TRADE FINANCE NEWSLETTER

Transcription

1 JUNE 2013 TRADE FINANCE NEWSLETTER Dear Customer, With this edition of our Newsletter, we will update you on current topics in the Trade Finance world. Juha-Pekka Leinonen Group Head of Trade Finance Sales The European economy is still fragile, but other parts of the global economy have started to recover. Economies in the developing countries and emerging markets are growing at a rapid pace and could be targets for European-based companies. We see particular export potential for small and medium-sized enterprises (SMEs) to the BRIC countries. To penetrate these markets, SMEs need to take major strategic steps to overcome export barriers and ensure growth of their business. Risk awareness has increased among companies across our home markets because of the challenging economic environment of recent years. As a result, companies are consolidating their risk policies, so that their subsidiaries across the world apply the same risk policy. This trend creates expectations also at our end. We have to be able to look at our corporate customers as a combined group and not focus only on activities close to the head office. Our Sales and Advisory team will look at your business in a global context and advise you on risk mitigation methods for your entire group. This will include making visits to the subsidiary locations as agreed with the head office. We think that this risk policy consolidation in the Trade Finance area is a healthy trend well in line with developments in other treasury areas such as F/X and interest rate policies. We see general changes in the trade finance landscape. New products, for example the Bank Payment Obligation (BPO), and also a new regulatory framework for banks, BASEL III, are being introduced. The ongoing liberalisation of RMB is making it easier to trade with China and we are of course ready to assist you in this matter. As your banking partner, we want to keep you updated on new products and trends, to illustrate where the Trade Finance industry is heading and what this means for your business. We look forward to helping you with your international trade. We make you better. Juha-Pekka Leinonen 1

2 EXPORT POTENTIAL FOR SMEs 1 TO THE BRICs 2 Today it is not only the largest and most successful firms that export to the BRIC countries. Since 2000, the number of Danish SMEs exporting to the BRICs has nearly doubled, and exports of Danish SMEs to the BRICs have more than doubled with an average growth rate of 8.5% per year - see figure 1. Allan Sørensen Associate Professor, Ph.D. Aarhus University, Department of Economics and Business allans@asb.dk Growth rates in most European markets and thus local (export) markets have been disappointingly low during the past five years, and the near future does not look promising in this respect. In fact, GDP in the EU today is still below the 2007 figure. To the contrary, over the past five years, the BRICs have seen yearly growth rates exceeding 5%. The high growth rates of the BRICs have enlarged the middle class, which holds potential consumers of European products and the BRICs may thus be interesting for European firms, irrespective of whether they produce intermediate, capital or consumer goods. Figure 1. Danish SMEs exporting to the BRICs Number of Danish SMEs (right axis) Exports of Danish SMEs in DKK millions (left axis) Source: Danish Ministry of Foreign Affairs (The Trade Council) and own calculations In this light, perhaps even more SMEs should consider (or reconsider) entering BRIC markets or other difficult but high growth markets? It may be the right strategy to cope with the current European slump and it may be the route to higher turnover, or at least to keeping the order books filled. However, these markets are neither easy nor cheap to penetrate, and SMEs in particular should think twice and consider their internationalisation strategy carefully. EXPORT MARKET BARRIERS The costs of exporting are significant relative to production costs, and needless to say, this applies in particular to exports to distant and exotic markets such as the BRICs. Moreover, export costs consist of more than transport, insurance, trade finance, exchange rate hedging and tariffs. Actually, fixed and sunk export costs are at least equally important and include the costs of gaining market-specific knowledge and knowledge about how to do business in the foreign market, setting up and running a foreign distribution channel, adapting products to foreign standards (and taste), adjusting the organisation and complying with administrative formalities and regulations and the like. Unlike transport and tariff costs, for example, fixed and sunk export costs do not vary with sales, and average trade costs are thus larger and more likely to be restrictive for SMEs. Hence, volume matters. 1 SMEs is short for small and medium size enterprises. A firm is a SME if it has annual turnover between EUR 2 and 20 million and between 10 and 100 employees. Smaller firms are micro firms. 2 BRICs is an acronym for the country group Brazil, Russia, India and China. 2

3 To illustrate this, a Nordic firm wanting to export to Brazil, for example, needs to have at least one employee who speaks Portuguese and is able to service customers late in the evening European time (international desk), to translate the product manual to Portuguese, to get the product approved on the Brazilian market, etc. irrespective of whether the firm exports for EUR 1 or 100 million per year. However, it is, of course, easier to recoup the fixed costs if you export for EUR 100 million than for only EUR 1 million per year. WHAT MAKES A SUCCESSFUL EXPORTER? The export ability of SMEs depends not only on the competitiveness of their home country but to a large extent on firm-specific characteristics. A SME can overcome the export barriers and become a successful exporter either by reducing firm-specific export barriers or by being sufficiently productive. In fact, numerous studies show that firm-level productivity is essential for a company s export ability, and exporters are (on average) more productive than non-exporters. So only highly productive firms are likely to overcome the export barriers. A firm may increase its export ability by reducing firm-specific export barriers. Studies have shown this can be done by obtaining knowledge about exporting, for example by joining an export association or by hiring managers with export experience. A key aspect of the internationalisation strategy of SMEs is the choice of export channel, as the cost structure of these varies substantially. Because of their low volume, SMEs should choose channels with low fixed costs; export sales to Brazil of EUR 2 million cannot finance a full Brazilian distribution network. It may be preferable to be part of a larger conglomerate in order to split the fixed costs. As volume matters, a sound piece of advice for SMEs is to concentrate on one or a few export markets. Moreover, SMEs should choose markets and products carefully, so that the sales volume is expected to be sufficient relative to the profitability of the product (high profit margin, for example niche products) and the costs of exporting. Being small should not restrict firms from considering promising and interesting growth markets such as the BRICs. However, as volume matters, SMEs have to be extra careful when assessing the pros and cons of exporting and when choosing markets, products and export channels. Doing Business 2013: Smarter regulations for small and medium-size enterprises The World Bank has published its annual report, Doing Business 2013: Smarter regulations for small and medium-size enterprises. The report is an overview of regulations affecting domestic firms in 185 economies and ranks the economies in 10 areas of business regulation, such as starting a business, resolving insolvency and trading across borders. The report is an ideal complement for investors looking for opportunities outside their own country, but also for companies looking for business partners at an international level. Read the report. World Bank Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group. DOI: / License: Creative Commons Attribution CC BY 3.0 3

4 CHINESE CURRENCY MOVING FASTER TOWARDS CONVERTIBILITY Flemming Jegbjærg Nielsen Senior Analyst, Danske Bank Markets FLOATING EXCHANGE RATE AND CONVER- TIBILITY BY 2015 CONVERTIBILITY MAKES IT EASIER TO TRADE WITH CHINA Recent years have been eventful for the Chinese currency, the renminbi (RMB), and coming years could well prove even more eventful. The new leadership in China appears to have turned its focus towards long-term structural reforms, despite the fragility of the Chinese economy, which could be facing a relatively severe slowdown. The Chinese leadership knows that continued strong growth performance in the long run is mainly dependent on maintaining strong productivity growth through continued economic reforms. Short-term stimulus may buy some relief in the short run, but is increasingly regarded as counterproductive in a longer perspective. This has been evident in the development in the foreign exchange market, where the Chinese central bank (The People s Bank of China - PBoC) has allowed the RMB to appreciate faster against the US dollar in recent months, even though recent data gives reason to question the strength of the recovery. This is a market difference from the policy of other Asian central banks, which have speeded up intervention in the FX market to prevent currencies from appreciating in the wake of massive injections of liquidity into the global financial markets, particularly the Bank of Japan. The behaviour of China s central bank basically reflects that it no longer considers massive intervention to avoid an appreciation of the RMB as desirable in the long run. Instead, it is gradually allowing market forces greater influence on the exchange rate. The foreign exchange system and the international payments system are expected to be significantly liberalised in coming years. The Chinese government is now widely expected to publish a detailed blueprint for achieving a convertible currency and a floating exchange rate as soon as This would be an extremely ambitious goal, and possibly too ambitious. Particularly the Chinese government could well be forced to lower its ambitions, if growth slows severely and it is forced to return to focus on short-term stabilisation of the economy. Stress in the financial sector in China could also cause ambitions to be scaled down. What are the practical implications of a convertible RMB? Basically, it means that there will be fewer restrictions on the use of the RMB. Hence, it should gradually become easier to trade with China. The documentation requirements for payments to and from China will become less cumbersome when RMB becomes convertible. In addition, risk management of exposures in RMB should become both easier and cheaper, as liquidity in the RMB market improves. This is a gradual process, and considerable improvements have already been made in recent years. An offshore market for the RMB has gradually emerged outside mainland China. This market has made it possible for companies not registered in China to trade the RMB, and more financial instruments have become available for hedging RMB exposure, including FX forward contracts with delivery. It is now also possible to invoice trade in RMB and make cross-border payments in RMB. In 2012, 8% of China s total trade was invoiced in RMB, and this share is expected to increase markedly in coming years. So far, invoicing in RMB is most common for exports to China, and exporters to China should be aware that for some of their customers, it may soon be a requirement that they are able to invoice in RMB. Many Chinese companies are willing to offer better contract terms if invoicing is done in RMB. Danske Bank has already handled RMB Documentary Credits from Chinese banks and will also be able to handle your RMB business in this respect. 4

5 MORE TWO-WAY VOLATILITY IN THE EXCHANGE RATE However, one consequence of a floating exchange rate will most likely be a more volatile RMB exchange rate, and managing RMB exposure will become more important. In the short term, the appreciation of the RMB will speed up. Over the next year, we expect the RMB to appreciate by about 2.5% against the USD and by more than 4% against the EUR. We believe that the daily trading band for the USD/RMB exchange rate will soon widen to possibly +/-2% from currently +/- 1%, signalling that China is moving towards a floating exchange rate. In recent years, the RMB has been a one-sided bet. However, we no longer see the Chinese currency as substantially undervalued, so in the future, we should get used to more two-way volatility in the RMB exchange rate. Figure 2. USD/CNY exchange rate April 2011 May ,6 6,5 Trading band widened 6,4 6,3 6,2 6,1 Apr Jul Oct Jan Apr Jul Oct Jan Apr Daily trading band PBoC reference rate Spot Source: Danske Bank Markets TNS Sifo Prospera 2013 Danske Bank number one in Trade Finance For the third consecutive year, Danske Bank Group came out on top in the recently published TNS Sifo Prospera 2013 analysis of Trade Finance performance in the Nordic region. Danske Bank wants to be a strategic partner for our customers by providing consultancy services concerning their risk management strategies and by enhancing their working capital management. We aim to be the unrivalled Nordic partner in this field of business. Søren Haugaard, Global Head of Trade & Supply Chain Finance, says: Danske Bank secured its leading position because of the commitment by our staff to provide professional advisory services and operational excellence. Read more. BANK PAYMENT OBLIGATION A NEW SOLUTION IN TRADE FINANCE With a traditional documentary letter of credit (L/C), a bank is obligated to pay in accordance to the physical presentation of compliant documents. With a Bank Payment Obligation (BPO) a bank is similarly obligated to pay in accordance to the electronic presentation of 5

6 compliant data. A BPO is an irrevocable undertaking given by one bank to another bank that a payment will be made on a specified date after successful electronic matching of data according to industry rules set by SWIFT and the International Chamber of Commerce Banking Commission (ICC). It is, however, necessary that both banks involved in a BPO have the technology in place to effect the transaction. The new technology standard have been released by SWIFT to enable banks to offer flexible risk mitigation and financing services to their corporate customers and to help the banks transform their Trade Finance services. The L/C, particularly well-suited to high-value and high-risk transactions, is commonly accepted as the safest form of payment, while the open account is typically considered the least safe payment option from the seller s point of view. The aim of the BPO is to combine these two payment methods and develop an in between option, as the BPO is somewhere between the L/C and open account in terms of risk. Compared with the L/C, a BPO is a less complex product because of e.g. the removal of a number of paper flows. Instead, data representing the purchase order, invoice, certificates and transport documents will allow banks to accelerate global trade finance processes. Earlier this year, approximately fifty banks were considering adopting the BPO. For the time being, only six banks worldwide are live with the BPO, while another 10 banks are ready to provide the service in the near future. It is the intention of Danske Bank to look further into the possibility of implementing the BPO, and we are monitoring market trends in this area closely. Once the BPO is implemented, we expect that it will contribute to help our customers develop their business further. We welcome your feedback and suggestions to our Newsletter as we strive to publish relevant and valuable information for existing as well as potential customers. If you have any comments our suggestions, please feel free to contact us at trade@danskebank.dk or (+45)

7 Disclaimer The content of this newsletter is for information purposes only. The newsletter does not constitute or form part of and should not be construed as, an offer to sell or issue or the solicitation of an offer to buy or acquire securities of Danske Bank A/S in any jurisdiction, including the United States, Canada, United Kingdom and Japan, or an inducement to enter into investment activity of any kind. No part of this newsletter, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. The content of this newsletter should be seen in context of advice received from the bank and should not in itself serve as basis for decisions of a legal or financial nature. The bank does not provide advisory services in relation to legal, financial or accounting matters. Customers are urged to seek advice on such matters separately. The content of this newsletter is not intended for distribution to, or use by, any person in any jurisdiction or country where such distribution or use would be unlawful. This newsletter contains forward-looking statements that reflect management s current views with respect to certain future events and potential financial performance. Although Danske Bank believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Accordingly, results could differ materially from those set out in the forward-looking statements as a result of various factors many of which are beyond Danske Banks control. This newsletter does not imply that Danske Bank has undertaken to revise these forwardlooking statement, beyond what is required by applicable law or applicable stock exchange regulations if and when circumstances arise that will lead to changes compared to the date when these statements were provided. This newsletter is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purposes without Danske Bank s prior written consent. 6