When Trading with the Middle East, Local Knowledge is King
The 2008 financial crisis had wide-reaching implications for
companies throughout the Gulf, and especially those in the United Arab Emirates
(UAE). Yet despite suffering setbacks as a result of the economic turmoil, the
UAE has demonstrated resilience – making a remarkable recovery as both a trading
hub and a consumer market.
Indeed, while World Trade Organisation
(WTO) statistics show the value of UAE import and export trade dropping from a
high of US$416bn in 2008 to US$335bn the following year, the region has since
bounced back. Last year the UAE turned over US$520bn in global trade –
significantly higher than the 2008 base.
And the Arab Spring has
failed to halt this resurgence – in fact, even potentially benefitting Gulf
states such as Qatar and the UAE seen as regional ‘safe havens’. Problems in the
eurozone have also been beneficial, as major European corporates sought growth
by expanding into nearby emerging markets to counteract dwindling demand at home
with the Gulf a prime target region.
Yet the potential for further
growth in trade between the Middle East and Europe is vast, although realising
the possibilities will require the support of a strong banking network. Yet
banking is another area hit hard by the 2008 crisis as global banks – many of
which had been expanding in the Middle East – began to retrench back towards
their home markets, encouraged by their governments.
This retreat
coincided with a post-crisis spike in credit risk – resulting in trade becoming,
once again, serviced through the issuance of documentary letters of credits
(LCs). Of course, LCs require local bank confirmation, so the crisis served to
stress the importance of a strong local banking network that understands the
subtle nuances of local trading counterparties and contracts. The best way to
tap into this local knowledge is through the tried and trusted route of
correspondent banking.
Opportunities for Trade
The Middle East also boasts some of the fastest-growing consumer markets
in the world, especially in luxury goods with estimates suggesting 15%
year-on-year (YoY) growth. It means that European companies – many with a
long-established reputation for quality built up over generations – are, for the
most part, determined to expand their sales operations in the region. This
makes the provision of documentary trade finance a key need, for both the
corporates and their banks.
Yet Middle Eastern appetite goes beyond
luxury goods. The construction industry is also picking up, after nearly
grinding to a halt after 2008. Here, the needs are enormous. Over the next 15
years, some US$4.3 trillion of investment is required for growth-accelerating
infrastructure in the Middle East, with Qatar in particular offering a raft of
opportunities as it ramps up investment ahead of the 2022 FIFA World Cup.
Triggered by the award of the tournament to Qatar, around US$100bn is expected
to be injected into infrastructure projects in the country, including the Doha
Bay crossing, the Doha Metro system and a major new airport development.
Given the cost advantages, many of these contracts are likely to be
awarded to Asian contractors. That said, European corporates retain a
significant interest. Specialist European contractors will be expecting to win a
large slice of the equipment supply contracts, especially on energy and
transportation projects.
Given the bold architecture of the region,
this could extend beyond infrastructure to commercial and residential contracts
as well, as it has done in the past. For instance, the construction of Dubai’s
Burj Khalifa, the world’s tallest building, required specialised concrete pumps
and expertise provided by Germany’s Putzmeister Holding, a concrete-pump
maker.
Overcoming Challenges
Despite
these opportunities, corporates on both sides of the Middle East-Europe trade
corridor face challenges when dealing with each other – including cultural and
language differences, physical distance, high transportation costs and
regulatory concerns. The biggest barrier, however, is payment risk, which is
also linked to political or economic risk.
Indeed, with political
unrest and economic uncertainty featuring prominently across much of the region
risk mitigation is a key concern for all corporates trading in the Middle East.
Understandably, they are focusing on reducing risks that arise through dealing
with less familiar economies and counterparties – especially those making
headlines for the wrong reasons. That means they are turning to their banks for
reassurance regarding the local trading environment. Corporates want the comfort
of knowing their bank has a thorough understanding of the risks and regulations
in any given geography, as well as the capacity to use this knowledge to support
the trading requirements.
In this respect, corporates are likely to
be best served by banks on both sides of the trade collaborating via a
correspondent banking partnership – a collaboration that is also likely to have
advantages for the banks themselves.
While a traditional way to
co-operate, the modern iteration of correspondent banking combines the trade
finance infrastructure of an international bank with the local knowledge of a
regional bank; thereby generating efficiencies that can both facilitate trade
and mitigate risk. Of course, correspondent banking networks are a strong route
for issuing and confirming paper-based documentary LCs – something still seen as
vital when trading in the Middle East.
A Beneficial
Partnership
Correspondent banking relationships, therefore,
can ease the pressure on local banks to offer streamlined trade processing for
their local corporate clients. Indeed, they can provide such services
electronically, but via a global banking partner rather than having to invest in
the technology platforms themselves.
Yet correspondent banking can
also provide local banks with liquidity and capital assistance, enabling local
banks to manage their balance sheets more efficiently, and thus reducing their
borrowing requirements. Global banks can also provide expertise to help in the
management of loan books and risk management.
So correspondent
banking relationships can lower costs for banks and help share risks, especially
in new markets. Significantly, a correspondent banking relationship also means
that participating global banks are not competing with local banks for corporate
business in their local markets.
Yet, just as a chain is only as
strong as its weakest link, the usefulness of correspondent banking networks
rely on the commitment and financial viability of the banks involved. Many
responded to the crisis in the eurozone by calling in loans, reducing credit and
retrenching to core markets. Commerzbank did the opposite: not a single credit
line to its correspondent banking relationships in the Middle East was removed
during that period.
As for the Middle East, the bank has been
developing relationships in the Gulf Cooperation Council (GCC) region for over
30 years. Given that trading contracts can only be built on strong foundations,
this commitment is vital if corporates are to seize the opportunities
available.