The world economy was already showing fault lines as we entered 2020, driven by trade rhetoric between the US and China, and uncertain economic growth.
As reported by the World Trade Organization (WTO), the value of world merchandise trade declined by 3% in 2019, while trade in commercial services registered only a 2.1% increase, meaningful falls compared to 2019.
The Middle East and Africa registered one of the largest declines globally in merchandise trade, 6.4% in 2019 and 2.9%, in 2018.
The UAE provided a bright spot, as an important player in the commercial trade in services thanks to its strong multi-mode transportation infrastructure. Qatar recorded the highest percentage increase in the service trade ranking in 2019.
Given this background, there was no immediate expectation for world trade to grow in a meaningful way in 2020.
In the Middle East and Africa, every business has been facing risks from the pandemic
However, the pandemic and related disruptions in mobility and supply chains have utterly changed the outlook.
For 2020, the World Bank’s baseline forecast is 5.2% contraction in the world GDP, with 4.2% for the Middle East and Africa. Meanwhile, the WTO predicts that all regions will suffer double-digit decline in trade.
In the Middle East and Africa, every business, regardless of size or sector, has been facing risks from the pandemic and related disruptions.
The collapse of the oil price delivered a parallel shock.
The regional economies’ external and fiscal balances have come under stress, which has heightened country and counterparty risks.
Credit rating downgrades have followed, as well as constrained liquidity. S&P states that the budget deficit in the Gulf Cooperation Council (GCC), is expected to reach $490bn by 2023.
The regional governments have responded swiftly to the socioeconomic crisis, with a variety of stimulus packages, including exemptions, suspensions and subsidies, to prevent credit crunch and support welfare.
The GCC alone mobilised more than $150bn to minimise the socioeconomic fallout of the pandemic in the region.
The pandemic and related disruptions have impacted trade due to intensifying capex/opex optimisations and worsening trade restrictions, but like any crisis, it has also brought lessons and opportunities.
Above all, the pandemic has prompted a major collaboration worldwide in an unexpected way. As trade flows have continued to shift and supply chains have been tested, buyers and sellers have demonstrated a ‘we are in this together’ mindset.
The pandemic has prompted corporate treasurers to step up digital transformation across their processes and supply chains. The pandemic has also mobilised substantial ESG efforts, underpinned particularly by export and development finance.
Regional supply chains have been under huge pressure to deliver against the backdrop of the constrained logistics and freight capacity on land, air and sea routes.
Yet buyers and sellers have removed the age-old tension over their conflicting objectives by extending payables and improving receivables, stepping up to support each other’s cash conversion cycle.
Even before the pandemic started to squeeze the economies in the region, supply chain finance solutions – ranging from receivables discounting to payables finance to distributor finance – were already gaining further ground.
One of the regional retail leaders, Landmark Group’s award-winning supply chain finance programme with Asian Development Bank, and the region’s largest non-oil and gas manufacturer and Emirates Global Aluminium’s award-winning dual tranche receivables programme are just two examples.
The pandemic has of course mobilised corporate treasurers for quick wins to improve their working capital, but has also pressed them on remaining super-focused on cash and costs.
There are still meaningful opportunities in several sectors, notably oil and gas. Additionally, key suppliers such as automotive or electronic manufacturers are also working on bridging credit gaps in the markets by supporting their distributors with extended payment terms through various solutions – and in some cases at their own cost.
Furthermore, the pandemic has encouraged regional governments to adopt best-practice approaches to enable access to finance, especially for SMEs, which face constrained liquidity.
For example, Saudi Arabia’s Ministry of Finance launched a new service on its digital platform, Etimad, to enable SMEs to obtain funds and sell receivables from the financial and banking sector.
Digital transformation in trade finance has long been under way even before the pandemic stressed the need for digitally enabled processes and supply chains – though it required a comprehensive approach, combining physical and financial aspects in tandem. For example, according to the International Trade & Forfaiting Association:
The pandemic and related disruptions have challenged the trade finance community with real force to accelerate such digital transformation of trade finance.
The Middle East and Africa are well-positioned to benefit due to the regional economies’ well-established commitments to digital transformation.
Africa is already a global leader in mobile money, while all around the continent the digital transformation is a key and integral part of national visions in countries including Nigeria, South Africa and Kenya.
The Middle East is no different, since regional national visions such as those in play in Saudi Arabia and the UAE build on digital transformation.
The UAE has also launched the world’s first digital trade finance bank – Anglo-Gulf Trade Bank – to rebuild trade finance on a collaborative, simplified and data-first approach.
Furthermore, there has been increasing outreach with new multi-bank platforms such as Komgo for commodity finance, Marco Polo for supply chain finance and Skuchain for inventory finance.
There is also Taulia, which now counts, among many investors, Prosperity7 Ventures, which is the Saudi Aramco’s diversification fund.
Following up from the pandemic, there will be increasingly more demand from corporates and the public sector to accelerate digital transformation within trade finance, including interoperability, real-time dashboards and end-to-end supply chain visibility embedded with deep-tier financing.
The pandemic has caused significant dislocation in financial and commodity markets, and volatility in availability and cost of funding, which has reinforced the need for Export Credit Agencies (ECAs) even more.
In response, ECAs and other agencies have mobilised substantial resources along with new programmes to support trade and capital flows.
For the region, this has translated into various ECAs’ supported facilities, including untied programmes highlighting the agencies’ long-lasting purpose to develop and maintain long-term commercial partners. The agencies in the meantime have been moving the case for sustainable business and finance strategies forwards in the region.
Just before the pandemic took over the region’s economies, K-Sure and Abu Dhabi National Oil Company signed a $3bn facility under K-Sure’s strategic partner programme.
Saudi Arabia’s Ministry of Finance signed its first-ever ECA facility: $258m with Euler Hermes, for procurement of buses to support public transportation.
In Africa, the Mozambique liquefied natural gas project completed the largest project finance facility in African history amid the pandemic thanks to support from several agencies.
Furthermore, the Multilateral Investment Guarantee Agency has issued a €359m guarantee for up to 10 years for a loan provided to the Trade and Development Bank for the purpose of lending to the real economy for building healthcare facilities in response to the pandemic.
Additionally, multilateral development banks such as the Arab Petroleum Investments Corporation, have launched a $500m support package.
The Islamic Development Bank has approved a pandemic response programme of $2.3bn to protect supply chains especially for strategically important sectors such as agriculture.
In Africa, Africa Development Bank raised $3bn from a COVID-19 social bond, the largest dollar-denominated social bond ever launched in international capital markets, to help ease the socioeconomic impact of the pandemic across Africa.
The African Export-Import Bank, along with the European Investment Bank, has been directing funding to local economies to support recovery.
While the recovery will require far-reaching socioeconomic stimulus packages to lift up the region, there are emerging lessons and opportunities to leverage upon more collaborative supply chains, digitally enabled processes and progressive export and development finance for the benefit of all.
Semih Ozkan is a trade finance director in an international bank. He is also regional head of the International Trade & Forfaiting Association
This article was taken from the December 2020/January 2021 issue of The Treasurer magazine.