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FX and Trade Finance Convergence Delivers Benefits

by Marcelo Moussalli, GTS-FX Payments, Latin America, Bank of America Merrill Lynch

Trade is at the heart of economic growth in Latin America. Closer integration of trade finance and foreign exchange can enable companies to lower costs and reduce risks.

Latin America’s economic fortunes have been transformed in recent decades, as greater political stability and increasingly open economies have spurred stronger growth. Critical to this renaissance is trade, both within the region and internationally (globally, cross-border trade has more than tripled in the last 30 years). Most importantly, over the past two decades Latin America has experienced huge growth in trade flows with other emerging market regions, which helped to buoy its economy.

The acceleration of so-called South-South trade between emerging market regions – with China a crucial trade partner given its appetite for Latin America’s natural resources – has given Latin America’s trade greater balance. In the past, the region suffered when its major trade partner, the US, slowed. Today, China represents around 30% of Brazil’s global trade, with the US and Europe accounting for around 25% each. Germany, Japan and various countries within Latin America are represented in the top 10 of both importing and exporting partners. Latin America’s broad trade base is expected to support continued expansion, with global trade predicted to grow at an average rate of 7% to 2020.1

The growth in trade in Latin America has put the unique financial characteristics of the region under the spotlight, such as its highly regulated markets and non-convertible currencies. With numerous different currencies, and widely varying regulatory regimes, managing trade and foreign exchange effectively can be challenging. Historically, trade finance and FX have been considered separate disciplines, both by companies and within banks. However, increasingly, the huge benefits in terms of risk management and cost efficiency of the convergence of trade finance and FX are being recognised.