Treasury Services in the Middle East: Evolution in Action
The Middle East is currently receiving an unprecedented
degree of attention and rightly so. With the United Arab Emirates (UAE) – and
Dubai in particular – acting as a pivot for shifting trade flows, and new
financial centres and investment in infrastructure creating even greater
potential, the region’s future is bright. That said, a number of hurdles
remain, not least the continued uncertainty stemming from ongoing
socio-political upheaval in certain markets.
With both
opportunities and challenges at hand, the role of treasury services providers
in the region is more important than ever, with the ability to fully realise
the Middle East’s greater potential hinging on in-depth understanding of the
region’s background, direction, norms and needs, as well as the solutions
needed to leverage this knowledge.
A Changing
Landscape
Treasury services, in one form or another, have
of course always been vital to the Middle East. The traditional role of
correspondent banking is closely intertwined with the region’s history, as far
back as its earliest days as a trade passage between east and west. With the
discovery of oil, the formation in 1960 of the Organisation of the Petroleum
Exporting Countries (OPEC) and subsequent rise of the Gulf’s oil-exporting
economies, the need to support trade flows became all the more important.
However, the region has now reached an inflection point in its
development, as shifting trade flows – following the transfer of purchasing
power from west to east and subsequent growth of developing economies – see the
Middle East becoming a pivot for new channels of commerce. Indeed, the total
value of the UAE’s merchandise trade alone grew to US$520bn last year, with
trade between the UAE and China (dubbed ‘the new silk road’) growing at an
annual average rate of 35% for the past decade.
While the UAE
retains its economic prominence, such Middle East-to-Far East trade connections
are indicative of trends throughout the region, with the growth in commerce
buoyed by an increasing number of trade ties. These are not just from oil
alliances such as that between the China Petrochemical Corporation (aka
Sinopec) and Saudi Aramco, but also through more diverse measures such as the
April 2013 agreement between Qatar and Vietnam to support mutual investment and
trade cooperation.
It is not just the Middle East’s domestic
corporates looking to leverage such burgeoning trade flows. Foreign companies
also recognise the opportunities that the region has to offer. Multinational
corporations (MNCs) from as far away as Japan are setting up business in the
region, as well as in the UAE’s jurisdictional ‘offshore’ zone.
That said, challenges remain. Concerns around socio-political instability
continue to hamper the region, with recent events in Turkey, Egypt and most
notably Syria testing investor confidence. While the wider region’s upward
trend is apparent, the state of political flux remains a key challenge and one
likely to influence the needs and demands of corporates, both domestic and
foreign, for some time to come.
Corporate Needs
So how has the evolution of the Middle East, over time, shaped market
demand for treasury services? Most immediately apparent is the continued
conservatism throughout the region, with the approach to business mirroring
historic cultural norms, and risk mitigation remaining the priority. An example
of this can be found in the continued popularity of Letters of Credit (LCs) – a
documentary means of trade settlement that elsewhere has been overtaken in
popularity by the more flexible and cost-efficient open account form of
trade.
It is not only a traditionally conservative attitude that has
caused LCs’ continued popularity among Middle East-based corporates. Political
unrest and the effects of wider economic uncertainty (emanating from close
neighbour Europe), along with sovereign downgrades to Egypt and Jordan, means
risk mitigation is especially important in the current climate.
In
addition, the Middle East’s strategic geographical position at the centre of
burgeoning intra-emerging market trade flows (over 50% of developing country
exports now go to other developing countries) means that such documentary trade
tools, as well as risk-mitigating working capital solutions, are even more in
demand. Corporates understandably are looking to minimise the dangers inherent
to dealing with less familiar economies and counterparties.
That
said there is, simultaneously, a growing need for innovation. While security
and payment assurance remains vital, the complexities of modern cross-border
trade and a growing role for the Middle East on the international stage means
increasingly sophisticated solutions are required. Not only are both domestic
and foreign corporates looking to streamline processes and create cost and time
efficiencies, but they are also in need of advanced electronic capabilities
able to support their growing multi-currency requirements. Other essential
requirements are holistic supply chain tools to increase end-to-end stability
and visibility, along with solutions aimed at enhancing cash management.
Of course, the nature of corporate demands varies throughout the region.
North Africa and the Levant may currently have less of a need for access to
more exotic currencies, whereas Dubai, in contrast, has bid to follow in Hong
Kong’s footsteps and become the next offshore trading centre for the Chinese
renminbi (RMB). Turkey too is at the forefront of developments, with domestic
corporates looking to internationalise their businesses, and looking to their
local banks to support their efforts in this respect.
The
Role of Banks
While corporate needs vary, one thing is
clear: local banks are under increased pressure to deliver a broader range of
treasury services that balance the need for enhanced risk-mitigation with the
desire for more innovative solutions and a truly global reach. From
multi-currency capabilities and automated platforms to specialist local market
knowledge – at both ends of transactions – and customisable client-focused
solutions, a complete product and service offering is needed to overcome market
challenges and help clients realise their potential.
Furthermore,
local and regional banks in the Middle East are themselves facing greater
competition as international banks ramp up their dealings in the region, in
line with the race between Dubai, Abu Dhabi and Bahrain’s Manama to be the
region’s foremost financial centre.
Foreign banks too, for example
those in Turkey, which aim to support the international ambitions of their
domestic clients, or those across Asia addressing the needs of corporates
looking towards the Middle East, may need assistance in delivering both
heavyweight technology and an in-depth understanding of new markets and
geographies.
Help is at hand though. By leveraging the capabilities and
expertise of an international treasury service provider such as BNY Mellon,
which has over a century of experience in the Middle East, and offers its
partnership on a non-compete basis, local and regional banks can tackle
evolving client demands, without the concern of additional local-market
competition. Indeed, by realising the benefits of such a collaborative approach
the region’s banks and, in turn, their own clients can confront new challenges
and grasp the resulting opportunities.