The yearly GTR conference brought about the usual crowd of CFOs, treasurers, corporate trade finance managers, bankers, insurers, lawyers, consultants and system providers. There was no particular overarching theme and the general atmosphere was rather positive. A few “usual” themes caught my attention:
The overall situation resumed nicely after the tumultuous covid credit events in the world of commodity trade finance. This is true especially from the perspective of the large traders to whom certain banks have pledged “whatever it takes” type of commitments. The year has brought about peak liquidity requirements first on the metal side, then oil and latest on gas and power whereby substantial additional liquidity was made available in record time from numerous banks and even states.
The large traders’ quest for additional sources of capital seems never-ending. Banks have been accommodating but there are limits. Meanwhile smaller and emerging traders are still struggling to catch banks’ attention and commitment while slowly and diligently building the required track record. There are no quick wins for building trust, just hard work and patience. Everyone anticipates that technical solutions aimed at mitigating, especially fraud risk, and making collateral more secure will help tremendously. And then there is the trade finance gap!
The trade finance gap and alternative liquidity providers
The Asian Development Bank’s global trade finance gap was previously estimated at USD 1.7 trillion. The study confirmed that SMEs involved in trade represent approximately 40% of the rejected trade finance requests. Hopes that direct lenders and trade finance funds can bridge that have been overly optimistic. Such players have hurdles both on finding the flows that will pay the high return requirements demanded by investors and building comfort on the investor side that they are deploying capital towards acceptable risks.
Such “fixed income” investors are not very familiar with trade finance and diligence is required in selling a risk mitigated package of classic trade finance assets (bills of exchange, receivables). For those players that have a good understanding of the risks involved and appetite beyond banks’ often restrictive approach, there is business to be made. What remains to be seen is how the economy will “land” following the unprecedented period of financial tightening we are seeing and impact on trade in general and commodity trade in particular. Furthermore the increased borrowing costs will test traders’ ability to pass it on to suppliers or off-takers in the supply chain. Ultimately there will be a higher bill to pay.
ESG pushes forward as the new compliance and companies (especially around debt facilities) need to embrace it sooner rather than later. Time is important and action needs to be taken sooner rather than later. Approaches vary a lot with some corporates working towards or having a dedicated rating while others prefer to develop very specific business related KPIs. There will be a forming process and the standard will be further refined but what is critical is that ESG needs to be put in the context of the company’s business model and properly understood by investors and stakeholders. What remains interesting to see is the linkage of syndicated facilities to ESG criteria, while transactional commodity finance lines, which remain the bread and butter of the trade and commodity finance sector seem not aligned.
From blockchain to post-trade execution platforms, there are many players on the trade related fin-tech market. The challenge has been to align stakeholders and the risk is to end up with a solution chasing a problem. The return on investment profile and messaging of such solutions needs to be further refined. Legislation will play a critical role and will further enable the digitization of trade and hence bring a contribution to increased transparency and (fraud) risk mitigation. It will all come together, as I believe the digitation of trade is in its infancy. With English law being the main choice for trade and related arbitration, we can only congratulate the UK for the advancements on the Electronic Trade Documents Bill.
Overall, it seems that we are moving from an environment stressed by specific events like supply chain constraints, fraud, absence of physical documents, liquidity requirements to a more overall challenging economic environment with increased operating costs and a new financial regime. Sticking to risk management, disciplined capital allocation and competitive advantages will once more help throughout more difficult times.