Facilitating Latin America’s trade trajectory Guest Contributor - January 12, 2015 4:43 AM | Categories: Trade Credit Commentary | Tags: Letters of Credit, open account trade, South South trade Dino Sani is head of Treasury Services, Latin America, for BNY Mellon. Latin America’s trade outlook – both internationally and intra-regionally – shows great promise, with appetite for Latin American exports experiencing a significant resurgence. The post-crisis recovery is driving trade with developed markets, and, while demand from emerging markets for Latin America’s raw materials has slowed somewhat, the emerging markets’ growing middle-class populations (most notably in Asia) are now fueling demand for Latin America’s consumer goods. Indeed, while the recovery of the US in particular undoubtedly bolsters Latin America’s cross-border trade activity, it is the region’s deepening “south-south” trade relationship with Asia that is creating the biggest stir. Bilateral trade between Latin America and Asia has prospered in recent years – growing annually by 20% since 2000, and reaching US$493 billion in 2012. China, of course, has long been the heavyweight in this respect and remains the largest export destination for Brazil, Chile and Peru. But in a demonstration of the two-way nature of this ‘south-south’ relationship, China is now investing significantly in Latin America’s infrastructure, energy and mining sectors. In fact, the region is the largest recipient of Chinese investment outside Asia, having received US$84 billion since 2002, and Brazil has become a key export market for China’s manufactured goods. With Latin America abundant in the raw materials – such as Chilean copper, Colombian iron and Brazilian soy – required to facilitate China’s growth, China’s vested interest in the region shows little sign of abating. Yet there is also awareness in Latin America of the need to diversify beyond natural resources, and the countries involved in the Pacific Alliance trade agreement (Mexico, Chile, Colombia and Peru) in particular are working to increase the variety of their exports. Mexico, for example, is the world’s largest smartphone producer and the fourth-largest exporter of mobile phones. Furthermore, Latin American trade is continuing to develop at an intra-regional level, thanks in part to political efforts to improve trade cooperation and integration (the Pacific Alliance and Mercosur cases in point), and also due to the region’s evolving demographics. The World Bank recently reported that Latin America’s middle class (the key consumer market) grew by a massive 50% over the last decade, and now forms 30% of the region’s population. Furthermore, it is projected that this middle class will comprise nearly half of Latin America’s total population by 2030 – further fueling intra-regional trade flows to satisfy the accompanying consumer appetite. Evolving trade expectations With deepening (and increasingly bilateral) trade flows, growing levels of FDI, a movement to diversify beyond raw materials and a growing impetus to support both international and intra-regional trade through the development of regional trade blocs, Latin America’s trading landscape is filled with potential. And this in turn means the region’s corporates are showing greater demand for effective and efficient trade processing solutions that can facilitate these expanding opportunities. The global financial crisis of 2008 reaffirmed the importance of risk mitigation in trade transactions, and documentary forms of settlement such as letters of credit (LCs) – still undeniably the most secure trade processing instrument available – remain hugely popular in the region; particularly favoured in Chile, for example, where concerns around economic disruption linger. Yet in this age of sophisticated technology, LCs are also beginning to seem relatively cumbersome and labour-intensive. Indeed, submitting paper-based documents can pose numerous practical challenges, with resubmission required if changes to the trade occur, for example. Such manual systems, which involve the processing of the document by multiple parties, also exposes the process to a higher risk of human error; errors that can result in costly delays. Subsequently, and with confidence in the world’s economic health steadily being restored, the global demand for open account solutions – which satisfy today’s requirements for speed, efficiency and transparency – is growing, with Latin American preferences no exception. Brazil, Uruguay, Peru and Colombia in particular are increasingly conducting trade in this way. Open account alone, however, offers little in the way of risk mitigation. And while exporters may be prepared to conduct open account trade with reliable, long-term partners, there is understandably some caution when approaching new counterparties in unfamiliar geographies – an increasingly common occurrence due to the ongoing progression of emerging markets and accompanying expansion of ‘south-south’ trade corridors. Meeting demands With expanding trade flows such a focus for corporates in Latin America, the region’s local banks are tasked with providing innovative solutions that provide the risk mitigating properties of LCs without losing the ease and efficiency to be gained from open account trade. But this is easier said than done. For example, one such solution needed is automated global trade document presentation, which receives and verifies original LC documentation online, and can receive original open account documentation and other trade documents. By incorporating automation (through the use of electronic platforms) with preferred documentary settlement, banks will be able to meet corporates’ evolving needs and deliver increased payments efficiency, lower transaction costs and enhanced visibility (itself all the more important thanks to heightened reporting requirements). However, while local banks and financial institutions continue to strive to facilitate trade ambitions, meeting these expectations can involve significant product or platform investment that, for many, is simply outside their reach – particularly given current compliance pressures that are adding to costs and diverting investment focus away from innovation. A partnership for success Collaboration (on a non-compete basis) between local banks and specialist global trade services providers can be an effective solution, marrying the best of both worlds with regards to a global provider’s advanced technological capabilities and international reach, and local bank’s region-specific knowledge and in-depth understanding of local clients’ needs. Indeed, with the provision of “added value” (truly holistic solutions beyond mere products) more important than ever, in order to re-boot the global economy, fusing local and global strengths is undoubtedly the most sensible way of enhancing corporates’ overall experience and ensuring the wheels of trade continue to turn smoothly. The benefits of collaboration go beyond the sharing of automated global solutions. By outsourcing processing functions to specialist partners, Latin America’s local banks can gain the capacity to focus on the areas where they can offer the greatest value, including truly personalised client service and strong local support. Certainly, LC documentation examination is a demanding task, requiring a considerable amount of resources in order to undertake extensive, detailed checks and reliable, efficient uploading of data. Outsourcing this function to an experienced global provider – one adept at providing an overnight documentation examination service, 24 hours a day, seven days a week – means local banks can give their corporate clients secure, efficient and cost-effective trade processing, while creating additional scope for focusing on offerings that provide real added value. By equipping local corporates with the tools they need, global and local banks can, together, assist Latin American trade – enabling the region’s companies to embrace the vast scope of trading opportunities at hand, in turn supporting the continuing economic advancement of this truly varied and exciting region. The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such. 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