J.P. Morgan's Trade Sales lead for Europe and the Middle East sees 2012 as a year filled with opportunities
The first few months of 2012 have seen a continuation of 2011 trends, with a dampening of global trade growth expectations. In addition to macro economic challenges, dollar liquidity issues have continued to thwart growth and diminish confidence.
It is easy to survey the newspaper headlines and wallow in gloom, but businesses have not stopped striving to make better products and better serve their customers. In fact, business is helping to keep national economies moving. Despite the challenges faced by the more developed countries across Europe and the United States, glimpses of positive news and trade opportunities witnessed during 2011 continue to emerge in the Middle East and Asia. These tentative steps towards economic recovery are expected to continue throughout 2012.
Trade finance has helped businesses free up cash, enhance working capital ratios and provide liquidity for both buyers and their suppliers. With the support of various trade finance instruments, local, regional and multinational businesses are working to stave off another global recession.
Europe’s Speedboat to China
Europe's tentative recovery is being led by German exports — up by 13.5% through the end of September 2011, for example, to €791.7bn.1 One of the main engines of that export growth has been China, where demand for goods tagged “Made in Germany” has been particularly strong. German exports to mainland China have quadrupled in value over the past decade, with China now as big an export destination for German goods as the United States.2
The timing for a full economic recovery is not certain, with the prospect of a double dip still hanging over Europe's policy makers. With tighter banking regulation, general lack of dollar liquidity funding, and a sombre short-term outlook, the prospect of seeing large increases in global trade volumes is slim.
The Middle East: More than Just Oil
It is important to note, however, that many EMEA region countries — especially in the Middle East and Africa — are demonstrating strong economic resilience. One of the more noticeable consequences is an increase in financial institutions seeking regional trade assets, since the return-to-risk ratio seems attractive.
Saudi Arabia, for example, is emerging as a regional centre. Its oil wealth is being recycled into deeper economic development, including cement, aluminium smelting and steel works. Major international banks also have a substantial and growing presence in the country.
Iraq, too, is starting to prosper as the country settles and oil output continues to rise, enabling investment throughout the country’s economy. The level of investment that Iraq requires to make good three decades of sanctions and unrest is immense, and includes large-scale projects for infrastructure development, electricity generation and mining. In the power sector, the country is battling a huge generation deficit accumulated during decades of neglect and has been establishing scores of independent power producer (IPP) arrangements across the country to build generating capacity as quickly as possible.3
Africa’s Electric Dreams
Trade in the Africa region can be fraught with risk. Internal transport costs are generally twice as high as in Europe and freight is frequently subject to bribery and piracy. The region's banking system is young, although it is developing fast.
Nigeria and Ghana, West Africa's most vibrant economies, are experiencing rapid development as their respective governments take electrification deep into their interiors. Both countries are part of the West African Power Pool, an Economic Community of West African States (ECOWAS) initiative which has encouraged deregulation and private sector investment and is now working to interconnect the grids of its 16 West African member nations.
Until recently, Ghana's power has come from hydro-electricity plants developed between the 1960s and the 1980s. Now, with extra prosperity derived from recently discovered offshore oil fields, the plan for power output is expanding.
In both Ghana and Nigeria, a mix of new generating capacity is planned, including gas, diesel, hydro and renewables. Some 31 potential sites have been identified across Nigeria for hydro-electric projects, and its programme also includes a number of solar power projects to help electrify particularly remote rural communities across Lagos State.4 In most of sub-Saharan Africa, according to the International Energy Agency, electrification covers just 10% of the population, but with the African continent at the forefront of the resources boom there are almost unprecedented export opportunities across the continent for companies in the power equipment sector.
It is not just the power sector where opportunity abounds in Africa. Equally exciting for Nigeria are the development plans for the Lekki Pensinsula, which will include a free-trade zone, a seaport and an international airport, in addition to light commercial, residential and tourist developments alongside a conservation park — all between the Lagos and Lekki lagoons. Light rail, roads, irrigation and an advanced telecoms network, not to mention power transmission and distribution systems to the various zones in the Peninsula, are all under consideration, too.
Ghana has also started extending its railway network, with the $1.6 billion upgrade of the Eastern Railway from the capital Accra to Ejisu and Kumasi, and a number of extensions and branches to connect growing cities in the east. The Trans-West African Coastal Highway, another ECOWAS-led project intended to stimulate trade and growth in West Africa, is also making progress.
Export credit agencies (ECAs) — like multilaterals — remain heavily involved in supporting trade, particularly in major goods such as aircraft. ECAs are essential for the building of structured trade finance solutions to support large-scale corporate capital expenditure. Airlines in the Middle East and Asia, in particular, are growing and seeking financial support for major purchases. Indeed, for the manufacturing sector in the United States and Europe, demand for aircraft has been a rare bright spot the past few years.
The Airbus A380 super-jumbo and Boeing’s Dreamliner have stimulated demand from carriers on major routes seeking the most efficient aircraft possible. Thai Airways’ first A380, for example, went into final assembly during November and is expected to be delivered in the first quarter of 2012 to support their routes between Bangkok and Frankfurt. Likewise, Emirates was one of the first customers for the A380 as part of its growth plan to make Dubai a major international hub. Emirates is also a big Boeing customer, signing in November the largest ever commercial order in Boeing’s history for 50 777 aircraft, valued at $18bn. As the New York Times notes this transaction underscores the confidence of the fast-growing airlines in the Gulf region, despite growing fears of stalling global growth. It also indicates the need for airlines across the world to contain rising fuel costs by investing in the most efficient aircraft.5
Airbus and Boeing have therefore prospered despite the challenging conditions. Indeed, their focus on exports, providing solutions for customers’ challenges, and their involvement in helping to put together financing for customers – leveraging ECAs – ought to provide an inspiration for manufacturers and exporters across the world.
Channelling Trade Finance
Despite the slow recovery, Europe and the Middle East have a world of trade opportunities on the docket for 2012. Trade finance will play a critical role on both the buyer and supplier side of this year's transactions, with more Receivables Finance, Export Letters of Credit financing, Promissory Notes discounting and Single Obligor Letters of Credit to facilitate trade. The challenge for the region's businesses and sovereign nations will be to convert these opportunities into economic drivers that jumpstart local industry.
About the Author
Jason Barrass is EMEA Head of Global Trade Sales J.P. Morgan. Based in London, Jason manages a team responsible for the origination of new trade business in the region.
Jason’s started his a career at NatWest Bank and has held several trade-related positions at various banks, including BankBoston and Citibank.
4 Solar power in Nigeria: pmnewsnigeria.com/2010/08/23/lagos-hands-over-119-solar-electrification-projects/
5 New York Times/Emirates order. nytimes.com/2011/11/14/business/emirates-airline-orders-50-boeing-777s.html