Latin America: Deepening supply chain finance

Publication info: Trade Finance ; London (Sep 2011): n/a.

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ABSTRACT
 
Compared to most developed markets, Latin America is where the action is at the moment for trade and sup-ply
chain finance as uptake and interest grow. While the news from the region is positive, it must be remembered that
not all countries are moving at the speed of Chile or Brazil, but the outlook is generally favourable. The current
global economic cycle has been very beneficial to Latin America for the better part of the last seven or eight years
due to the overall increase in commodity prices and the increasing flow of commodities to Asia, in particular China.
There is also a fairly benign political environment that has allowed businesses to flourish in Mexico, Colombia,
Peru, Chile and Brazil - as well as in parts of Central America. With so much of the region's economy dominated by
commodities it is possible to build up a picture of trade and supply chain activity by looking at its use in the oil and
gas sector, dominated by large companies such as Petrobras, PetroPeru, Ecopetrol, and ENAP. Much of this
activity is standard trade finance such as the issuance of letters of credit primarily to import equipment on a short-
term basis to expand existing facilities. There is also high demand for financing as these companies ramp up their
production to meet global demand. This is being partially met by domestic banks, but they do not have the depth
of wallet to completely cover this, which is stimulating offshore borrowing.

FULL TEXT
 
Latin America is one of the few parts of the global economy from which good news seems to emanate at the
moment. Oliver O'Connell examines the expanding use of supply chain finance as the region grows.
Compared to most developed markets, Latin America is where the action is at the moment for trade and sup-ply
chain finance as uptake and interest grow. While the news from the region is positive, it must be remembered that
not all countries are moving at the speed of Chile or Brazil, but the outlook is generally favourable.
The current global economic cycle has been very beneficial to Latin America for the better part of the last seven or
eight years due to the overall increase in commodity prices and the increasing flow of commodities to Asia, in
particular China. There is also a fairly benign political environment that has allowed businesses to flourish in
Mexico, Colombia, Peru, Chile and Brazil - as well as in parts of Central America.
Francisco Aristeguieta, global transaction services Latin America and Mexico region head at Citi, observes: "What
we find now is that our business in Latin America has shifted from a US-driven multinational operation to a global
multinational operation, and inter-regional flows are really the driving flows in both cash and trade - there are large
successful local ventures that are now able to expand across the region."
Companies that were once domestic champions, now expanding abroad, are a big focus of the trade and supply
chain sector, as there is now a growing middle-income consumer base within the region. This is combined with the
strength of the trade relationships with other emerging regions, especially Asia, and to a lesser extent sub-Saharan
Africa, which present their own opportunities.
Commodity boom is the driver
With such volatility in global markets it is important to look beyond the short-term at longer-term trends, and Latin
American banks and corporates have a strong commitment to ensuring stable growth in the region. Brazil, Mexico
and Colombia continue to be very attractive propositions for investment and even Argentina and Peru with their
political complexities are on investors' radars. There are also significant opportunities from the infrastructure drive

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taking place as a by-product of the commodity boom - the significant reserves are being used for countercyclical
infra-structure spending.
That is not to say that Latin America is immune to global problems - there is a concern about the reliance on trade
with the US and Asia, and about the volatility of commodity prices, as both produce a degree of uncertainty. There
is little that a corporate treasurer can do about this other than hedge strategies for risk mitigation in trade.
With so much of the region's economy dominated by commodities it is possible to build up a picture of trade and
supply chain activity by looking at its use in the oil and gas sector, dominated by large companies such as
Petrobras, PetroPeru, Ecopetrol, and ENAP. Much of this activity is standard trade finance such as the issuance of
letters of credit primarily to import equipment on a short-term basis to expand existing facilities. There is also high
demand for financing as these companies ramp up their production to meet global demand. This is being partially
met by domestic banks, but they do not have the depth of wallet to completely cover this, which is stimulating
offshore borrowing.
Dennis Dubois, trade and supply chain solutions product management for Latin America and the Caribbean at
Bank of America Merrill Lynch, comments: "In the broad commodities space we don't see as many supply chain
finance trans-actions as one might expect, but we do still see a lot of traditional products being used - letters of
credit, and some documentary collections, many times issued by Chinese importers going to Latin America
exporters. The exporters then seek to minimise that risk by having the banks confirm the credit or, increasingly
discount them. While not a classic supply chain transaction that would involve buyer and supplier agreements,
traditional supply chain finance instruments are being used and the net results are still the same, by which the
seller accelerates their receivables while allowing the buyer longer terms."
Supply chain finance does extend into the oil and energy business, as oil exporters find that they are coming up
against their credit limits, but want to offer competitive or longer payment terms. These two factors do not tend to
go together, with individual deals values going up with the price of oil, and deal tenors going out.
Supply chain finance transactions appear on both a funded and non-funded basis. Dubois explains: "The split is
pretty much 50:50 because many oil companies are cash rich and do not wish to monetise their receivables even
when significantly extending out payment terms. However, they do still want to cover their risk from a credit or a
country perspective and in those cases we have a quasi-supply chain mechanism, but without the external bank
funding component to it. But whether under this mechanism or traditional funded SCF, we're consistently seeing a
desire to lay off to a bank longer-tenored risk. "
Rise of LatAm manufacturing
More traditionally, supply chain finance solutions are deployed in the manufacturing sector - the Asia-US trade flow
of consumer goods is a somewhat over-used example. However, a lot of large companies in Mexico, Peru and
Colombia, that might have been suppliers to larger clients elsewhere, are going outside of their home countries and
wanting to implement what they see as best practices in their experience as suppliers themselves. As they
become buyers they want to push out the same programmes that they know work.
Andrea Leonel, executive director, technical sales group manager, at JP Morgan Treasury Services, notes: "Given
recent market conditions, where the credit market continues to present cash constraints, supply chain finance is
playing an important role, enabling buyer and sellers to meet their liquidity needs, with lower cost of funds to
suppliers. In parallel, there is a trend in the trade relationships to become more efficient and convenient by using
open account and electronic presentation of documents, which provide a proper environment straight through the
supply chain finance process."
Aristeguieta at Citi concurs: "Capital is harder to raise and so the easiest way of raising capital is to find it
internally through increased efficiencies and to manage it more effectively. We are helping clients do this by
promoting our channel finance platform in Latin America. It has been rolled out in Colombia, Mexico and Peru and
we will roll it out across the rest of the region soon."
Banks are keen to capitalise on this growing spread of clients willing to finance their suppliers in an effective way -
a fundamental need for multinationals already operating in Latin America, as well as the new emerging regional

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champions that are coming out of these markets for intraregional flows. This is a very important trend that is
gaining a lot of momentum, especially in Mexico - an economy more centred on manufacturing than its
neighbours. A lot of Mexican companies have been part of supply chain financing flows with their buyers in the US
and so are more open to the concept, and are certainly leading the way in rolling it out, not just domestically, but
also in their own cross-border supply chains.
The automotive sector in the region proves a good example. Says Leonel at JP Morgan: "All sectors are looking for
cash flow and cost of capital solutions. A reasonably marked sector is the automotive industry, where payment
tenors are significantly long, and pricing is key, therefore, supply chain finance poses key benefits for both buyers
and suppliers."
The role of local banks
Local banks have generally improved their position since the global financial crisis, both in their home markets and
in the sophistication of the products they offer. However, it seems on the supply chain finance side of the business
there is still an extremely important role for the international banks. There are a couple of reasons for this: they are
generally larger and have better access to liquidity; they are more familiar with cross border trade and supply chain
solutions; a number are still in an expansionist mode when it comes to their portfolio as their home markets are
stagnant and they see plenty of opportunity in rapidly developing regions such as Latin America. Many of these
banks already have longstanding relationships with the upper segment of clients such as Petrobras or Codelco.
There is a blurred line between where the local banks have an advantage and where the international banks do. As
you go deeper into the market there is a point where the international banks will not want to participate, as they do
not have the expertise, local knowledge or physical capability to service that level of client. That is where the local
banks clearly have the upper hand. A lot of local banks do still have a need to approach larger international banks
for funding of their trade transactions due to problems accessing the capital markets.
There is a lot of interest in exploring cross-border synergies in which banks in-country that service the middle
market can partner with banks overseas. The idea is being discussed that maybe these institutions should work
closer together as it would bring supply chain finance down from a relatively lofty position to a place that would be
more attractive to a lower middle market spectrum of corporate clients. Discussions between local and
international banks continue as to what they can do jointly on a cross-border basis - each helping their own clients.

Dubois concludes: "While traditionally supply chain finance has been prevalent between the US and Asia, it is only
now starting to make a significant impact in Latin America both intra- and inter-regionally. I think that is a
development that will continue to expand very rapidly over the coming years."

DETAILS

Subject: Supply chains; Trade finance; Commodity prices; Global economy

Location: Latin America

Classification: 9173: Latin America; 5120: Purchasing; 1300: International trade &foreign
investment; 3400: Investment analysis &personal finance; 1110: Economic
conditions &forecasts

Publication title: Trade Finance; London

Pages: n/a

Publication year: 2011

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 Publication date: Sep 2011

Publisher: Euromoney Institutional Investor PLC

Place of publication: London

Country of publication: United Kingdom, London

Publication subject: Business And Economics--Banking And Finance

ISSN: 14648873

Source type: Trade Journals

Language of publication: English

Document type: Feature

ProQuest document ID: 897016741

Document URL: https://search.proquest.com/docview/897016741?accountid=45039

Copyright: ( (c) Euromoney Institutional Investor PLC Sept 2011)

Last updated: 2014-08-23

Database: ProQuest Central

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