Article


By Mark Ford

Nearly a decade ago, Goldman Sachs predicted that the combined rapidly developing economies known as the BRICs - an acronym of Brazil, Russia, India and China - could eclipse the combined economies of the world's richest countries by 2050.

That prediction may be challenged by Russia's recent economic performance. The country had the worst performing BRIC economy in 2009 with an estimated GDP decline of at least 8 per cent. Brazil too saw GDP decline by 5.5 per cent, but India and China continued to justify claims to be the locomotives of the global eco no my. In 2009, China's and India's GDPs grew by 8.3 per cent and 6.5 per cent respectively.

Examining the letter of credit markets in these four countries seems to underline the relative fortunes of each of these BRICs.

Russia

After two very difficult years, Russia appears to be depending substantially on external support as it seeks to revive its international trade. In February, the International Finance Corporation (IFC) increased the amount of its facility for the Credit Bank of Moscow (CBM) by US$40 million under the Corporation's L/Csupported Global Trade Finance Program (GTFP).

In November, the European Bank of Reconstruction (EBRD) - which runs the acclaimed L/C - oriented Trade Finance Program - said it would step in and acquire a minority equity stake of 11.75 per cent in Promsvyazbank, Russia's third largest locally owned private bank. The transaction makes EBRD an equity investor in no fewer than 12 Russian banks.

Multilateral development bank interventions, such as those represented by IFC's and EBRD's L/C guarantee schemes, have attained a higher profile since the G20' s muchpublicized goal of making US$250 billion available for trade finance. These programs may well have helped L/C flows in BRIC countries where, according to a World Trade Organisation report in March, average L/C prices have fallen to 0.71.5 per cent from 1.52.5 per cent a year ago.

Regional development banks are also emerging to help boost trade finance flows. Trade finance is a priority for the Eurasian Development Bank (EDB), established in 2006 by the Russian and Kazakh governments to boost investment across the former Soviet Union. Member states now include Armenia and Tajikistan. In February, Russia's VTB Bank and EDB agreed an accord in which the banks are expected to jointly fund various projects, including plans to develop trade finance.

Brazil

Brazil is also using the GTFP to boost L/C availability. In December, the IFC added Banco WestLB do Brasil to the program. The bank will begin using it to support commodity exports in two export financing deals totalling US$18 million. By using the program, WestLB do Brasil plans to provide more export finance to intro duce its clients to new markets.

Organic growth seems to be returning to the Brazilian trade finance market.

According to its executive vice president, Milto Bardini, Brazilian bank BicBanco, which pulled off a 280 per cent increase in fourth quarter 2009 profits over the same quarter in 2008, is bullish about its prospects for trade finance. Bardini told BNamericas that if the exchange rate is maintained, trade finance should soon make up 22-25 per cent of bank's portfolio.

India

Demand for L/Cs in India appears to be growing, due to the improved availability of US dollars in the overseas market and renewed confidence in the banking sector. According to the Business Stand ard, the country's banks are experiencing a surge in demand for certain shortterm trade finance facilities, including L/Cs opened by buyers of Indian goods.

India has hugely ambitious plans to boost exports. The Foreign Trade Policy (FTP) 20092014, which sets out a raft of measures to facilitate Indian exports, aims to stimulate annual export growth of 15 per cent. This means that by 2014, India expects to double its exports.

Exim Bank of India is a key player in the FTP and a participant in the GTFP. India's export credit agency provides confirmation of L/Cs under the GTFP, while the IFC provides guarantee facilities to cover confirmation of L/Cs and other trade instruments.

While India is clearly encouraging L/C business, it is also using the FTP to ensure that L/Cs are not used to flout export bans placed on certain goods if they are in short supply in the domestic market. Recently, this occurred with the imposed ban on exporting rice.

Traders have sought to bypass export bans by claiming that deals were sealed prior to the effective date of the ban, even if L/C documentation showed that shipping dates fell after the ban became effective. Now the FTP specifically states that if an export or import is subjected to any restriction it will usually be per mitted, provided the shipment is made according to the documentation and via an irrevocable commercial L/C established before the date the restriction was imposed. In order to use such an L/C, the applicant has to register it and contract the authorities within 15 days of the date the restriction was issued.

China

China's resurgence from the global economic downturn has been nothing less than spectacular. Lending growth in the first two weeks of 2010 was reckoned to be around three times higher than it was during the same period last year. Ironically, this has had a mixed impact on the L/C market. In January 2010, reports emerged that L/Cs were in short supply in China, because the authorities were determined to suspend credit to contain the economic boom. Indeed, in the same month, banks across China were ordered to suspend new lending. One such bank, Credit Suisse, told local media that L/Cs had suddenly been withdrawn; other reports talked of L/Cs being withdrawn even when arrange ments for them appeared to be solid.

But a major change in China's policy looks set to make a longterm impact, at least in the regional L/C environment. Last April, the Chinese government announced the launch of a renminbi trade settlement (RTS) pilot program involving a handful of enterprises in several provinces. The direct settlement system in the Chinese currency aims to reduce foreign exchange risk and conversion costs and envisages the replacement of L/Cs denominated in US dollars with those written in the Chinese currency.

The idea has been received enthusiastically in some quarters. Standard Chartered Bank (SCB) claims it was the first foreign bank to be licensed to par ticipate in the program. Another early participant was OCBC Bank of Malaysia, whose range of services in the program includes the issuance and payment of L/Cs, as well as advising and confirming export L/Cs.

China is now rolling the RTS out across the region and has sent a delegation of officials from the Shanghai Municipal Office of Finance Service, People's Bank of China and State Administration of Foreign Exchange Shanghai to accompany SCB in order to promote the program in Malaysia, Thailand and Singapore. In February, the Bank of China suc cessfully executed its first crossborder RTS for Australia's Auswate Recycling Pty Ltd., one of the bank's most important export clients.

Analysts have expressed concern over aspects of the program, suggesting that problems could arise with claims and liabilities, foreign relationships, exchange management, liquidation arrangements and monetary policies. But the potential benefits are clear. The program helps minimize foreign currency exposure, simplifies the foreign currency transaction process and reduces crossborder transaction costs.

Mark Ford's e-mail is markford@gotadsl.co.uk