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‘South Atlantic’ trade looks to finance solutions from banks

The beef business is very big in Brazil

The beef business is very big in Brazil

Inter-regional trade between the Middle East and Latin America has experienced dramatic growth over the past decade. Whilst volumes are still relatively small in comparison to trade flows with their respective main trading partners, the trajectory is clear and brings a multitude of business opportunities. BANA AKKAD AZHARI and DINO SANI, BNY Mellon treasury services’ heads of relationship management for MENA and Latin America respectively, examine this developing relationship and discuss how banks can help to facilitate these opportunities

The prominence of emerging markets in the global economy is continuing to increase, presenting an influx of opportunities for countries to diversify their trading and investment partners.

Certainly, developing relationships with non-traditional markets has been a particular priority for Latin America in order to help combat the impact of the floundering economies of its main trading partners – Europe and the US – in the aftermath of the global financial crisis.

The Middle East’s rapidly expanding, youthful population and dynamic growth is fuelling a consumer boom, making it an ideal location for Latin

America to cultivate new business relationships. And with Latin America abundant in agricultural goods and minerals, such a relationship has plenty to offer in terms of reciprocity, as countries in the Gulf currently import as much as 90 per cent of their food.

Trade between the Middle East and South America has surged in recent years, with trade almost tripling from $11bn to $30bn during the period 2008 to 2012. Though these figures continue to pale in comparison to both regions’ more established trade corridors with North America, Asia and Europe (for example, Latin American trade with the US in 2012 was worth more than $800bn), and currently account for less than three per cent of each area’s global exports (according to the WTO), the potential value and mutual benefits each presents to the other is beginning to be understood and explored.

Significantly, the average annual growth of Latin American/Caribbean trade flows both to and from the Middle East was higher than that with the rest of the world between 2001 and 2010. Exports to MENA countries increased by an average of 17.79 per cent, compared to just 10.99 per cent to the rest of the world, while import levels were 12.96 per cent and 10.11 per cent respectively.

Commodities, as expected, dominate the bilateral trading relationship, with the Middle East supplying Latin America with refined oil and chemicals, and importing agricultural products. Brazil is at the forefront of Latin America’s expanding trade relations with the Middle East, with its food exports to the region reaching a record 17m tonnes in 2013, with sugar and meat alone accounting for revenues of almost $5bn, according to the Arab-Brazilian Chamber of Commerce.

Brazil, in fact, is one of the Middle East’s largest meat providers, and has established a niche position by supplying MENA with beef and poultry slaughtered in accordance with halal requirements. Importantly, it has the capabilities to do this on a mass scale; a significant advantage over its main global competitors. Furthermore, certification agencies – which also provide labelling in Arabic – are opening across a number of Latin American countries.

In this way – ie, understanding the particular needs of different regions – Brazil has identified market gaps and positioned itself accordingly as a key import source.

Meanwhile, the Middle East exported more than $11.39bn worth of products to Brazil in 2013, including mineral fuel, fertilisers, plastic, seafood, glass and glassware and electric machinery. These  primarily came from Saudi Arabia, Algeria, Morocco and Kuwait, each of which exported more than $1bn of goods to Brazil.

While mineral fuel, including oil, were significant export components, the Arab-Brazilian Chamber of Commerce reported that 2013 saw a huge increase in Brazil’s Middle East imports in terms of plastics, ships and boats. This, importantly, demonstrates a strong level of diversity in the Middle East’s overseas sales.

Trade trend likely to thrive

The burgeoning relationship between the Middle East and Latin America is a trend likely to continue and thrive. Indeed, according to a 2011 survey by the Economist Intelligence Unit, Latin America is the region that anticipates the most growth with the Middle East over the next five years. And as countries across both regions recognise the mutual benefits of the inter-regional partnership, strategic efforts are being made to strengthen ties by promoting awareness and co-operation, such as through the establishment of free trade agreements (FTAs) and high-level political visits.

An FTA between Turkey and Chile came into force in 2011, for example; the first that Turkey has entered into across the whole of the Americas. It is designed to promote trade co-operation and facilitate the exchange of commodities and services between the two countries. And, to build on this, Turkey is now also exploring FTA possibilities with Colombia, Ecuador, Mexico, Peru and various Central American countries in efforts to achieve greater market diversification and reduce its dependency on the West.

Furthermore, the Middle East/Latin America relationship extends beyond trade. Latin American countries in particular are seeking to attract capital from the Middle East in order to fund infrastructure and other development projects, which are imperative if the region is to fulfil its growth potential.

Indeed, MENA has a vested interest in investing in foreign agriculture for its food security, and the untapped potential in Latin America is fuelling investor appetite. For example, Qatar’s Al Gharrafa Investment has increased its stake in Adecoagro, a South American agricultural company, and the Gulf’s largest dairy company, Almarai, has acquired Argentinian company Fondomonte – including its 12,306 hectares of land.

Certainly, both regions are willing and prepared to strengthen their economic ties. Following the introduction of direct flights linking major cities of the two regions in 2007 – such as Dubai to São Paulo, Rio de Janeiro and Buenos Aires – air traffic has increased by 70 per cent, according to the International Air Transport Association, supporting the growing business activity between the Middle East and Latin America.

Corporates look for comfort

While relations are undoubtedly improving, it is vital that both Middle Eastern and Latin American corporates are comfortable with the trade processing methods available (to ensure they can trade effectively and securely) if the full scope of opportunities that each region can offer the other are to be grasped.

New trading partnerships with unfamiliar counterparties in far-off locations are understandably approached with caution due to the increased element of risk they can present. Indeed, the financial crisis reawakened global concerns in this respect, with the importance of proficient risk mitigation for trade transactions coming to the fore.

The Middle East has long been – and remains – a strong advocate for the stalwart, reliable letter of credit (LC), possessing risk mitigation properties that are second to none. Indeed, with excellent risk mitigation features and respectable margins, LCs offer a solid risk/reward balance and remain a preferred trade processing method in the Middle East. Yet while LCs have long been appreciated for the level of security they provide, it is beginning to be accepted that, as a form of processing in the modern world, paper-based LCs may not be the optimal solution.

In fact, with confidence in the global economy re-emerging – combined with modern-day demands for speed and efficiency – global trade is now increasingly being performed via open account.

This is an emerging trend in Latin America, particularly in Brazil, Colombia, Peru and Uruguay. Though LCs remain a popular form of trade processing in the region due to their value from a security aspect, their use is no longer growing.

Of course, though, while companies may be prepared to conduct open account trade – which offers less in terms of security – with established, trusted partners, this is not an ideal solution for cross-border trade with new counterparties in unfamiliar geographies, and is, therefore, unlikely to appeal as the preferred processing method for businesses wanting to tread the Middle East/Latin America trade corridor.

Meeting increased expectations

For the budding relationship between Latin America and the Middle East to be able to flourish, banks must be able to provide solutions that can combine the needs of today’s corporate clients; solutions that not only tick the box for high standards of risk mitigation, but are also fast, efficient and reliable.

While local banks are dominant forces in the field of trade processing, with well established, highly proficient LC offerings, LCs alone cannot fulfil the scope of today’s corporate client needs – which also include enhanced transparency and visibility over end-to-end transaction flows. It is an amalgamation of the security properties of the LC and the ease, efficiency and cost-effectiveness of open account trade settlement that is needed to drive the cross-border trade demands of today.

With these needs in mind, automatic electronic data-matching is a method of trade processing that receives and verifies original LC documentation online (as well as being able to receive open account documentation and other trade documents). Such automated technology allows the inefficiency and risks associated with manual processing to be consigned to the past, whilst simultaneously providing security, enhanced processing speed, improved visibility and data reporting capabilities, as well as cost reductions. Indeed, these capabilities are able to satisfy today’s hunger for efficiency, whilst upholding the traditional risk mitigation properties of the LC.

As local banks look to support the growing horizons and evolving demands of their clients, this may be easier said than done as the technological investment necessary may not be viable – particularly during a period of heightened regulatory requirements and associated cost pressures. Yet if local banks are unable to innovate and meet these changing needs, corporates could find themselves struggling to find the support they need to allow them to confidently tap into the opportunities in the Middle East/Latin America corridor – and those of the emerging markets as a whole.

Of course, technological capabilities are only part of banks’ offerings. What is also crucial for corporate clients undertaking trade in unfamiliar countries is local market expertise; the knowledge and insight into country-specific rules and regulatory requirements that must be navigated to successfully enable trade. And it is here that local banks cannot be rivalled.

With cross-border trade requiring such a broad scope of capabilities and expertise, collaboration between local banks and specialist global trade services providers through correspondent banking relationships can be an ideal solution.

Through such non-competitive partnerships, local banks can leverage the larger counterparts to offer trade processing solutions that satisfy modern and traditional client demands without the need for significant investment in technological product development.

Indeed, local-global alliances can offer  technological capabilities with a truly global reach that cater to the growing demands for emerging market connectivity, whilst also offering the comfort of the specialist expertise of local banks.

It is through this fusion of knowledge and support that businesses will be able to approach new opportunities and venture into new trade corridors – such as that between the Middle East and Latin America – confident that they are strongly positioned with the secure, efficient and reliable tools to do so.

The views expressed in this article are those of the authors only and may not reflect the views of BNY Mellon. Also, the article does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.

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