Global trade patterns remain in a state of constant flux. The latest major disruption to trade flows is being driven by restrictions on Russian exports, following the country’s invasion of neighbouring Ukraine, but that upheaval is taking place against a backdrop of high commodity prices, disruption to supply chains and concerns over liquidity.
This situation has left importers, traders and lenders scrambling to find new markets and trade corridors. In the case of Russia, sanctions on oil and gas exports – as well as the reputational risk of continuing to trade with Russian companies – have presented a fresh challenge. In many cases, including energy, agri-commodities and metals sectors, the prominent role of Russian suppliers has made reshaping trade flows a difficult undertaking.
However, just as those trade routes are narrowing, others are opening up, not least in the Middle East and North Africa. In particular, the UAE has already proven its resilience as a financial and trade hub, emerging from the pandemic in excellent economic health. In 2021, initial forecasts from the International Monetary Fund had pointed to a slow year for growth, yet these were soon revised sharply upwards, from 1.3% to 3.1%.
Rising commodity prices have also largely benefited the UAE, not least due to its role as a leading oil exporter. Companies forbidden from importing Russian oil – or those wary of doing so due to reputational risks – are under pressure to find new sourcing markets. Reuters reported in April that the European Commission is already working with oil-producing countries to agree deals on moderately priced oil imports. The UAE is also emerging as an alternative base for legitimate Russian companies, assets and capital, that are finding market access restricted despite not being subject to sanctions or having ties to the government.
The UAE’s growth is not limited to the energy sector. The Dubai Chamber of Commerce and Industry has revealed that the emirate’s non-oil trade has grown by nearly 13% over the last year, driven in part by the recovery of its hospitality, tourism and leisure industry. This non-oil boom is epitomised by the pioneering Expo 2020 in Dubai, which closed at the end of March this year.
In the immediate term, the UAE is not expected to suffer contagion effects from the tightening of Russian trade flows. An April 2022 report by S&P Global rated the country as having “no or limited vulnerability” across all areas assessed – economic and credit growth, asset quality, profitability and liquidity – in the context of the conflict.
More broadly, the Gulf state is taking major steps towards boosting its status as a trade and financial hub. A landmark agreement to normalise relations with Israel is expected to bring significant benefits to both markets, not just through bilateral trade but by making it easier for Israeli, European and US firms to benefit from the UAE’s status as a gateway market to the rest of the Middle East and Africa.
Reforms have also been made to align the country with the world’s other financial capitals, such as London, Singapore and New York. Notably, the UAE shifted to a Monday-to-Friday working week from the start of this year, abandoning its traditional Sunday-to-Thursday business hours.
For banks and alternative lenders active in the trade space, this broadening of horizons presents a significant opportunity. Smaller and mid-market companies represent over 95% of businesses across the Middle East and North Africa, and contribute around 40% of GDP, yet often struggle for reliable and affordable access to trade finance facilities.
The so-called trade finance gap, which measures the difference between demand and supply for such facilities, has widened to US$1.7tn in recent years according to research by the Asian Development Bank – yet the IMF estimates that broadening access across the region could raise annual growth by 1%.
This situation creates a highly promising environment for providers of supply chain finance (SCF), including payables and receivables products. SCF programmes can thrive even when other trade finance facilities are in short supply, enabling mid-market buyers to maximise their working capital and access liquidity through optimising payment terms with suppliers or customers, while offering funders high-performing and stable returns.
Though traditionally the domain of banks, SCF is increasingly characterised by platform businesses that allow multiple funders to participate in programmes. This lowers risk further by eliminating the risk of any single point of failure – though that said, SCF has historically had low default rates and shown high levels of resilience, even during economic downturns.
The platform model also brings other benefits. It can provide an ideal environment for legacy banks to collaborate – rather than compete – with emerging fintechs. Even where banks are reluctant to join existing ecosystems, they often opt to purchase white-label software from more tech-savvy fintech counterparts.
The growth of SCF in the Middle East is not being driven purely by the financial services sector and macroeconomic factors, however, but also through the active involvement of public bodies. In the UAE, the Abu Dhabi department of finance has partnered with local financial institutions to introduce a US$1.6bn SCF facility in the healthcare sector during the peak of Covid 19, and there are similar government-led success stories in Dubai. Through supportive and open legislation, backed by investment, UAE authorities have laid the groundwork for a thriving SCF market across the Gulf state.
With no shortage of demand from mid-market companies, supportive legislation and a ready-made infrastructure enabled by locally active platforms for would-be lenders, the UAE may be emerging as the next global powerhouse for supply chain finance a hub to access wider MENA region.