Asia’s economy has proved itself to be resilient during the recent financial crisis compared to the US and Europe which have been more severely impacted and suffered a reduction in domestic consumption rates.
Yet, as part of a global economy, many Asian economies could not escape the impact of the crisis.
Although, the Asian markets that have been affected have managed to turn things around quicker, with the region achieving 5.2% growth in 20091. Although the Asian trade finance market is holding up well, the landscape has changed and practitioners need to recognise the different needs of their corporate clients, says Roger Packham, Regional Head of Trade Finance Asia at Deutsche Bank’s Global Transaction Banking. We have observed greatly improved conditions in all of the 14 markets in Asia where Deutsche Bank currently does business. With activity in intra-Asia trade flows picking up, both the number of transactions and the volume of trade finance loans have shown strong growth so far this year and liquidity has returned close to pre-crisis levels.
Asia – a key driver of growth
In many respects, Asia is currently driving the global recovery. Indeed, recent research has predicted that Asian Gross Domestic Product (GDP) will grow by around 7% in 2010 – compared to a projection of 2.7% growth globally – and East Asia is expected to perform even better with growth of 8.7%2. In South-East Asia, aggregate growth is likely to rebound to 5.1% in 2010, from just 1.2% in 2009, and South Asia, too, will pick up in 2010, led by a projected 8.2% performance in India, and strong growth in Sri Lanka (6.0%)3. With respect to trade, a report from the World Trade Organization in late March predicted that global trade volumes will show a rise of around 9.5%4 in 2010, a marked contrast from the contraction of over 12% seen in 2009 – the greatest decline since the 1940s.
While world trade is still showing a mixed recovery, the emerging markets have seen external trade pick up strongly and in some cases rapidly, unlike the developed economies. In a few instances, the export performance of emerging markets is close or above the precrisis levels.
According to figures released by the Netherlands Bureau for Economic Policy Analysis, also known as the CPB5, world trade volumes rose 3.5% in March from the month earlier. Following the rise in March, trade flows are now just 4% below the all-time peak reached in April 2008, and are up 21% from their recent low in May 2009. In the first quarter of 2010, trade flows rose 5.3% in comparison to the last quarter of 2009. Developing Asia has led the recovery in trade flows since the middle of last year, and imports to the region in March were 13% above their pre-crisis peak of April 2008.
The rapid recovery in Asia is especially impressive. With its huge fiscal packages, China boosted not only its own economy but also intra-Asian trade. As a consequence, total export traffic from a host of Asian countries, such as Japan, Indonesia, Malaysia and Taiwan, grew at a double-digit pace towards the end of 2009. China’s enormous demand for goods helped fill the gap that the slump in international trade had caused in the countries of Asia. This is documented by Japan’s export figures. In January, Japan’s exports to China jumped by 80% year-on-year and thus returned close to pre-crisis levels. Japanese exports of chemical and automotive products to China in particular nearly doubled in December 2009 in comparison to the previous year’s figures6.
A common factor fuelling Asia’s growth has been the expansion and increasing affluence of the middle classes. The emergence of a large and dynamic middle class raises Asia’s profile as an attractive destination for products ranging from consumer goods to financial services. The growth of the middle class over the past decade has been noticeable in many Asian countries.
In China for example, the percentage of rural households with annual net per capita income above RMB 5,000 (US$ 735) was only 2% in 1995, but rose to 24% in 20067.
Even though the outlook for the region is promising, there are still plenty of issues that need to be considered if trade is to continue to lead the recovery in Asia. Risk management and mitigation products are still at the top of the agenda for many as corporates remain concerned about the financial health of key counterparties. To this end, financial supply chain (FSC) solutions, which allow a corporate to improve its own working capital position while also assisting key suppliers, continues to be a key area of focus. As corporates learn lessons from recent events, they have been striving to put in place arrangements to assist them should a similar situation arise again.
Indeed, adopting a more cooperative approach to the financial supply chain is a trend that has been developing for some time, both in Asia and across other regions.
Optimizing working capital: a case study in Vietnam
A recent deal that reflects current best practice in terms of optimizing working capital and liquidity for corporates is the account receivable financing arranged by Deutsche Bank for the Vietnam Southern Food Corporation (Vinafood 2) in mid-2009. Vinafood 2 is a state-owned entity and the leading rice exporter in
Vietnam. The company currently accounts for over 70% of Vietnam’s rice exports and a number of other agricultural products and foodstuff. Its key clients include the Philippines, Indonesia and Malaysia.
Vinafood 2 already maintained a number of local banking relationships that supported its financing needs via discounting export bills with full recourse. However, when Vinafood 2 was mandated by the National Food Authority (NFA) of the Philippines to export 1.5 metric tonnes of rice, with payment terms of document against acceptance (D/A), it needed to comply with a new Vietnamese government directive stipulating that they had to discount the D/A bills on a non-recourse or limited-recourse basis. As local banks only possess limited offshore networks, this had to be done through an international player such as Deutsche Bank.
In order to address Vinafood 2’s needs, Deutsche Bank – utilizing its network in both Vietnam and the Philippines – delivered a 180 day non-recourse discount export facility of approximately US$ 84 million which was partially backed by credit insurance. NFA pre-arranged a portion of the import financing using two local banks and mandated Deutsche Bank Philippines to provide the rest through Trust Receipt loans to settle against NFA’s discounted bills upon maturity.
Deutsche Bank Philippines also acted as the collecting agent for Deutsche Bank Vietnam, thus enabling greater control over document flow and enhancing risk mitigation.
Apart from reflecting current best practice in receivables financing, this was a notable deal given it was structured during the financial crisis – when many financial institutions were closed to new business. In addition, Deutsche Bank was able to secure 90% indemnity coverage from a highly rated insurer despite market conditions then – and was also able to fix the discount rate against the trend of rising USD cost of funds at this time.
Market trends
Although conditions have certainly improved, the second half of 2010 may be tougher for trade finance providers in Asia, with credit margins contracting dramatically as liquidity returns to the market. The growth in intra-Asian trade and the move away from being predominantly export-driven economies will certainly help cushion Asian markets from economic challenges in other parts of the world.
There are several key trends that are likely to shape the trade finance landscape for the Asian markets in 2010 and beyond. Risk mitigation remains at the top of the agenda for many corporates and products such as Letters of Credit (LCs) are therefore likely to continue to be popular for the foreseeable future. Many suppliers still want to be paid quickly and likewise buyers want their goods right away, hence many clients feel that traditional forms of trade finance, such as LCs, Bills of Exchange and Guarantees are still relevant forms of payment. This has also been accompanied by an increase in demand for credit insurance and related products.
In many respects, we are likely to see a split in terms of recovery speed between the larger economies in Asia that have significant domestic demand, such as China and India, and the more export-dependent economies such as Hong Kong, Korea and Singapore that may take more time to rebound to previous high levels due to sluggish growth in exports to western markets such as the EU and the US.
Equally, there will also be a different pace of recovery and growth among the various industry sectors. Those that are largely domestically driven – such as infrastructure and retail – will perform better, while export-driven industries such as manufacturing may take a little longer to return to pre-crisis performance levels.
With Asia continuing its growth momentum this year, Deutsche Bank is set on capturing the opportunities brought about by the increased trade flows within the region. This is a result of the Bank maintaining its focus on the region as a key growth pillar sustaining investments in building product capabilities, expanding network coverage, and developing talents in Asia, all despite the difficult times last year. Furthermore, the Bank also has a strong track record in providing clients with innovative trade finance solutions, in particular FSC solutions aimed at enhancing working capital management, improving operating efficiencies, and reducing costs. Deutsche Bank is well placed to service the needs of its corporate and financial institution clients in Asia and across the globe, and we remain committed to meeting the needs and aspirations of our clients. Our success in the recent Trade Finance magazine Awards for Excellence Poll in Asia is testimony to this.
Notes
1 Asian Development Bank, 13th April 2010, http://www.adb.org/Media/Articles/2010/13194-asian-developments-outlooks/
2 World Trade Organization, 26thMarch 2010, http://www.wto.org/english/news_e/pres10_e/pr598_e.htm
3 Asian Development Bank, 13th April 2010, http://www.adb.org/Media/Articles/2010/13194-asian-developments-outlooks/
4 World Trade Organization, 26thMarch 2010, http://www.wto.org/english/news_e/pres10_e/pr598_e.htm
5 World TradeMonitor:March 2010, Netherlands Bureau for Economic Policy Analysis, 31May 2010.
6 “World trade heading for double-digit growth in 2010”, DB Research, 11 March 2010.
7 “Emerging Asia’s middle class – a force to be reckoned with”, DB Research, 21st August 2009.
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