PwC: Global commerce set to bypass the West as SAAAME emerging market intra-trade increases

Singapore a key intra-trading centre in SAAAME

Singapore, 2 July 2012—Rapidly accelerating growth and increased intra-trading across South America, Africa, Asia and the Middle East (SAAAME) is leading to a radical shake-up in the competitive environment for financial services businesses, both within the SAAAME region and beyond, according to “Project Blue: Capitalising on the rise and interconnectivity of the emerging markets” published today by PwC.

SAAAME regions are emerging as an increasingly interconnected trading zone, which effectively, in physical terms at least, bypasses the West. Trade flows within this region are growing around 50% faster than trade flows between SAAAME and developed markets. This is underpinned by factors such as the rate of population growth in this region and the availability of capital in the form of current account and fiscal surpluses as well as sovereign wealth funds.  

Dominic Nixon, Asia Financial Services Leader at PwC, said:

The real story is not so much the speed of growth within SAAAME, but how interconnected the trade flows between these markets have become. Intra-SAAAME trade will continue to proliferate and it presents untapped opportunities for the region, particularly Singapore which has played a key intra-trading centre because of its port complex.

Dominic Nixon continued:

As an international financial centre, Singapore is one of the main gateways to Asia and Southeast Asia. With the rise of SAAAME, Global commerce and trade could bypass the West altogether, leaving financial institutions that had been less focused on SAAAME at risk of being cut out of the window of opportunity presented. Financial institutions in this region have yet to reach their full potential to mine opportunities from the emerging-to-emerging market commerce. Deeper engagement and building stakeholders’ trust is needed if they want to sustain competitive relevance.

The PwC Project Blue report highlights that the interconnectivity of intra-SAAAME trade and investment flows is as significant as the growth and projected size of the emerging markets.  These flows are growing much faster than the traditional routes from developed-to-emerging and developed-to-developed countries (see figure 1 below). Within SAAAME, there are pockets of particularly high trade growth, notably between Asia and Latin America and between Africa and the Middle East. Singapore is one of the 12 largest destination countries for Foreign Direct Investment (FDI) to SAAAME, and leads among ASEAN as a trading partner to other markets within SAAAME.

 

*CAGR: Compound Annual Growth Rate

Chris Matten, Partner, Financial Services Industry Practice, PwC LLP Singapore, said:

CEOs of financial services companies believe that emerging markets are more important than developed markets to their organisation’s future. Five of the top ten financial institutions by market capitalisation are based within SAAAME. Within Singapore’s top 20 trade flows, 70 percent were within the SAAAME region. There are tremendous opportunities for growth and competitive activity.

Chris Matten added:

We are seeing credit continuing to flow from Western to SAAAME markets as the relative capital strength of the latter increases. Although much of this SAAAME capital is still managed in the West, the eventual rebalancing will have a strong impact on financial markets and other businesses that operate within them.

Commenting on opportunities to financial institutions presented by SAAAME, Dominic Nixon said:

The bulk of intra-SAAAME flows is due to trade in commodities and raw materials, however consumer markets will play a significant part in driving economic growth in the SAAAME region in future. With the world’s urbanised population set to increase by 12 percent – or 1.8 billion people – over the next 30 years as more people move from rural areas to cities, the opportunity lies in meeting the demands of urban growth and developing services that meet city dwellers’ needs. The trend in Singapore in recent years has been a shift to focus on savings and wealth in the financial services space, especially in the context of its rapidly ageing population. Growing SAAAME middle classes will demand more differentiated and tailored banking, insurance and investment products, putting pressure on financial institutions with strong local presence to keep pace.

Growth and innovation is changing the playing field for financial institutions,” added Dominic Nixon. “Rather than following the path to maturity seen in the West, we can expect to see SAAAME markets create their own patterns of development, leading innovation in many areas and creating a new DNA for financial services worldwide. Regulatory barriers could present a potential challenge to innovation, so one of the keys to making the most of these opportunities is how quickly market controls evolve.

Compare for instance the rate of insurance penetration in Singapore at 6.1 percent and Hong Kong at 11.3 percent. Both are fairly similar markets in terms of development, but clearly, Singapore still has a lot of room for insurance growth.

Chris Matten said:

While Singapore enjoys close bilateral ties within SAAAME, Singapore-based institutions still have a limited presence there. Part of their success in future expansion will lie in their ability to attract the right partners and collaborators to cover their key markets, as well as being equipped in the areas of governance and risk management for dealing with new and unfamiliar risks.

Urban expansion in the SAAAME region creates significant infrastructure investment opportunities for financial institutions, bearing in mind how the Eurozone crisis is likely to impact these emerging markets. Decreased trade finance, coupled with new liquidity requirements and regulations, will result in a decline in capital flows to developing countries, which in turn affects infrastructure projects and fundraising for infrastructure. At the moment, the gap between private infrastructure investment and the estimated total global infrastructure requirement is approximately US$2 trillion per annum.

Additionally, the sustainability of trade expansion in this region boils down to several other factors: its developing financial infrastructure; increasing access to long-term funding; and the ability to tap into rapidly growing sources of liquidity and investment.” 

Hence, the development and growth of SAAAME markets offer bright spots for financial institutions internationally who not only understand the risks involved, but who also recognise the importance of developing service offerings that are relevant to the local market.

Dominic Nixon concluded:

In an increasingly globalised financial services sector, the impact of the rise and interconnectivity of the emerging markets will be felt in the West as much as SAAAME itself. Singapore and Singapore-based institutions will also face growing competition from SAAAME-based international groups. Singapore already has the advantage of believing in intra-trading, as apparent in the position it played in APEC and ASEAN, and the initiatives to promote freer trade and services. The Singapore-based financial institutions have to anticipate and be agile to respond to rapidly changing customer expectations, behaviours and the use of technology, which are simultaneously shaping SAAAME and wider global markets.

ENDS

 

Notes:

  • ‘SAAAME’ refers to South America, Africa, Asia and the Middle East. SAAAME doesn’t include Japan as this is a developed G7 economy. Mexico is excluded as it trades mainly within the North American Free Trade Agreement zone and less with SAAAME. For now, Russia and the Commonwealth of Independent States (CIS) are also excluded from SAAAME, as its trade is largely internal or with Europe.
  • “Project Blue: Capitalising on the rise and interconnectivity of the emerging markets” is part of PwC’s ongoing research on the future of financial services, known as Project Blue. To find out more about this work, please visit www.pwc.com/projectblue

PwC has set out a framework for considering these current and future trends:

 

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