1) SPONSORED STATEMENT Emerging markets continue to advance South-South trade and investment flows will increasingly shape the global economy in the years to come, write David Aldred, EMEA Industrials Sector Head for Treasury & Trade Solutions and Yusuf Ali Khan, Head of Trade for Middle East, North Africa, Pakistan & Turkey at Citi. O ver the past year, news about emerging markets has been often seemed negative. Having been hailed as the saviours of the global economy during the financial crisis, many of the largest emerging markets have since suffered slowing economic growth (China) or even recession (Russia, South Africa and Brazil). Most recently, the halving of the oil price (and a broader slump in commodity prices) has taken its toll on many emerging market countries. However, while headline growth in some major developing countries may have declined, it is important to remember that it continues to outpace many developed economies. The ASEAN-6 economies – Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam – are expected to grow 4.8% annually from 2014-2025 on an aggregated purchasing power parity (PPP) basis, while India’s GDP is predicted to expand by 7% a year until 2019. Besides, a focus on GDP growth alone ignores the fundamental structural change that is taking place in many emerging markets. Higher productivity investments in net-exporting sectors, especially in manufacturing, will feature more prominently in the ASEAN-6 countries over the next decade, for example. Meanwhile, in the Middle East huge population growth – three times the global average between 1970 and 2010 – and the sharp rise in regional wealth are transforming the region. As important is the growing interdependence of emerging market countries, especially those in Asia, the Middle East and Africa. The share of 24 | GLOBAL TRADE REVIEW South-South foreign direct investment (FDI) in total world FDI has grown from 3% at the beginning of the century to around 14% in 2009. Furthermore, while OECD countries’ FDI fell 57% between 2007 and 2012, FDI from developing countries rose by 19%. South-South flows increase South-South trade flows are increasing around the world but China in particular has been a major driver of increased economic links between emerging market countries. China is investing in infrastructure and energy projects across the world, helping to build export markets for its own companies and, in the longterm, boosting economic growth that will drive further flows and increase demand for energy commodities. China has become a major investor in the Middle East, especially in markets where Western companies have been scaling back their commitment, such as Iraq. As a result, flows into and out of China from the Middle East are expected to dominate in the years to come. By 2020, the largest share of Gulf Cooperation Council (GCC) exports will be to China (at around US$160bn) while imports from China will be US$135mn, nearly double the value from 2013. Chinese flows into the GCC have largely targeted the consumer and telecoms sectors, although the rise of Chinese companies in the constructions space has also been rapid. China is also making strategic investments in emerging market countries that provide a natural gateway to the Middle East. In April during a visit to Pakistan, Chinese President Xi Jinping, announced US$46bn worth of investments and finalised agreements or broke ground on US$28bn of projects, in the energy, infrastructure and oil and gas sectors. As well as increasing its global investment (and aid budget, which it uses as an effective trade tool), China continues to plan for the future and has made a number of far-sighted decisions that reflect the growing importance of SouthSouth trade to the future. For example, in April Qatar opened the Middle East’s first centre for clearing transactions in the Chinese renminbi, paving the way for increased trade and investment between China and Gulf Arab economies. Ultimately, there is speculation that some of the long-term energy supply contracts Qatar has signed with China could be redenominated in renminbi. While China remains a major source of FDI in emerging markets, there is also increased activity by governments and corporates from South Korea and Japan. Both countries have provided capital goods to the oil and gas and automotive sectors in the Middle East. Corporates in the GCC have bought liquefied natural gas carriers from Korean and Japanese shipyards and this trend is likely to continue. India also remains a great source of labour as well as investment for the Middle East. There are over 6 million Indians working in the Gulf, and Indians are increasingly setting up businesses in the region. Greater regional centralisation Increased South-South flows – and the emphasis on investment in Asia, the Middle East and Africa by many emerging market companies – is prompting a focus 

2) SPONSORED STATEMENT on the need to improve visibility, control and efficiency. Companies across a wide range of sectors are increasingly seeking to centralise and manage trade and other flows in the Middle East, North Africa, Sub-Saharan Africa and even Asia from a single location, with the United Arab Emirates (UAE) proving an increasingly popular choice. Historically, the diverse economic, regulatory and political environment in the Middle East and Africa has meant that many companies managed operations and treasury on a country-by-country basis. However, as companies expand their operations many are recognising the benefits of centralisation of functions such as sales, procurement and finance in a single location. Companies can establish a centre for re-invoicing in order to improve visibility and control and keep liquidity out of countries that have regulations or FX controls that limit their flexibility, for example. Moreover, the emphasis on revenue growth is prompting increased adoption of sales and distributor finance, which frees up customer credit lines (potentially facilitating increased sales), and supply chain finance (SCF), which helps to build sustainable supply chains. Structures such as these require the creation of a centralised hub if they are to work effectively. One notable recent implementation of SCF has been by Etihad Airways, which wanted to strengthen its supply chain while achieving process benefits, such as automation of invoices. It also aimed to improve its cashflow and working capital. It decided to implement a SCF solution for key suppliers globally that would enable them to receive early payment for their receivables and access low cost finance. Etihad Airways’ SCF programme – one of the first in the Middle East and the first for an airline outside the US – has accelerated suppliers’ cashflow and boosted their balance sheets. Although Etihad Airways made the decision to implement a SCF solution independently, the project is in line with the Abu Dhabi government’s 2030 Vision to improve access to finance for suppliers. As well as helping to grow sales and build stronger supplier relationships, the drive to provide alternative sources of finance to distributors and suppliers is partly driven by changes in the banking sector. The introduction of Basel III, which encourages a focus on risk-weighted assets, is reducing banks’ willingness to lend over the long-term through the project finance market, for example. Shortterm assets, such as those associated with trade, are treated more favourably by Basel III. At the same time, the increasing size of many SCF programmes is encouraging greater use of multi-bank securitisation and asset distribution participation from other banks. By distributing SCF assets, with both relationship and nonrelationship banks, liquidity is enhanced and pricing optimised. Yusuf Ali Khan, Citi INCREASED SOUTH-SOUTH FLOWS ARE PROMPTING A FOCUS ON THE NEED TO IMPROVE VISIBILITY, CONTROL AND EFFICIENCY. David Aldred, Citi Changes in infrastructure finance In the Middle East, the need for infrastructure investment to overcome a backlog of demand and meet the needs of a growing population is huge. Historically, most infrastructure projects have been funded through a combination of commercial bank financing, coupled with support of European and US export credit agencies (ECAs) and multilateral agencies, which are collectively referred to as official agencies. These bodies’ support remains important and they continue to innovate: in March, UK Export Finance provided cover for an Islamic bond, known as a Sukuk, issued by Dubai’s Emirates Airline to purchase aircraft including the Airbus A380, for example. The Middle East can be divided into two distinct country categories: oil rich (mostly GCC) countries; and non-oil rich states (Egypt, Lebanon, Pakistan). Reliance on official agency-backed financing in the GCC states has largely been focused on the aviation, shipping and telecoms sectors and has declined in recent years. This is due to increased liquidity as well as fierce competition among banks seeking good quality assets where commercial lending has displaced more structured approaches. Meanwhile, in high-risk countries, such as Egypt and Pakistan, where the demands for infrastructure financing are too large for the local bank market to support, ECA-supported financing is an invaluable tool for public and private sector borrowers. The growing importance of emerging markets in general – and greater SouthSouth flows in particular – is reflected in increasing activity by Asian official agencies. One landmark deal that highlighted this trend was the UAE’s awarding of a contract in 2010 to the Korea Electric Power Corporation to construct the first of four APR1400 nuclear reactors to sell electricity to the Abu Dhabi Water and Electricity Authority. The deal was financed by US$10bn in funding by South Korea’s export financing bank, Export-Import Bank of Korea (Kexim), its largest financing at that time. East Asian (particularly Japanese, Korean and Chinese) construction and engineering firms have also expanded significantly across the Middle East, thanks in part to demand for power plants, refineries, and infrastructure projects and the country’s official agencies have extend short-, medium- and longterm financing to support them. In the shipbuilding sector, where there is considerable Middle Eastern demand for energy transport vessels, Asian official agencies, including the Japan Bank for International Cooperation (JBIC), Nippon Export and Investment Insurance (Nexi), Korea Trade Insurance Corporation (K-Sure), Kexim and China’s China Export & Credit Insurance Corporation (Sinosure) are thought to be considering supporting orders from the Middle East for vessels from shipyards in their countries in the future. JULY/AUGUST 2015 | 25