TXF Asia 2023: Meeting at the crossroads

Singapore is often said to be a city of crossroads. It is certainly a melting pot in the truest sense of the term, with Chinatown nestled next to Little India and the soaring skyscrapers underneath the baking heat of the equator. It proved to be the perfect host once again as TXF brought together the export, project and commodity finance communities for its Asia 2023 event. This year, the Andaz Hotel was the venue for two days of networking and industry insights.

Chief among the topics for discussion was Asia’s energy transition. Renewables projects have established commercial viability across the continent and there is growing interest in emerging energy technology. Hydrocarbon-based projects are prevalent, but this simply reflects the reality that fossil fuels are still essential to industry across the region. In 2023 so far ECAs have provided support for the Balikpapan oil refinery upgrades and Lotte Group’s newest integrated petrochemicals facility in Indonesia.

Despite this, throughout the conference delegates expressed a desire for greater clarity from policy makers and government institutions. Bankability for emerging sectors as well as traditional assets depends upon strong regulatory frameworks and clear government leadership.

For some context, Asia Pacific sits comfortably in second place according to TXF Intelligence’s latest export finance market activity data. Almost $15 billion has been recorded across 48 deals and that figure is set to climb with more than one big-ticket financing set to close before the end of 2023.

A golden age of export finance

Christina Tonkin, Managing Director of Corporate Finance at ANZ Bank, kicked off the conference with a strong pronouncement on the health of the industry: a golden age of export finance is incoming. As the international community seeks collaboration in the face of an unprecedented set of economic and ecological challenges, export finance can play a huge role in connecting businesses and customers. To highlight this point, Stephan Jansma, CFO Asia Pacific at Trafigura, underlined the growing importance of associations between commodity traders and ECAs to energy security.

The data is there to support this optimism; TXF Intelligence’s H1 data report for export finance in 2023 shows that volumes are already just $10 billion short of the entirety of 2022. Strong activity will encourage innovation in the heartlands of export finance while stimulating confidence in new markets.

A US-China standoff

The world has waited patiently for the Chinese economy to resume normal service in the post-COVID environment, but the evidence suggests that times have changed for good. Key performance indicators show a troubling picture, from real estate and manufacturing output to youth unemployment and mortgage default rates.

For the international community the consequences of these changes are unpredictable. Michael Every, Senior Asia Pacific Strategist at Rabobank, expects a new era of standoffs between the US and China that will be played out in the commodities markets and across supply chains. A combination of interest rate hikes in the US and economic stimulus packages in China could have serious consequences for the commodity trade finance industry.

Transmission is key to the transition

This takeaway featured prominently across a number of panel sessions. Mainstream debates around the energy transition often focus on building up production, but it would be a mistake to ignore other aspects of energy infrastructure. Greater investment in grid capacity, storage facilities and transmission lines will be essential to the electrification process.

This issue is particularly significant in Asia, where growing demand for power is placing increased pressure on outdated grid infrastructure. Another issue in this space will be manufacturing capacity; as more countries look to export and project finance to support their energy transition, engineering contractors will be increasingly stretched to meet the demand for infrastructure.

Emerging technologies must build a case for bankability

Discussions around new technology projects are always exciting. The possibilities on offer through hydrogen and biofuels could revolutionise hard to abate sectors like aviation and shipping, and governments in Asia are looking to establish clear policies for renewable fuels. In Singapore, the government is investing in research on green ammonia engines with the ambition of reducing emissions from its marine industry while maintaining its status as a centre for bunkering.

However, the floodgates are yet to open when it comes to commercial bankability. It is not simply the initial expense that puts off investors. Rather, the uncertainty over pricing and the absence of an established offtake market creates substantial risks. There is no clear project finance model for renewable fuels, notwithstanding Saudi Arabia’s NEOM project, which represents a unique case. In this environment, governments can take the lead as they did when solar projects were still nascent through both a clear policy platform and financial incentives for investment.

DFIs face competing pressures

Development finance institutions have expressed a desire to expand their activity across Asia. The AIIB has permanently expanded its sector support to include more social projects in the wake of the COVID-19 pandemic, and FinDev Canada, one of the world’s newest DFIs, is focusing on its partnerships with Export Development Canada in the region.

Estimates now place the global trade finance gap at around $2.5 trillion, and DFIs will be expected to play a significant role in stimulating greater investment for emerging markets. However, even within Asia a cocktail of challenges can limit their effectiveness. In countries with unevenly distributed populations, DFIs struggle to attract support for projects that benefit isolated rural communities. Along the Pacific, the risk of natural disaster must be considered in every deal. Support for local banks and currency markets, which can be crucial for domestic trade, is often impossible because DFIs do not have the capacity to provide every form of local currency.

On a more positive note, it is only by tackling these risks that DFIs can lead the way for other forms of investment.

Energy transition in focus

While collaboration is an essential driver of development, every country will approach the energy transition in their own way. To that end, a number of ‘country in focus’ sessions provided an insight into opportunities and challenges at a national level. Vietnam is looking to take advantage of its geological advantages with a rapid expansion of its offshore wind assets. New government legislation has sought to provide clarity but companies have argued that the regulations are so far unsatisfactory. Lessons will no doubt be learned from Taiwan, where ECA-backed financing for offshore wind has been largely successful even in the face of ongoing engineering challenges.

In Australia much of the focus is on commodity-related infrastructure. LNG facilities and mineral refineries have received significant attention as Australia looks to capitalise on its natural resources. One area of interest going forwards will be battery storage technology. Any new solar project will now greatly benefit if storage can be co-located. Expect to see more developments in this space given that the Rangebank BESS, located in Cranbourne, has recently marked Australia’s first non-subsidised battery storage project.

Private credit insurance still needs to improve its profile

Credit insurance is an essential aspect of the financial ecosystem, and the private market has a role to play in helping ECAs and DFIs to de-risk. However, the role it plays in facilitating deals is rarely high profile. The knock-on impact of this is lower uptake of private insurance, which itself raises the cost of credit insurance. One panellist remarked that the rules of private credit insurance were written when the market was still immature, but times have now changed and greater visibility is essential. It is a good sign that several providers have sought to collaborate more with the Berne Union.