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Global Trade Advisor — Fall 2009
Welcome to another edition of Global Trade Advisor, a quarterly email report on international trade trends and strategies from RBS. This publication highlights trade services solutions that promote greater transaction efficiency and improved working capital management. We also report on how these solutions are helping specific companies manage their global financial supply chain with greater ease and control.

Interest in supply chain finance grows
as companies seek liquidity, stability

Global credit tightening has heightened interest in and demand for supply chain finance solutions. Large corporate buyers today are looking to secure their supply chain and have a vested interest in ensuring that their suppliers have access to working capital liquidity.

Latin America poised for economic rebound,
accelerated trade activity in 2010

RBS is forecasting a sharp rebound in the economies of Latin America in 2010, along with a substantial increase in trade between the region and the rest of the world.

 
Interest in supply chain finance grows
as companies seek liquidity, stability

Global credit tightening has heightened interest in and demand for supply chain finance solutions.

The global credit crisis has hampered supplier access to working capital and increased vendor financing costs. Suppliers are having difficulty obtaining bridge financing or competitive credit rates for their working capital needs, while the buyer tactic of extending payment terms is placing even more pressure on their cash flows.

As a result, interest in supply chain finance has risen dramatically in the past 18 months, according to Mona Ghazzaoui, senior vice president, North American Supply Chain Finance, at RBS. "We've seen a major shift in the market due to the liquidity squeeze," she says. "Companies are taking a step back, looking at their working capital structure, and realizing that within their supply chains they have untapped sources of working capital funding."

In the past, supply chain finance was but one of many capital-raising strategies a company could pursue, along with options such as commercial paper, revolving credit lines and asset securitization. But with these other avenues impeded by credit constraints, more companies today have been revisiting supply chain finance, even to the point of assigning dedicated employees to evaluate and implement supply chain finance solutions, a rarity in the past, Ghazzaoui says.

"The liquidity squeeze has made it a priority for corporations to allocate resources to create ownership of these projects," she says.

"The liquidity squeeze has made it a priority for corporations to allocate resources to create ownership of these projects."

Financing takes precedence

Supply chain finance solutions are built upon two central components: enabling technologies and financing.

Enabling technologies include Web-based accounts receivable/accounts payable reconciliation and settlement platforms with dynamic discounting or third-party financing features, supplier collaboration portals, and various types of global visibility technology and analytics tools. These technologies support real-time online information sharing, funds transfer, dispute resolution and other related supply chain processes.

While supply chain finance solutions aim to make supply chain management processes more efficient and visible to all participants, they also enable suppliers to obtain easier access to credit on more favorable terms at various stages in the supply chain.

Supply chain finance was once driven by large corporate buyers primarily focused on improving supply chain processes through technology. But now that so many of their suppliers are facing extreme liquidity challenges, the financing component has emerged as the main attraction, Ghazzaoui says. "Above all else, large corporate buyers today are looking to secure their supply chain, and so they have a vested interest in ensuring that their suppliers have access to working capital liquidity," she says. "Their main goal with these solutions is to maintain a stable and reliable supply chain."

In-country solutions

One notable trend is the rise of in-country supply chain finance solutions in highly developed countries such as the United States and the United Kingdom, Ghazzaoui says.

"Originally, the product focused on finding participants primarily among suppliers in Asia or other emerging markets where the need for financing was particularly keen," she says. "Starting about the middle of last year, we've seen a growing interest in participation among domestic suppliers in places like the U.S. and the U.K., because they're running short of alternatives for financing their working capital."

Abundance of technology platforms

Another trend in supply chain finance is the increasing number of technology platform alternatives, Ghazzaoui says. While only banks can offer financing, both banks and independent technology companies offer Web-based supply chain finance platforms. And the number of banks with their own platforms is climbing, she says.

At the recent Sibos conference, a major international gathering for financial institutions held in Hong Kong this year, several banks announced the launch of their own proprietary supply chain finance platforms.

Keys to success

Ghazzaoui offers the following advice for companies implementing a supply chain finance solution:

  • Assign a dedicated project manager. Many supply chain finance projects have not been implemented because no one was assigned ownership, she says.
     
  • When selecting a bank to provide a supply chain finance solution, focus on its ability to lead arrange large deals and help your company onboard large numbers of suppliers in a timely manner.
     
  • Establish a pilot program before initiating a large-scale, global solution. A pilot program will enable you to test the technology and the overall effectiveness of the solution before proceeding.
     
  • Look at your supply chain finance investment as a long-term solution rather than a short-term financing fix. Once in place, a supply chain finance solution can sustain and support a company's supply chain well into the future.

For more information about RBS or Citizens Financial Groupís supply chain finance offering, please contact:
Supply Chain Finance Advisory Group
Tel: (514) 284 5720

Additional Resources

Supply Chain Finance: Are We There Yet?
World Trade magazine's September cover story asked six panelists, including Susan Baker Shipley, RBS Global Trade Finance Head North America, about the current status of SCF programs and how they are evolving to meet the needs of firmsí supply chain funding in the face of reduced credit facilities.
Read the article.

Latin America poised for economic rebound,
accelerated trade activity in 2010

RBS is forecasting a sharp rebound in the economies of Latin America in 2010, along with a substantial increase in trade between the region and the rest of the world.

Key factors contributing to this forecast are the comparatively minor impact of the global economic crisis on Latin America and a two-decade trend of increasingly open trade in the region, according to Benito Berber, RBS senior vice president and economist for Latin America.

Region avoids brutal shock

With the exception of Mexico, which is closely tied to the U.S. economy, Latin America has not been impacted as severely by the recent global economic downturn as many other parts of the world, such as Eastern Europe, Berber reports. This is reflected in his projections for gross domestic product (GDP) growth in 2009, which is the year in which the full force of the downturn will be recorded, he says.

"In a sense, the global financial crisis hasnít been a huge problem for the region."

"I'm estimating 2009 GDP growth for Mexico of negative 6.5%, but for the other Latin American countries, growth should range from negative 1% to positive 1%," Berber says. "In a sense, the global financial crisis hasn't been a huge problem for the region."

In the wake of the crisis, Latin American trade has fallen off due to the "double whammy" of reduced prices for the region's commodity exports and decreased demand for Latin American goods in the developed world, in particular in the United States and Europe, Berber says. With less export revenue, Latin American imports also declined, he says. Current account deficits, which measure the health of trade activity, widened across the region from an average of negative 2% to negative 3%.

"Trade decreased, but it was more like a temporary shock, even in the case of Mexico," Berber says.

'Sharp rebound' on the way

Berber is projecting a "sharp rebound" in the economies of Latin America next year and escalating trade activity, fueled by rising commodity prices, increased government spending, accommodative monetary policy and rising private consumption.

Berber notes that equity markets in Latin America have already bounced back. "Share prices are already factoring in that next year is going to be a good year," he says.

He predicts that the region's mainstay economies, Brazil and Mexico, will grow at a rate of at least 3.5% in 2010. And GDP numbers in countries such as Peru and Chile should be even higher, he predicts.

"Both imports and exports in the region will be up," Berber says. "I expect trade between Latin America and the rest of the world to substantially accelerate next year."

Open-trade trend

One reason Berber is bullish on Latin America's trade prospects in 2010 and beyond is the continuing trend toward greater integration with the world economy, which he traces back to the North American Free Trade Agreement (NAFTA) between the United States, Mexico and Canada. Since NAFTA's implementation in 1994, Latin American countries have been lowering tariffs both within the region and with countries outside of it, he says.

Economists can measure a country's "degree of openness," which is defined as exports plus imports as a percentage of GDP. For the last 20 years or so, this indicator has climbed in many Latin American countries. Two decades ago the degree of openness for most Latin American economies was below 15%, Berber says. But today Chile leads the region with a 90% degree of openness, followed by Mexico at 63%, he says.

The fact that there is plenty of room for even greater openness is another reason Berber sees more trade growth in Latin America's future. Brazil, the region's largest economy, is still relatively closed with just a 30% degree of openness, he says.

"If Brazil were to sign a free trade agreement with Mexico — there have already been negotiations — and eventually sign a trade pact with the United States, then trade in the region would continue to increase at the same pace or faster," Berber says.

The one exception to this growth story, notes Berber, is Venezuela, which is curbing trade with countries outside of President Hugo Chavez's orbit of influence. However, given the country's dependence on oil exports to the United States and the drop in oil prices, Chavez has less money to spend outside Venezuela and his influence has diminished.

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