The 2008 global financial crisis – resulting in the collapse of Lehman Brothers – has, in fact, strengthened the financial landscape, with new sources of liquidity emerging from new players. Will Nagle, CEO, and Andrew Church, Regional Head Asia, at specialist financier Falcon Group, discuss this new landscape, and its opportunities – not least in relation to Vietnamese corporations and the Middle East.
The 2008 global financial crisis left the world economy picking up the pieces. Many banks required support to stave off bankruptcy and increased government deficits. The outcome has been tighter government spending and more complex banking regulation, which has resulted in once-global banks restricting their lending, narrowing their geographic outlook, and focusing on funding larger companies over small businesses.
Indeed, given the cost and due diligence of maintaining compliance standards is the same regardless of the size of the company, global banks are often prioritising larger companies, as they provide greater returns.
What is more, due to government pressure, many international banks have had to prioritise core domestic clients and specific business areas, leaving thousands of businesses – perhaps in non-core markets and industries – without the funding they need. Asia has been hit particularly hard by this funding gap, leaving many corporate borrowers in countries such as Viet Nam without the support they once enjoyed from international lenders.
Of course, the above scenario has been the case for most of the seven years since the crisis. And the signs are a more secure and diverse financial landscape is starting to emerge. In fact, one consequence has been a greater variety of funding providers – with non-bank financial institutions such as specialist or alternative financiers stepping in to provide funding and to facilitate trade. Indeed, such has been their success, many are now finance entities previously beyond the remit of the global banks: a remarkable turnaround.
Viet Nam's funding void
This is especially the case with smaller companies, and especially those in emerging markets such as Viet Nam. Such entities bore the brunt of the post-crisis credit crunch, yet are now able to find funding for international trade, thanks to the rise of the alternative lender.
Small-to-medium sized enterprises (SMEs) are a key driver of Vietnam's economic development, contributing 46 percent to its GDP. Moreover, SMEs employ 77 percent of the workforce in Viet Nam (according to figures from the Asian Development Bank released in April 2015). So this is a critical sector – needing and deserving support.
Of course, restrictions on funding were not the exclusive preserve of SMEs. In countries such as Viet Nam, even the largest corporates found themselves subject to a credit squeeze – especially from international lenders. Vietnamese banks can potentially provide funding – especially in local currency – but, for Vietnamese companies to grow internationally, they need access to reliable dollar funds for trade and investment. Also, regional banks have become equally restricted in their lending capacity and – in many cases – are subject to the same stringent banking regulations as large global banks.
An interesting additional aspect to this is the fact that trade finance – as traditionally offered – is one of the lowest-risk financing techniques available, with a default rate well below 0.5 percent (according to an annual survey by the International Chamber of Commerce Banking Commission, released in 2014). So, although it is penalised under post-crisis regulations such as Basel III, it offers an opportunity for alternative funders that understand the structures, and are aware of the very low default rates, and therefore of the regulations.
Much of Asia has benefitted from the growth of alternative financiers in recent years, although it is new to Vietnam. This is now changing as alternative financiers discover the advantages, and opportunities, within Viet Nam.
Certainly, Viet Nam is ripe for alternative financing. Exports have increased by 13.6 percent in the past year – adding over US$13 billion to the economy – contrasting regional trends of declining foreign sales. Furthermore, Viet Nam is expanding its industrial manufacturing sector, demonstrating its capacity, and desire, to grow. Clearly, the desire for finding new markets is there – as long as they can secure the funding.
What's more, Viet Nam is extending its economic reach by developing new economic partnerships with countries such as the UAE, which has stepped up as Viet Nam's largest trading partner in the Middle East. The relationship between the two countries has grown steadily over the past few years with bilateral trade reaching US$3.687 billion in the first half of 2015, increasing 20.06 percent over the past year.
Across Asia, specialist or alternative financiers are being looked upon as a new source of funding for corporates, as they stand out from traditional lenders by offering flexibility. Certainly, this flexibility – partly helped by the fact that they are not as restricted as global banks by regulation – allows them to construct custom financing solutions that meet their clients' exact needs. Indeed, even larger corporates with access to funding are turning to specialist financiers for bespoke solutions. What is more, the size of specialised financiers allows such specialised solutions to be delivered much more quickly than traditional banking solutions.
Of course, specialist financiers do not have the balance sheets or firepower of global banks. However, they make up for this by collaborating rather than competing with both global and regional banks – combining specialist flexibility with extensive bank resources. As such, Vietnamese corporates now have access to funding through lenders that offer multifaceted and inventive solutions that are tailored to their unique needs: solutions they can access without abandoning long-term relationships with partner banks – the best of both worlds. — FALCON