Recent trade finance developments, particularly in the wake of the global financial crisis, benefit corporates in developed markets and those based in burgeoning growth areas such as export-driven Latin America. Jon Richman, Deutsche Bank’s Head of Trade Finance and Financial Supply Chain, Americas and Burkhard Ziegenhorn, Latin America Regional Head of Global Transaction Banking, Deutsche Bank, discuss trends in both regions, and consider the future of global trade finance.
Global trade was once predominantly conducted on letter of credit (LC) terms. LCs, though expensive and comprising a largely inefficient, paper-based process, were favored because of the security and bank credit support they offer.
Trade Finance Developments in Latin America
Latin America’s flourishing export markets are a key driver of trade finance in the region. Despite the opening up of key markets such as Brazil – the region’s largest economy – conventional tools remain the trade method of choice. This may be explained by the special regulations many Latin American countries have for trade finance instruments that sometimes grant them benefits under tax and insolvency laws. Certainly, the rapidly changing regional taxation and regulatory environment makes tax a chief consideration for domestic trade entities, which is reflected by the predominant use of tools covered by the regulations.
One such tool is the standby LC, which can effectively mitigate risk without being as labor-intensive as commercial LCs. The downside of this option, however, is that credit constraints have largely reduced the size of corporates’ revolving credit facilities, meaning that contingency funds reserved for standby LCs can be used up by daily cash management needs.