New Trade Partners, New Thinking About Trade Finance in Latin America

By Ted Howard

Shifting trade lanes and a working capital focus spur growth in Latin American trade finance opportunities. 

Trade finance in Latin America has always been an important source of liquidity to support international trade flows. Although there are challenges to doing business in the region, trade finance is one area that, thanks to a combination of new and old methods, is filled with new possibilities.

While trade finance has been driven by the needs of globalization, it has also been driven by banks and their ability to offset the risks inherent in cross-border transactions. Corporations, both international and local, are seeing the benefits of extracting value from their supply chains. They also look at it as good cash management.

The maturation of trade finance tools has created a setting where all sides can benefit. Indeed, the mantra of trade finance these days is what can be called a “win/win” in that the buyer, the seller and the bank can all gain (“a win/win/win”); each link in the chain obtaining significant improvements and operational efficiencies. What’s interesting is that new products are not necessarily replacing more traditional forms of trade finance—letters of credit (L/Cs) et al—there are just more tools in the trade-finance tool box, particularly in Latin America.

“Traditional trade instruments, like L/Cs and Guarantees, while experiencing modest market growth, remain very relevant in the region, especially to facilitate dealings in other emerging and more challenging markets around the region and the globe,” says Jon Richman, Head of Trade Finance and Financial Supply Chain Americas, Global Transaction Banking, Deutsche Bank. “Financial supply chain, on the other hand, which supports trade and working capital management for open-account-based terms, is undergoing much more rapid growth.”

Trade lanes open up

Boosting the success of many regional companies and economies has been new business from Asia, particularly China, much of it commodity-focused. Accordingly, as Latin American trade has shifted more toward Asia-Pacific, trade partners in the region have also grown more receptive to trade finance in order to expand avenues of business with more trading partners.

“One of the reasons why trade finance is popular in Latin America is because these markets are commodity-oriented and trade finance has been a key source of finance for commodity trade,” says Alfredo Parra, Head of Trade Finance Latin America, excluding Brazil & Argentina, Global Transaction Banking at Deutsche Bank.

And Deutsche Bank, with a presence in both regions and a leading position in trade finance as a European bank, has sought to serve corporates in Latin America by building up its trade finance capabilities there. A stronger capability to finance Asia-Latin American interregional and pan-regional trade, moreover, benefits all large multinational corporations (MNCs) doing business with Latin American entities, as they can leverage the Bank’s traditional and more sophisticated, cross-border trade finance, including the rapidly developing financial supply chain suite.

One of Deutsche Bank’s products that meets the risk challenge head-on is its distributor finance offering. The product is for large corporations—both local and international—looking to expand across the region. Its aim is to support a potentially growing network of distributors by offering companies a revolving line of credit with a specific purpose to finance inventory purchases from the anchor supplier. “Distributor finance has become a very high growth area as MNCs expand into emerging markets,” says Mr. Richman. Often, he says, these distributors are very small and distributor finance is available “to give them access to the credit that they likely would not be able to get with traditional relationship banking,” he says.

Other tools

Today’s treasurer has been tasked with managing the company’s cash in the most efficient way possible. Accounts receivable financing, another offering in Deutsche Bank’s suite of products, allows short-term trade financing and an opportunity to get a stable source of financing supported by the organization’s underlying business.

“Interest rates are low and the importance of managing working capital, the awareness of that for all companies and their partners, has never been higher.”— Jon Richman, Deutsche Bank 

Both Mr. Parra and Mr. Richman point out that such products can provide additional liquidity, mitigate risks from non-payment and reduce days sales outstanding.

Another Deutsche Bank trade finance product is supplier financing, which offers suppliers financing at advantageous interest rates based on the relatively strong credit standing of the anchor buyer. Large buyers are leveraging these opportunities, most notably, to extend their own days payable outstanding to improve cash flow. “Extending days payable and shortening days outstanding are increasingly seen as important ways to manage operational efficiency and improve cash flow,” Mr. Richman says. This means using firms like Deutsche Bank that “can appropriately structure such facilities to enable delivery of a win/win solution for them and their trading partners—be it their customers or their vendors.”

Small slowdown, big opportunity

A confluence of events in global markets, including the US Federal Reserve’s tapering of its quantitative easing program, a slowdown in emerging market economies, shrinking demand for commodities particularly in China, has resulted in a modest and temporary reduction in the growth in trade, according to Mr. Richman.

However, Mr. Parra says, this should be seen as a “buyer’s market” opportunity given that banks have stepped up to supply the surge in trade growth. Global bank regulatory changes are reasons for treasurers to establish the benefits of trade financing as a good primary or secondary source of liquidity and risk management.

“Now is the time because pricing is good,” adds Mr. Richman. “Interest rates are low and the importance of managing working capital, the awareness of that for all companies and their partners, has never been higher.”

These events have also encouraged corporates with a presence in Latin America—and doing business with the region—to explore new facets of traditional trade instruments like L/Cs. As investors see compelling progress with the global economy, new tools will continue to enter the market, assuring sustained growth in trade finance. “It will also continue to grow because it is important to most of the Latin American economies,” Mr. Parra says.

This is highly apparent in Mexico where the government in late 2013 introduced significant telecommunication, education and energy reforms. Concerning energy, these reforms are expected to bring into the country billions of dollars as the national oil producer begins licensing, profit-sharing, and product-sharing arrangements with private oil companies.

Thus, the demand for trade finance solutions to facilitate the retooling of the nation’s energy supply will be even greater.

Low impact, high value

As more and more companies expand into new regions around the globe, the need for trade finance mechanisms that offer a host of benefits will increase. This is particularly true amid rising costs and an uncertain regulatory environment. As a result, trade finance is positioned to remain a strategic priority for businesses of all sizes.

Trade finance will continue to be seen as a practical way for banks to meet buyer and supplier liquidity needs within that tighter regulatory framework. This is particularly true in Latin America, Mr. Richman says, as the region’s businesses grow and its importance in global trade becomes more essential. Given its presence worldwide as well as the strong partnerships with financial institutions, and relationships with global clients, Deutsche Bank is in a unique position to facilitate dealings within the region as well as with other challenging markets.