Building Resilient Supply Chains Amid Economic and Geopolitical Uncertainty

Joao Galvao, Managing Director, Head of Trade Finance Sales, Americas, at Standard Chartered Bank

While a US recession may prove to be insignificant or likely avoided entirely, the geopolitical outlook inspires caution, and companies engaged in global trade would do well to take a closer look at their financial supply chains to ensure they’re well-equipped to deal with the impact of growing trade tensions.

The majority of economists believe that the US will avoid a recession. Though there are signs of better-than-expected GDP growth, a surprisingly strong job market, and a healthy level of consumer spending, the economy is still reeling from the consequences of successive interest rate hikes and stick-high inflation.

Against a backdrop of global macroeconomic uncertainty, especially considering geopolitical tensions and the possibility of material shifts in trade policies with an unprecedented number of elections this year including US, the outlook presents a worrying scenario for companies. Corporations face the challenge of higher working capital and greater risk mitigation needs, while simultaneously striving to strengthen their supply chains to unprecedented levels of resilience.

While a 2024 downturn is unlike. There is consensus that the supply chains are shifting, and planning and preparation will be key in establishing a more resilient and diversified supplier base to navigate any ‘known unknowns.’

The good news is that companies today have more time to do so than in prior years of crisis, such as in 2008 when the events were fast and tumultuous, surprising many companies and leading to a rushed implementation of strategies and solutions to mitigate the impact.

Given the volatile situation today and lessons learned during the financial crisis and pandemic era, it is prudent that companies act now to gear up for the impact of a period of disruption on their supply chains. Regardless of whether or not we enter a recession, there is a consensus that credit markets will continue to tighten, which is particularly concerning for small and medium-sized enterprises (SMEs), and in turn the supply chains to which they provide vital inputs.

Trade Finance Matters

During the 2008 financial crisis, large investment-grade companies came to the aid of their suppliers by issuing letters of credit, providing down payments on purchase orders, and extending various other kinds of working capital support to sustain their global supply networks.

"Given the volatile situation today and lessons learned during the financial crisis and pandemic era, it is prudent that companies act now to gear up for the impact of a period of disruption on their supply chains."

Although some of these measures were far from ideal from a treasury management perspective, they helped to accelerate the importance and implementation of trade finance solutions. According to the International Monetary Fund, the share of world trade supported by bank-intermediated trade finance increased during the 2008 downturn.

As has been proven time and time again, in times of crisis, trade finance emerges as the lifeblood of international trade. It’s a countercyclical product with a range of solutions, such as supply chain finance, which can transfer credit risk from smaller businesses to larger, well-established companies, helping to shore up resilience right across the supply chain ecosystem.

Where supply networks need to be reconfigured and new suppliers introduced, trade and supply chain finance instruments can help companies manage the increased risks of less established relationships.

Lenny Floria, a senior treasury manager at Nokia USA, shares that Nokia USA’s trade finance banking relationships were key in supporting the company’s working capital metrics during the financial crisis.

To boost the resilience of supply chains, large buyer companies can implement or expand supply chain finance programs to improve the availability and cost of funding throughout their networks and ensure the stability of strategic suppliers. Likewise, suppliers–often SMEs–can engage with their large buyers about the prospects of joining an existing supply chain finance program, or leveraging alternative funding options, such as receivables products.

Working proactively with trade finance specialists, treasury teams within companies of all sizes can identify the appropriate financing tools to enable them to withstand the current economic scenario and ensure the agility and sustainability of their supply chains.

Given that economic uncertainty and higher financing costs are projected to continue, now is the time for companies to be reassessing their supply chains and their trade finance lines, and making sure that they have strong, reputable trade finance banks by their side. A proactive approach will go a long way to preventing undesirable working capital issues and emerging well-equipped to scale during expansionary periods.

While some businesses already have a financing and liquidity plan in place for weathering the storm, those that do not tend to not have taken any pre-emptive measures for bolstering their supply chains. For example, for several US companies engaging in trade with the Middle East, Africa, and Asia, solutions often fall short in terms of their support to suppliers in those dynamic markets.

ESG Objectives

As companies prepare to navigate forthcoming challenges and position themselves for success, their goals are also turning toward achieving important sustainability-related objectives within their supply chains. For large corporates, this shift could include rewarding suppliers based on environmental, social, and governance (ESG) criteria.

For many years, Standard Chartered has been working with companies to develop supply chain programs that provide tangible benefits to those who deliver on their ESG commitments.

The Bank’s enhanced partnership with US clothing company PVH Corp on a sustainability-linked supplier finance program is a recent example of a solution that is helping to drive suppliers’ environmental and social ambitions across the supply network.

Under the facility, suppliers to PVH Corp will get access to discounted financing if their day-to-day operations meet performance standards linked to environmental targets and a series of social elements, including a healthy and safe working environment, as well as employment issues, such as eradicating forced labor, child labor, harassment, and abuse.

As is demonstrated in this facility, and across the spectrum of the Bank’s suite of solutions, trade finance is a powerful tool that can be used to engage and incentivize companies across supply chains. It can be harnessed not only to offer working capital improvements but also to foster sustainable practices.

With careful planning, suitable financial instruments, and the right partners, companies can ensure they’re doing everything in their power to mitigate potential risks and emerge stronger in the face of economic uncertainty.