No 5UPDATE ON THE ASIAN ECONOMY 08/2015

Unlocking the vast growth opportunitiesin China

We’re more than half way through the calendar year and are continuing our focus on building innovative and sustainable solutions to support our customers’ growing trade, capital and people flows between Australasia and Asia.

This edition explores some landmark deals including the first AUD Euro Medium Term Note (EMTN) issue for Singaporean agribusiness company Olam International, and a first-of-its kind end-to-end electronic trade transaction for our customers BHP Billiton and Cargill.

In June we welcomed the signing of the China-Australia Free Trade Agreement (ChAFTA). We believe the ChAFTA is a real game-changer for Australian businesses, as it contains dramatic tariff reductions across exports and increased access for our services industries. With another 124 countries counting China as their largest trading partner, we encourage Australian businesses to act now.

We are similarly excited about the prospect of an Australia-India Free Trade Agreement by 2016. Negotiations for the agreement are currently being held, and with the agreement in place we anticipate Australia and India trade flows to double to A$35 billion by 2020.

In 2015 we’re continuing to see large Asian customers actively seeking investment opportunities in Australia and we’re ready to actively support them as the Number 1 Lead Transactional Bank and the Number 1 Lead Relationship Bank in Australia1. This position was reinforced by the fantastic accolades we received from our customers via the Peter Lee and Euromoney survey results released in June. It’s this recognition from our customers that ensures we continue to build a strong and regionally experienced team in Asia with deep relationships in all of our key markets.

I would like to acknowledge the fantastic achievements of a number of our Australian customers who are leading the way in China. In May I attended the Australia-China Business Awards Gala Dinner in Hong Kong. It was inspiring to see that 10 Westpac customers were finalists and three customers were winners in their respective categories, including Blackmores, University of Wollongong and King & Wood Mallesons.

I encourage you to reach out to your Relationship Manager, so that you are maximising and exploring the immense opportunities between our regions and how we can connect you.

Welcome

Bala Swaminathan, General Manager, Westpac International

1. Peter Lee Associates Large Corporate and Institutional Relationship Banking Survey Australia. Rank vs. Top 4. Quantitative measure from 602 votes in 2015. Peter Lee Associates Large Corporate and Institutional Transactional Banking Survey Australia. Rank vs. Top 4. Quantitative measure from 602 votes in 2015.

Issue 05 – August 2015 | 1

Managing risk am

id currency turbulence

2 | August 2015 – Issue 05

With US monetary expansion on the way out, finding ways to manage currency volatility is critical.

After nine years of monetary expansion, markets know that the resumption of ‘normal’ interest rates in the US will strengthen the greenback, and on the other side of that cross, the A$ is likely to decline. But the currency’s descent is anything but smooth and predictable, making those industries exposed to foreign exchange risk – such as agribusiness – keener than ever to find ways to manage the volatility.

A falling A$ against the US$ is broadly positive for Australian farmers, as it makes the nation’s produce more competitive in the global market. Unfortunately, it also drives up the cost of inputs like fertiliser and equipment. But in general, farmers gain more advantage from higher profits when the A$ is weaker than they do from lower costs when it is stronger. Finding the right balance is critical.

Shane Sampson, Head of Corporate FM Sales, Asia, at Westpac in Singapore, says successful hedging is not simply a matter of locking in the exchange rate at which you transact, but “locking in your margin.”

“We can use a range of forward contracts and FX options, but the producer’s production cost and certainty of production, is going to dictate where they want to lock in,” he says. “For Australian farmers and producers, while they’re ultimately selling their product in A$, it’s going to be linked to that US$ commodity

price and the exchange rate, so they really need to think about ‘what’s my cost of production?’ and then ‘what is the current A$ commodity price?’ and if that margin is satisfactory, then hedging and locking in a proportion of their production makes complete sense. If their cost of production is a lot higher, they may not look to hedge; or they may hedge but they may take some optionality in their hedge book,” says Sampson.

Buying options enables the producer to be protected, but also be able to “exercise a bit of a view” on the likely direction of the commodity price, or the exchange rate, he says. “Some producers want participation if that commodity price or exchange rate continues to move in their favour, but if it doesn’t, they at least have some protection. It’s almost like an insurance policy: they’re paying a premium for that,” says Sampson.

Increasingly, Australian firms buying and selling into China may look to utilise Australia’s hard-won status as a renminbi (RMB) trading hub, which allows transactions formerly triangulated through the US$ to be struck directly in Australian dollars and Chinese yuan. In particular, the Australian Securities Exchange (ASX)-Bank of China renminbi settlement service, which was instituted in

February 2014, allows Australian banks to settle RMB trades in real time in Sydney: Australian companies trading with China can pay and receive RMB, confining their exchange rate risk to the A$/yuan rate. Moving to RMB invoicing eliminates FX risk for the Chinese customer, which may allow the Australian exporter to achieve a better price for its goods, given that the Chinese customer no longer has to include the cost of hedging its FX risk in its quoted price.

Sam Lloyd, Associate Director at Westpac in Brisbane, gives the example of a client that was exporting macadamia nuts wholly in US$ to its Chinese customer. Because of the liquidity issues in China, our client’s customer was having difficulty securing enough US$ to pay for shipments – and therefore, shipments needed to be delayed.

“We suggested to the exporter that we could swap all of its A$/US$ forward exchange contracts into A$/CNY (Chinese yuan) contracts, and ask its customer if it would be easier for it to pay in renminbi. The Chinese customer was both surprised and greatly appreciative of the approach,” says Lloyd. “We were able to accept renminbi, cargoes were able to sail, and our client experienced no delays.”

This was possible because of Australia and China’s currency convertibility arrangements, through the Sydney hub. And Lloyd says there have been very positive developments stemming from the trade. “Our client competes with other Australian macadamia processors as well as South African, Kenyan and South American producers, but at the moment, it’s the only supplier that can offer a Chinese yuan price.”

That gives Westpac’s client a lot more bargaining power than its competitors, says Lloyd. “Because of the costs involved in actually converting US$ to Chinese yuan at the moment in China, the customer is more willing to give preference to our Australian client than they are to deal in US$ with their South African and Kenyan suppliers, even though product from those destinations is cheaper,” he says.

“Increasingly, Australian firms buying and selling into China may look to utilise Australia’s hard-won status as a renminbi trading hub…”

FEATURE – MANAGING VOLATILITY Issue 05 – August 2015 | 3

Australia’s FTAs:

Getting dow

n to business

4 | August 2015 – Issue 05

With free trade agreements with South Korea, Japan and China, and India hopefully not far away, Australian firms will have the box seat to some of the largest markets in the world.

In one of the most notable achievements of Australian governments of either stripe, 2014 saw the securing of three Free Trade Agreements (FTAs): one with each of South Korea, Japan and China. In June, Australia and Singapore also signed a Comprehensive Strategic Partnership (CSP) – a 10 year road map to take Singapore-Australia ties to the next level and plans to review the Singapore-Australia FTA later in 2016.

Australia now has ten FTAs, nine bilateral and one ‘plurilateral,’ with the Association of South-East Asian Nations (ASEAN).

The next cab off the rank will be India: the eighth round of negotiations for an Australia-India FTA (referred to as the Australia-India Comprehensive Economic Cooperation Agreement) were being held in June/July 2015.

In theory, FTAs support increased trade flows between the FTA countries by reducing trade barriers caused by import quotas, tariffs and quarantine protocols. The lower barriers facilitate higher trade flows, which in turn lead to higher levels of Foreign Direct Investment (FDI). FTAs also directly facilitate this FDI – in relation to inward investments – by increasing the threshold at which an approval by the Australian Foreign Investment Review Board (FIRB) becomes mandatory.

The nation’s ‘book’ of FTAs has certainly delivered increased opportunities for Australian agribusiness, says Steve Breslin, Director of agribusiness at Westpac Institutional Bank (WIB) in Sydney. But in practice, given countries’ perception of their interests, the negotiations rarely end up wholly win-win.

“Inevitably, the FTA negotiation is a political process, and sometimes certain agri sub-sectors see little or no improvement, because the other side saw that area as a ‘deal breaker.’

For example, he says, in the China-Australia Free Trade Agreement (ChAFTA) the Australian sugar, rice, wheat, canola and cotton industries saw “no real immediate benefits,” as these were sensitive areas for China; whereas Australian dairy was excited about a boost that should help it level the playing field against New Zealand, which has had a FTA with China covering NZ dairy since 2008. The dairy industry has called the China FTA a ‘game changer’.

In addition to dairy, the beef, wine and fisheries industries are set to benefit substantially from the agreement.

Overall, Breslin expects the ChAFTA agreement to be ‘a big influence’ on Australian agribusiness. “ChAFTA will promote further growth of Chinese investment into Australia, in particular by raising the screening threshold (at which investments in non-sensitive sectors by private sector entities from China are considered by the FIRB) from A$248 million to over A$1 billion.

“Australia’s agricultural sector should get a similar boost to New Zealand’s after its China FTA. New Zealand’s exports to China grew from over NZ$2.2 billion in 2008 to close to NZ$10 billion in both 2013 and 2014. Also, a lot of Australian agribusinesses were being invited to set up operations in China, rather than just increasing exports from Australia, as the world’s most populous nation looks to tap this country’s expertise.”

Westpac’s Head of Greater China, Andrew Whitford further supports this:

“This agreement delivers more bilateral concessions than any other free trade agreement in China’s history, however the business community needs to act quickly.

“We are not China’s only dance partner. 124 countries claim China as their largest trading partner. Hence, Australian businesses need to take advantage of this lead and the concessions under this landmark FTA while we have it.”

Breslin says Westpac is ready to help customers take advantage of the multitude of opportunities arising from the nation’s FTAs.

Westpac has a well-established and rapidly growing on-the-ground presence in the key Asian FTA markets, including branches in China and India, providing banking solutions around financing, foreign exchange, interest rate management and commodity hedging. “Our Australian agribusiness teams in WIB work closely with Westpac’s farm-gate agribusiness bankers to offer an in-depth understanding of the local market place for the inbound investor and tailor solutions according to their individual needs,” he says.

SPECIAL FEATURE –FREE TRADE AGREEMENTS

Australia’s agricultural sector should get a similar boost to New Zealand’s after its China FTA.

Issue 05 – August 2015 | 5

Rising demand for food is placing significant pressure on the environment. Westpac is committed to supporting growth of the agribusiness sector which meets this demand in a sustainable way.

As rising global demand drives intensified production of agricultural commodities, increasing pressure on natural ecosystems, Westpac Group is taking steps to support and promote responsible and sustainable agribusiness practices.

In early 2014, Westpac became the first Asia-Pacific bank to sign the ‘Soft Commodities Compact’, developed by the Banking Environment Initiative through extensive collaboration with the Consumer Goods Forum over a two-year period, with advice from the World Wildlife Fund (WWF).

Tony Smith, Westpac Institutional Bank’s Head of Consumer and Agribusiness, says Westpac’s adoption of the Compact reflects its ambition to bank sustainable agribusiness supply chains and to help raise industry-wide standards.

“This commitment will help us better support our customers, many of whom are members of the Consumer Goods Forum, and their efforts towards net zero deforestation in their supply chains,” says Smith.

Westpac Group has also further strengthened its Sustainable Risk Management Framework with the introduction of a new position statement on financing agribusiness.

The position statement outlines the standards Westpac applies when lending to customers involved in cultivating, processing or distributing agricultural products – which we will work with our customers to achieve.

“Agribusiness plays a fundamental role worldwide in feeding the global population, driving economic growth, reducing poverty and supporting livelihoods, but the sector also has a range of environmental and social challenges which require responsible management,” said Smith.

“These include habitat degradation, unsustainable use of water and agrochemicals, release of greenhouse gases and displacement of local communities”, he said.

“This initiative reflects our belief that as one of the largest companies in our region, Westpac has a responsibility to use its influence to help protect the environment and the rights of the local communities in which we operate.”

SUSTAINABLE AGRICULTURE

“…Westpac’s adoption of the Compact reflects its ambition to bank sustainable agribusiness supply chains and to help raise industry-wide standards. ”

6 | August 2015 – Issue 05

Leading the way for

sustainable agriculture Issue 05 – August 2015 | 7

To find out more about Westpac Institutional Bank’s focus on Asia, speak to your Relationship Manager today.

SOLUTIONS FOCUS

Capability update: eDocumentationWestpac has successfully participated in a first-of-its-kind end-to-end electronic trade transaction, involving an iron ore shipment from Australia to China, in which the bank used a new Trade Finance instrument called Business Payment Obligation (BPO) in combination with an electronic document platform.

The transaction, completed in April 2015, involved an iron ore shipment from Australia to China, sold by BHP Billiton to Cargill, with Westpac acting as recipient bank for the seller.

The trade used the new CargoDocs BPO Plus platform, enabling digital data flow through all four parties of the transaction. This allowed the transaction to be completed in a single day.

Global trade finance is an industry that is “absolutely ripe for this type of

innovation,” says Axel Boye-Moller, Head of Global Transactional Services, Asia, at Westpac Institutional Bank. “What we have here is a digital framework which combines some of the benefits of traditional letters of credit with benefits of open account trade – it enables fast and efficient international trade while providing risk mitigation to exporters.

“It’s a new and very efficient way of doing business and supporting trade, and the BHP/Cargill transaction is an interesting and promising start,” says Boye-Moller.

“This is another example of how we are delivering innovative solutions for our customers in Australasia and Asia, helping them to achieve even greater trade efficiency and speed.”

Developing the Aussie EMTN MarketWestpac’s role as sole arranger of majority Temasek-owned Singapore agribusiness Olam International Limited’s A$180 million issue of EMTNs in March 2015 was the latest ‘first’ for the bank in its ongoing strategy to develop the Aussie EMTN market. Russell Baines, Director of Debt Securities, Asia, at Westpac Institutional Bank, half-jokingly calls it the ‘koala market’ – adding that Westpac would like a name that differentiates A$ EMTN issues from the more well-established ‘kangaroo’ market.

Having brought the first Chinese issuer, the first Singaporean issuer and the first Malaysian issuer to the market, Westpac has now introduced Olam as the first unrated issuer.

The senior unsecured notes (due 2020) yielded investors – mainly Asian private banks – a fixed A$ coupon of 4.875%,

with Olam swapping the funding back into US$ through Westpac. “It was a win-win trade, because the investors put their A$ to work at 4.875%, while Olam’s effective funding cost on the trade came in at just under 3.9%,” says Baines. “The investors got the higher rate and the cross-currency swap worked to give the issuer the lower rate.”

Baines says the predominantly Asian investor base is very keen to invest in A$, but wants to see local names that it knows and understands. “We’ve carved out a bit of a niche in the Aussie EMTN market, we understand the needs of the investor base,” he says. Westpac has also struck one NZ$ EMTN issue for an Asian issuer.

8 | August 2015 – Issue 05

Issue 05 – August 2015 | 9

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