January 2019

Though a strong 2017 positioned global trade for a booming 2018, politics got in the way, and the sense of uncertainty prevailed. However, trade continued to grow, and there was an increased focus on digital developments and sharing data to facilitate trade finance. This review reflects on an eventful 2018 in trade and the results of the Euromoney Trade Finance Survey 2019

Global trade made a strong start to 2018, following a positive trajectory in 2017, as noted in our upbeat January 2018 news story, ‘Global trade moves from gloom to boom’. But could this be sustained? It appeared not…

Headlines about trade were all too often relating to “trade war” rhetoric between the US and China, punctuated by the ongoing “deal or no deal” Brexit question in Europe. As this continued to play out during the year it was clear that the relationship between free flowing multilateral trade with supply chains spanning several continents and economic growth is a close one.

Trade grows but so does global debt

By the end of September 2018, the World Trade Organization (WTO) anticipated merchandise trade volume growth of 3.9% in 2018, with trade expansion slowing to 3.7% in 2019. This downgrading of the April 2018 WTO forecast of 4.4% was, it said, down to the “rise in actual and proposed trade measures targeting a variety of exports from large economies”. In other words, while the direct economic effects of all the rhetoric have been “modest to date”, the WTO believes investment spending may be reduced as a result. Director General Roberto Azevêdo explains, “While trade growth remains strong, this downgrade reflects the heightened tensions that we are seeing between major trading partners.”

This was echoed by the International Monetary Fund (IMF) on 20 December 2018 that noted, “The global economy started 2018 on an upbeat note, buoyed by a pickup in global manufacturing trade through 2017. As investors’ confidence in the global economic outlook lost steam, so did the upswing.”

Figure 1: Slowing down

Despite the uncertainties and challenges brought about by trade conflict, growth forecasts for developing Asia remain, notes the Asian Development Bank (ADB), unchanged at 6% for 2018 and 5.8% for 2019 thanks to robust domestic demand. There is good news from India which is “maintaining growth momentum on rebounding exports, and higher industrial and agricultural output”. And although China’s growth is slowing, it is still expected to turn in 6.6% in 2018, moderating to 6.3% in 2019.

Writing in City A.M on 26 November 2018 in advance of the G20 Summit that saw the 90-day US/China trade war truce, Dr Rebecca Harding, a regulator contributor to Deutsche Bank’s flow magazine, points out that “trade has become politicised, even weaponised to gain strategic influence”. Furthermore trade agreement structures, she says, in her article “Born in the USA”, “do not cater for the reality of how goods and services are moved across borders in the 21st Century” and need to reflect flows of digital trade. She also warned of the risks associated with the breakdown in the multilateralism trade structures and agreements represent.

Such a breakdown runs the risk of benefits from new technology remaining tantalisingly out of reach. Technology, said the WTO in its World Trade Report 2018, “has the power to transform international trade profoundly in the years to come.” The report looks at how digital technologies affect trade costs, the nature of what is traded and the composition of trade. While the expansion of digital trade is, says the report, “likely to entail considerable benefits”, “international cooperation is needed to help governments ensure that digital trade continues to be an engine of inclusive economic development.”

As for global debt, now that the IMF has updated its Global Debt Database to include both the government and private sides of borrowing for the entire world it concludes:

  • Global debt has reached an all-time high of US$184trn in nominal terms, the equivalent of 225% of GDP in 2017.
  • The most indebted economies in the world are the richer ones with the top three – the US, China and Japan – accounting for more than half of global debt and exceeding their share of global output.
  • Private sector debt has tripled since 1950 and is the main driving force behind global debt, spearheaded by China. However, it remains very low in low-income developing economies.

Trade finance

Most trade finance does not contribute to the global debt mountain because it is by nature self-liquidating and short-term (excluding, of course, the long-tenor export finance transactions). And the demand for trade finance is more acute than ever in a landscape of post-crisis reduced correspondent banking lines as a result of high KYC and KYT costs rendering some transactions unprofitable for banks.

Given the ongoing concern about the US$1.5trn trade finance gap, with SMEs suffering most from the difficulty that banks have in providing trade finance where the cost of compliance outweighs any return on the lending, collective solutions in the form of platforms, networks and standards that everybody trusts are a priority for the entire industry. Repositories such as the Trade Information Network (The Network) launched at Sibos Sydney in October 2018 are trying to address this. The Network “aims to address the unmet demand for financing earlier in the supply chain by enabling corporates to easily and securely communicate trade information directly with banks of their choice.”

The Network is just one example of how the trade finance industry is collaborating to adapt to the digital era, with the ICC Banking Commission playing a crucial role in defining generally accepted frameworks and harmonising standards to make this happen. The ICC Banking Commission’s annual report on global trade published in April 2018, reported that 60% of its survey respondent banks are moving towards greater digitalisation, but that only 9% could confirm that technology solutions had increased efficiency. In flow’s report on the survey, we noted, “Despite obvious ripeness for digital disruption, the sheer multitude of documents and players (banks, customs authorities, shippers, and insurers, among others) involved in trade finance transactions have made it difficult for the industry to digitalise quickly.” So, it will be interesting to see what progress is made in 2019 to move this forward.

Globally at home with a winning provider

Being there for clients with trade finance support through the good and the tough times is what Deutsche Bank is known for and has been ever since the bank’s foundation in 1870. You only have to read the story of Metinvest, where trade is being repaid despite the geopolitics that threatened to derail this remarkable Ukrainian metals and mining corporate.

All 7000 voters in the Euromoney trade survey 2019 seemed to think so as well, with Deutsche Bank being voted as No.1 in fifteen categories (see Figure 2 below) that include all the regions the bank operates in.

Figure 2: Deutsche Bank results in the 2019 Euromoney Trade Finance Survey

Commenting on the events of 2018 and these Euromoney survey results, Deutsche Bank’s Global Head of Trade Finance Daniel Schmand said, “In a year of intense trade activity during which macroeconomic and geopolitical events kept everyone on their toes, we are delighted with the confidence that clients have placed in Deutsche Bank’s market leadership and service strength. We take the responsibility to ensure this is well-placed with the utmost seriousness, and look forward to a busy 2019.”

Daniel Schmand

Head Trade Finance

Daniel Schmand

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