Over a year since the dual shocks of Covid-19 and a precipitous decline in oil prices, the path to recovery is now underway in the Middle East and North Africa (Mena). The International Monetary Fund (IMF) predicts real GDP growth for the region of 4% this year, as activity in advanced and major emerging economies bounces back, global trade rebounds and commodity prices improve.1
However, this upbeat outlook masks wide differences across economies – and along supply chains. While many larger corporates have been able to weather the storm of 2020, their smaller counterparts have been more exposed to economic uncertainty, depressed demand, and disrupted access to the finance they need in order to continue trading.
Nevertheless, they have persisted: according to the Global Entrepreneurship Monitor’s 2020-2021 report, despite the pandemic, entrepreneurship is growing in Mena.2
Breaking down barriers
Recognising the fact that Mena’s SMEs are key drivers of sustainable economic diversification, governments across the region have moved quickly to implement support mechanisms, including lowering or suspending fees for license renewals, the reform of employment regulations to enable greater flexibility, and specific programmes such as the UAE’s Targeted Economic Support Scheme.
However, the public sector cannot do this alone. To ensure a lasting post-pandemic recovery, a main challenge will be targeting support to firms that are viable in the long term while ensuring that the many SMEs that are still facing liquidity challenges are not left behind – and the only way to achieve this is through a collaborative market approach, says Syed Khurrum Zaeem, head of trade and transaction banking, Africa and Middle East at Standard Chartered.
“It is vital that all corporates in the region, from multinational to SMEs, have the working capital they need to grow and trade,” he says. “Achieving this will have major implications for financial inclusion, private sector development and the region’s plans for economic diversification.”
It is vital that all corporates in the region, from multinational to SMEs, have the working capital they need to grow and trade
The ecosystem approach
In recent months, large corporates across Mena have united in an unprecedented effort to keep entrepreneurs trading in the face of substantial headwinds.
“In the pandemic, liquidity tightened significantly and large clients drew down on their revolving facilities,” says Zaeem. “However, the conversations very quickly shifted to how they could leverage their rating to support their suppliers’ working capital needs. Several clients on a bilateral basis asked us to reduce risk on certain counterparts to free up liquidity in some of the worst-affected sectors, and we saw significant uptake into supply chain programmes. That was a real lifeline to the SMEs and small players in terms of getting them liquidity at an affordable cost.”
By fostering the use of trade receivables as a borrowing base, SMEs in export value chains have been able to continue to raise financing for their production cycle and the procurement of inputs required for exports.
“One of the things we have seen change in the last year is that previously clients were more interested in what the benefits of supply chain finance were for them. They were not necessarily interested in the ecosystem,” says Ahmad Izhar, director, trade product management, UAE, at Standard Chartered. “This has now changed, and supply chain sustainability and stability has become more important for large corporates than simply profits. They want to support their small suppliers, and this is where we step in.”
Supply chain sustainability and stability has become more important for large corporates than simply profits.
Although global banks operating in the region don’t tend to have direct exposures to SME clients, their connectivity and reach across markets puts them in the ideal position to bring together the ecosystem to facilitate access to trade finance and working capital for all. And by partnering with platforms that have access to SME transactions and supply chain data, banks have yet another tool available to identify – and address – working capital needs.
“We can already support suppliers through our proprietary offerings, but by selectively collaborating with third-party providers, we can provide finance earlier on in the working capital cycle. Our partnership with SAP Ariba, for example, links the physical and financial supply chains, making financing more accessible,” says Izhar.
Uplifting sustainable suppliers
As in other regions, the impact of Covid-19 has accelerated engagement with ESG issues, and the momentum is building – providing yet more opportunities to ensure every business can participate in the recovery.
Speaking at the G20 Riyadh Summit in November last year, Prince Abdulaziz Bin Salman Al-Saud, Saudi Arabia’s minister of energy, emphasised the need to build an inclusive, resilient, and sustainable future for all, while in April this year, the US-led Leaders Summit on Climate saw both Saudi Arabia’s King Salman bin Abdulaziz Al Saud and President Sheikh Khalifa bin Zayed Al Nahyan of the United Arab Emirates outline plans for a green recovery from the pandemic.
These high-level commitments are beginning to filter down into the private sector, with numerous businesses in the region signing up to initiatives such as the World Economic Forum’s (WEF) initiative for stakeholder capitalism metrics, setting policies on responsible investing and impact goals.
“The pandemic has accelerated the conversation,” says Zaeem. “We now see a move towards developing the supply chain and making sure that vendors are stable and sustainable and that payments can be received in a digital manner. Corporates are asking their banks for assistance in demonstrating that not only can they fulfil all of their duties, but that so too can their suppliers.”
Connecting with the digital agenda
In Mena, the nascent digital trade revolution offers multiple opportunities for an inclusive trade recovery. Home to two of the three jurisdictions that have enacted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records (MLETR) – Bahrain and Abu Dhabi Global Markets (ADGM) – the groundwork is being laid for a series of positive developments in paperless trade.
For SMEs, the digitalisation of accounts receivables and payables enables the acceleration of know your customer (KYC) and anti-money laundering (AML) procedures which until now have hindered their access to trade finance, as well as facilitating the production of quick digital accounts which can help lenders assess and monitor credit risk in real time.
Enabling access to new markets
Growing support through credit insurers is also helping to buttress Mena’s exporters, as they seek to expand into new markets. A recent alliance between Standard Chartered and Etihad Credit Insurance (ECI) provides seamless access to trade credit solutions and funding for UAE businesses that are aiming to establish their presence locally and globally. This strategic move not only supports entrepreneurial ventures and empowers local businesses, but also boost the overall development of the UAE economy.
“We see a lot of clients going from Mena to markets in Africa, where they don’t have visibility on the risks and how to mitigate them,” says Zaeem. “It was very important for us to support that space.”
“We are the first foreign bank to partner with ECI,” adds Izhar. “The benefit for our clients is that they get to monetise receivables upfront, while their buyers get the terms that they are looking for, which means they can do more business with more suppliers.”
A better future for all
In the wake of the upheaval caused by the events of the last 12 months, an opportunity now exists in Mena to build an equitable and sustainable recovery, and to effect change in a lasting way. From creating jobs for the 20 million young people expected to join Mena’s workforce by 2025, to bridging the gender gap and driving the transition to more sustainable patterns of production and consumption, a collaborative ecosystem approach to trade will set the course for a greener, more prosperous Mena region in the years to come.3
This article was also published on Global Trade Review.