As the euro continues to fall and the world frets about Greece and how the global economy may be sliding back to recession, Andre Boico examines his charts and remains serene. The director and head of pricing and business analysis at SWIFT, the body that provides secure messaging services to most of the world’s banks, can track the volume of interbank messages in near real time. The global economic recovery, he says, remains intact.
How can he tell? While SWIFT cannot access the confidential contents of the millions of messages that financial institutions exchange every day using its messaging network, Boico knows the aggregate volumes of those messages, what kind of transactions are being settled, and where.
“We know when they were sent,” he says. “We know what type of message it is, whether it’s a financial institution transfer, a customer transfer, a letter of credit. We know that it is a particular stock exchange transaction or a particular settlement instruction.” And what the message flow is telling Boico is that transactions linked to GDP growth are strongly on the rise so far into 2010.
“What is absolutely interesting is that trade transactions actually spiked,” he reports. “Trade messages in Category 4 [Collection and Cash Letters] and Category 7 [Documentary Credits and Guarantees] had one of their best performances in many, many years.” The direction of the trade-related messages indicates which countries are experiencing GDP growth. “It’s intra-Asia, it’s Asia to the U.S. and Asia to certain countries in Europe like Germany,” says Boico.
The fallout from Greece and the euro is showing up in the traffic, though. Since April 17, messages in Category 3 (Treasury Markets, Foreign Exchange, Money Markets and Derivatives), Category 5 (Securities Markets) and Category 6 (Treasury Markets, Precious Metals and Syndications) have soared sharply.
“That’s really linked to foreign exchange volatility,” Boico explains, as traders dumped the euro and bought U.S. dollars. The volume of messages linked to stock market activity has also jumped as investors rushed to the exits. Forex and equity transactions are not actually done via SWIFT, but most deals are confirmed and settled through the banks, which do so via the SWIFT messaging system.
However, Boico reports, the forex- and securities-linked volatility is not affecting the volume of messages related to economic growth, which continues to show robust growth. “The link to the economic foundation, to economic performance, meaning trade, GDP and so on, continues to be there,” he says.
Can the current disruptions in Greece, which many fear may contaminate Europe’s other weaker economies, reverse that trend? Boico does not think this is likely to happen. “I think 2010 will be a good year,” he says. “The good news is that the fundamentals linked to trade and industrial output are good.”
Asia: Growth Driver
He has decades-worth of message flow data and correlations to back him up. “We have not seen, and we have studied this for 20 years, situations in which GDP is shrinking and yet people are investing [as indicated by messages linked to trade and securities transactions],” says Boico. “It’s just not possible.”
So far into 2010, the average daily volume of trade-related messages worldwide is up nearly 9% compared with the average daily traffic during the same period in 2009. “This is really the traffic that is the most linked to letters of credit and what happens in the ports, the ships that come, the trucks that load and unload,” Boico notes.
The average daily volume of payments messages has risen by more than 5% so far this year, while that for securities is up almost 9%. The average daily average volume of messages, in total, is higher by 5.9% compared with the same measure last year. “We are significantly above 2009,” says Boico.
The key driver is Asia. Average daily volume of total messages across the region is up by more than 15% -- that’s 1.9 million messages every day. The surge is underpinned by messages related to trade (up 24.8%), securities (up 20.5%) and payments (up 16.5%). “This is the first time we’ve seen Asia traffic growing faster than other regions,” says Boico. The trend started at the end of 2009 and has been sustained so far into 2010.
Hong Kong is leading the charge. The average daily traffic there is 361,392 – that’s higher by 52.9% compared with the average daily volume this time last year. Payments growth has spiked by 62% while securities growth is up 58%. Hong Kong recently reported a higher-than-expected 8.2% GDP growth for the first quarter of 2010.
In contrast, daily average volume in New Zealand has fallen by 3.6%, which possibly foreshadows lacklustre economic expansion there. Japan is basically standing still – daily average volume growth there is just 0.1%.
Average daily traffic in China, which has reported first-quarter 2010 GDP growth of 11.9%, is up 27% -- with the average daily volume of securities messages doubling up (rising 112%). “That’s because of new financial instruments and new players,” Boico explains. Securities traffic among banks that have been on SWIFT for five years is up 20% to 30%.
So far in 2010, the average daily volume of messages in Asia in total and per category has returned to pre-2009 levels. “If I look at the 1997 financial crisis in Asia, it took two and a half years for SWIFT traffic to return to pre-crisis levels,” says Boico. “This time around, Asia has recovered in less than a year.”
One key reason is the average daily volume of intra-Asian messaging, which was negligible in 1997. “Intra-Asia is growing very fast, faster than in the past,” says Boico. “But traffic between Asia and the U.S. and Europe continues to be strong, too. If you also look at traffic between Asia and Germany, that’s very interesting. Germany is probably the first big economy in Europe to get out of the crisis.”
Is the trend sustainable? “I think the recovery is far more solid [than people think] and will continue,” says Boico. “Of course, we have to be vigilant.” The picture will be clearer in mid-June, he adds.
But Boico is already predicting that SWIFT’s May traffic will be its highest ever. So long as trade, payments and securities dominate, as they have been so far this year, the global recovery story should remain intact. Or so we should all hope.
About the Author
Cesar Bacani is senior consulting editor at CFO Innovation.