Beyond the EU: reaching the emerging markets

August 2016 | EXPERT BRIEFING | FINANCE & INVESTMENT

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Traditionally, the UK has relied on trade with other developed markets; in fact, nearly 50 percent of all UK exports go to the European Union. Of course, the recent Brexit referendum means this could all be about to change.

While maintaining existing and potential trade with the EU is crucial, the loosening of EU ties might also prompt UK companies to look further ashore. In this respect, the growth of the emerging markets presents a significant opportunity.

A new economic frontier

One of the most exciting prospects offered by emerging markets is the growth of their middle class populations – offering a relatively untapped consumer base for all types of products and services.

The middle class population in Asia alone has reached 525 million, which exceeds the entire population of the EU, according to Ernst & Young. Globally, emerging market middle class spending has increased from $6.9 trillion in 2010 to an anticipated $20 trillion in 2020, according to McKinsey & Company.

Additionally, the emergence of new technologies and infrastructure projects are already creating investment opportunities, as well as more business-friendly environments, by reducing production costs, creating economies of scale, and opening doors to neighbouring countries and regions.

Many intergovernmental unions such as the Gulf Cooperation Council (GCC) in the Middle East, for example, are working towards promoting regional integration in order to create easier access to resources and to stimulate regional economic cooperation.

What’s more, the implementation of soft infrastructure processes such as the removal of tariffs and non-tariff barriers is making access to emerging markets easier. The WTO’s Trade Facilitation Agreement, for instance, is expected to reduce trade costs by 13 to 15 percent through the removal of tariffs and non-tariff barriers, and will enter into force once two-thirds of members ratify the agreement.

The trade finance gap

However, despite the many opportunities presented by the growth of the emerging markets, a lack of funding stands between growth-hungry businesses and this new economic frontier.

Indeed, regulation implemented in the wake of the global financial crisis, notably Basel III, requires banks to hold more capital on their balance sheets. So, in order to remain profitable, many banks are pressed to increase prices, overhaul processes in order to increase efficiency, or step away from trade finance business.

Furthermore, compliance measures such as know-your-customer (KYC) and anti-money laundering (AML) regulation, while crucial to creating a safer global economy, have also negatively impacted the availability of global bank financing. The International Chamber of Commerce (ICC) 2015 Global Survey on Trade Finance found that 70 percent of banks reported declining transactions – meaning their lending capabilities to certain areas of trade finance were restricted due to the increased costs resulting from stricter compliance measures. Moreover, 46 percent of respondents reported the complete termination of corresponding relationships due to increased costs and complexities surrounding compliance measures.

Bridging the gap to accessible funding

As banks retreat from trade finance, it falls to local banks and specialist financiers to pick up the pieces – a task they are well-equipped to do. Regional banks have strong domestic reputations, as well as expertise, and specialist financiers, in particular, are less stringently regulated due to the fact that they do not take deposits. This affords specialist financiers a level of flexibility to provide financing where banks cannot – creating bespoke financing solutions tailored to each company’s unique needs.

Moreover, while a lack of available funding is a relatively new problem for developed market companies, it is one the emerging markets know well. They have long-observed a need for specialist financing and, as such, specialist financiers are well established across these regions – they have in-depth local knowledge and extensive local networks that can help any UK company adapt to new markets.

Certainly, specialist financiers do not have the same-sized balance sheets as global banks. Yet, they make up for this through collaboration, rather than competition, with players across the financial landscape. Often companies can access solutions that encompass both the extensive resources of global banks and the flexibility of specialist financiers.

The rise of specialist financing is the sliver-lining of the global financial crisis – making the financial landscape more diverse. Indeed, companies with sights set on emerging markets now have access to a more sophisticated funding base than ever before.

Currently we do not know what the future holds for UK-EU trade. What we do know, however, is that the emerging markets offer boundless opportunities, and specialist financiers can provide the tools required to tap into their potential.

Emma Clark is Head of Business Development, UK and Europe at Falcon Group. She can be contacted on +44 (0)207 337 6200 or by email: emma.clark@falcontradecorp.com.

Emma Clark

Falcon Group