MAY 2015 TRADE FINANCE NEWSLETTER Dear customer, Customer satisfaction is the primary driver for Danske Bank, and we are proud and grateful to be voted the best Nordic Trade Finance Bank in the Prospera survey for the fifth consecutive year. Thank you! SØREN HAUGAARD Global Head of Trade & Supply Chain Finance When we meet with banks and customers outside Europe, we are inspired by the growth achieved and the initiatives taken in the local economies. Across the southern hemisphere, from South-East Asia across the African continent to parts of South America, economic growth rates are higher than in the OECD countries, and in many countries there is a growing middle class, which will bring stronger demand for consumer goods and environmental infrastructure investments. While this is good news for Nordic exporters who can develop opportunities in new markets, it is also a challenge as entry into new markets entails new risks. In this edition of our newsletter, we will share some of our views on the new markets and on mitigating risk and we zoom in on the ASEAN region. These 10 countries and their 610 million people combined have a GDP of less than half of China s GDP. With a concerted effort by this group of countries, the potential is substantial for Nordic exporters. One of our economists, Senior Analyst Flemming Jegbjærg Nielsen, describes the potential in his article. As in many emerging market economies, the conduct of financial transactions is restricted. In international trade, such restrictions influence trading partner agreements on currency. Global trade in emerging markets is often conducted in USD or EUR, but we increasingly see emerging markets currencies being used. Claus Harder, Co-Head of Currencies, Commodities & Corporates, and Thomas Harr, Global Head of FICC Research, comment on the currency situation. The Trade Finance business is a joint venture between two commercial partners and their banks with their international reach and global networks. In the increasingly regulated financial industry, banks are under pressure to maintain their international profile. Danske Bank is committed to remaining the best Trade Finance bank and as such to maintain our international reach and strong global network. Torgny Krook, Global Head of Financial Institutions and Hedgefunds, explains how we will do it. I hope you find the articles relevant and interesting, and our Trade Finance teams look forward to continuing our good business relations. Søren Haugaard 1
ASEAN AIM FOR SINGLE MARKET IN 2015 FLEMMING JEGBJÆRG NIELSEN Senior Analyst, Danske Bank Potentially a large market, but difficult to integrate The Association of Southeast Asian Nations (ASEAN) was created by Indonesia, Thailand, Malaysia, Singapore, and the Philippines in 1967. The main reason then was to strengthen security cooperation in South-East Asia and stem the rise of communism. Unlike in the EU, for example, there was initially no substantial economic dimension to the ASEAN cooperation. Vietnam, Cambodia, Laos, Myanmar and Brunei have since joined the ASEAN, which thus today consists of ten South-East Asian countries. The total population in the ASEAN region is about 610 million less than half the number in both China and India but more than in both the EU and the US. The ASEAN region s GDP (measured by the PPP-adjusted USD exchange rate) is estimated to be about 40% of China s GDP. The ASEAN region is thus potentially a large market in most terms, although it cannot compete with China in terms of size. Within the ASEAN, the differences between the countries are larger than the differences in the EU. For example, the income level (measured by GDP per capita in US-dollar) in Singapore is 50% higher than in the US, while the income level in Myanmar and Laos is only about 9% of the income level in the US. The political systems are also very different, with countries such as Indonesia and the Philippines having gradually transitioned to democratic political institutions while Myanmar, Vietnam and Laos remain largely authoritarian regimes. Culturally the countries also differ significantly with Islam, Buddhism and Christianity all represented as the main religions in some ASEAN countries. For that reason, the ASEAN region cannot be regarded as a single market and the ASEAN institution with decisions being based mainly on consensus remains a relatively weak political institution. Three reasons why you should pay attention to the ASEAN There are three reasons why we should pay attention to the ASEAN in the coming years. First of all, there is now more focus on economic integration within the ASEAN and the ASEAN countries will start to behave like a single market. In 2007, the ASEAN countries agreed on the goal of creating an ASEAN community by the end of 2015. This included the goal of creating a single market with no tariffs and ideally no non-tariff trade barriers within the ASEAN. The community also aims to gradually free the movement of both capital and labour between the member countries. At the moment it looks as if the ASEAN will be successful in abolishing all trade tariffs by the end of 2015, but considerable non-trade barriers will remain. Nonetheless, for Scandinavian companies it will become easier and cheaper to trade within the ASEAN countries. As the ASEAN also has free trade agreements with, for example, China, Japan, South Korea and Australia, the ASEAN will also be a favorable export base for the rest of Asia. Secondly, some of the low income countries in the ASEAN region in particular are expected to become manufacturing hubs for low-cost labour-intensive manufacturing. The reason is that labour-intensive production such as clothes and textiles production is increasingly moving out of China because of substantially higher labour costs in China. Hence, if 2
Scandinavian companies want to outsource labour-intensive production to ASEAN countries, Vietnam, Cambodia, Laos and possibly Myanmar - if it is able to continue its current reform process - may be attractive options. China s recent focus on infrastructure investment outside China, for example through the Asian Infrastructure Investment Bank (AIIB), should also boost growth in the ASEAN region. Last, but not least, the ASEAN region will continue to be a high-growth market in coming years. Unlike the greying nations in East Asia (China, Japan, South Korea and Taiwan, for example), the ASEAN countries will continue to see strong population and GDP growth in coming years. GDP growth is expected to stay in the 5-6% range with the strongest growth potential in the low-income countries. Hence, the ASEAN will remain a high-growth market. Scandinavian trade with the ASEAN has potential to increase Scandinavian trade with the ASEAN region is relatively modest. With the exception of Norway, it was less than 2% of both exports and imports in 2014. By comparison, Germany s share of trade with the ASEAN region was more than 2% in 2014. The table below shows that growth in Scandinavian trade with the ASEAN has been strong in the past 15 years and this trend is expected to continue in the next decade. 2014 2000-2014 Export share 1 Import share 1 Export growth 2 Import growth 2 Sweden 1.5 1.5 28.9 143.3 Denmark 1.4 1.3 147.3 70.0 Norway 2.2 2.4 684.2 371.2 Finland 1.7 0.7 8.6-2.7 1) Country imports (export) from ASEAN region as percent of total imports (exports) 2) Percent, forecast for Dec. 14 figures Source: IMF Direction of Trade Statistics ASEAN GDP growth is expected to exceed 5% 8 % y/y 7 6 5 4 3 2 1 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 3
MANAGING FX RISK IN GLOBAL TRADE As means to manage the FX risk associated with global trade, we have chosen to highlight some of the complex Asian currencies and the challenges of trading in these currencies CLAUS HARDER Co-Head of Currencies, Commodities & Corporates, Danske Bank The 11 most widely traded Asia ex-japan (AXJ) currencies are the Chinese yuan (CNY), offshore renminbi (CNH), Korean won (KRW), Hong Kong dollar (HKD), Taiwan dollar (TWD), Singapore dollar (SGD), Indian rupee (INR), Indonesian rupiah (IDR), Malaysian ringgit (MYR), Philippine peso (PHP) and Thai baht (THB). Which exchange rate regimes govern the AXJ currencies? The AXJ currencies are generally managed exchange rates, with the USD being the most important anchor, followed by the CNY, EUR and JPY but that covers a broad spectrum of different exchange-rate systems. At one end of the spectrum are the KRW, INR, IDR, THB and PHP, which the IMF classifies as having floating exchange rates. Despite the IMF classification, however, the central banks frequently intervene to mitigate excessive fluctuations, says Claus Harder. THOMAS HARR Global Head of FICC Research, Danske Bank In theory, the CNH is also free-floating, as the People s Bank of China (PBoC) has never intervened in the offshore market, but in practice, the CNH trades closely in synch with the CNY, which is heavily managed. In practice, therefore, the CNH is not free-floating. The MYR and SGD are classified by the IMF as being subject to other managed arrangements. This reflects the fact that the central banks intervene substantially to mitigate fluctuations in the exchange rates. The CNY is classified as having a crawl-like arrangement with the USD as the anchor, while Hong Kong operates a currency board versus the USD, explains Claus Harder. The SGD, HKD and the offshore renminbi (CNH) are convertible and deliverable currencies, that is, they can be readily bought and sold without government restrictions and delivered offshore without restrictions. The THB is deliverable as it can be delivered offshore, but there are some limitations in terms of buying and selling the THB, so it is classified as partially convertible. The KRW, TWD, INR, IDR, PHP and MYR are non-deliverable, as they cannot be delivered offshore, and are partially convertible as there are some limitations in terms of buying and selling those currencies. Could you elaborate on the AXJ exchange-rate products? According to the Bank For International Settlements (BIS) Triennial Central Bank Survey 2013, the CNY is now the most traded AXJ currency with an average daily turnover of USD 120 billion across FX products, followed by the HKD (77), the SGD (75), the KRW (64), the INR (53) and the TWD (24). The other currencies all have an average daily turnover of less than USD 20 billion. All the AXJ currencies have an FX spot, forward, FX swap and FX option market. In the KRW, HKD, CNY, CNH, SGD and INR currencies, the FX option market is relatively liquid, but the other markets are illiquid. The INR, IDR, PHP, MYR, KRW, TWD and CNY also have a nondeliverable forward (NDF) market as these currencies are not fully convertible, says Thomas Harr and continues: 4
In 2010, the Chinese authorities decided to allow the renminbi to be traded more offshore; this kick-started the rapid pace of the CNH market. Hong Kong is by far the biggest offshore centre for the renminbi, but Singapore, London and Taipei are also growing CNH centres. Rapid CNH deposit growth has been the key driver, but the CNH is also increasingly an investment currency along with the dim sum (CNH) bond markets, says Thomas Harr. What are the risks/challenges associated with trading in the AXJ currencies? The main challenge when trading in the AXJ currencies is the combination of low liquidity and, for some of the currencies, the lack of deliverability. The latter in particular presents some challenges when companies are looking to hedge the risk relating to future inflows or outflows in those currencies, says Claus Harder. However, Non-Deliverable Forwards (NDFs) are instruments that can be used for hedging cash flows or assets in the restricted currencies. The standard convention for NDFs is against USD, which leaves a residual risk in relation to the EUR or DKK. This is typically undesirable from a client perspective, and to mitigate this risk, Danske Bank offers NDFs against both EUR and the Scandinavian currencies, says Claus Harder. What is the outlook for 2015 for the AXJ currencies? We expect the CNY to strengthen around 2% against the USD in 2015, as China s leadership will maintain a strong FX policy because of the internationalisation of the CNY and the rebalancing of the economy. We expect other Asian currencies to weaken against the USD because of lower Asian growth, expensive valuations and capital outflows when the Fed raises interest rates, says Thomas Harr. He expects the weakness of Asian currencies to be led by current account deficit currencies such as the IDR, whereas current account surplus currencies such as the TWD and the KRW should perform better. This year, Asian currencies are likely also to weaken against the EUR following the sharp fall in EUR/Asia FX in 2014, concludes Thomas Harr. WHY GLOBAL BANKING IS CHANGING AND HOW THIS WILL AFFECT US ALL TORGNY KROOK Global Head of Financial Institutions and Hedgefunds Was there ever a truly global bank? From anyone active in international trade or trying to fund a project located outside your core region, the answer is likely to be no. Possibly with the exception of a CFO in one of the top 100 corporations of the world. The rest has always had to deal with both local and regional banks. For a company looking for financing, this means a substantial investment in time and effort trying to get to know the local banks and get them to get to know the company and see that the project is the best idea since sliced bread. As Exporters and Importers alike are likely to be in the business of producing and selling or buying goods and services, but not in the business of arranging financing or taking risk on countries and banks. And the higher the risk on the bank and country, the more likely a company is to ask one of its core banks to absorb these risks. This is where a wellfunctioning set up in the form of trade and export finance products and services offered by banks come into the picture. Now, here is where global banking is changing and will continue to change: 1. Geopolitical risks are repeatedly considered one of the aspects of most concern to business leaders and so also to banks. The perception of the world becoming a riskier 5
place is a fact. However, some would argue that the world has not become any riskier today than it was say 20 years ago; it is just that we know so much more about it now than we did then. Others would say: The world is getting smaller and as a result we think we know more about it, but do we? 2. Banks are required to hold more capital, also in relation to trade and export finance and much more in relation to business considered as associated with a high risk such as financing or providing trade finance solutions in countries where the political and financial situation is less stable. All things being equal, this will generally make banks more risk aware and possibly also more price sensitive. 3. Banks will have to know much more about the countries, banks and clients they deal with, their business, people and processes. In particular, the burden put on banks regarding anti-money laundering is substantial. You could say that this is rather obvious and yes, it is. However, the level of in-depth knowledge that regulators and therefore the board of a bank require is considerably higher than it was before, and the documentation and processes involved are becoming a huge burden for banks. 4. International sanctions are becoming more financial, and banks are at the core of enforcing the sanctions. In addition, we have the extraterritorial legal arm of the US, which means that any bank needing to deal in US dollars also has to comply with all US regulations. The fines of tens of billions of dollars that have so far been paid by US and non-us banks serve as an incentive to put in depth client knowledge and compliance very high up on the list of priorities. All of the above inevitably leads to more and more banks reviewing their business models in general and their international network in particular. Banks need to decide (i) on the network of international banking partners/correspondent banks on the basis of what is needed for providing the relevant support to core clients, and (ii) on the direct and indirect profitability and costs of these business relations. Banks will choose different ways of executing their strategies in this area, but one thing is clear: Banks are likely to concentrate their business with other banks on fewer and stronger banks. As a consequence, not all local banks in weaker countries will be able to execute international trade finance transactions or international payments. Over the last few years, we have seen a tendency for banks in Europe and the US to cut the number of correspondent banks by, in some cases close to fifty percent. And there is more to come. At the same time Senior Bankers will have to spend much more time on the road making sure to stay really close to the banks in their region. To make this work in the trade finance area will require an even closer dialogue between the exporter, the financial institutions team and the trade finance specialists. At Danske Bank, we are absolutely committed to continuing to be the best trade finance bank for our clients, despite the challenges mentioned above. We believe that, also in the future, it will be vital to have a strong and wide-spread network with a large number of correspondent banks but that going forward, we will have to maintain even closer relations with these banks. Strategic partnerships with selected regional banks will be an important component. We collaborate with colleagues in the Trade Finance organisation, with Corporate Banking and Business Banking and are in direct dialogue with banks, exporters, regulators and central banks. We listen, provide advice and align expectations. 6
140 YEARS OF PARTNERSHIP WITH THE BEST CORPORATES AND INSTITUTIONS IN THE WORLD HAS PAID OFF Best Supply Chain Finance provider in the Nordic Europe 2015 Best Trade Finance provider in Denmark 2015 #1 Overall Performance Trade Finance Nordics 2015 #1 Trade Finance in Denmark, Sweden, Norway and Finland 2015 CONTACT US We welcome your feedback and suggestions to our Newsletter as we strive to publish relevant and valuable information for existing as well as potential customers. If you have any comments or suggestions, please feel free to contact us at trade@danskebank.dk or +45 45 14 35 60. Disclaimer The content of this newsletter is for information purposes only. The newsletter does not constitute or form part of and should not be construed as, an offer to sell or issue or the solicitation of an offer to buy or acquire securities of Danske Bank A/S in any jurisdiction, including the United States, Canada, United Kingdom and Japan, or an inducement to enter into investment activity of any kind. No part of this newsletter, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. The content of this newsletter should be seen in context of advice received from the bank and should not in itself serve as basis for decisions of a legal or financial nature. The bank does not provide advisory services in relation to legal, financial or accounting matters. Customers are urged to seek advice on such matters separately. The content of this newsletter is not intended for distribution to, or use by, any person in any jurisdiction or country where such distribution or use would be unlawful. This newsletter contains forward-looking statements that reflect management s current views with respect to certain future events and potential financial performance. Although Danske Bank believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Accordingly, results could differ materially from those set out in the forwardlooking statements as a result of various factors many of which are beyond Danske Banks control. This newsletter does not imply that Danske Bank has undertaken to revise these forward-looking statement, beyond what is required by applicable law or applicable stock exchange regulations if and when circumstances arise that will lead to changes compared to the date when these statements were provided. This newsletter is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purposes without Danske Bank s prior written consent. 7