Shades of blue: Painting a picture for global trade in 2022
How to build resilience into the global supply chains that have not proved robust over the pandemic has been a top issue for trade in 2021. COVID, climate and digitisation will be key themes for trade next year too. Will companies, banks and trade finance professionals be feeling blue in 2022? What will be the next blue moon event?
Just how fragile parts of global trade supply chains have been, and continue to be, has been a surprise to many during the pandemic. In October 2021, paint giant Akzo Nobel announced it was running out of the ingredients for the colour blue, among other things. CEO Thierry Vanlancker told analysts after publishing third-quarter earnings, “It’s creating complete chaos.”
Nonetheless, in Akzo’s marketing materials for Dulux paints, the key colour for 2022 will be “an airy and fresh tone that opens up and breathes new life into any space.” It’s called ‘Bright Skies’, and yes, it is a shade of blue. While Akzo may well be sorting out its procurement challenges, as a metaphor for global trade, there is a disconnection between what we want, and what we will get.
The three ‘rs’ of recovery, robustness and resilience have been mentioned by banks and trade professionals throughout 2021 – and the latter two, building resilience into supply chains that have not been robust are going to continue as dominant issues going into 2022. These have been themes in our Global Trade Report 2021 and at TXF’s Global Trade 2021 event where we looked more deeply at some of the issues that have emerged during the year. Omicron does not help, and neither does the disparities between vaccine rollouts in different countries. Factoring the climate element into global trade at every level, environment, social and governance (ESG) will also continue to be a major theme in 2022 and beyond – even if COP26 wasn’t stellar.
Recovery is happening – but is it robust?
The recovery has been stuttering in certain areas from the depths of 2020. In the third quarter of 2021 OECD merchandise trade growth in the G20 slowed markedly in value terms, even though it had reached a relatively high plateau in the second quarter. G20 merchandise exports and imports increased by 0.9% and 0.4% in Q3 2021.
Ballooning shipping costs and a partial recovery in travel had boosted growth in trade in services values, with exports for the G20 nearing 2019 levels. We have to factor in base effects from the full stops in 2020 and that commodity prices explain a large part of the increase in trade values, with congestion in international shipping and supply issues around semiconductors – it is not just blue paint and tin cans – pushing up traded goods prices. Price pressures will remain a theme in 2022.
Trade itself is a multi-faceted component of gross domestic product (GDP). Economics textbooks define GDP as consumption, plus investment plus government plus exports minus imports (C+I+G+(X-M)). In pre-pandemic cycles, trade has typically been boosted by consumption, it also forms a big element of investment, and of course most tangibly in exports and imports. This unusual cycle has had the big freeze from shutdowns, distortions of government support (which, yes, boosts trade in the ‘government’ element of GDP, but generally isn’t as heavily trade-intensive, particularly in manufactures). Those dislocations of demand and interruptions to supply, will continue to make it a more unpredictable rollercoaster next year.
We’re still in the middle of unwinding state support in developed countries, we have seen debt to GDP ratios rise – not necessarily a problem in itself when debt servicing costs remain low, but the bounce back is not to normality and it is not even, and it has a particular impact on services trade.
Global insolvency predictions have been revised this year. Atradius Economic Research, for instance, amended its forecast in October to say there will be a 1% fall in insolvencies globally in 2021, which, compared to its earlier prediction of a 26% rise – is a major adjustment. Will that tsunami we were talking about last year ever happen? Quite possibly with a lot of artificial support there and zombies still out there – but that can has been kicked down the road. It may even be too soon to predict much insolvency/restructuring action next year.
Asymmetries prevail. UNCTAD’s trade and development report published at the end of October painted a picture of economic recovery after decades of inequalities, polarising pressures and the pandemic ‘which provides an opportunity to rebalance’ and ‘build back better’ – but in spite of the G7 calls for it, there’s been little chance of unifying the separate economic worlds – emerging/developed without concerted reform measures on national and international levels.
As Chris Southworth, secretary general at ICC UK, pointed out at TXF’s Global Trade 2021 event, in the context of an uneven response to vaccinating the world, “We can’t trade until we all trade.”
The trade digitisation gear change: Don’t leave SMEs behind
Should we be feeling blue about digitisation of trade? There has been an acceleration of digitisation on a commercial level and a change in buyer behaviour amid the pandemic, but paper continues to predominate in trade. It’s fair to ask, if not now, then when? Regulation on standards remains a long haul and adoption is still slow.
Trade technology platforms have proliferated, and some are doing well. The Model Law on Electronic Transferable Records (MLETR) has made big progress over the past year, and essential regulatory progress in the UK, for instance, is afoot, but it is not there yet. The 1882 Bills of Exchange Act needs to be amended in order to get proper legal recognition of electronic documents of title and payment instruments in common law. ITFA and Sullivan & Worcester’s practical work with the digital standards initiative on electronic payment undertakings (ePUs) have been a step forward, but are not yet underpinned by regulators’ support. Promises of G7 adoption or assimilation of MLETR should help energise the regulatory side.
SMEs and MSMEs are going to have to be the next focus for those hoping to narrow the $1.7 trillion trade finance gap (as estimated by the Asian Development Bank), and to engage with SMEs in promoting climate mitigation. A way to lower the toll for SMEs to bridge ‘digital islands’ is explored by Michael Vrontamitis and Subra Shankhar in TXF’s Global Trade Report 2021.
Putting trade reform on the front foot, the ICC’s update on its trade digitisation progress – its roadmap ‘Reconceiving the global trade finance ecosystem’ – sets great stall in building what it calls an interoperability layer into structures. One trade professional joked that adding interoperability ‘layers’ is a bit against the vibe of the concept of interoperability.
Nonetheless, that means creating what the report calls ‘digital trade enablers’, ‘trade finance interoperability foundations’, and thirdly ‘guiding principles for interoperability’. Legal Entity Identifiers (LEIs) are also seen as a way of helping extend digitisation among smaller players (even it those players may see it as an expensive solution). Continued direction/impetus is needed from above to make this happen.
Digitisation walks hand in hand with data for ESG and SCF
Does trade have a data problem? Certainly, better use of data is at the heart of most strategies to improve both digitisation of access to SMEs to international trade, and also to accelerate their journey to mitigate climate change and ESG generally.
As Rebecca Harding, CEO at Coriolis Technologies, a consultancy, says, “It has to be a ‘digital first’ agenda. We will miss out on the ‘S’ (social) in ESG unless SMEs digitise.”
In order to monitor, rate and report the progress of ESG among smaller companies, it is essential that those companies can provide good data. Moreover, smaller companies at the level of tier three/four in any supply chain, are not extensively covered by companies who deliver ESG ratings, such as EcoVadis. Harding argues that there is a big opportunity to bring data, tech and analytics together for SMEs, and that doesn’t have to be on the blockchain.
Transparency on all levels for SCF
Building ESG into supply chain finance (SCF) metrics will also be key. For sure, ESG is only one part of the transparency story for 2022. SCF will likely continue to face greater regulation around disclosure requirements in the coming year. Calls for increasing transparency will be ever more important (both major international accounting standards boards, FASB and IASB are making/proposing changes).
As one participant at TXF Global Trade 2021 says: “There are artificial distinctions between short term debt and SCF. More disclosure will allow lower-rated transactions to happen and for companies to make their own decisions on how cash is presented. Greater disclosure will float more boats.” The same speaker continues, “More regulation isn’t necessarily going to make things better – but it needs to be smarter and enforced better.”
Capacity is back in trade credit insurance
Another take-home from the trade event that bodes well for next year is that that capacity has improved in trade credit insurance. In 2020, the EU and other governments (and their many ECAs which had adopted export promotion functions) relaxed the difference between marketable and non-marketable risks. Formerly marketable could now be non-marketable and insured through government support. In the 1980s, the EC proposed that ECAs should not take on risks which were otherwise marketable. The story is long and complicated but a rough settlement emerged whereby marketable risks were to be insured by private companies and non-marketable by governments through their agents.
But the restoration of EU marketable risk definitions as the pandemic unwinds may herald “a bit more of a storm brewing between private insurers and ECAs,” as one private market player warned. This will be one to watch in 2022.
Separately, for the private market, loss ratios for SCF programmes with banks were lower during the pandemic than with corporates, says one insurer. Many private insurers continue to look at trade tech and the changes that need to be made to drive scale. Meanwhile, although some CPRI business lines are being wound down at Zurich and QBE, one of the main impacts could be not on total capacity but ultimately instead on restricting the ability of private insurers to speak to CFOs and treasurers about other areas of insurance.
The expression ‘once in a blue moon’ is a precursor to the expression ‘black swan events’.. The past few years have given us COVID, Greensill, Ever Given in the Suez Canal, among others. Next year those once in a blue moon events for trade could as likely be geopolitical as viral or climatic (or a mix of all three). Somehow blue moons seem less apocalyptic than black swans, and they are rare but predictable.
Here is hoping for brighter shades of blue next year in trade. Opening our eyes to new challenges in supply chains will remain vital. The blues come and go. Unfortunately, I won’t be able to celebrate from my independent local village pub (the Plough), which specialised in hosting local blues music bands, will be closing at the end of next week. For it, Omicron proved to be more than once in a blue moon.
Become a TXF subscriber for unrestricted access to TXFnews.com 365 days a year
Contact us for individual and team rates by emailing firstname.lastname@example.org
Take a look below at some of the exclusive subscriber articles published last week
TXF Export Finance Industry Survey 2022: Have your say
TXF wants to hear from ECAs, banks and borrowers, importers and exporters, in a bid to paint an up-to-date picture of the ECA landscape and garner marker sentiment via our export finance industry survey 2022....Read on here
BU AGM: Assessing the state of the private insurance-ECA market
TXF spoke with Dominique Meesen, Berne Union’s medium/long-term (MLT) committee chair, head of reinsurance at Credendo, and vice-chair Andrew Underwood, also chief underwriting officer at AXA XL to discuss the resilience of the MLT private insurance market, the importance of collaboration between ECAs and private insurers, as well as fostering more visible data exchanges between BU members....Read on here
Sullivan: Are trade finance assets safe or inherently risky?
Partner Geoffrey Wynne and senior knowledge development lawyer Jaqueline Cook present Sullivan's November seminar, addressing the question: Can you make your trade finance transactions more secure with or without security?...Read on here
First Sentier raises cash advance facility for GDIF
First Sentier Investors has raised a A$750 million ($526 million) cash advance facility for its Global Diversified Infrastructure Fund (GDIF)......Read on here
Isbank tightens pricing on ESG-tied loan
Isbank is expected to raise a 367-day dual currency ESG-tied revolving credit facility with lower pricing than previous such financings. Proceeds will refinance a loan agreed in November 2020....Read on here
More details on mandates for Gabon hydro financing
Sponsors of the 82MW Ngoulmendjim hydro project in Gabon – Eranove (60%) and Gabon Power Company (40%), a subsidiary of the Gabonese Fund for Strategic Investments (FGIS) – have mandated two banks to fund the scheme....Read on here
More details on North East Link tunnels PPP
More details have emerged on the A$11.1 billion Central Package tunnels PPP – the major part of the A$15.8 billion North East Link project in Melbourne, Australia....Read on here
LAP nears close on airport expansion debt
Project company Lima Airport Partners (LAP) is nearing financial close on the long term debt facility for its Jorge Chavez International Airport expansion project in Lima, Peru.....Read on here
More details on Intersect Power's construction financing
More details have emerged on the $800 million of construction debt Intersect Power closed in early November to finance its 300MW Radian Solar PV project in Brown County, Texas, and the Athos III 228MW solar and 448MWh storage project in Riverside County, California....Read on here