Brexit not affecting trade financing
Even as international and domestic markets adjust to major global changes – like Brexit, a new US administration, a high foreign exchange, and a rise in US interest rates – trade financing is expected to stay strong and even improve in the coming years, according to an industry expert.
“The big issues have been Brexit and the new Trump administration,” said James Varnadoe, managing director of SGT Trade Finance Fund and Advisory Board chairman of the Miami Finance Forum.
“There’s quite a bit of uncertainty in terms of trade. You’ve seen foreign exchange fluctuations in Latin America, especially Mexico… That relationship with Mexico has really been brought into the question with new administration.”
Today, more than in the past, trade is being financed by way of asset-based lending, he said.
“In the past we did inventory as collateral. Now we’re much more focused on receivables as collateral,” he said.
Asset-based lending, or ABL, provides businesses with immediate funds and ongoing cash flow based on a percentage of the value of a company’s assets, such as commercial accounts receivable and inventory.
The loan is then combined with insurance from a credit insurance company, which insures the receivables.
SGT Fund no longer uses the Export-Import Bank, the official export credit agency of the United States, which has historically been the primary avenue to insure transactions involving cross-border deals.
The bank suffered a lapse in authorization that lasted the latter part of 2015. In December 2015 lawmakers revived its congressional authority that had lapsed in July of that year. It has been back up and running – though unable to operate at full throttle – since then.
SGT Fund now uses private credit insurance companies, like Euler Hermes and others.
“The [Export-Import Bank] just wasn’t a reliable source for insurance anymore,” Mr. Varnadoe said. “It is prohibitively expensive and private insurance companies offer better rates.”
Issues like a rise in the foreign exchange have been detrimental to trade financing, he said.
Only recently, in the heat of US elections, 21 Mexican pesos translated to only one US dollar.
The post-election Trump effect on the dollar has unwound, however. As of last week, 18.5 Mexican Pesos scored a US dollar.
Another sign of positive modifications, Mr. Varnadoe said, is the slight decrease in oil prices. Oil prices are expected to stabilize – a good sign, as unstable oil prices create volatility in the market.
Banks continue to be burdened by regulatory restrictions, he said, adding that they “cause friction in transactions and definitely inhibit trade financing.” Regulations aren’t expected to change notably under the new administration.
Then there’s the general climate of protectionism right now, mostly as a result of Brexit and a new administration. Protectionism refers to government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition.
“You think that would hurt the international sale of goods, but my belief is that it will continue to grow even under the national politics,” Mr. Varnadoe said.
“Miami is unique,” he said. “People don’t realize that if you go to Middle America and talk to a bank, they don’t know what trade financing is. Miami is an international city and trade is a big part of its economy. A lot of banks have trade financing here – that’s not true in the rest of the country.”