While recent forecasts have shown pockets of optimism, they continue to paint a bleak outlook for the global economy and the state of international trade in the months ahead. The International Monetary Fund’s global economic outlook update in October was more positive than its June forecast, but still predicted a contraction of 4.4 per cent for the global economy in 2020, while the WTO’s October forecast expects world trade will fall by 9.2 per cent in 2020. This is an improvement on the 12.9 per cent drop it predicted in April, but still not good news.
One positive for trade in ASEAN is that amidst the global uncertainty, the Association of Southeast Asian Nations (ASEAN) and its major trading partner countries have reiterated their commitment to the Regional Comprehensive Economic Partnership (RCEP).
Once enacted, the trade deal will cover close to one-third of the world population and global GDP, injecting strong impetus to the continued development of global trade, regional integration as well as economic development across the region.
The continued support for global trade will be important for ASEAN governments in protecting the region’s important Small and Medium Enterprises (SMEs) sector. SMEs are the backbone of the ASEAN economies, making up around 97-99 per cent of the enterprise population and accounting for more than 60 per cent of employment.
Despite their contributions and importance to the region’s economy, SMEs continue to face significant barriers that prevent them from being adequately represented in international trade.
One of the foremost challenges that prevent SMEs from participating in international trade is the lack of access to finance. According to the Asian Development Bank (ADB), the current global trade finance gap is estimated to be at US$1.5 trillion, with half of this figure attributed to SMEs in developing countries in Asia and Africa.
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The World Economic Forum (WEF) has estimated this funding gap could well reach US$2.5 trillion by 2025, although this estimate predated the onset of the COVID-19 pandemic which has since weighed further on global trade.
How can we help ASEAN’s SMEs overcome rising barriers?
From Open Banking and platforms to the Internet of Things (IoT) and data analytics, technology is coming together to help create opportunities for greater access to international trade and break down barriers to funding for SMEs.
Take the example of Nguyen Van Son and his coffee farm, Son Pacamara, in Da Lat, Vietnam. Son Pacamara uses natural, organic processes that are sustainable for the environment, but growing coffee this way is difficult and expensive. Obtaining the funds needed to sustain the business was a problem for Nguyen and he approached his local Vietbank.
Leveraging technology, Vietbank was able to look beyond past financial performance when assessing Nguyen’s suitability for finance, instead considering all aspects of his business, including previous crop yields. It then combined this information with predictive analytics and data such as weather patterns and currency fluctuations, to better model the business’s potential and viability, meaning Nguyen was successful in securing finance he needed for his business.
In addition, Nguyen also received critical advice and support in optimising other aspects of his business. Using a cutting edge fintech trade solution, Vietbank also has access to a huge network of potential global customers for its clients like Nguyen, which helps to identify any risks of doing business with them.
Today, Son Pacamara is selling coffee to customers across the world, including in Korea, the UK and the USA, delivering products to wider distribution chains. Both Nguyen and his buyers have full visibility of the end-to-end supply chain to track the location of the goods, as well as physical factors such as the temperature and humidity of the cargo, so everything is delivered to the highest possible standard.
The collaboration between Nguyen and Vietbank clearly shows it is possible for SMEs to build a successful, entrepreneurial and international business through smart technology and informed decision making.
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As well as technology being used by financial institutions, it is also important to help SMEs digitise their operations. Earlier this year, Finastra partnered with Mastercard and the Asian Development Bank (ADB) to help build a new digital pathway to credit for wholesalers.
Through the application of technology, the programme aims to help SMEs digitise trade, making it easier for them to participate in global supply chains. The programme will start in Indonesia with 500 retailers and aims to build to 5,000 retailers by the end of Q1 2021.
Post-COVID-19, the WTO has warned that the MSME trade finance gap is likely to increase as financial market confidence will take some time to recover from the negative effects of the pandemic. Governments in the region have introduced national stimulus packages which provide liquidity support to address cash flow issues, but SMEs continue to face an existential risk as they have less resilience and flexibility in dealing with the shocks brought on by the crisis.
While governments and businesses in Southeast Asia remain eager to support and participate in multi-lateral trade, it is imperative to accelerate the application and adoption of new technologies to help local enterprises improve access to trade finance, and build successful, sustainable businesses amid the new environment.
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