Published June 12, 2009

Trade stirs to life again, but it's back to basics

Traders tap LCs again, avoid complex hedges; volumes pick up, fees moderate

By SIOW LI SEN

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(SINGAPORE) Singapore traders are buying and selling again and funding costs have returned to more normal levels, although the recovery is not across the board, bankers say.

According to global payments platform Swift, February-to-April trade volume out of Singapore declined 3-5 per cent - a vast improvement from January's plunge of 23 per cent.

Demand from China, especially for essentials like food, has picked up.

In addition, some Singapore exporters have used the financial crisis as an opportunity to venture into new markets in Africa and Latin America.

This is a far cry from the dark days of the last quarter of 2008, when there was widespread panic of defaults and counterparty risk was so high that trade almost came to a standstill. Those who still had orders to fill had to accept outrageous prices quoted by banks.

But in recent months, trade in non-discretionary items such as food - from wheat to rice to palm oil to sugar - has really picked up, Sumit Aggarwal, head of trade at Standard Chartered Bank Singapore, told BT.

Textile trade has also picked up, he said.

'We believe it's not merely restocking. There's a return of trade activity and the beginning of a recovery in trade flows. We have very strong trade flows.'

Stanchart Singapore's trade volumes have increased almost 40 per cent from a year ago, as it remained opened for business throughout the crisis and took market share, Mr Aggarwal said. 'It's a validation of our strategy to remain open to clients . . . and offer them trade finance lines.'

Chow Theng Kai, OCBC Bank's vice-president for group transaction banking, said last year's unprecedented financial crisis led to a collapse in global demand and tightening of credit. 'However, over the past two months, we have seen a moderate pick-up in trade activity due to China's increased demand for commodities.'

Jonathan Speight, head of trade and supply chain for HSBC in Singapore, said the bank sees 'some indication of increased demand for trade finance in certain pockets and sectors, such as the palm oil industry and the chemicals industry, for instance'.

Bankers say traders are focused on basic funding - and are staying away from complex structures such as hedging of foreign exchange.

'We are also seeing companies going back to basics in their international trade, but with a better appreciation of the risks involved and having built the ability to manage risk, particularly counterparty risk, more effectively over the past 12 months,' Mr Speight said.

Fees have moderated in line with more normal conditions.

OCBC's Mr Chow said letter of credit (LC) confirmation fees were priced much higher during the financial crisis due to higher counterparty risks and higher funding costs.

'However, as signs of the crisis tapering off emerged in the last two months, we have seen credit appetite for trade assets slowly returning to the market and prices beginning to ease'.

But risks remain, and companies which used to deal through open accounts - bypassing banks - are now turning to LCs.

'In the current economic environment, companies are turning to traditional trade finance instruments, such as LCs, that offer a more secure payment mode while enabling them to pass the risks on to the banks,' said So Lay Hua, group head of transaction banking at United Overseas Bank.

Ms So said the standard fees for LCs remain unchanged.

'In general, the market is cautious about taking additional risk and this is seen across the entire supply chain with buyers, suppliers and banks,' he said. 'Banks will continue to exercise vigilance in extending credit facilities.'

Stanchart's Mr Aggarwal highlighted 'smart' Singapore traders who are venturing into new markets.

'We have facilitated a number of Singapore clients who chose this market to open new business in Africa and Latin America,' he said. They are selling goods ranging from textiles to food, telephone equipment - and even publishing.

Stanchart's help to clients essentially doubles their capital so they can trade more, he said. 'We buy over their receivables, give them cash and, with that, they can go and do additional business.'

With Stanchart financing the trade, traders don't have to mortgage their factories, homes or even their jewellery to get funding from banks, he said. 'This helps them compete with cheaper Indian and Chinese rivals.'

A trade finance loan, typically for 90 days, is normally regarded as a low-risk (since banks own the goods), high-margin business for lenders.