By Richard Reynolds, of Atradius UK
The Middle East and North Africa (MENA) is a key export region and for UK businesses, offers opportunity to expand trade horizons.
The Middle East market in particular is lucrative and fast growing with a rising demand for products and services. The Middle East is of course synonymous with oil but the real success factor for the region has been the diversification away from oil. An educated workforce and entrepreneurial mind-set is pushing growth in numerous sectors. For instance, Kuwait and Oman have invested heavily in entrepreneurship and have even offered retrospective educational loans to Indian workers to encourage enterprise.
African economies are also fast growing – however this is from a low base. Export opportunities certainly exist but it is important to understand the trading environment and exporters need to set expectations accordingly.
Changes in political leadership, currency fluctuations and the performance of individual industries in overseas markets all impact the success of trade relationships, and global market intelligence is an essential part of exporting. Accessing quality information is key and is where Trade Credit Insurers can add value. Highlights from our latest report on the MENA region are provided below. Atradius’ Country Reports are available to download from our website and help businesses to better understand the countries they want to do trade with:
After the 2013 military coup, Egypt’s economic situation has improved and growth is expected to accelerate due to improved business and consumer confidence alongside rising investments. Reforms launched to improve the business environment such as cutting red tape and improving the legal system are attractive to foreign investors.
The economy is expected to grow by 4% in 2015/16 and improved stability will boost domestic demand. Meanwhile, the government has liberalised its exchange rate regime slightly, allowing the Egyptian pound to depreciate which supports export and tourism growth. This is all good news for exporters.
The UAE has a major interest in regional stability to encourage and ensure continued trade, foreign direct investment inflow and tourism. To achieve this, it pursues a balanced foreign policy and both political and economic relations with Europe and the US are close.
In Abu Dhabi, government infrastructure investment is expected to continue in the oil, gas and aluminium industries which will support growth. Meanwhile, the rebound of Dubai’s property market after the severe crisis of 2009 is boosting economy activity.
Growth opportunities will come from the World Expo 2020 in Dubai which will support economic growth in the coming years.
The ongoing political turmoil in the Middle East is challenging, with major security problems due to the situation in Iraq and Yemen. Meanwhile,GDP growth is expected to slow to 3% in 2015 following growth of 3.6% in 2014.
A highly oil-dependent economy, accounting for 93% of government revenues, means that a decline in oil prices has a large negative impact on public finances. Despite this, the government passed an expansionary budget for 2015 aimed at preventing political opposition and social unrest. This can be funded by large international reserves, however, a structural shift to a longer term low oil prices would pose a risk for the economy.
The political situation in Algeria is stable but potential instability lingers on the horizon. It is uncertain if the aging president will serve his whole term until 2019 and there is no obvious successor.
Algeria is trying to move towards a market economy but, because of its massive oil and gas reserves, its socialist history and many years of civil war, the government still exercises tight control over the economy. The country is still too dependent on the oil sector and needs to diversify further. Government intervention, an under performing banking sector, red tape and corruption still hamper foreign investment and private enterprise initiatives.
Jordan’s economic growth is negatively affected by ongoing conflicts in the region. However, economic growth is expected to accelerate from 3.1% in 2014 to 4.3% in 2015, in part boosted by increasing activity in construction from infrastructure and tourism expansion projects.
Private consumption is also expected to sustain growth, despite high unemployment. On the supply side, services and transport will continue to make a key contribution. Highly dependent on energy imports, Jordan benefits from the lower oil price.
In 2014, economic growth slowed to 2%, mainly due to a disappointing harvest. The country is still highly dependent on agriculture, which employs 40% of the workforce. For 2015 a rebound in agriculture is anticipated and if realised an increase in GDP growth of 4.6% could be achieved.
Growth is also sustained by increasing exports, mainly to the Eurozone. The government has increased efforts to diversify the economy by developing industrial manufacturing, especially export-driven sectors such as cars, aeronautics and electronics. Those efforts are increasingly paying off, and exports of those goods are increasing. Economic reforms have lifted efficiency and attracted greater levels of foreign investments.
Tunisia experienced a smooth transition to parliamentary democracy and the economy is expected to grow moderately in 2015 and 2016, supported by increased demand from the Eurozone. However, the security situation remains very unstable following terrorist attacks which could to hit tourism levels and negatively affect economic recovery.
More structural reforms are necessary to accelerate economic growth and to reduce the high unemployment. Tackling bureaucracy, reducing corruption, reforming the tax and subsidy system are necessary to improve the economic conditions. However, given the current political and social conditions, it seems that progress will remain slow for the time being.
To help mitigate the risks, trade credit insurance is the simplest, most cost effective way to protect businesses against the risks of not getting paid. Atradius not only pays out claims if, for instance, there is an insolvency, currency fluctuation or political risk but customers also benefit from the strength in depth of our knowledge and experience over almost a century of enabling trade. We support business domestically and overseas; providing expert analysis, risk protection and comprehensive resource to facilitate trade. Our world-wide Collections Service is best in class and is a an integral element of our customer offering. Credit insurance not only protects businesses from the unexpected, but also steers them away from potential risks, allowing businesses to channel their energies towards more profitable opportunities.
Businesses need to take risks in order to grow and growth often begins with a new opportunity in a new market. With the right mind-set, preparation and protection, businesses are poised to take advantage of the wealth of opportunity that international trade offers.
Barclays announces new trade finance platform for corporate clients
Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.
With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.
This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.
James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”
Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”
What’s the current deal with commodities trading?
By Sylvain Thieullent, CEO of Horizon Software
The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.
Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).
Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.
The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.
Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.
The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.
However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.
What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.
Afreximbank’s African Commodity Index declines moderately in Q3-2020
African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.
The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.
An overview of the AACI for Q3-2020 indicates that on a quarterly basis
- The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
- The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
- Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
- Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
- Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
- Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
- Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
- Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.
Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.
Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:
“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’
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