Trade Finance in Latin America 2018

Trade Finance in Latin America 2018

Economy & Policy Regulation

Good news, bad news. This is the current state of trade finance in Latin America as assessed by “The Changing Face of Trade Finance” panel held by LatinFinance on Friday.

Before diagnosing the current challenges and potential solutions, the panel first evaluated today’s trade environment, which on a macroeconomic level has given reason for optimism.

“Trade growth was 4.7% in 2017, the expectation is that it will be 4.4% in 2018, and around 4% in 2019. The three years prior, trade was flat with regards to world GDP” said Tod Burwell, CEO of the Bankers Association for Finance and Trade.

Despite these encouraging statistics, trade tensions are escalating, most publicly between the US and China, which Yana Dumaresq, Brazil's deputy minister of Industry, Trade and Services, argues has a two-pronged effect. “I am convinced that there will be no winners in a trade war; there will be short-term gains for specific sectors and countries in a given moment but in the long-term these gains will be surpassed by turbulence in the multilateral global trading system,” Dumaresq said.

“While the tensions bring a chance to negotiate, there will also be challenges,” she added.

With regards to the banking system, David Schwartz, CEO of the Florida International Bankers Association noted that the largest banks are contracting, focusing on a smaller set of clients in an increasing effort to ‘de-risk’ their portfolios, a trend that started with the Patriot Act in 2002.

“As banks started to review their portfolios, they began to ask: what is the risk/reward; if the deal flow isn’t there, why should I maintain this relationship? This de-risking took hold in the Caribbean and Central America almost immediately as these relationships were closed out.”

The international regulatory accord, Basel III, also contributed to this impetus to de-risk.

“Especially in Brazil, margins are already low; Basel III costs are high,” Schwartz said. This cost/benefit analysis by bankers has resulted in the breakdown of trade relationships, not only by bank or country, but as Schwartz explains, also by sectors that were being financed locally.

“With high risk industries, banks are no longer as favorable on loans with the new compliance standards,” Schwartz said.

What are steps to solving these complex issues? The panel agreed fixing the current trade finance issues starts with increased data pooling - across banks but also with government agencies. However, as is the case within many other institutions in Latin America, current laws thwart attempts to increase data sharing, requiring subpoenas to share information internally.

Digitalization is also key. As paper is still primarily used in documentation, monitoring financial crimes remains challenging. Innovations in fintech can help bridge these brown areas of surveillance. Antonio Peña, president of the Inter-American Chapter of the United States-Mexico Chamber of Commerce noted that “Banks and governments need to bring in machine learning (AI) to examine all of this data, to reduce false positives, but also false negatives.”