- Balancing Supply & Demand
- Managing Supply Chain
Trade in transition: a UAE perspective
Geopolitical tensions have overtaken the pandemic as the most disruptive force affecting traditional patterns of trade. UAE companies are in the middle of these changes and are actively reshaping their supply chains.
The Ukraine conflict, risks of inflation and recession, and US sanctions on Chinese markets are playing an important role in reshaping the global dynamics of trade as companies seek to de-risk their supply chains. Many organisations are actively realigning their supply chains to be physically closer to their domestic markets while shifting from a ‘just in time’ model to one that is structured to be ‘just in case’.
What does this mean for companies in the Middle East? Historically a focal point for international trade and a catalyst for market diversification, the region has benefitted from companies setting up distribution and logistics hubs to tap opportunities in Asia, Africa, and Europe. The government of the UAE is going one stage further with its Make it in the Emirates programme in which it is seeking to attract and support global manufacturing companies to set up in the country.
World-class airports, ports and free-trade zones support this development, but corporate changes to supply chains means the region faces global headwinds. According to a study by ports operator DP World, if trade pressures continue, exports from the Middle East may fall by 3.52%.
Reshaping the supply chain
This expectation is reflected in new research conducted by HSBC. Between August and October 2022, HSBC surveyed financial decision makers from 787 organisations across 14 markets, including 68 in the UAE, to find out how business decision-makers are reshaping their supply chain and working capital strategies considering such global developments.
According to the findings of this survey, HSBC Supply Chains Research, the top three macro factors driving changes to those supply chains are counterparty risks, changes to trade corridors, and border restrictions. North America is seeing the most dramatic realignment or replacement of supply chains with 63% of finance executives admitting they were looking to streamline their supply chain.
As supply chains are reshaped – and shortened – new trade corridors are emerging. These include between the Middle East and East Asia, the Middle East and ASEAN and the Middle East and Europe. Corporates in the region are taking advantage of these new corridors and increasing their flows.
Aligned with the rest of the world, UAE-based companies are further mitigating trade volatility by increasing inventory holdings. According to the survey, the average increase in inventory holdings above normal levels reached 82.6% in the UAE, compared to 85.3% globally. Increases in excess inventory are down to three main issues: Covid-19 restrictions (61.8%), freight rates (52.9%), and better preparation for future (20.6%) – all symptoms of those macro headwinds and broadly in line with international responses.
There are benefits and drawbacks to this approach. Companies can more quickly fill customer orders as they come in and, as a mitigation strategy, reduce the risk of being affected by item/component shortages within the supply chain.
But increases in trade inventory tie up capital and reduce liquidity, which means finding ways to make supply chains more efficient and transparent becomes more urgent. Digitisation – through online banking solutions – could be an option to boost working capital and improve oversight of the supply chain.“The UAE has proven its resilience as a financial, manufacturing, and trading hub, emerging from the pandemic in a position of economic strength,” says Chaker Zeraiki, Head of
Global Trade and Receivables Finance at HSBC UAE. “Global trade patterns remain in a state of flux and navigating new market conditions requires resilient and sustainable supply chains.”
In step with liquidity management, UAE-based enterprises are concerned about currency volatility, with 51% citing it as their top supply chain worry – much higher than the global response in which only 28% of respondents cited it as their top concern. The UAE Dirham’s peg to the strengthening U.S. Dollar is driving this and, given many suppliers expect to be paid in U.S. Dollars, treasury departments are looking for solutions that meet their own financial requirements and the stability of their supply chains.
A typical strategy to handle these risks is to hedge out any future FX and interest rate fluctuations. According to the HSBC survey, the top three solutions adopted by UAE companies comprise: buying FX forwards (85.3%), interest rate swaps (47.1%) and FX options (27.9%) – in line with global peers.
When it comes to supporting the supply chain, or smoothing out trade risks within it, UAE companies are more inclined to opt for traditional trade finance (85.3%), inventory financing (61.8%), and working capital (57.4%) to fund suppliers versus the international average.
Sustainability in the supply chain
Supply chain sustainability is increasingly important for financial executives in the UAE. While only one quarter of UAE companies have an environmental policy (compared to 40% globally), more than half (52.9%) say one will be in place within two years. With the UAE set to host this year’s COP28 summit, corporate sustainability in the region will be in sharp focus. Indeed, the government of the UAE has committed to becoming net zero by 2050 and reducing its greenhouse gas emissions by 31% against a business-as-usual scenario by 2030. This commitment shows the importance the country is attaching to increasing sustainability.
Needing to increase the sustainability of the supply chain is considered an important business requirement. Eight in ten finance executives believe it is essential if they are to hit their own environmental business targets, such as reducing their carbon footprint. Methods for encouraging suppliers to adopt sustainability policies include mandating compliance with their own sustainable policies to both be onboarded and transact.
Maintaining strong relations with key suppliers will remain a top priority for any international company over the next decade, but it will require increasingly more sophisticated and bespoke ways to mitigate supply chain risk and achieve sustainable outcomes.
As global trading patterns continue to shift, companies from the Middle East are taking advantage of the new opportunities that are arising. New markets, new suppliers and a new emphasis on risk mitigation require a strong banking relationship, one that can help clients navigate the transition.
To read the full report, click here.