Treasury and Trade Solutions

Trade Around the World: Cultivating the Changing Latin American Landscape for Growth

The world is heating up. And that’s not in reference to climate change. Global trade is on the rise with gross domestic product (GDP) increasing approximately 3% over the past few years. Even Latin America, which has faced its challenges recently, is showing encouraging signs of following this trend with about 2% growth across the region.

Sanjeev GanjooHead of Trade Finance, Latin America, Citi Treasury and Trade Solutions

Gustavo CastroHead of Trade Sales, Latin America, Citi Treasury and Trade Solutions

Today, global trade flows are also increasing where volumes were measured in the vicinity of $42 trillion as of 2017. While Latin America has contributed approximately 6% to global trade flows over the past five or six years, down slightly from historical patterns, this was due mostly to geopolitical shifts. Adding to this lingering instability, ongoing uncertainties still exist with recent and upcoming elections across Latin American nations as well as changes in economic policies in key countries, such as Mexico, Brazil and Argentina.

While complexities across the 21 countries where Citi has full banking licenses in the region continue to influence the markets, momentum has started to pick up and Citi expects Latin American trade flows to grow going forward.

Harnessing the strength of corporate credit Given changing market conditions, most corporates doing business in Latin America are focusing on risk mitigation approaches in order to help cushion their balance sheets. These strategies typically take the form

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of supply chain finance to extend days-payable-outstanding (DPO). They also have an eye toward improving working capital management, or receivable finance as well as trade finance, which looks to reduce days-sales-outstanding (DSO) to decrease the cash conversion cycle and help bolster the balance sheet. Financing programs such as these are increasingly being seen as highly effective tools which could help bring stability to the marketplace and a healthier supply chain.

As interest rates rise around the world increasing the cost of borrowing, corporates doing business in Latin America are frequently turning to supply chain finance programs to help harness the strength of their credit profile in order to reduce the stress on suppliers in today’s complex emerging market.

Citi’s Treasury Diagnostics benchmarking tool calculated that from January 2013 to June 2017, about 47% of companies in Latin America are turning to supplier financing solutions to address concerns around sustainable growth and growing pressure to increase returns on investment capital. When compared to adoption rates of 37% of corporates in developed markets, it is clear that supplier finance programs are viewed favorably in the region.

While helping buyers generate cash flow by increasing DPO, supplier finance programs can also be well-suited for supporting suppliers. In Latin America, small- to medium-sized suppliers, who are often overlooked by such programs, can benefit from receiving cash much faster than the traditional 90 to 180 days.

Sales finance solutions can create win-win opportunities In addition to the growth of suppler finance, Citi Sales Finance is also seeing increased demand. As a relatively new solution, with about only 15% of corporate clients currently using similar strategies in the region, the availability of such programmatic structures by few global banks such as Citi, can be viewed as potential game-changers. In the face of tightening credit conditions, Sales Finance is designed for helping corporates, or sellers, to de-risk balance sheets, improve free cash flows and enhance return on capital. Secondly, for buyers, it also helps improve their working capital.

For banks, as well, the theme has been focused on a portfolio-based approach as financial institutions try to mitigate the risk of offering these solutions through either recourse actions, credit insurance or the use of acceptable collaterals.

Moreover, for corporates looking to help mitigate risk for receivables on their balance sheet or reduce their DSO, they are looking for various techniques including Receivables Financing and Sales Financing. Agricultural businesses, more specifically fertilizer chemical businesses, particularly with smaller distributors seem to be adopting this strategy to help drive growth. In this case, there is often a large corporation involved that launches Sales Finance and this seller then helps ‘cross-pollinate’ the strategy to other SMEs they work with across Latin American countries. This is especially important when more than 50% of these emerging economies are powered by small- to medium-sized enterprises.

Helping propel the growth of Sales Finance is also the potential win-win opportunity attracting both buyers and sellers. How does it work? This strategy can be used to manage emerging market counterparty concentration as Citi monetizes a portfolio of receivables and works as a partner with corporates to release much needed working capital for suppliers. The potential benefits of such a solution can include reducing risk and shortening DSO. In addition, once risk is intermediated by banks, corporates may be able to free up their balance sheet to reinvest towards increased sales and R&D which can further strengthen the supply chain.

Expect Latin American trade flows to grow going forward

WHILE COMPLEXITIES ACROSS THE 21 COUNTRIES WHERE CITI HAS FULL BANKING

LICENSES IN REGION CONTINUE TO INFLUENCE THE MARKETS, MOMENTUM HAS STARTED TO

PICK UP AND CITI EXPECTS LATIN AMERICAN TRADE FLOWS TO GROW GOING FORWARD.

3Trade Around the World: Cultivating the Changing Latin American Landscape for Growth

Structured financing creating bright spots for trade in Latin AmericaToday, Citi is one of the leaders in Sales Finance in Latin America, supporting a number of sectors, such as the agri-chemical, energy, industrial, consumer and health care industries. Despite continuing volatility in the region, Citi anticipates interest in Sales Finance to increase over the next two to three years as trade evolves and markets rebound and Latin America countries become part of the global trade model.

As multinationals look to take advantage of more structured financing strategies such as Sales Finance and Receivables Finance in Latin America, working with a global banking partner can have its advantages. Success in implementing such solutions with one subsidiary can be easily translated to other subsidiaries across the region as well as internationally, making the roll out of Sales Finance far easier and more effective.

Corporates should also look for a longstanding solution that has a proven track record in the marketplace to help ensure a positive outcome of the initiative. Citi’s industry-leading global working capital solutions provide global capabilities to help create growth for clients, especially during changing markets.

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These materials are provided for educational and illustrative purposes only and not as a solicitation by Citi for any particular product or service. Furthermore, although the information contained herein is believed to be reliable, it does not constitute legal, investment or accounting advice and Citi makes no representation or warranty as to the accuracy or completeness of any information contained herein or otherwise provided by it.

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