Safety net for forays into emerging markets

PHOTO: Safety net for forays into emerging markets

A NEW scheme aims to make the often risky business of venturing into emerging Asian markets a bit easier for both banks and companies.

The programme aims to guard Singapore banks against the risk of non-payment by their counterparts in markets such as Myanmar and Central Asia.

The risks of transacting with financial entities in emerging markets are usually difficult to assess and can be a constraint on trade, said Mr Terence Seow, assistant chief executive of trade agency International Enterprise (IE) Singapore, which launched the programme yesterday.

Singapore banks might not be willing to take on the risks of accepting letters of credit from certain foreign banks, which might lead to the trade transaction falling through.

Under the new scheme, banks here will be able to obtain credit guarantees for these transactions.

IE Singapore will share the risk on the credit guarantees with the Asian Development Bank (ADB) and insurer Swiss Re Corporate Solutions.

The initiative is expected to boost exports from Singapore to emerging Asia by US$1 billion (S$1.26 billion) annually, and benefit 250 firms here a year.

It will ride on an existing credit guarantee scheme - the Trade Finance Programme - offered globally by ADB and backed by its triple-A credit rating.

"There are many growth opportunities outside traditional Asian markets that we want to help Singapore companies benefit from, but from a bank's point of view, it's less straightforward from a risk management perspective," said Mr Seow.

"Before this, there was a lot of demand for ADB's programme and it could not serve everyone. We're coming in to open up the funnel so that more companies can benefit."

More than half the credit guarantees given out under ADB's programme last year backed exports from Singapore.

The volume of trade transactions from companies here supported under this programme has grown almost fivefold since 2010, reaching a high of US$1.7 billion last year, out of a total of US$4 billion.

Trade financing gaps in Asia, estimated to be as high as US$425 billion last year, "impede trade, growth and job creation", said Mr Steven Beck, ADB's head of trade finance.

"The tougher regulatory environment as a result of the global financial crisis is one of the reasons for the trade financing gap... Multilateral institutions like ours have a role to play in addressing this," he added.

Banks here said the scheme is a good move. Ms Clara Hang, head of global trade finance at OCBC Bank, said the programme will allow the bank to "assess trade corridors that would otherwise not be accessible to us because of limited or no credit appetite".

Ms Lum Yin Fong, managing director of global transaction services at DBS Bank, said credit guarantee facilities will "help to enhance the risk profiles of the underlying trade transactions".

The Singapore Business Federation's chief operating officer, Mr Victor Tay, said trade volumes between Singapore and its emerging Asian neighbours have been on the rise, so trade facilitation schemes are likely to be useful.

He added that local companies are increasingly looking beyond Asia to other emerging regions, such as Africa and the Middle East. "When companies are operating in lesser-known countries with smaller banks - that's where a credit guarantee will be useful."

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