Treasury Today Country Profiles in association with Citi

Follow the ‘Southern Silk Road’

Another year, another summit at Davos. In late January world leaders and business chief executives gathered in Switzerland to exchange ideas on global trends and economic problems. While attention centred largely on Eurozone troubles, one speech in particular stood out from the crowd for its scope and originality.

Stephen King, Group Chief Economist at HSBC, highlighted the emergence of a new ‘Southern Silk Road’, a reference to the trade route that formed the backbone of inter-continental commerce a millennium ago. King argued that growing trade and capital flows between Asia, the Middle East, Africa and Latin America will be a major trend in years to come, shifting geopolitical relations and signalling a “return to the world as it was perhaps a thousand years ago.”

These are tall words. HSBC forecasts that trade and capital flows between emerging markets could jump ten-fold in the next four decades. Rising prosperity in Asia, for example, has led to an increase in regional trade; China and India signed trade deals worth $16 billion in December 2010 – $6 billion more than the Sino-US trade deal agreed a month previously.

The new Silk Road represents an opportunity for corporates and banks alike in the developed world. Trade flows not need remain the preserve of its inhabitants. Yet there are barriers to entry. Economic obstacles, such as tariffs and customs duties, prove troublesome to establishing a large client bases in these regions. And, as emerging economies grow, political tensions with the developed world may rise. This could spell trouble for Western investors and corporates with operations in Asia and the Middle East: already we see trade tensions simmering between China and America.

But the nature of emerging markets is also different. The overwhelming majority of businesses along the new Silk Road are small-to-medium enterprises. These companies often transact in low value cross-border payments. Old Western banking processes are ill-suited to taking advantage of this burgeoning market. Take correspondent banking for example. A legacy of the 1970s, corresponding banking is a very costly process for low value cross-border payments. Indeed, SWIFT has recently admitted as much: a recent white paper deemed the current model to be ‘too bank product-centric, based on inherently inefficient multiple agreements’, before adding solemnly that ‘[t]he world has changed around us.’

With change, however, there is opportunity. Internet and mobile technology have unlocked a massive potential for online transactions. According to a report conducted by Capgemini and RBS, the global number of e-payments transactions totalled some 17.9 billion in 2010; a figure estimated to grow by 19.1% in 2012 and 2013. The emerging markets look set to be a key part of this growth.

Indeed, e-commerce arguably facilitates entry into emerging markets for Western corporates. It is the best method to access a large client base in a relatively short period of time. Providing online payment facilities to customers situated along the new Silk Road can often circumvent infrastructural and logistical difficulties on the ground. Cash visibility increases; costs are reduced; and payments are received more quickly. Corporates are only beginning to take notice. But the advantages are clear. “E-commerce dramatically impacts sales reach for corporates, increasing the pool of buyers to whom they can sell cost effectively,” says Neil Burton, Director of Product Strategy at Earthport, a global financial services organisation. Earthport specialises in facilitating low value cross-border payments, a position that allows it to capitalise not only on rising regional trade flows along the new Silk Road, but also low value payment transactions between developed and emerging economies.

It is understandable that the focus of Davos centred on the Eurozone’s woes: the European economy is a vital part of the global financial system. But it is also worrying. Davos is supposed to be where the global elite gather to discuss future trends and developments. Trade and capital flows will continue to shift eastwards, and with them business opportunity. Global policy makers are concentrating on the immediate-term whereas, ideally, they should be thinking long-term.