Working with Latin American banks to boost South-South trade

A local bank branch in Bangkok, Thailand.

By Steven Beck

The inclusion of an Argentine bank in ADB's Trade Finance Program is an important step toward realizing the potential for trade between Asia and Latin America.

We're thrilled to welcome Banco Patagonia Argentina into ADB's Trade Finance Program (TFP). As a participating bank, TFP will provide guarantees to Banco Patagonia covering payment risk from Asian banks backing trade (import and export) transactions. In other words, we'll work with the Argentine bank—and the handful of other South American banks already signed up—to support South-South trade between Asia and Latin America.

Bank-to-bank relationships underpin a lot of world trade. Banks act as intermediaries in trade between exporters and importers, especially when the parties don't know each other well and live in distant emerging markets. Representing their respective clients (importer and exporter), banks transmit funds and documents between each other and provide bank-to-bank guarantees covering performance risk (will the exporter go broke and be able to deliver goods?), payment risk (will the buyer/importer go broke and not pay?) and country risks (will a country impose a moratorium on hard currency payments flowing out of a country that prevents exporters from getting paid?).

Given its importance—and TFP's interest in promoting south-south trade—I did a little research into Asian-Latin America bank-to-bank relationships and was really surprised to discover that outside of the People’s Republic of China, India, Japan, Republic of Korea, Malaysia and Singapore there are virtually no direct banking relationships between the two continents. To say the least, this suggests that the potential for trade (and its delivery of growth, jobs, and poverty reduction) is not being maximized.

Trade between the two continents, which has grown nearly 20% over the past decade, has been conducted mostly through the few big global banks that have had a presence ‎on all continents – but a relatively new phenomenon called ‘de-risking’ has jeopardized global banks’ role in supporting trans-continental trade.

Banks have terminated relationships with other banks, and exited some emerging market countries entirely at an alarming rate. While all agree that regulators need to tighten rules on banks to ensure they do not (inadvertently) support crime, there are unintended consequences associated with the regulation that make anti-money laundering and ‘know your client’ regulations both expensive and cumbersome to comply with.

In light of the new requirements, rather than incur the expense, effort and risk associated with maintaining bank relationships in emerging markets, some global banks have chosen to terminate relationships, and even exit some emerging markets entirely. This why the importance of creating direct bank-to-bank relationships has never been more critical to trade.

By joining TFP, Banco Patagonia Argentina will be introduced to banks throughout developing Asia, and will thus be able to support Asia-Latin America trade under TFP's AAA-rated guarantees. And given the sad state of global trade—according to the OECD and WTO, trade in 2015 slowed to levels not seen since the 2007-2008 global financial crisis—and the anemic growth and job creation that stem from it, we need to build these partnerships to support more trade more than ever.

Imminent drops in transport and communications costs, along with the Trans-Pacific Partnership and other trade agreements, present opportunities, but for these opportunities to be seized upon, banks, companies and multilaterals to work together to forge new relationships to create more growth and jobs.

ADB TFP’s agreement with Banco Patagonia Argentina represents another small step in that direction, one that TFP aims to build up throughout Latin America and also Africa.