The Middle East economy is thriving. Trillions of dollars are being invested in infrastructure over the next two decades and a rapidly expanding population is contributing to a consumer boom. With European companies having specialised skills to offer in these sectors, existing trade ties between the regions are set to flourish. Yet current global economic and political upheaval pose risks to these potential trading opportunities, which is why the support of a correspondent banking network is more important than ever in paving the way for successful trading relationships. Ralph Nitzgen, Senior Executive Officer and General Manager, Commerz bank Dubai branch, makes the case
Potentially for the first time since the days of the Silk Road the Middle East is establishing itself as the key trading hub between Europe and Asia. Yet this time the region is attracting attention from both Asian and European corporates as a strong market in its own right – both in terms of the Middle East as a consumer centre (for instance, containing the world’s largest shopping mall) and as a recipient for an unprecedented US$4 trillion of infrastructure investment. European companies in particular are salivating at the prospect.
Figures reveal that almost 30 per cent of the Middle East’s entire import trade in 2011 was from Europe (worth US$194 billion) – putting Europe behind only Asia in terms of Middle East import sources. And as the Middle Eastern economy expands and develops, it is likely the region will look increasingly to European corporates for services, goods and expertise.
Certainly, governments across the Middle East are eager to diversify away from dependence on hydrocarbons. And this, combined with a high oil-wealth GDP, means the region boasts some of the fastest-growing consumer markets in the world. For instance, Saudi Arabia is at the pinnacle of this consumer boom. Its rapidly increasing population (predicted to rise by a third to 38 million between 2010 to 2030), is 82 per cent urban and 60 per cent below 30 years old: exactly the demographic for further consumption spending. Add to this high levels of disposable income, and the country is the fastest-expanding market for consumer products in the Middle East.
Yet this is not only an opportunity for Europe’s famed luxury brands (though it is certainly an opening for such firms). Convenience stores such as Dutch retailer SPAR are also capitalising on the increasing popularity of small convenience stores in the Middle East. The chain opened its first shop in the United Arab Emirates in 2011 and is now looking to expand across the region.
As part of the Middle East’s economic drive the region is also investing heavily in infrastructure. Plans spanning the next two decades are being facilitated by programmes such as the Abu Dhabi Economic Vision 2030, which will see, amongst other things, the construction of three museums – a national museum, a branch of Paris’s Louvre and a Guggenheim: all due to be in place by 2020 and designed to be tourist hotspots.
In total, it is estimated that US$106 billion of annual infrastructure spend is being invested up until 2020 to stimulate growth across the region. And with the 2022 FIFA World Cup in Qatar approaching, ambitious projects are underway to enhance transport systems in its capital, Doha – including a metro system and the Sharq Crossing across Doha Bay.
However, there is no guarantee of European involvement in the region’s burgeoning infrastructure development. Indeed, with Asian constructors able to offer significant cost advantages, it is important that European corporates utilize their long-established reputations as specialists. Certainly, European companies have long provided high-end equipment on major projects, which is likely to continue – resulting in European companies perhaps providing the equipment for projects while Asian companies win the overall construction mandates.
Collaborating for success
That said – and despite the abundance of trading opportunities – navigating the Middle East-European trading corridor presents obstacles to corporates on both sides of the trade. These can be as basic as cultural and language barriers; although by far the greatest issue, particularly in the current climate, is payment risk (which also includes non-payment due to political risk).
This makes risk mitigation a priority for corporates aiming to trade with the Middle East, which is where their banks come in. Indeed, for the potential of Middle Eastern trade to be fully realised, corporates require the confidence that their bank has an understanding of the local nuances and needs of that region.
In this respect, correspondent banking networks that link both Middle Eastern and European banks may be the favoured option for corporate clients. Such networks combine the local presence and market knowledge of Middle Eastern banks with the transaction expertise and sophisticated technology solutions of the leading European banks.
Correspondent banks working in partnership can generate risk mitigation structures that include the use of letters of credit (LCs), either issued or confirmed by the banks depending on the risks. And while other regions have been moving towards open-account trading, documentary credits (such as LCs) continue to be the preferred means of generating payment certainty in the Middle East.
Yet correspondent banking goes beyond risk mitigation (important as this is). It can provide local banks with liquidity and capital assistance, enabling them to scale down their borrowing requirements on the international money markets. Also, those global banks participating in a correspondent banking relationship, such as Commerzbank, are not competing with local banks for corporate business in their local markets, so banks can benefit from lower costs and shared risks without being concerned that they are collaborating with a rival.
But the success of these banking networks – and their ability to support international trade – is down to the corresponding banks themselves, hence the need to continue the strong relationship aspects of correspondent banking. For our part, we have been cementing and nurturing relationships in the Middle East for over 30 years – through good times and bad. During the height of the eurozone crisis, for instance, Commerzbank did not respond – as did many European banks – by retracting credit facilities. In fact, we have not removed a single credit line in the Middle East since the start of the global financial crisis in 2007.
Indeed, we believe it is vital that a banking network provides both financial viability and commitment. Only then can correspondent banking networks encourage the trading opportunities for which they provide the backbone.
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Ralph Nitzgen is senior executive officer and general manager, Commerzbank, Dubai. He joined the bank in 1989 and, after working as a representative for Commerzbank in Germany, moved to the Middle East in 1996, where he became chief representative for the GCC countries and Yemen. He has worked with the region ever since, holding the position of regional manager, Middle East, as well as his current position, which he assumed in 2007. Nitzgen is also a member of the board and treasurer of the German-Emirati Joint Council for Industry & Trade (AHK), Abu Dhabi, and is a member of the board of the German-Arab Chamber of Commerce, Berlin.