x Abu Dhabi, UAEWednesday 17 January 2018

Trade finance contraction hits Emirates

The global contraction in trade is affecting the UAE, the world's third-largest re-exporter, with banks seeing a decline in trade finance.

The global contraction in trade is affecting the UAE, the world's third-largest re-exporter, with banks seeing a decline in trade finance, industry officials say. "The fourth-quarter contraction in [trade finance] volumes and deals continued into this year and it still shows a downward trend," Lakshmanan Sankaran, the head of trade finance at the Commercial Bank of Dubai, said on the sidelines of the ICC Banking Commission Conference in Dubai yesterday.

"The downturn in world trade should not be further fuelled by a shortage in supply," said Marc Auboin, an economic counsellor with the World Trade Organisation. Global trade flows total about US$1 trillion (Dh3.67 trillion), 90 per cent of which is financed through trade finance, which is mostly short term. Mr Auboin said a 1 per cent decrease in global trade finance would leave a gap of $100 million in trade flows.

He said south-south and south-north trading was particularly affected by a decrease in finance. International trade flows have already fallen an average of 30 per cent since the crisis hit. Emirati banks depend on trade finance and on average allocate a third of their assets to it, Mr Sankaran said. Mashreqbank, the largest regional financier of trade deals, said its trade finance volumes had declined slightly in January and February. "The market is tight. The tsunami has affected us," said Somnath Menon, the head of operations and technology at Mashreq. Clients are flocking to the safest, most conservative methods of paying for goods.

Mr Menon said many banks were seeing a sharp decline in "collections", a method that does not guarantee payment between a merchandise seller and buyer. He said clients were increasingly demanding letters of credit, in which the bank effectively assures payment by buying the risk and selling it on. If a seller produces a document, he gets his money. UAE banks seem more willing to finance trade than to hand out new corporate or private loans.

One of the reasons could be that letters of credit generally have a delay before they are listed as assets in the balance sheet, Mr Sankaran said. UAE banks have practically frozen their lending after deposits have flowed out of the country during the financial crisis that began in September, leaving them with more loans than deposits. Since then, the Federal Government has injected Dh50 billion in liquidity, followed by a Dh16bn injection into five Abu Dhabi banks by the emirate's Government.