Appeal of trade finance structures grows in Dubai

20 February 2013

Dubai strengthens position as commodities hub

The use of structured trade and commodity finance in the Middle East has almost doubled over the past three to four years, according to trade finance executives.

Although the rise has come from a low base, it indicates that the region, and Dubai in particular, is becoming an increasingly important part of global trade flows.

A total of $4.13bn-worth of trade finance deals were signed in the Middle East in 2012, according to data provider Dealogic.

Although this total is slightly under the $4.5bn-worth of trade finance deals signed in 2011 in the Middle East, the long-term trend suggests that there are a greater variety of trade financing structures being used by banks to support trade and commodity flows through the region.

The use of traditional trade finance tools such as letters of credit (LCs) is also increasing across the region, with a poll taken at a recent trade finance conference in Dubai showing that two-thirds of the delegates saw the use of LCs rising.

The biggest borrower last year was the Saudi Electricity Company, which raised a $1.4bn export-credit agency-backed loan for its Rabigh 6 thermal power project.

As well as large-scale export credit agency (ECA) loans, there were also a number of smaller commodity finance deals as well. The UAE-based oil trader BB Energy (Gulf) raised a $400m revolving syndicated structured commodity finance loan at the end of last year. Oman Trading, a joint venture between oil trader Vitol and the Oman Oil Company also raised a $480m trade finance borrowing base last year.

Both deals hint toward the increased use of structured trade and commodity finance deals being signed in the region. In particular, BB Energy (Gulf) which is based at the Dubai Multi Commodities Centre (DMCC), decided to expand its team of commodity finance specialists last year in an effort to explore new financing options, including trade finance, syndicated loans and bonds.

With Dubai’s aim to position itself as an international commodities hub and the continued growth of the DMCC, there could be a further uptick in the structured trade and commodity finance.

However, borrowers in the region continue to complain that the cost of borrowing in Dubai is far higher than in other financial centres such as Singapore, potentially reducing the competitiveness of the emirate.

Issues such as regional political instability and fear of non-payment has pushed exporters and importers in the Middle East to turn to traditional trade finance instruments such as letters of credit to ensure they get paid for their goods.

Yet the use of LCs can incur a number of additional charges and fees, particularly if an LC raised by a local bank on behalf of an importer needs to have an additional confirmation provided by an international bank.

Despite signs that the use of trade finance instruments could increase in the region, globally trade finance volumes fell by five per cent in 2012 compared to 2011. According to data provider Dealogic, the total trade finance volume last year stood at $171bn.

Although volumes fell, they have not declined to the same levels seen between 2008 and 2010 when bank liquidity was extremely tight.

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