In countries where U.S. dollars are scarce, buyers of urgently needed medical supplies and PPE are faced with the initial hurdle of the need to acquire dollars before they can even enter the highly competitive global procurement game. Failing to solve for this “trade before the trade” will cost lives in this global pandemic and threaten all of us.
Where do dollars come from?
U.S. dollars show up in my bank account on payday. I receive them when I sell something to a customer. The Federal Reserve prints them whenever we need them. These are all answers that an employee, an entrepreneur, or a politician might give if they live in the United States or in a developed country that has a thriving market economy and is an active participant in international trade, like a member of the G20 or the EU. In many markets though, it’s not that simple. Dollars have to come from somewhere. They can come into a country from the overseas sale of goods via exports, where a commodity like coffee or tea or a finished good like a laptop is manufactured in a country and then sold overseas for dollars, or another major currency easily traded for dollars, like euros or pounds sterling. Dollars can also come from tourists coming into the country and spending their dollars while physically in the country on accommodations, services, and goods. This is a significant source of dollar revenue for many emerging markets. Dollars can also come from foreign direct investment, when a foreign investor invests in a business venture in dollars and that investment is dollar denominated. Finally, dollars can come in the form of donor funding. Large NGOs like the Global Fund and multilateral institutions like the World Bank can inject dollars into an economy in the form of grants.
Okay, now that we’ve established where they come from why does it matter?
It matters because the majority of global trade is settled in U.S. dollars. This means a seller of goods, equipment, or services will often only accept payment in U.S. dollars from their customers. Multinationals that sell globally solve the currency problem very elegantly by making it the buyer’s problem. Corporate treasurers don’t want to manage accounts receivable in dozens of differing and constantly fluctuating currencies, so they simply eliminate this complexity by invoicing their customers in dollars: Problem solved—for the seller.
But what if you’re the buyer? What if you’re a small business representing an enterprise buyer in a market where dollars are harder to come by—where your country typically needs to spend more dollars outside of the country to purchase everything you need to run your economy and build critical infrastructure for healthcare, education, energy, and sanitation than you take in through the methods outlined above? This position of being a net importer in a dollar-scarce economy has been the normal mode of operations for dozens of emerging economies for decades. It’s tough and it’s one of the things that make it really hard to be a lower income economy in a globally connected world. It was a hard problem to solve before the current COVID-19 crisis. Now it is a matter of life and death.
For the sake of clarity, let’s examine the sources of U.S. dollars referenced above and see how they’re generally impacted as a result of the global response to COVID-19:
Tourism: almost 0
Foreign Direct Investment: slowing
Donor Funding: necessary
As emerging economies outline and implement their national and regionally coordinated response plans to combat the spread of COVID-19, they’re needing to design a procurement strategy to acquire all of the goods and equipment requred to protect their citizens, adequately equip their healthcare workers and test, treat, and eventually vaccinate their populations. All of these goods—the PPE, the beds, ventilators, drugs, tests, ethanol, tiny bottles, and highly anticipated vaccines—will be sold largely in U.S. dollars and, to a lesser degree, in other hard currencies equally difficult and expensive to source. This is where we come to the title of this article: The Trade Before the Trade.
Developed markets like the United States, France, Italy, Canada, and even the states of New York, Michigan, Illinois and California, all of which have access to dollar liquidity, are competing with each other for their allocation of the equipment needed to protect their citizens. They go straight to market with their dollars and compete for increasingly expensive and highly sought after goods.
In emerging economies, where dollars are scarce, the competition for dollars must be won first in order to even be able to enter the competition outlined above. These countries need to first source hard currency through DFIs, donors, or by selling their currency which has already begun depreciating, to buy dollars.
That is the trade before the trade and it is becoming increasingly challenging. The effects of dollar scarcity, currency depreciation and price competition for the goods themselves are creating a compounding effect that will cost lives. Even buyers with hard currency in hand are often competing for a place in line to secure future production from factories making the most sought after products. Without hard currency, buyers don’t stand a chance of securing quality products and at best are left competing for substandard scraps and rejects.
Kountable has been working with our network of global traders to design solutions to help manage this problem. We have been building partnerships with global capital providers who have both a profit motive and a mandate to solve these problems. We have been collaborating with international banks to assist with settlement and currency management strategies to help these traders successfully compete on behalf of their government and local enterprise customers. We have designed Kountable’s Treasury Cloud as part of our platform offering and it has helped these local traders earn more profit, manage risk and serve their customers in the pre-COVID environment.
Managing for the trade before the trade at the national level is hard enough. Imagine how challenging this is when you’re an entrepreneur running a small business hired to procure large quantities of healthcare equipment for the welfare of your country. This is something we’ve had to help our customers manage every year for the last five years. The stakes are higher now.
The global response to combat the spread of COVID-19 in emerging markets needs to include solutions that mitigate the impacts of dollar scarcity and efficiently manage the trade before the trade. If these markets are going to compete on the global stage we need to collaborate to ensure they are equipped to handle the dynamics and variability that come when dozens of countries both neighboring and otherwise are competing for the same resources and the same supply of dollars.
In the five years we’ve been working to solve this problem at Kountable we’ve seen some of the fastest growing markets implementing innovative solutions in both healthcare and IT using the world’s left over and out-of-date inventory. They may be running e-government programs that far exceed our current capabilities here in the US or managing mobile money transactions on technology hardware manufacturers no longer support. That innovation is admirable and is part of the grit that I admire in these markets. One thing we’ve learned about the spread of COVID-19, though, is that in order to truly reopen global markets, we need to beat this virus on a global scale. That means getting the right equipment to the right place at the right time as efficiently as possible. To make this happen in emerging economies, multilateral institutions, governments, banks and global manufacturers are going to have to collaborate to help them solve for the trade before the trade.
Proof of the explosive growth that's possible for all when trade has a trust network that includes SMEs in the mix.