Over the last couple of years, Brazil's economic success as one of the world's 25 largest exporters and importers has increased the importance of the trade finance market in the country.
This growth has relied heavily on exports destined for China. Ten years ago, the US was the biggest trade partner for Brazil but now China has surpassed the US as the main trade partner. In 2017, Brazil exported $219B and imported $140B, resulting in a positive trade balance of $78.3B. Agricultural products, such as soybeans, sugar, iron ores and poultry have dominated the export market of Brazil.
The traditional way that companies in Brazil have financed exports has been through "Pre-Export Finance" loans. These transactions rely on the risk of the buyers and not necessarily of the borrower. Lenders discount the export amount based on buyers' risk and give the money to the exporter before they export. Once the items are exported the funds go back to the bank to pay the loan through a collection account - an escrow. Collateral agents and escrow agents are needed for these types of transactions between the exporters, buyers and the banks as they require controls of the buyers' list - the "eligible buyers" and the escrow account where payments are credited. As Brazilian tax legislation benefits exporters, this structure has been widely used.
Even at the height of the Brazilian economic crisis, the trade finance market has always been strong and steady. Exports like soybeans, sugar and poultry, along with other agribusiness, have consistently helped maintain a steady flow of finance into the country.
Challenges for financing in Brazil
Businesses are now facing some challenges when looking for financing. There are fewer international commercial banks offering trade finance and credit facilities have offered much shorter tenors than exporters' needs. For example, in the past, tenors were long enough to allow a farmer to finance two cycles of their crop with two export cycles. This...