How COVID-19 is redefining trade finance
Getting corporates back on track now and in a post-COVID-19 world
With the Coronavirus outbreak taking its toll on global trade, export-oriented corporates are among the most under pressure. Insights talks to Enno-Burghard Weitzel, Cluster Lead Trade Finance, about how banks can help corporates get back on track and whether the new working environment may provide not just challenges, but also opportunities.
Enno, what have been the broad effects on trade during the Coronavirus crisis?
There have been various phases from a trading perspective. First, corporates felt a supply shock when production in Wuhan, in the Chinese province of Hubei, began to grind to a halt in January 2020. And what started in one region soon impacted production, and exports, countrywide.
As the virus spread globally, we saw new epicentres of corporate inactivity left in its wake – negatively affecting production chains that rely on both China and an enhancement phase of production in other badly affected locations, such as Italy and Spain.
Now we are beginning to see production lines starting to open up once again in the worst-affected regions of China, but a return to pre-crisis capacity cannot be expected for the foreseeable future.
How are corporates responding to the Coronavirus outbreak?
The slide in global trade as countries across the globe descended into lockdown has understandably been hugely disruptive for corporates. And though state support has helped to soften the initial shocks, issues around cash-flow forecasting and access to liquidity have understandably arisen.
As such, corporates have looked towards their banking partners for support in several vital areas: in addressing near-term liquidity shortfalls; in keeping credit lines active, wherever possible; and in mitigating risks across the corporate’s day-to-day operations, including their trade operations.
What trends are you seeing in terms of demand for trade finance products?
We note that some corporates have swiftly moved away from open-account trading with counterparties. Indeed, sophisticated risk-mitigating trade finance products have become more commonly used, such as letters of credit (LCs) – a staple of any crisis environment – as well as other risk-sensitive instruments, such as bank guarantees and confirmations.
Of course, access to such instruments is another matter. Indeed, risks in international business are now mounting and will impact lender appetite. In this respect, the trade-finance gap will likely widen, and it may be some time before confidence returns to the market once again.
The current situation is understandably tough for corporates. Where might opportunities arise in the post-pandemic recovery?
Corporates are navigating unprecedented uncertainties. That said, there may well be light at the end of the tunnel as businesses reflect upon their current strategies and seize opportunities for change.
Certainly, Europe-based corporates are likely to evaluate near-shoring exercises. This will involve scrutinising the locations of their current manufacturing hubs – and could result in some being relocated towards Africa and eastern Europe, to the detriment of Asia.
Shoring strategies would have previously been devised during a relatively low-risk environment, when the key deciding factor of where to manufacture was cost. This is no longer the case, and near-shoring – particularly for products at the lower end of the value chain – may soon be a more likely scenario. It is less likely, however, that the same will happen for higher-value products, where results in these emerging manufacturing hubs are less proven.
Do you believe this downturn also creates opportunities for banking partners to re-evaluate their offering to corporate clients?
I think that’s certainly true – particularly in terms of offering digital solutions. For now, at least, the remote-working model is the new normal. Trade finance – as a paper-intensive business steeped in tradition and jurisdiction-specific practices – needs to play catch-up.
Thankfully, financial institutions have been creating innovative and fully digital trade finance solutions for some years now. Now, out of both necessity and convenience, the current working situation will likely expedite uptake of digital solutions among the corporate client base as they move away from paper-based processes. For some smaller corporates, this is a sea change – and we’ve been on hand to offer support when it’s needed.
What types of solutions has Commerzbank implemented?
There have been plenty. The main incubator, our R&D subsidiary, has quickly implemented solutions on behalf of our corporate client base. One such solution that has been rolled out is a voucher sale platform, which enables a customer to pay now for goods and services to be delivered later once lockdown measures have been eased. This has been a shot in the arm for many corporates, especially in the hospitality sector, that have seen revenue vanish during the past few months.
Being agile in these circumstances applies equally to financial institutions, too. At Commerzbank, we have recently introduced a digital signature feature, which can be used when issuing guarantees. This allows us to continue issuing guarantees without the need for our employees to be present in the office to sign them.
How important are long-term partnerships given all the uncertainty?
You cannot underestimate their importance. As mentioned earlier, risks in international business have understandably risen, and this may lead some financial institutions to retreat from certain geographies or sectors.
This is not the approach we seek to take. Instead, our international expertise and the deep-rooted relationships we harbour with our corporate clients means we can offer more support, not less. For instance, we have always strived to understand the inner workings of our corporate clients’ operations – and today this is helping us to make more accurate assessments of a corporate client’s financial situation, and therefore provide the necessary financial support and solutions they need – whether that be by extending credit lines or introducing measures to improve liquidity.
As Germany’s key lender, Commerzbank must remain prudent. However, corporate clients remember times when we have provided support in darker times – and this has often been a key ingredient to long and fruitful partnerships . During this unsettling period, we will seek to uphold this commitment to our clients, wherever we can.