Download Emerging markets continue to advance

SPONSORED STATEMENT
Emerging markets
continue to advance
South-South trade and investment flows will increasingly shape the global
economy in the years to come, write David Aldred, Corporate & Public Sector
Sales Head, Middle East, North Africa, Pakistan, Turkey (MENAPT), Treasury and
Trade Solutions, Citi and Yusuf Ali Khan, Head of Trade for Middle East, North
Africa, Pakistan & Turkey at Citi.
O
ver the past year, news about
emerging markets has been
often seemed negative. Having
been hailed as the saviours of
the global economy during the financial
crisis, many of the largest emerging markets
have since suffered slowing economic
growth (China) or even recession (Russia,
South Africa and Brazil). Most recently,
the halving of the oil price (and a broader
slump in commodity prices) has taken its
toll on many emerging market countries.
However, while headline growth in
some major developing countries may
have declined, it is important to remember
that it continues to outpace many
developed economies. The ASEAN-6
economies – Indonesia, Malaysia,
the Philippines, Singapore, Thailand
and Vietnam – are expected to grow
4.8% annually from 2014-2025 on an
aggregated purchasing power parity (PPP)
basis, while India’s GDP is predicted to
expand by 7% a year until 2019.
Besides, a focus on GDP growth
alone ignores the fundamental structural
change that is taking place in many
emerging markets. Higher productivity
investments in net-exporting sectors,
especially in manufacturing, will feature
more prominently in the ASEAN-6
countries over the next decade, for
example. Meanwhile, in the Middle East
huge population growth – three times the
global average between 1970 and 2010 –
and the sharp rise in regional wealth are
transforming the region.
As important is the growing interdependence of emerging market
countries, especially those in Asia, the
Middle East and Africa. The share of
24 | GLOBAL TRADE REVIEW
South-South foreign direct investment
(FDI) in total world FDI has grown from
3% at the beginning of the century to
around 14% in 2009. Furthermore, while
OECD countries’ FDI fell 57% between
2007 and 2012, FDI from developing
countries rose by 19%.
South-South flows increase
South-South trade flows are increasing
around the world but China in particular
has been a major driver of increased
economic links between emerging
market countries. China is investing in
infrastructure and energy projects across
the world, helping to build export markets
for its own companies and, in the longterm, boosting economic growth that will
drive further flows and increase demand
for energy commodities.
China has become a major investor in
the Middle East, especially in markets
where Western companies have been
scaling back their commitment, such as
Iraq. As a result, flows into and out of
China from the Middle East are expected
to dominate in the years to come. By 2020,
the largest share of Gulf Cooperation
Council (GCC) exports will be to China
(at around US$160bn) while imports
from China will be US$135mn, nearly
double the value from 2013. Chinese flows
into the GCC have largely targeted the
consumer and telecoms sectors, although
the rise of Chinese companies in the
constructions space has also been rapid.
China is also making strategic
investments in emerging market countries
that provide a natural gateway to the
Middle East. In April during a visit to
Pakistan, Chinese President Xi Jinping,
announced US$46bn worth of investments
and finalised agreements or broke ground
on US$28bn of projects, in the energy,
infrastructure and oil and gas sectors.
As well as increasing its global
investment (and aid budget, which it uses
as an effective trade tool), China continues
to plan for the future and has made a
number of far-sighted decisions that
reflect the growing importance of SouthSouth trade to the future. For example,
in April Qatar opened the Middle East’s
first centre for clearing transactions in
the Chinese renminbi, paving the way
for increased trade and investment
between China and Gulf Arab economies.
Ultimately, there is speculation that some
of the long-term energy supply contracts
Qatar has signed with China could be redenominated in renminbi.
While China remains a major source
of FDI in emerging markets, there is also
increased activity by governments and
corporates from South Korea and Japan.
Both countries have provided capital goods
to the oil and gas and automotive sectors in
the Middle East. Corporates in the GCC
have bought liquefied natural gas carriers
from Korean and Japanese shipyards and
this trend is likely to continue. India also
remains a great source of labour as well
as investment for the Middle East. There
are over 6 million Indians working in the
Gulf, and Indians are increasingly setting
up businesses in the region.
Greater regional centralisation
Increased South-South flows – and the
emphasis on investment in Asia, the
Middle East and Africa by many emerging
market companies – is prompting a focus
SPONSORED STATEMENT
on the need to improve visibility, control
and efficiency. Companies across a wide
range of sectors are increasingly seeking
to centralise and manage trade and other
flows in the Middle East, North Africa,
Sub-Saharan Africa and even Asia from
a single location, with the United Arab
Emirates (UAE) proving an increasingly
popular choice.
Historically, the diverse economic,
regulatory and political environment in
the Middle East and Africa has meant
that many companies managed operations
and treasury on a country-by-country
basis. However, as companies expand
their operations many are recognising the
benefits of centralisation of functions such
as sales, procurement and finance in a
single location. Companies can establish a
centre for re-invoicing in order to improve
visibility and control and keep liquidity
out of countries that have regulations or
FX controls that limit their flexibility,
for example. Moreover, the emphasis on
revenue growth is prompting increased
adoption of sales and distributor finance,
which frees up customer credit lines
(potentially facilitating increased sales),
and supply chain finance (SCF), which
helps to build sustainable supply chains.
Structures such as these require the
creation of a centralised hub if they are
to work effectively.
One notable recent implementation of
SCF has been by Etihad Airways, which
wanted to strengthen its supply chain
while achieving process benefits, such as
automation of invoices. It also aimed to
improve its cashflow and working capital.
It decided to implement a SCF solution
for key suppliers globally that would
enable them to receive early payment
for their receivables and access low cost
finance. Etihad Airways’ SCF programme
– one of the first in the Middle East and
the first for an airline outside the US –
has accelerated suppliers’ cashflow and
boosted their balance sheets. Although
Etihad Airways made the decision to
implement a SCF solution independently,
the project is in line with the Abu Dhabi
government’s 2030 Vision to improve
access to finance for suppliers.
As well as helping to grow sales and
build stronger supplier relationships, the
drive to provide alternative sources of
finance to distributors and suppliers is
partly driven by changes in the banking
sector. The introduction of Basel III,
which encourages a focus on risk-weighted
assets, is reducing banks’ willingness
to lend over the long-term through the
project finance market, for example. Shortterm assets, such as those associated with
trade, are treated more favourably by Basel
III. At the same time, the increasing size
of many SCF programmes is encouraging
greater use of multi-bank securitisation
and asset distribution participation
from other banks. By distributing SCF
assets, with both relationship and nonrelationship banks, liquidity is enhanced
and pricing optimised.
Yusuf Ali Khan, Citi
INCREASED SOUTH-SOUTH
FLOWS ARE PROMPTING
A FOCUS ON THE NEED TO
IMPROVE VISIBILITY, CONTROL
AND EFFICIENCY.
David Aldred, Citi
Changes in infrastructure finance
In the Middle East, the need for
infrastructure investment to overcome
a backlog of demand and meet the
needs of a growing population is huge.
Historically, most infrastructure projects
have been funded through a combination
of commercial bank financing, coupled
with support of European and US export
credit agencies (ECAs) and multilateral
agencies, which are collectively referred to
as official agencies. These bodies’ support
remains important and they continue to
innovate: in March, UK Export Finance
provided cover for an Islamic bond,
known as a Sukuk, issued by Dubai’s
Emirates Airline to purchase aircraft
including the Airbus A380, for example.
The Middle East can be divided into
two distinct country categories: oil rich
(mostly GCC) countries; and non-oil
rich states (Egypt, Lebanon, Pakistan).
Reliance on official agency-backed
financing in the GCC states has largely
been focused on the aviation, shipping
and telecoms sectors and has declined
in recent years. This is due to increased
liquidity as well as fierce competition
among banks seeking good quality assets
where commercial lending has displaced
more structured approaches.
Meanwhile, in high-risk countries,
such as Egypt and Pakistan, where the
demands for infrastructure financing
are too large for the local bank market
to support, ECA-supported financing is
an invaluable tool for public and private
sector borrowers.
The growing importance of emerging
markets in general – and greater SouthSouth flows in particular – is reflected in
increasing activity by Asian official agencies.
One landmark deal that highlighted
this trend was the UAE’s awarding of a
contract in 2010 to the Korea Electric
Power Corporation to construct the first
of four APR1400 nuclear reactors to sell
electricity to the Abu Dhabi Water and
Electricity Authority. The deal was financed
by US$10bn in funding by South Korea’s
export financing bank, Export-Import Bank
of Korea (Kexim), its largest financing
at that time. East Asian (particularly
Japanese, Korean and Chinese)
construction and engineering firms have
also expanded significantly across the
Middle East, thanks in part to demand for
power plants, refineries, and infrastructure
projects and the country’s official agencies
have extend short-, medium- and longterm financing to support them.
In the shipbuilding sector, where
there is considerable Middle Eastern
demand for energy transport vessels,
Asian official agencies, including the
Japan Bank for International Cooperation
(JBIC), Nippon Export and Investment
Insurance (Nexi), Korea Trade Insurance
Corporation (K-Sure), Kexim and
China’s China Export & Credit Insurance
Corporation (Sinosure) are thought to be
considering supporting orders from the
Middle East for vessels from shipyards
in their countries in the future.
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