less contingency funding available for standby LCs. Consequently, banks such as Deutsche Bank are providing bilateral facilities to customers specifically for standby LCs. This frees up working capital, allowing companies to simplify their exposures by working with a single bank, and enhancing efficiency by enabling a single point of entry for standby LC business.

Supply chain transparency is also critical for Brazil and other Latin American economies in order to manage the security implications of more extended, and increasingly diverse trade routes. An effective way of achieving improved transparency and control is the use of end-to-end supply chain automation through Deutsche Bank’s innovative electronic platform. While automated supply chain and trade finance tools are provided by some global banks for their customers operating with customers and suppliers in emerging markets, some domestic providers may rely on larger partner banks to provide this capability.

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