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Navigating trade in a world of disruption

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Navigating trade in a world of disruption

International Chamber of Commerce Banking Commission Annual Meeting

Trade finance faces considerable emerging geopolitical and technological challenges. Yet, if navigated successfully, these challenges also bring vast opportunities for future growth.

Such was the consensus at the ICC Banking Commission’s 2018 Annual Meeting, which took place in Miami from 3rd-6thApril, gathering participants from over 65 countries. Comprising task force meetings, specialised group discussions, plenary addresses and breakout sessions – on issues from global financial regulation to innovation in supply chain management – the Meeting sought to open up further avenues for collaboration in the trade finance industry.

The new normal of uncertainty

Top of the agenda was the historic geopolitical uncertainty facing the international rules-based trading system. Daniel Schmand, Chairman of the ICC Banking Commission and Global Head of Trade Finance at Deutsche Bank, remarked that the focus must be on “surviving in an environment where the new normal is uncertainty”.

Trade has faced political and economic challenges in the past, of course. Indeed, ICC Global Development Director, Julian Kassum, explained that the private sector has historically risen to the occasion – noting that the ICC Banking Commission’s rules first emerged in the 1930s, at a time of rising protectionism and nationalism.

Jerome Peze, CEO of Tinubu Square – a provider of technology to credit insurers, receivables financing organisations, and multinational corporations – also offered a nuanced outlook: “In business we always live with risk;the question is how we adapt and provide solutions.”

 Changing perceptions of risk

In addition to politically-motivated trade barriers, Thierry Senechal, Managing Director of Finance for Impact, cited non-tariff barriers as “one of the greatest barriers to trade and trade finance”, which “can be complex, costly and time-consuming to overcome.” In Jordan, for example, it takes, on average, 640 days to enforce a contract – meaning that banks are reluctant to lend to SMEs.

The scale of the decline in access to bank-intermediated finance was another pressure discussed at the event. Panelists noted that since 2008, some 40,000 correspondent banking relationships have been terminated worldwide; a loss of 15%.

Regulation was seen as a major driver of this trend, mostly due to the increased operational cost of know-your-customer (KYC) compliance. While panellists confirmed checking transactions was essential to combatting illicit money flows – which cost the world economy some $2 trillion a year –this can cost as much as $50,000 per client for some banks.

Kwabena Ayirebi, Director of Banking Operations atAfreximbank, went further, adding that for certain banks a reduction in correspondent relationships is “not always a matter of actual or perceived risk of a given geography, but rather a pragmatic way to demonstrate to regulators that they are taking action”.

This has had important ramifications for global trade flows. Some $1.5 trillion worth of trade demand remains unmet by the supply of finance. As Marc Auboin, Economic Counsellor at the World Trade Organization, stressed, “Financial exclusion almost always means trade exclusion.”

More encouragingly, Senechal noted the increasingly important role of development banks, which facilitated approximately $20 billion of trade finance transactions last year. As a result, this year’s forthcoming Global Survey –the ICC Banking Commission’s flagship report– will include an expanded section on the impact of these institutions. Previewed in Miami, the Survey includes data from 251 banks across 91 countries and captures a total of $9 trillion worth of trade finance transactions.

 Disruptive technology

Data will also be vital for bridging the persistent trade finance gap. Dominic Broom, Global Head of Trade Business Development at BNY Mellon Treasury Services, described it as “at the heart of the issue”.

New technologies also bring opportunities to develop and maintain trust, argued Shona Tatchell, CEO and Founder of Halotrade, a company that uses blockchain technology to make supply chains more transparent. Indeed, there was broad agreement in Miami that blockchain could be a game changer in transforming the physical and financial supply chains facilitating trade. Panellists agreed that it could solve a host of problems – from addressing customs bottlenecks at borders, to securely sharing KYC information.

The ongoing entry of fintechs into the market, meanwhile, was deemed a positive, rather than a threat. Maria Fernanda Garza, Executive Committee Member and Regional Coordinator for the Americas at the ICC, and CEO of Orestia, described the chance for banks to form mutually beneficial partnerships with these new players as “a great opportunity to create a win-win scenario”.

The Meeting also explored the continued shift from traditional trade products to supply chain finance. Commenting on the trend, Alexander Malaket, Deputy Head of the Executive Committee at the ICC Banking Commission, and President of Opus Advisory Services, said: “We are seeing a more sophisticated approach to trade – looking at communities of suppliers and service providers– in order to assess how to finance them on a holistic basis.”

Elsewhere, panellists discussed the Bank Payment Obligation (BPO) and its continued relevance to the trade finance industry. A dedicated BPO sub-group – including 20 members from banks, fintechs, consulting firms and service providers, and chaired by Michael Quinn, Managing Director and Global Head of Traditional Trade at J.P. Morgan – outlined the steps necessary to revitalise the instrument.

 New rules for the digital era

Given the potential of new technologies, the Banking Commission offered updates on its Working Group dedicated to exploring the digitalisation of trade finance. Divided into three streams, the Group is focused on exploring the e-compatibility of ICC rules, the minimum standards for digital connectivity, and the legal enforceability of digitalised documents.

According to Dave Meynell, Senior Technical Advisor at the ICC Banking Commission, adapting and developing these rules for the digital era will be crucial for both capturing the growth potential of new technologies, and continuing the central role that the ICC occupies within the global trade finance industry.

Steven Beck, Head of Trade and Supply Chain Finance at the Asian Development Bank, agreed. Highlighting the critical role that the ICC has played in creating the first ever rules for international trade, he noted the huge responsibility it now bears to ensure that it sets standards and guides the industry through what is a “new digitalised trade era”.

A sustainable trading future

Of course, whatever form digitalisation takes, the future of trade will fundamentally depend on sustainable supply chains. That is why the panellists discussed the ways in which banks, governments and trading companies can ensure that goods are both sustainably produced and authentically certified.

First, they must uphold green values. Rudolf Putz, Head of the European Bank for Reconstruction and Development’s Trade Facilitation Programme, explained: “The one selection criterion, which we have for all issuing banks, is that their green trade finance transactions align with our principles.”

After all, being unsustainable does not only threaten companies’ reputation; as Putz added, firms that break increasingly robust domestic or international legislation “run the risk of not receiving any more financing from foreign export credit agencies and banks which, in turn, can result in credit risk”.

Second, they must build traceability into supply chains. According to Makiko Toyoda, the Acting Head of the International Finance Corporation’s Global Trade Finance Programme, advances in traceability “can provide more financing opportunities”.

Addressing the Meeting on its final day, the ICC Banking Commission’s Senior Policy Manager, David Bischof remarked that “a new era for the global trade finance industry has begun.” In a fast-changing world, the trade finance industry must not only make the case for trade; it also has to change with it.

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UK might need negative rates if recovery disappoints – BoE’s Vlieghe

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UK might need negative rates if recovery disappoints - BoE's Vlieghe 1

By David Milliken and William Schomberg

LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.

Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.

Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.

Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.

“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.

“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.

Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.

Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.

Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.

Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.

Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”

“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.

By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”

Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.

“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.

($1 = 0.7146 pounds)

(Reporting by David Milliken; Editing by William Schomberg)

 

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UK economy shows signs of stabilisation after new lockdown hit

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UK economy shows signs of stabilisation after new lockdown hit 2

By William Schomberg and David Milliken

LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.

The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.

A separate survey of households showed consumers at their most confident since the pandemic began.

Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.

The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.

Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.

Official data for January underscored the impact of the latest lockdown on retailers.

Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.

“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.

The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.

BORROWING SURGE SLOWED IN JANUARY

There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.

Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.

That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.

The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.

Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.

“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.

Some economists expect higher taxes sooner rather than later.

“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.

Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.

The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.

IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”

However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.

Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”

($1 = 0.7160 pounds)

(Editing by Angus MacSwan and Timothy Heritage)

 

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Oil extends losses as Texas prepares to ramp up output

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Oil extends losses as Texas prepares to ramp up output 3

By Devika Krishna Kumar

NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.

Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.

This week, both benchmarks had climbed to the highest in more than a year.

“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.

Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.

Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.

Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.

“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.

Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]

The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.

“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.

(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)

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