World trade as well as that of the Middle East and Africa has begun its journey towards recovery – a recovery that varies from one region to another, but a recovery nonetheless, and one that appears more positive than initially anticipated at the onset of the pandemic.
According to the World Trade Organization’s latest annual trade forecast, worldwide merchandise trade volume is expected to have grown by 8% by March 2021, after having fallen by 5.3% in the year to March 2020.
The forecast for the Middle East and Africa is similarly strong, 12.4% for March 2021, compared to an 8.1% drop in the year to March 2020, highlighting the regions’ strong correlation with global value chains.
Fiscal and monetary support, resilience and access to finance have helped mitigate some of the negative socioeconomic effects of the pandemic. Corporate treasurers have been in the eye of the storm, dealing with many issues including, but not limited to, liquidity, funding, counterparty risk management, currency exposures, systems, processes and controls, and staffing – all of which have presented meaningful lessons and opportunities along the way, particularly around supply chains, digital transformation and sustainability.
The pandemic and related disruptions impacted every business in the Middle East and Africa, regardless of size and sector, and highlighted the vital role supply chains play for these trade-dependent regions. Initially, supply shocks due to disruptions in supply lines challenged supply chains and demonstrated how interdependent and complex they are globally.
Later on, demand shocks driven by a sense of scarcity – the perception that we would run out of goods and supplies – and by the new prevalence of ‘one-click buying’ squeezed supply chains further. The supply and demand issue facing us today looks more like an aftershock of excessive demand along the supply chains. According to DP World’s Trade in Transition Regional Report: Middle East & Africa, the Middle East has mainly dealt with ‘demand shocks’, while Africa has encountered more in the way of ‘logistic shocks’ in the wake of the pandemic.
Regardless, businesses in both regions have responded well to the supply chains challenges – including the physical blocking of the Suez Canal – and have been prompted to reshape supply chains for the future. For example, DP World, a global trade enabler through worldwide ports, terminals and associated services business, has launched smart trade solutions to facilitate trade flows. It also recently acquired Cargoes Finance, which provides financing for receivables and payables along with an enterprise tracking tool for intermodal shipments.
In Africa, Export Trading Group, a diversified agricultural business, responded to supply shocks by having its own vessels deliver products from farm to gate, providing its business with end-to end control. The pandemic has also encouraged the commencement of the African Continental Free Trade Area in January 2021, which will help increase intra-African trade and integrate Africa further into global supply chains, with the countries involved working to attain parliamentary approval for membership.
With an evolving supply chain picture, emerging trade corridor opportunities along with changing dynamics and new risks, corporate treasurers will be in the frame when it comes to supporting their businesses. We have seen increased use of supply chain finance solutions, especially among large businesses. As noted in a Wall Street Journal article, Saudi Aramco is exploring a supply chain finance initiative to improve suppliers’ experience and along the way, their access to finance.
From the corporate treasury perspective, digital transformation has evolved rapidly from narrative to action in the wake of the pandemic, with businesses becoming increasingly more engaged and challenging banks and fintechs to provide more digital, connected and intuitive solutions. Transparency and improved efficiency across operations, including across supply chains, are important goals.
There are many early-stage (proof of concept) products focused around digital trade finance, and some will emerge as viable solutions for businesses. That said, corporate treasurers have been looking to deploy digital solutions capable of making an immediate impact on their businesses, and more importantly capable of being digitally enabled through their processes and supply chains.
As well as the Saudi Aramco supply chain finance initiative and DP World’s digital trade finance platform, Abu Dhabi National Oil Company is investigating digitisation to improve its trade ecosystem by introducing electronic bill of lading instead of old-fashioned paper. Furthermore, Komgo, a commodity finance platform, is taking one customer at a time to become digital agent for commodity trading companies in the regions to digitise workflows and transactions.
The pandemic has provided businesses with an outright incentive to focus on stakeholder value (instead of shareholder value), where they can balance sustainability and profits. As businesses have been increasingly focusing on environmental, social and governance (ESG) positive activities when making decisions, treasurers have been steering their organisations towards sustainable finance only to discover ‘the future of financing is rainbow’, as noted by Standard Chartered Bank’s recent article. Governments, businesses and financial institutions have been coming together with purpose to drive ESG financing and to begin to do that at scale.
During the pandemic, the Eastern and Southern African Trade and Development Bank secured €334m in MIGA-backed financing (Multilateral Investment Guarantee Agency) to support its trade finance business, including imports that relate to social development initiatives. Similarly, African Export-Import Bank (Afreximbank) has closed $520m under NEXI’s support (the Italian bank known for its payments systems) to use the proceeds towards its Pandemic Trade Impact Mitigation Facility to help African sovereigns, businesses and financial institutions to reduce the impact of the pandemic.
In the Middle East, Masdar, the leading developer and operator of renewable energy projects in the region, and Amplus Solar, a part of Petronas Group, have signed up the first green trade finance lines of credit to help energy transition in the region. Saudi Electricity Company meantime closed up to $500m facility under JBIC GREEN to finance the construction of new substations and transmission lines to integrate renewable energy to the grid networks and to introduce smart meters in Saudi Arabia.
Increasingly, capital will move to regions and initiatives where it can have the most positive impact in ESG terms. Businesses and financial institutions have incorporated more and more ESG factors into their investment decisions, with corporate treasurers taking a leading role towards this more sustainable situation. To reinforce that direction, regulators, development finance institutions and industry associations have been working to define a more sustainable future – with the EU taxonomy and the International Chamber of Commerce’s recent white paper in sustainability in export finance as leading examples.
The pandemic and related disruptions have not only challenged corporate treasurers in the region, but have also charged them with taking a leading role to help channel capital along with policies, procedures and processes to support business and supply chain resilience, digital transformation and ESG impact.
Semih Ozkan is a trade finance director in an international bank. He is also regional head of the International Trade and Forfaiting Association
This article was taken from Issue 4, 2021 of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership
