Positive outlook for 2013 trade financeLast Updated February 06, 2013

Positive outlook for 2013 trade finance

Despite 2012's downturn in volumes, trade financiers remain optimistic that the market will return to form in 2013.

Speaking at Exporta's Russia and Eurasia trade and export finance conference, a host of the industry's most prominent figures spoke positively as to the prospects of the market in Russia and further afield.

About the forthcoming Basel III regulation which is likely to impact on banks' liquidity, the head of the European Bank for Reconstruction and Development (EBRD)'s trade facilitation programme, Rudolf Putz said: "I don't feel too negative about the upcoming situation. Yes, trade financing pricing may go up and it may be more difficult for SMEs to gain access to trade finance, but these companies are often willing to pay higher pricing, so long as they get the required access to finance. We shouldn't expect a boom in 2013 or 2014, just steady growth. A boom will return when expenditure on equipment and machinery return."

One of the most commonly cited reasons for optimism was the effect of export credit agencies (ECAs). Where the risk appetite of foreign banks in Russia has diminished, ECAs have quite often bridged the financing gaps, particularly since the inception of the Export Credit Agency of Russia (Exiar).

Many banks have begun utilising ECAs and while industry figures suggested that for many corporate clients pricing is not the sole consideration, all acknowledged the boon such agencies have had on their balance sheets.

When banks' liquidity is pinched because of regulation, the utilisation of such instruments as ECA guarantees and the facilities of international financial institutions such as the EBRD may help keep the Russian trade finance industry buoyant, said the head of trade finance solutions for Promsvyazbank Oskana Gudzenko.

Exiar's first deputy CEO Mikhail Karyakin confirmed to GTR that the ECA completed close to

20 transactions in 2012 - its first full year in business - and has transactions in the pipeline in industries across the board, most of which are outside the erstwhile dominant oil and gas sectors. Furthermore, Euler Hermes board member Dr Hans Janus said the agency had the three most successful years in its history of working in Russia in 2010, 2011 and 2012.

HSBC's associate director of export finance and global specialised finance Alyson Cole confirmed that the bank closed 11 ECA-backed deals in 2012 and spoke of the growing influence of such instruments, in a market in which long tenors and affordable pricing have become so desirable.

However, a commonly held view is that while pricing is important, the private sector still has a key advantage over ECAs in practice: its efficiency. "The attractiveness of ECA finance depends on the timeline you're working with," said Commerzbank's vice-president and group head of export finance for CEE and the CIS Jochen Anton-Boicuk.

Discussions also turned to the dominance of the state banking sector in Russia, which is said to cover 70% of the trade finance market. Again, though, financiers voiced the opinion that while competing on price and tenor with government institutions might be tricky, when transactions need to be closed with haste, the private sector holds an advantage.

Domestically, though, Sberbank's head of export finance Evgeny Kravchenko says the bank has started to compete even on the tenor front. Another Russia banker told GTR that Sberbank has made working with SME exporters a priority.

Having returned to ECA-backed financing for the first time in a number of years with the Euler Hermes-backed finance it received from Commerzbank and on-lent to Irkut at the close of 2012, the bank expects to see such volumes increase further still in 2013.

Deutsche Bank: Taming the open account tiger

07 June 2012

Open account settlement is the most popular form of trade finance, but only now is it being brought in line with other instruments in the trade finance sector. Daniel Schmand, Deutsche Bank’s Head of Trade Finance and Cash Management Corporates EMEA and newly appointed Vice-Chair of the ICC Banking Commission, explains the modernisations taking place.

Despite challenging market conditions and the accompanying need to minimise risk, open account as a means of trade settlement has continued to grow in popularity – a long-term trend that is apparent in all markets. According to statistics, approximately 81% of global trade is now settled using open account, confirming its importance compared to alternative trade financeinstruments such as letters of credit (LCs) and import bills for collection.

That said, despite constituting the most common form of trade settlement, open account is also the largest unregulated area of the market – yet to receive the benefits of the regulations that have brought structure to other areas of trade.

But this is hopefully set to change. In recognition of the importance of the open account space, the International Chamber of Commerce (ICC) Banking Commission has created a new role –which I am proud to be taking on – with responsibility for the newly created area of supply chain finance.

Looking across the breadth of supply chain finance, from forfaiting and factoring to open account trading, I’m looking forward to aiding the delivery of best market practice across the sector. And this has started with the implementation of the Bank Payment Obligation (BPO) – a key project that will bring flexible risk mitigation and increased efficiency to trade finance,combining the advantages of documentary credit trade and open account settlement.

A new era of trade

The BPO – expected to gain the formal approval of the Banking Commission in early 2013 – is an initiative that will bring international trade into the 21st century. Born out of the need to combine the efficiency and freedom of open account trade with the security and structure of LCs, the BPO is an irrevocable undertaking given by one bank to another that payment will bemade on a specified date following a successful ‘match’ report. This report, to be generated by SWIFT’s Trade Services Utility (TSU), or an equivalent application, will match data via ISO 20022 messaging standards.

Certainly, the BPO is designed to meet the developing needs and preferences of the trade finance marketplace. Banks and corporates alike are seeking to improve working capital management and increase flexibility and transparency, at the same time as managing risk and reducing costs. Furthermore, corporates have until now faced the restriction of, and have

effectively been tied down to, a limited number of big banks with suitable platforms for receivables. Without a doubt, the need for increased inter-operability has also become readily apparent.

And the BPO has been designed to meet these needs and more. Most importantly in today’s volatile environment, the accuracy

of the solution – alongside its assurance of payment – will mitigate the risks associated with international trade, for both buyers and sellers alike. The objectivity and automation of electronic data-matching will consign the risk and inefficiency of manual processing to the past. Also, the speed of automation, coupled with the provision of access to flexible financingpropositions, will serve to reduce costs – particularly welcome at a time when corporates are under increasing pressure in this respect. Certainly, the provision of flexible financing (for example, the BPO can be used for pre-trade finance, unlike LCs) and the bank-to-bank nature of the obligation (again, unlike LCs) sets the solution apart from other forms of trade finance.

Equally important is the solution’s support of interoperability, with the use of a standard set of ISO 20022 messages enabling collaboration between banks and across global markets – a key feature in an era of true globalisation.

A strong foundation

Of course, this is not the first e-commerce solution for the open account space. This is, however, the first to have achieved the market-wide interest needed to revolutionise global supply chain finance. In this endeavour, the BPO has been aided by the unprecedented partnership between the ICC and SWIFT.

Certainly, there can be no doubt as to the strength of the offering’s foundation. By combining the neutrality and expertise of a leading rule-making body (the ICC) with the technology and clout of a highly-trusted provider of financial messaging, the ICC/SWIFT partnership is in a better position to modernise open account trade finance through the industry-wide adoption ofthe BPO than any previous initiative.

Indeed, at Deutsche Bank our own confidence in the partnership – and in the BPO, generally – is reflected in our close involvement in the process. For example, my colleague David Meynell, Head of Product Management, Trade Finance Financial Institutions, is on the Drafting Group which has been producing the BPO rules – a formal draft of which is expected to be completed in the second half of this year. In addition Deutsche Bank has representation on several of the ICC working groups and is currently in the process of concept testing the BPO together with SWIFT and corporates. Deutsche Bank is proud to be at the forefront of this exciting development in trade finance.

The role of corporates

That said, the drafting and implementation of these rules should not be carried out without the involvement of the wider trade finance community. In fact, the active engagement of corporates in the design of these rules is vital in ensuring they are commercially compatible. Certainly, corporates will be significantly affected by the rules, despite the BPO’s bank-to-banknature, and should make the most of this opportunity for much greater involvement.

As the growth in both supply chain finance and open account trade accelerates, it is the strength of partnerships – such as that of the ICC and SWIFT – combined with the collaborative efforts of the wider trade finance community that is key to the production and implementation of innovative solutions that meet the market’s developing needs.

BPO fact box

A Bank Payment Obligation (BPO) is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after successful electronic matching of data according to an industry-wide set of ICC rules.

Key stages of a BPO transaction:l Exchange of contracts between buyer and sellerl Instruction of obligor bank by the buyer to establish the BPO. This will contain the data the seller needs to provide to obtain paymentl Obligor bank issues the BPO to the recipient bankl Recipient bank notifies the BPO to the sellerl Post-shipment, the seller provides the BPO-required data, which flows through both banks and is matched to original BPO requirements

Benefits for importers:l Safer than prepayment. The buyer does not have to pay up-front before receiving the documents of title to the goods purchasedl Facilitates financing for the buyer, e.g. extended payablesl BPO strengthens buyer/seller relationships. Secures the supply chainl BPO helps to expand business opportunities. May increase competitiveness in foreign marketsl The buyer can confirm that the goods are shipped on or before the due date to the required specificationl The buyer can structure payment according to the buyer’s interestsl The buyer can negotiate better terms and conditions. By issuing a BPO, the buyer demonstrates the ability to pay and can negotiate improved terms in the future

l The BPO protects the buyer since the bank only pays when the seller complies with the specific terms and conditions and produces the data requiredl The buyer can build safeguards into the BPO, including inspection of the goods and quality control, and set production and delivery timesl BPO increases convenience; and reduces cost

Benefits for exporters:l Assurance of paymentl Access to flexible pre-shipment or post-shipment financel The credit risk is transferred to the obligor bankl Reduces risk of buyer cancelling or changing the orderl The buyer cannot refuse to pay due to a complaint about the goodsl Foreign exchange risk can be eliminated with a BPO issued in the currency of the seller’s countryl The seller can structure the delivery schedule according to the seller’s interests, determining when payment will be

made and shipping the goods accordinglyl The bank bears responsibility for any oversightsl Automated data matching reduces complexity and increases reliabilityl By removing subjectivity of physical document-checking the risk of discrepancy, dispute and delay is reducedl BPO can be introduced at any stage of the transaction. Mismatches can be acceptedl Automated processing accelerates settlement and financing

Benefits for banks:l Low risk businessl Prudent use of capitall Steady source of commission and fee incomel Opens door to new business opportunitiesl Strengthens core relationshipsl Automated solutionl Lower operating costs

l Meets the market requirement for banks to collaborate more on risk and client on-boarding.

Export Credit Agencies from Emerging Economies November 4, 2008

By Bob Thomson

Text by Bob Thomson, additions by Regine Richter

The role of emerging countries’ ECAs is rapidly increasing: The U.S. Export-Import Bank for example reported to the US Congress in 2006 that, “by 2010, China’s Export-Import Bank and Sinosure (the state overseas investment insurance agency) will be lending and guaranteeing more than $70 billion annually for large scale investments in developing countries and economies in transition.” (“Blank Checks for Unsustainable Development”, Bruce Rich, Environmental Law Institute, 2007). It is therefore worthwhile to take a closer look on some of these ECAs.

Brazil

Brazil's export credit efforts are carried out by the Banco Nacional de Desenvolvimento Econômico e Social (National Bank of Economic and Social Development – BNDES) and by the Seguradora Brasileira de Crédito à Exportação (Brazilian Export Credit Insurer – SBCE). BNDES is a state entity, while SBCE is privately held, 75% by France's Coface, with some 25% government ownership.

BNDES is Brazil's national development bank, providing financing for projects within Brazil as well as playing a major role in the privatisation programs undertaken by the federal government.

The disbursements of the support lines to exportation of BNDES-ExIm reached US$ 6.4 billion in 2006, 9% higher than in 2005. BNDES provides longer term credits and guarantees, leaving short-term transaction to the private sector.

Oversight of BNDES is provided by the Ministry of Development, Industry and Foreign Trade.

BNDES is not a member of the Berne Union. On its website BNDES says: “BNDES considers it fundamentally important, in the execution of its credit policy, to take into account ethical and environmental principles. As such, BNDES is firmly committed to the principles of sustainable development.”

SBCE acts on behalf of the government for medium- and long-term operations (over 2 years), supporting IRB, Brazil's state-owned reinsurance institute, to analyse, structure, manage and monitor risks inherent to the Brazilian exports

SBCE has the following shareholders:

· Banco do Brasil, 12.1% · BNDES, 12.1% · Bradesco Seguros, · Sul América Seguros, · Minas Brasil Seguros, · Unibanco Seguros and · Coface (Compagnie Française d'Assurance pour le Commerce Extérieur), 27.5%

SBCE is a member of the Berne Union and therefore subscribes to their Guiding Principles.

China

Of China's three policy oriented banks, China Export and Importbank is the lending ECA, Sinosure is the insurer/guarantor ECA, and the China Development Bank has become an export credit lender in addition to its more traditional international role in the foreign direct investment field. These banks operate largely according to macroeconomic policy and political directives from Beijing. As a result, they enjoy substantial financial and political support from the central government, usually in the form of capital injections from the People’s Bank of China.

The China Export and Import Bank (Chexim), like all the policy banks, report to the State Council. It also is under the partial direction of the Ministry of Commerce and the Ministries of Finance and Foreign Affairs. At the top of Chexim’s governance structure is its Board of Directors. Beneath the Board of the Directors is the Office of the Chairman and President, which is the executive body that carries out the resolutions of the Board of Directors.

The China Export-Import Bank is not a subscriber to the Berne Union.

Services provided:

· Export seller’s credit, which is a loan at preferential rates for Chinese firms wanting to sell their goods abroad

· Export buyer’s credit, which is a medium- or long-term loan to a foreign buyer who wants to purchase Chinese-made goods. Often large construction projects need to buy equipment, and Chexim financing makes buying Chinese equipment more attractive

· Guarantees for either Chinese exporters, foreign importers, and/or their banks

Chexim differs from most export credit agencies, because it serves the country’s official conduit for governmental lending. In this capacity, Chexim also provides:

· Low interest or concessional loans from Beijing to developing countries’ governments in order to enable them to buy Chinese goods and services for development projects

· On-lending of foreign government loans, which means that Chexim channels loans from foreign governments to specific projects within China via government agencies, provincial governments, or NGOs. In 2005, these funds amounted to US$16.8 billion, almost half of all of Chexim's loans,

and came mainly from Japan (82%) and Germany (11%).(Source: Michelle Chan-Fishel)

Outstanding loans extended by China Eximbank to the African Continent 2006:

· North Africa 30.8% · Eastern Africa 3.6% · Southern Africa 51.0% · Western Africa 11.7% · Central Africa 2.9%

(Source: p.39, 2006 Chexim Annual Report)

China Export and Import Bank issued “Guidelines for Environmental and Social Impact Assessments of the China Export and Import Bank’s (China EXIM Bank) Loan Projects” in August 2007. The guidelines require a social and environmental impact assessment for overseas projects, and require borrowers to follow laws and regulations of the host country. The guidelines were developed in accordance with the China's Environmental Impact Assessment (EIA) Law, Environmental Protection Law, and Environmental Management for Construction Project Ordinance, and "with reference to regulations and procedures for environmental and social assessments of other international financial organizations."

The English translation of the guidelines is provided by International Rivers and is not an official translation.

While having the guidelines is a good start, there is still a need for pressure to adhere to them, as an example from Gabon shows: There, a Chinese-Gabonese joint venture wants to explore the Belinga iron ore deposits. There are environmental concerns about a proposed port that will need to be built due to the project and the site of a hydroelectric dam that will power the project. A waterfall earmarked for the dam is located in the Ivindo National Park, where building the dam might result in a declassification of the area as National Park, spurring further development in the area. Wild chimpanzees and gorillas inhabiting the Belinga area are another reason for environmental concerns. The Chinese companies of the joint venture got financing by the Chinese Exim Bank. Although the guidelines require that projects of this type have environmental impact assessments conducted, this haven’t happened for the Belinga project.

The case is explained in the chapter “Chinese investors and the environment – a South African perspective” in the publication “New Financiers and the Environment” of International Rivers.

Sinosure is a policy bank, overseen by the Ministry of Finance, and also has relationships with the Ministries of Commerce and Foreign Affairs. Its mission is to support and promote Chinese exports and foreign investment through export credit insurance for other banks for loans that they make to buyers and sellers of Chinese products.Sinosure is a member of the Berne Union and therefore subscribes to their Guiding Principles.

Sinosure offers a range of export credit insurance products, including:

· Short-term export credit insurance, which lasts less than one year, and guarantees that Chinese exporters will get paid if their overseas buyers default.

· Medium- and long-term credit insurance, which lasts more than one year, and encourages Chinese firms to bid for large construction projects where equipment and machinery is needed.

· Investment insurance, which is offered to Chinese companies (as well as their shareholders and banks) that want to operate overseas, but are worried about certain political risks, such as the threat of war.

· Guarantees, which are offered to the banks of Chinese exporters that want to participate in overseas projects.

· SinoRating, research and analysis to help Chinese companies understand the risks associated with operating in various countries, or with certain potential business partners.

Most of Sinosure’s short-term trade financing goes to exports and imports to/from developing countries. However, when it comes to medium- and long-term financing, a majority (56%) of its medium- and long-term insurance goes to the countries of Iran, Sudan, the Philippines and Pakistan.

According to Sinsoure’s 2004 annual report, its financial products went to support overseas trade and investment in:

· Asia 39% · North America 29% · Europe 23% · Latin America 4% · Oceania 3% · Africa 3%

(Source: Michelle Chan-Fishel)

Sinosure’s transactions include:

· Cooperation agreements with PetroChina, Sinopec, CNOOC, · Sinochem, Zhenhua Oil and Citic Group to provide “all sided risk guarantees” for overseas

projects (185) · Insuring a buyer credit ($15.6 million) and a commercial credit ($2.5 million) for BNP Paribas

Bank’s loan of $18.1 million to the Vietnam Construction Export and Import Corporation (Vinaconex), which is building the Cua Dat Hydroelectric Plant in Vietnam ($100 million)

· Calcined soda plant in Uzbekistan (186) · Blanket export insurance for Sinochem Corporation · Cuban Government agreement on debt re-organization · Blanket policy agreement on short-term export credit insurance with the China Machinery

Equipment Import and Export Corporation · China Chemical Industry Engineering Company and the China Chengda Engineering Company to

build a power plant in Indonesia · Yunnan Machinery Equipment Import and Export Company, Yunnan Machinery Import and

Export Company, and the China Complete Plant Equipment Yunnan Branch · China Aerospace Technology Import and Export Corporation Beijing Branch for exporting cargo

ships to Iran.

· China Dongfang Electric Corporation and Sichuan Provincial Machinery and Equipment Import and Export Co. Ltd.

· Hebei Provincial Textile Import and Export Group Company; · Chongqing Foreign Construction Corporation to build P-H highway development project in

Uganda (financed by the World Bank) · Government of Myanmar on debt restructuring · Various operating and financing agreements with Nigerian oil developers, including: Amni

Petroleum, Emerald Energy Resources Limited and BlueWater Oil and Gas Investment Company (187)(Source: Sinosures website and economic publications put together in “Time to go Green: Environmental Responsibility in the Chinese Banking Sector” (pdf), by Michelle Chan-Fishel, Report by Friends of the Earth United States and Banktrack, p.81)

Further information on Chinese ECAs and the environment:

International Rivers website:

· China Exim Bank· China's Global Role· Publications on China· Report: New Financiers and the Environment (May 2008)

Friends of the Earth United States website:

· Global Finance

India

There are two Indian ECAs, the Export Import Bank of India and the Export Credit Guarantee Corporation of India (ECGC), covering credit and risk guarantees respectively.

The Export Credit Guarantee Corporation of India Limited (ECGC) was established in 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit.

Being essentially an export promotion organization, it functions under the administrative control of the Ministry of Commerce & Industry, Department of Commerce, Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community.

ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. It is a member of the Berne Union and subscribes to their Guiding Principles.

In financial year 2006 a total of 568 contracts were secured by 174 Indian exporters with the support of Exim Bank. These deals amount to US$3.29 billion covering 64 countries.

Exim Bank of India has in place 78 Lines of Credit, covering over 80 countries in Africa, Asia, Latin America, Europe and the CIS, with credit commitments amounting to US$ 2.3 bn, available for utilization for financing exports from India. Exim Bank's LOCs afford a risk-free, non-recourse export financing option to Indian exporters.

The Export-Import Bank of India was established “for providing financial assistance to exporters and importers, and for functioning as the principal institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country's international trade ..." : The Export-Import Bank of India Act, 1981.

Exim Bank is managed by a Board of Directors, which has representatives from the Government, Reserve Bank of India, Export Credit Guarantee Corporation (ECGC) of India, a financial institution, public sector banks, and the business community.

Countries of operation

Project export contracts 2006 (Rs. 269.5 bn) Active LOCs (US$1739 mn)West Asia 47% US$250 mn 14.4%South Asia 15% US$218 mn 12.5%North Africa 23% US$442 mn 25.4%Sub-Saharan Africa 6% US$552 mn 31.7%SE Asia, Far East & Pacific 6% US$ 99 mn 5.7%Europe & CIS 2% US$ 85 mn 4.9%Americas 1% US$ 93 mn 5.3%(Source: 2006 ExIm India Annual Report)

Sectors supported

Contracts supported 2006Construction 5% 9 Rs. 6.63 bnConsultancy 2% 16 Rs. 2.45 bnTurnkey 65% 52 Rs. 87.91 bnTrade finance (supplies) 28% 491 Rs. 38.51 bn(Sources: Export-Import Bank of India, Export-Import Bank of India - links)

South Africa

The Export Credit Insurance Corporation Ltd (ECIC) is an independent, limited liability company with the Government of South Africa, through the Department Trade and Industry (dti), as the sole shareholder.

The Export Credit Insurance Corporation (ECIC) is registered as an insurer underwriting bank loans, supplier credits and investment into South Africa. The ECIC was established on 2 July 2001 by the Export Credit and Foreign Investments Reinsurance Amendment Act (9 of 2001)

with the brief to fill a gap in the market in the provision of medium and long-term export credit insurance and investment guarantees on behalf of government.

ECIC is a member of the Berne Union and therefore subscribes to their Guiding Principles.

Sectors supportedFocus on mining infrastructure sector per October 2006 PPT presentation to the Trade and Industry Portfolio Committee of the South African Parliament.

The ECIC’s portfolio exposure is spread over 21 countries, with the highest (47,4%) in Mozambique. Its biggest exposure is for the Mozal Aluminium smelter in Mozambique (35%), followed by Iran (29%), Mozambique excluding Mozal (12,3%), and Turkey (8,2%). However, the Mozambican exposure was reduced significantly during the year from 65,4% at its commencement.

In February 2008 ECIC guaranteed a loan to Paladin Energy. The loan consists of a US$ 167 million financing package from an international banking syndicate for the construction of the Kayelekera Project in Malawi, a uranium mine. The banking syndicate consisted of Société Générale (France), Nedbank (South Africa) and Standard Bank (South Africa). (Source: “Paladin Energy Announces Bank Approval for US$ 167 M Project Finance for Kayelekera Uranium Project, Malawi”). The transaction is mentioned as well in the report “Mined U” (pdf) by WISE)

(Source: Export Credit Insurance Corporation Ltd)