Uptick in demand for forward cover expected

Demand for forward
cover spiked on the
back of the rand’s
recent weakening
as South African exporters
ran to lock in the currency’s
weaker levels, according to
financial institutions.
Stephen Meintjes, head
of financial institution and
trade transactional products
and services at Standard
Bank, said there had been
an increase in demand for
forward cover immediately
following the rand’s demise
last month.
“The numbers for mid-
December indicated an uptick
in forward cover of more than
double the average weekly
turnover. This was mainly
driven by exporters who locked
in the weak ZAR levels,”
Meintjes said.
“We expect corporates to
increase their forward cover
this year as market uncertainty
continues,” he said. “Importers
should take advantage of any
ZAR strength early in the
year to take out forward
cover.”
Meintjes said demand
for forward cover
in 2015 had been
consistent with
previous years with
clients on average
covering 40% of their
obligations using forward
cover. Trade finance
value based on SWIFT for
documentary credits and
collections only was US$1.2
billion for the year.
In line with global trends,
Meintjes said demand for open
account/supply chain finance
products had increased due
to the higher costs of other
traditional trade finance
products.
“This
has been
particularly
evident in
the SME
sector where
trade-related
working
capital
solutions
have driven
demand. In
the corporate
sector, due to heightened
country risks prevalent in South
Africa as well as other emerging
markets in 2015, documentary
trade products have remained
the dominant trade finance
products,” he said.
Meintjes said SWIFT stats
for trade finance volumes
evidenced an approximate 15%
decline in trade finance, such
as documentary credits/letters
of credit/and foreign bills for
collections in 2015 compared to
2014 although value wise there
had been no decline.
And, he added, while there
might be slow
growth in
demand for
imports and
exports, the
impact of the
latest Fitch
rating agency
downgrade of the
country’s four
major banks and
the slowdown in
economic growth
would negatively
impact trade finance.
However, he pointed out that
non-bank players were entering
the market and creating
opportunities for partnerships,
as barriers to entry had fallen
and regulations favoured nonbanks
for some asset classes,
particularly in open account
and supply chain finance.
Value Logistics divisional
director, Stephen Segal said he
expected the demand for trade
finance to grow in 2016 due to
the weaker rand and a shortage
of working capital.
“Importers are concerned
about the rand weakening
further in 2016 due to
uncertainty with the state of
the economy but don’t believe
this will affect the volume of
imports,” he said.
However, it was “quite
difficult” for SMMEs to get
finance due to risk factors,
Segal said.
“Trade finance is generally
expensive as the client would
have exhausted all other
avenues of obtaining finance
and would use this as a last
resort. It adds huge costs to the
landed price of imported goods
and in some instances makes it
not profitable to sell.
“Due to the weakening
rand we have seen many
importers now using bonded
warehouses to store their
goods, taking the strain off
their cash flow,” he said.
INSERT & CAPTION
It is quite difficult for
SMMEs to get finance
due to risk factors.
– Stephen Segal