2023 – The Year of The Balance
Amr El Haddad
CEEMEA Head of Working Capital Solutions at Kyriba
Board Member, ITFA Middle East Regional Committee (MERC)
Tech or Treat
First home banking service offered to US consumers was in 1980, and it was through internet modems to allow consumers to access – only access – their account information securely. In a span of 30 years, both online and mobile banking were growing at a faster pace than the internet itself. The world has learnt, adopted, and felt in love with the letter “e-“ in only 30 years.
We don’t need to wait that long again to embrace new technologies. The UK parliamentary houses, France, Germany, UAE, and many other countries are sprinting off to lay down the foundation of a legal framework of enforceable digital trade and digital debt instruments, recognizing the financial benefits for their trade and shipping businesses. Regulators in the rest of the world are probably waiting for an encouragement either in the form of a nice force majeure; the giants – the US and China – to impose dealing in digital instruments, or a push from a large local company which is becoming less competitive in a digital world. Next gen tech is already present, and you can hear whispers of how to deploy ChatGPT and artificial intelligence in treasury and banking business.
On the other hand, FinTech market has reached a decent level of maturity, and despite the clamor of the daily newcomers in the marketplace, you could also feel that those new companies come with relevant ideas which harmonize well with the rest of the orchestra. Market is yet to witness one of those natural selection processes though to help successful FinTech companies continue and grow and offer less incentivizing environment for the fast blooming – fast withering enterprises.
Big ships will manage to sail through
Inflation has defied expectations. Central Banks in many developing countries currently face higher than expected inflation rates, and as a logical result, a new cycle of monetary policy tightening has begun that might be unprecedented. Fed rates are expected to raise again to a new height, and while this could be good news for some, the results might be catastrophic on others with the flee of short-term investment to safer and more profitable harbors, creating a more challenging financial and economic environment to smaller economies. This whole situation will likely have a positive impact on banks with strong balance sheets, banks which have accumulated good levels of cash in low rates, and on the flipside, will severely impact banks with mis-managed balance sheet, financing tenor mismatches, and continuous need of short-term refinancing to face their trade finance needs.
The Balance!
Banks’ profitability faces downward pressure due to asset-quality deterioration, and higher cost and capital allocations pressures, with this being counterbalanced somehow by higher policy rates facilitating wider margins. Transaction Bankers need to properly manage their balance sheet to hit that fine balance in managing a profitable assets and liabilities book.
Such combination of challenging conditions like tighter liquidity policies and inflation rates typically accompanied with higher loan reserves, geopolitical risks and subsequently less credit appetite to lower rated corporates, and also the necessity to keep a specific level of asset quality for balance sheet related purposes may all slow down credit growth, but not to pull the curve downwards. Banks, encouraged by an overall global desire to get out of recession, will be required to cautiously inject more funds into their markets supported by the fact that we haven’t seen a credit collapse in the last decade or so. Again, banks will need to hit that fine balance between meeting the growth requirements of their customers’ base and the relevant liquidity and risk concerns. We have already started hearing the never-old-slogan of “the right deal for the right customer”.
Interestingly, Sub-Saharan Africa is the region which will show the highest level of credit growth rates mainly due to the upsurge in the government fiscal deficits in recent years, along with the higher inflation rates and low financial inclusion. Gulf Countries Council (“GCC”) region is outperforming others in terms of wider spreads and an overall strong regional performance backed by governmental commitment to lead the rally to a better tomorrow. Dubai, as an example, has announced $8.7 trillion to double the size of its economy and become a global hub of trade and investment in the next decade.
ESG – Deep Tier SCF: The Hyperlink
ESG compliance has become an impactful prerequisite in many ways and in many types of businesses. Besides the level of depth lately brought by Scope 3 emissions, a parallel deep analysis of supply chains is being conducted to ensure suppliers compliance to ESG measures down to many levels. Anchors of the SCF programs, along with their good suppliers of suppliers – typically SME’s – who comply with ESG requirements, will be financially rewarded in the form of subsidized lending interest. Those SMEs will be happy accessing liquidity sources, usually cheaper, buyers or the program anchors will be happy helping their supply chain become more resilient in a turbulent word and winning a leadership position amongst their network, and banks will benefit from higher credit utilization and subsequently higher profits. Win – Win situation to everyone thanks to ESG measures.
Regulators, on the other side, will need to meet the requirements to incentivize financing green initiatives without inadvertently cutting off access to funding for SMEs which typically rely heavily on energy intensive industries. In other words, finding the right balance in allocating enough cash rewards, out of what might be limited financial resources, to ESG complaint businesses. Ways to find that fine balance are obviously different from one country to the other, however, advanced economies will obviously better identify and monitor ESG related exposures, reward the good performers and penalize institutions which fail to comply with the new rules. Such link between ESG compliance and funding economic sections which might be typically challenging to finance will probably remain and grow.
