CITI Research Report On Supply Chain

SUPPLY CHAIN FINANCE
Uncertainty In Global Supply Chains Is Going to Stay
Citi GPS: Global Perspectives & Solutions

January 2023
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Citi GPS: Global Perspectives & Solutions January 2023
Nathan Sheets Robert Sockin

Global Chief Economist Global Economist
Citi Research Citi Research
+1-212-816-2991 | nathan.sheets@citi.com +1-212-816-1658 | robert.sockin@citi.com
Aaron Liu Chris Cox

Global Economics Team Global Head of Trade and Working Capital
Citi Research Solutions
Citi Treasury and Trade Solutions
+1-212-723-4418 | aaron.s.liu@citi.com
+44-20-7986-8611 | chris.cox@citi.com
John Finnigan Admir Imami

Head of Development Organizations Investment Director, Head of Trade & Supply
Citi Public Sector Group Chain Finance
British International Investment plc
+1-212-816-6166 | john.finnigan@citi.com
Nathalie Louat Paolo Monaco

Director, Trade and Supply Chain Finance Director, Financial Products - SME Finance &
International Finance Corporation Development
European Bank for Reconstruction and
Development (EBRD)
January 2023 Citi GPS: Global Perspectives & Solutions 3
SUPPLY CHAIN FINANCE

Uncertainty in Global Supply Chains is Going to Stay
Trade flows are a fundamental driver of global economic growth and commerce,
mitigating pressures and inflationary challenges, with social and environmental
benefits intrinsically linked to that growth. Trade accounts for 52% of global GDP,
according to the World Bank.
A year ago, Citi published a comprehensive report examining The Complicated

Road Back to “Normal” for global supply chains. I think we can agree that the past
year — or even the past several years — have indeed been complicated.
Nevertheless here we are, somewhere closer to normal, as Citi’s most recent
Global Supply Chain Pressure Index shows overall levels have fallen back to pre-
pandemic norms but supply chain stresses remain with inflationary pressure and
rising interest rates across many countries.
Jane Fraser
However, this latest report, published by Citi experts leading our thinking on supply
CEO, Citi
chains and backed by survey responses from thousands of large multinational
corporations and their suppliers globally, indicates that disruption remains top of
mind.
The pandemic and then the war in Ukraine demonstrated the fragility of supply
chains. Many companies and customers experienced the pain of those disruptions
and are now looking for resiliency wherever they can get it. While reshoring and
nearshoring may seem like the next steps, buyers and suppliers alike indicate that
the higher priority is resiliency or redundancy deeper into the supply chain.
Enterprises are now focusing on inventory management strategy, diverse and

longer-term partnerships with producers, and a deeper investment in digital tools.
The surveys also show they are focused on bringing the same resilience to their
financial supply chains that they have brought to their physical supply chains to
counter disruption.
The concern for the health of supply chain finance is amplified by inflation, which is
hovering around 40-year highs in many countries, and also rising interest rates.
These new challenges hit the smallest suppliers hardest, but the good news is as
demand for resiliency grows, so too does the opportunity for smaller players not
traditionally as engaged in global trade.
The report details how supply chain finance (SCF) programs like the one Citi offers
can help to mitigate that financing challenge, particularly for small and medium-
sized enterprises (SMEs). It also highlights the role multilaterals are playing in
providing critical risk mitigation and access to liquidity that enable banks to support
SME suppliers further down the supply chain, including last-mile suppliers in
developing countries.
The challenges for trade continue to evolve and there is much to do to improve
resilience across supply chains globally, physically, and financially. The many
disparate laws, local regulations, and standards can make international trade
fragmented at times, and lead to inefficiencies across supply chains. It is essential
that we continue to collaborate on global solutions, including standardization,
technology, and regulation. Citi is proud to play a pivotal role in that ecosystem and
to present the insights we gain from doing it.
© 2023 Citigroup
EVOLVING CHALLENGES
PRESSURES ON SUPPLY CHAINS HAVE EASED, BUT AWARENESS OF VULNERABILITIES HAS GROWN
After peaking in September 2021, Citi’s Global Supply Chain Pressure Index eased somewhat further in December 2022. Overall
pressures are now near levels seen during the global manufacturing expansion of late 2017 and early 2018. While conditions are
normalizing rapidly, our sense is that firms will still take the lessons from this cycle seriously and look to adjust their production
strategies to prevent prolonged disruptions in the future.
Source: Bloomberg, Haver Analytics, Citi GPS

Citi Global Supply Chain Pressure Index (Left) and Sub-Indices (Right) Note: PMI = Purchasing Managers’ Index
Std Dev Std Dev

3 3
Shipping Costs
Global PMIs
2 2
Inventories
1 1
October
0 0
November
December
-1 -1
-2 -2
2016
2017
2018
2019
2020
2021
2022
2023
2016
2017
2018
2019
2020
2021
2022
2023
THE ROLE OF SUPPLY CHAIN FINANCE
Physical supply chain disruption has given way to a new challenge: high inflation and rising interest rates. Corporates
responded to physical supply chain disruptions quickly but must now turn their attention to the health of the financial supply
chain that powers physical supply chains.
Benefits of Supply Chain Finance: Uses the higher rating

of buying companies to
enable suppliers to gain
access to attractively-
priced finance
Strengthens relationships
between buyers and
suppliers — an inherently
interconnected
ecosystem Enables buyers
to access scarce
supplies and
lower costs
Extends finance Improves efficiency

further into the for companies on both
supply chain to reach sides of the equation
the smaller suppliers
that need it most
THE STATE OF SUPPLY CHAINS: WHAT SUPPLIERS ARE SAYING
Citi Research conducted a global survey of corporate suppliers participating in Citi-managed supply chain finance
programs. Respondents most commonly identified rising costs as their greatest challenge.
46% of suppliers globally indicated they are

passing costs directly on to customers
71% of North American suppliers indicated they

are passing costs directly on to customers
67% of suppliers indicated 2023 orders were

at or above their expectations
50%+ expect some level of supply chain disruption

to persist into 2023
Suppliers are pursuing a number of strategies to counter supply chain disruptions:
62% are expanding second-tier supplier networks

to increase resiliency
41% are seeking financing earlier in the commercial

cycle, such as in the production stage
34% are seeking longer lead times to produce

goods
THE STATE OF SUPPLY CHAINS: WHAT LARGE CORPORATES ARE SAYING

Citi partnered with East & Partners to conduct primary, voice-of-the-corporate research on the supply chain challenges,
resiliency, and futures of top 100 annual revenue-ranked corporates in each country market.
75%+ 42% 50% 70% 50%+ 10%

are of those with expect their have are prioritizing of CFOs or
experiencing predominantly sales of goods adopted new greater treasurers feel
higher small suppliers internationally technology integration and their supply
inventory feel impacted to increase to track communication chain partners
costs by rising in the coming goods with existing are ready to
interest six months suppliers expand at their
rates pace without
additional
support
© 2023 Citigroup
6 Citi GPS: Global Perspectives & Solutions January 2023
Contents
The Macroeconomic Picture ..................................... 7
Global Supply Chains — Signs of Further Healing 8
A Closer Look at the Components of the Index ..................................... 9
Implications for Inflation ........................................................................ 11
Looking Ahead: Lessons for the Long Run .......................................... 12
Concluding Thoughts ............................................................................ 13
The Role of Supply Chain Finance ......................... 15
The Role of Supply Chain Finance 16
What is Happening to Global Flows? ................................................... 16
Rising Interest Rates and Financing Costs Threaten Supply Chains .. 19
Boosting Resilience is Key ................................................................... 20
Ensuring the Financial Health of the Supply Chain .............................. 20
The Role of Supply Chain Finance ....................................................... 20
Innovation and Partnerships Matter ..................................................... 21
Looking Beyond Disruption................................................................... 22
The State of Supply Chains .................................... 23
Supplier & Large Corporate Surveys 24
What Suppliers Are Saying................................................................... 28
What Large Corporates are Saying ...................................................... 32
Conclusion ............................................................................................ 36
The Role of International Finance Institutions in
Supply Chain Finance ............................................. 37
The Role of IFIs in Supply Chain Finance 38
Critical Risk Mitigation .......................................................................... 38
Case Study: British International Investment 40
Countercyclical Strategy Swings Into Action .............................................. 40
A Sustainable Development Agenda .................................................... 40
Case Study: European Bank for Reconstruction and
Development 42
Achieving Net Zero in Supply Chains: A Major Challenge ................... 42
How Can International Financial Institutions (IFIs) Help? .................... 45
Case Study: International Finance Corporation 49
How IFC Makes Supply Chain Finance Work for Developing Markets ...... 49
A Growing Need ................................................................................... 49
Aligning SCF with IFC’s Evolving Development Agenda ..................... 50
© 2023 Citigroup
The Macroeconomic
Picture
© 2023 Citigroup
Global Supply Chains — Signs of

Further Healing
Nathan Sheets Our Citi Global Supply Chain Pressure Index eased somewhat further in December
Global Chief Economist, Citi Research 2022 (see Figure 1). The index has improved for eight consecutive months. While
overall pressures are still somewhat above readings immediately before the
Robert Sockin pandemic, they are now hovering near levels last seen in the third quarter of 2020
Global Economist, Citi Research and are also similar to levels seen during the global manufacturing expansion of late
2017 and early 2018.
Aaron Liu
Global Economics Associate, Citi Research We view the improvement in our index as largely reflecting easing in the global
consumers’ demand for goods. There are two main drivers of the slowdown in
global goods spending. First, consumers have been rotating back to services
spending as the pandemic recedes and households feel more comfortable with
health conditions. Second, high inflation over the last few years has led to genuine
demand destruction as price pressures have eaten into real incomes.
The good news is that heightened supply chain pressures have been a central
driver of price pressures in global goods industries, and the unwinding of these
forces should lead to a continued cooling in global goods inflation. More worryingly,
since demand destruction is an important driver of loosening supply chain
pressures, these developments are also a sign of mounting recessionary risks
across countries and globally.
Figure 1. Citi Global Supply Chain Pressure Index Figure 2. Developed Market Inflation: Core Goods vs. Services
Source: Bloomberg, Citi GPS Source: National Statistical Sources, Haver Analytics, Citi GPS
While a rapid fall in goods inflation would be a welcome development, it is a

necessary but not sufficient condition for central banks to turn less hawkish. The
rotation of consumers out of goods and into services is putting upward pressure on
services hiring and wages and, in turn, services prices (see Figure 2). These
dynamics look painfully persistent. Unless services inflation breaks far sooner than
expected, many central banks are likely to keep tightening policy.
In the longer term, this cycle has highlighted many vulnerabilities in the current
configuration of global supply chains. While pressures are normalizing, our sense is
that firms will still take the lessons from this episode seriously and look to adjust
their production strategies to prevent prolonged disruptions in the future.
© 2023 Citigroup
Several important trends are likely to emerge, including a reconfiguration of supply

chains, an emphasis on longer-term partnerships with producers, an adjustment in
how inventories are managed, and a further embrace of digitization.
The extent to which this episode will lead to shifts in the geographical distribution of
global production remains unclear. The COVID-19 cycle could kick off a process of
“re-shoring” whereby firms move production closer to home. For the U.S., this would
mean moving production out of China and Asia more generally and into Latin
America, particularly Mexico. Re-shoring would lower transportation costs, give
firms more visibility into production, and limit a range of risks that come with
dispersed supply chains.
Still, production moved to Asia for compelling business reasons, including lower
costs, and many of these factors are likely to remain true in coming years. All told,
we expect some re-shoring to take place but do not envision a mass exodus out of
Asia. More likely, firms will continue with globally diversified production strategies,
but they will seek increased geographical diversity among their suppliers and will
prepare for worst-case scenarios by having more inventory on hand and developing
contingency plans in the case of interrupted production.
A Closer Look at the Components of the Index

The Purchasing Managers' Index (PMI) is As highlighted in Figure 3, all three of the key components of our index — shipping
useful in identifying the direction of costs, global purchasing managers’ indices (PMIs), and inventories —have
economic trends in the manufacturing and improved notably since May. Of the three, the declines in PMI and inventory
service sectors. indicators have been particularly pronounced.1
Figure 3. Citi Global Supply Chain Pressure Sub-Indices Figure 4. Global Purchasing Managers’ Indices (PMIs)
Source: Bloomberg, Haver Analytics, Citi GPS Source: S&P Global, Haver Analytics, Citi GPS
1 Our index is the first principal component (PC) of these three sub-indices. Each of the
sub-indices is, in turn, the PC of relevant underlying data series. For more detail
regarding the construction of the index see Global Supply Chains — How Intense Are
the Pressures?, January 2022.
© 2023 Citigroup
For the PMIs, backlogs of work have been below 50 for several months now and
are showing readings even somewhat better than the pre-pandemic average (see
Figure 4). In contrast, suppliers’ delivery times and particularly input prices continue
to point to some ongoing tightness, but they have retreated sharply from levels seen
earlier in 2022 and are near readings seen during the 2017-18 global manufacturing
expansion. Taken together, the PMIs have now fallen to levels that are more
historically normal.
The inventory indicators are also showing marked improvement, as finished goods
inventories are being replenished (see Figure 5). Notably, the global PMI for
finished goods inventories has been above 50 for several months, recording some
of the highest readings of the last several years. The German ifo Business Climate
Index component for finished goods inventories has also recently turned positive
after more than a year of negative readings.
The U.S. inventory picture is a somewhat different story. While the U.S. inventory-
to-sales ratio climbed in 2022 overall, it increased only modestly from its 2021
trough and is still far removed from pre-pandemic levels.2 As shown in Figure 6, the
ratio has moved sideways in recent months as inventories and sales have more or
less flatlined. This ratio will likely rise going forward, but the relative contributions
from rising inventories versus falling sales remain to be seen.3
Figure 5. Finished Goods Inventory Indicators Figure 6. U.S. Retail Sales and Inventories
Source: S&P Global, ifo, Haver Analytics, Citi GPS Source: U.S. Census Bureau, Haver Analytics, Citi GPS
2 These data are somewhat less timely than other measures in our inventory sub-index,
with observations only available through November.
3 Technically, the PMI asks firms to compare the current situation to the situation one
month previously. Thus, as the PMI crosses 50, it means that inventories have stopped
becoming leaner but does not imply that inventories are back to normal levels. Viewed
from this perspective, the PMI and U.S. retail data look more consistent with each other.
© 2023 Citigroup
As highlighted in Figure 7, the overall improvement in global shipping costs has

been less pronounced than for the PMI and inventory data but, nonetheless, has
been significant. As shown in Figure 7, the cost of shipping a container from China
to the U.S. West Coast, which has been a prominent contributor to the supply chain
tensions, has fallen sharply from its peak of over $20,000 in this cycle to below
$2,500. Other shipping cost data have also improved markedly in recent months.
Figure 7. Global Shipping Costs
Source: Freightos, The Baltic Exchange, Bloomberg, Haver Analytics, Citi GPS
Implications for Inflation

In previous work done by Citi’s Global Economics team, a statistically significant
relationship was found between the Global Supply Chain Pressure Index and core
goods inflation (i.e., excluding food and energy) when the model includes the
pandemic cycle for both the U.S. and Developed Market countries more generally.
The relationship was particularly strong with a three-month lag.4
Figure 8 shows the results for our U.S. core goods inflation model. The model has
tracked the contours of inflation in this episode fairly closely. Notably, the most
recent data are well aligned with our model’s output. For developed market
countries, our model has also tracked developments closely, although the data have
diverged somewhat more in recent months than for the U.S. model alone (Figure 9).
Still, the developed market model did argue that pressures would cool in recent
months which, on net, has occurred.
The rapid improvement in our Global Supply Chain Pressure Index during the
summer is just starting to feed into our models. Our forecasts argue that goods
inflation is likely to cool significantly further from today’s levels. Specifically, given
that supply-chain developments tend to influence inflation with a lag, the recent
easing of pressures we have seen suggest that U.S. core goods inflation would fall
to 1% in coming months, down from its recent pace of over 3.5% and significantly
improved from its highs earlier in 2022 above 10%. For developed market core
goods inflation, we expect improvement to be quite rapid too, moving from a current
pace of near 5% to under near 1% as well.
4For more details on the models, see Global Supply Chain Pressures Ease Further,
September 2022. Our DM aggregate includes the U.S., Euro Area, Japan, the U.K. and
Canada.
© 2023 Citigroup
Figure 8. U.S. Core Goods Inflation: Actual vs. Regression Model Figure 9. Developed Markets Core Goods Inflation: Actual vs.
Regression Model
Source: U.S. Bureau of Labor Statistics, Haver Analytics, Citi GPS Source: National Statistical Sources, Haver Analytics, Citi GPS
Looking Ahead: Lessons for the Long Run

The key takeaway from our Global Supply Chain Pressure Index is that conditions
are normalizing rapidly. Still, businesses are unlikely, in our view, to move back to
pre-pandemic business as usual. This cycle has highlighted a range of areas where
supply chain management can be improved to avoid disruptions and ensure a
consistent and reliable production process.
One major lesson from the pandemic was that firms need to be cognizant not just of
their immediate suppliers, but of the suppliers of their suppliers. These second-tier
and even third-tier linkages caused previously unthinkable disruptions in global
production over the last few years. Businesses will be increasingly focused on these
linkages going forward and will assess the necessity and durability of these
relationships. This process is likely to have several key implications.
First, supply chains are likely to go through some process of reconfiguration.

Producers will look to diversify suppliers of key inputs to avoid shortages and
excessive dependence on single sources of supply. In tandem, firms are likely to
aim for ways to increase visibility by monitoring all elements of the production cycle.
Second, the relationships throughout the supply chain that are maintained are likely
to be made stronger. Firms may enter into longer-term commitments with suppliers
in order to ensure a consistent flow of products throughout a cycle. This type of
arrangement will require more upfront committed capital but will also minimize
downside risk. Third, firms will embrace digitization and automation to be able to
assess supply chain dynamics in real time. This process will make firms more
plugged in to any rapidly evolving developments and allow them to adjust more
nimbly.
© 2023 Citigroup
Inventory management is also likely to shift. Pre-pandemic, firms largely employed

a just-in-time inventory strategy that looked to keep inventories lean to maintain a
cost-effective production process. Alternatively, just-in-case inventory management
focuses on not running out of stock in the event of a surge in demand and requires
somewhat larger inventories. The pandemic showed the benefits of a just-in-case
inventory strategy, as many firms were not prepared for the surge in goods demand
that followed the initial lockdowns. While just-in-time is not likely to be abandoned
entirely, at a minimum, firms are likely to hold larger inventories than they did
previously for components that are hard to source.
An important related question is how firms will shift their production geographically,
particularly given that reorienting supply chains likely means bringing at least some
production closer to home. In this past cycle, firms have seen that having far-flung
supply chains can come with high risks. Moreover, the current political environment
in the U.S. and other countries may also lead to the diversification of supply chains
away from China. Governments may even help redirect supply chains for both
domestic economic and security reasons. The U.S. CHIPS and Science Act that
passed in August 2022 very much underscores this point as it aims to increase U.S.
technology production largely at the expense of China.
Still, the ultimate extent of how much production will be “re-shored” or moved closer
to home remains an open issue and will depend heavily on the relative costs of
production in various parts of the world. China and other East Asian economies
housed a significant share of global manufacturing in recent decades because they
were a cost-effective option for firms. Many of those realities are still in play. Our
sense is that some production will leave Asia, but the region will remain an
important source of global manufacturing. Rather than making drastic shifts away
from certain regions, firms are likely to rely more on contingency planning to have
backup options in case a segment of their supply chain breaks down, as well as to
keep larger inventories to maintain production in the event of disruptions.
All told, this reevaluation of supply chains itself will come with significant upfront
costs and any adjustments to production will be an expensive process. Ultimately,
the extent to which firms research these issues and then move through with
structural changes will depend on how they assess the risks of material disruptions
to supply chains occurring in the future. Undoubtedly, various firms in differing
industries will have diverging views about the nature of supply chain risks and will
respond in different ways. Still, by our reckoning, the overall direction of travel for
most firms is clear.
Concluding Thoughts
The data across the board show a material improvement in supply chain pressures
from April through December of 2022. This loosening of supply chain pressures
reflects both the rotation of spending back to services as the pandemic wanes and
demand destruction from high inflation. Given that supply chain pressures were a
critical driver of goods inflation during this cycle, we expect the reverse to hold true
and that an easing of supply chains will mean an easing of global goods inflation.
However, we still see high uncertainty around our analysis. In previous work, we
were unable to identify a compelling relationship between supply chains and goods
inflation before the pandemic — the two only appear related once the current cycle
is included. Our estimates may therefore overstate the effects an unwinding of
supply chain pressures will have on goods inflation. Still, data so far are
encouraging as core goods inflation is down from its peak as our modeling would
suggest.
© 2023 Citigroup
Moreover, goods inflation is only part of the current high inflation environment.
Services represent the lion’s share of consumer spending — historically roughly
two-thirds in the U.S. and close to 60% in developed markets, on average — and
price pressures in services are building as the sector continues to recover. Put
bluntly, services inflation is running high and looks like it will be hard to bring down.
Unless these pressures on services prices break much sooner than expected —
which looks unlikely — many central banks will keep tightening policy in coming
months.
Longer term, this episode of historic supply chain disruptions is unlikely to be

quickly forgotten. Businesses will generally move to make their supply chains more
efficient, easier to monitor and manage, and more robust to disruptions in any one
part of the production process. With an eye on supply-chain resilience, firms will aim
to achieve increased geographical diversity and — for critical inputs — increased
redundancy of supply. Inventory management is also likely to change significantly,
with firms stockpiling more components than usual particularly for hard-to-source
materials.
The implications for different regions in the world and globalization more generally,
remain to be seen. U.S. firms, for example, may look at Latin America as an
alternative to producing in China and elsewhere in Asia. Still, Asian economies are
likely to remain attractive options for production from a cost perspective, and those
considerations will have to be weighed against broader supply chain risks. Taken
together, while it seems likely that global integration will decline at least somewhat
and some production will be “re-shored” closer to home, the relative strength of
these factors and their broader implications for the global economy remain to be
seen.
© 2023 Citigroup
The Role of Supply Chain

Finance
© 2023 Citigroup
The Role of Supply Chain Finance

Chris Cox In our December 2021 Citi GPS Global Supply Chains: The Complicated Road
Global Head of Trade and Working Capital Back to “Normal” report, we identified signs of improvement in supply chain
Solutions, Citi Treasury and Trade Solutions management and an easing of pressures. We highlighted the potential for changes
to long-practiced supply chain management techniques, such as the shift from just-
in-time to just-in-case inventory management. We also noted that corporates were
re-examining and optimizing their supply chains by strengthening supplier
relationships and diversifying critical component sourcing — either by sourcing
capacity in additional regions or closer to home. The need for greater automation
and tools to enhance visibility also appeared to be growing.
With the start of 2022, we saw renewed COVID-19 lockdowns, especially in Asia
and specifically in China. The war in Ukraine, which began in February 2022, has
cast a long shadow across the global economy. Ukraine and Russia are significant
producers of food and energy supplies. The resulting stresses and implications are
particularly intense in Europe given its dependence on Russian energy and other
commodities. Companies are more focused than ever on making their supply chains
more resilient. However, the situation is evolving rapidly. Some of the themes
identified just a year ago are already under reconsideration, and what the new
normal becomes remains to be seen.
What is Happening to Global Flows?

Globally, Citi’s Treasury and Trade Solutions division processes $4 trillion of daily
payment flows on average. Payment and receivable flows through the Citi payment
network reveal an ongoing improvement, as global trade has stabilized following
multiple disruptions in 2021 and early 2022. Payment flows have seen some
normalization in the second and third quarter of 2022 following periods of volatility in
the first quarter.
Q1-Q3 2022 Versus Q1-Q3 2021

 The most striking trend in the first three quarters of 2022 compared to the same
period of 2021 is the 65% growth in natural resources and clean energy transition
(NRCET) trade flows as energy prices soared in the wake of sanctions placed on
Russia and flows shifting regionally in acquisition of additional sources of oil, gas,
and commodities. Growth was led by domestic flows in the U.K., the U.S., and
the UAE.
 There has also been considerable growth in industrials (27%). Domestic flows in
the U.S. (up $56 billion) and Singapore (up $16 billion) are the primary growth
drivers. Flows decreased out of the U.K. into Singapore (down $12 billion), as the
U.K faces increased economic challenges.
Technology flows grew by 13%, with domestic flows within the U.S. showing the
largest increase (up $40 billion). This corresponds with the push towards onshoring
manufacturing and the distribution of critical technological components in the U.S.
The large increase in domestic U.S flows does not correspond to a mass exodus
from a traditional market. In fact, flows from Taiwan to the U.S. were up $18 billion.
Flows from Taiwan to Hong Kong were down $28 billion.
© 2023 Citigroup
Figure 10. Supply Chain Shift Analysis by Sector (% Change in Payment and Receivable Flows YTD 2022 vs. YTD 2021, as of September)
Source: Citi Treasury and Trade Solutions, Citi GPS
Figure 11. Supply Chain Shift Analysis by Region (% Change in Payment and Receivable Flows YTD 2022 vs. YTD 2021, as of September)
© 2023 Citigroup
Q3 Versus Q2 2022
Payment flows remained strong through the third quarter of 2022. However, notably,
industrials saw a decline while other sectors showed slight increases, suggesting
that increased purchases of raw materials and inventory stock buildup in past
quarters have leveled off.
 Healthcare flows increased strongly by 17%, led by flows to Ireland, which saw a
$10 billion increase, indicating that health-related purchases remained strong
amid continued pandemic-related needs.
 NRCET grew by 11%, led by domestic flows in the U.K. (up $75 billion).
 Industrials flows dropped by 9%, with significant drops within Singapore (down
$9 billion) and from Singapore to the U.K (down $6 billion).
 Technology flows declined by 2%, with a major decline in flows within the U.S.
(down $3 billion) and from the U.S to Taiwan (down $3 billion).
Figure 12. Quarter-on-Quarter Growth in Flows Across Industries
© 2023 Citigroup
Rising Interest Rates and Financing Costs Threaten

Supply Chains
While complexities multiplied throughout the first half of the year — with pandemic-
related issues lingering and the war in Ukraine adding further disruptions — an
additional threat to the health of efficient supply chains has emerged.
Initially, increased costs for goods across the supply chain were widely considered
as transitory. The expectation was that they would stabilize once logistics
bottlenecks eased. As economies opened from pandemic-enforced lockdowns,
consumers would switch from purchases of durable goods to the service economy,
leading to a stabilization in supply and demand imbalances. This has indeed
happened in the global goods industries, with shipping and logistics inflationary
pressures easing significantly over the past eight months (as displayed earlier in
Citi’s most recent Global Supply Chain Pressure Index).
However, inflationary pressures have dramatically increased over the last six
months. Our survey of over 1,000 suppliers that are part of Citi-managed supply
chain finance (SCF) programs highlights the impact of these physical supply chain
challenges. Respondents, most of whom were small and medium-sized enterprise
(SME) suppliers, cited COVID-19 restrictions and logistics problems as significant
challenges. Tellingly, the survey revealed that an increase in cost of goods sold,
including the cost of sourcing raw materials and components, was respondents’
principal concern. Inflation in many countries is now hovering around 40-year highs
and is starting to constrain real incomes and growth.
To counter this development, central banks around the world have raised interest
rates to the highest levels in years. Physical supply chain disruption has therefore
given way to a new challenge: high inflation and rising interest rates. After an era of
near-zero interest rates, inflation has put pressure on physical supply chains. In
particular, the sudden shift in the financing landscape has focused attention on the
health of the financial supply chain that powers physical supply chains. Higher costs
are taking their toll on suppliers’ profit margins as they are financing inventory at
their own cost of capital and in an inflationary environment. Moreover, financing
costs for smaller companies are rising much faster than those for large corporates,
increasing supply chain risk. Higher costs are also being passed on to corporates —
and ultimately to consumers.
Figure 13. Global Supply Chain Pressure Index vs. Financing Costs
Note: IG = Investment Grade, HY = High Yield, OAS = Option-Adjusted Spread.

Source: Bloomberg, Citi GPS
© 2023 Citigroup
Boosting Resilience is Key

In response to the physical supply chain disruptions of recent years — and in
anticipation of further interruption — almost 60% of suppliers we surveyed believe
disruption remains very or somewhat likely. This is driving corporates to be laser-
focused on boosting supply chain resilience, and they have responded in a number
of ways. One common change is an increase in inventory as corporates switch from
a just-in-time to a just-in-case approach. Higher inventory comes at a cost, however,
as it ties up working capital and reduces capital efficiency.
Onshoring/nearshoring is also a goal for some corporates amid geopolitical and

supply chain instability, although it has slipped down the priority list given the
immediacy of other challenges. Onshoring/nearshoring also increases costs,
although as one North American survey respondent in the transportation sector
notes, “customers are willing to pay slightly more to ensure products are produced
domestically in order to avoid supply chain issues.”
However, in addition to these physical supply chain responses, companies want to

enhance customer relationships and build resiliency into the financial supply chain
to counter physical supply chain disruptions. Our survey shows that suppliers are
eager to diversify their liquidity sources and credit capacity, for instance.
Ensuring the Financial Health of the Supply Chain

The disruption of global physical supply chains ushered in a shift in inventory
management strategies from just-in-time to just-in-case. Amid disruption and the
uncertain geopolitical landscape, reshoring/nearshoring emerged as potential
solutions to help address instability. However, reshoring has been limited to date.
Many corporates have instead added inventory buffers to ensure continuity and
mitigate potential disruption caused by unforeseen shocks. Some are even
considering broadening their supplier base to expand their access to key inputs.
However, moving away from the highly efficient supply chain model and carrying
excess inventory comes at a cost. Managing working capital more effectively is
necessary if corporates are to counter the impact of additional carrying costs on
their margins.
To help ensure the financial health of supply chains and mitigate risks, buyers and
suppliers want to ensure they have ready access to financing, when and where it is
needed. Making financing more readily available not only adds stability to the buyer-
supplier ecosystem, but also helps enhance relationships between buyers and their
key suppliers. The cost of capital continues to climb for both organizations large and
small. But in an increasing interest rate and inflationary environment, the differential
between the cost of investment grade and non-investment grade finance is
becoming significantly wider. Buyers should be mindful of how this negatively
impacts companies’ working capital needs across the supply chain and adversely
affects small suppliers. Small suppliers can make up a large portion of a buyer’s
supply chain, and even one supplier default can have dramatic impact on a buyer’s
operations.
The Role of Supply Chain Finance

SCF facilitates the flow of goods and finance that enable the global economy to
function. In recent decades, it has become a mainstream tool for corporates in
many sectors and has supported clients’ suppliers through good times and bad.
Now, SCF looks set to become more important than ever.
© 2023 Citigroup
In an increasing interest rate and inflationary environment, the differential between

the cost of investment grade and non-investment grade finance is becoming
significantly wider, putting pressure on smaller suppliers. SCF uses the higher rating
of buying companies to enable suppliers to gain early access to attractively priced
finance. This increases suppliers’ resilience, shoring up the physical supply chain.
SCF also delivers a number of additional benefits. Participation in an SCF program

strengthens buyer/supplier relationships, potentially enabling buyers to gain access
to scarce supplies or to lower costs, reducing the pressure on their margins. Buyers
can also use participation in an SCF program as a way to expand their supplier
network — a key goal for 62% of suppliers in our survey — in order to navigate
supply chain disruption or reconfigure their supply chains through nearshoring.
Another favored response among corporates seeking to bolster their financial

supply chain is to extend finance further into the supply chain. The
interconnectedness of modern supply chains means that deep-tier financing
solutions are necessary: Financing needs to reach the smaller suppliers that need it
most. In a survey introduced to Citi SCF suppliers globally, responses confirmed
many suppliers are also seeking “financing earlier in the commercial cycle, such as
at the purchase order stage” and want to make use of tools such as pre-shipment
finance that enable them to better manage their working capital.
Innovation and Partnerships Matter

As SCF has grown, it has attracted an ever-larger range of providers, including — in
recent years — many FinTechs. Importantly, SCF is not a one-size-fits-all solution;
however, it must be dynamic and support the complex, cross-border flow of goods.
Moreover, the capabilities of providers vary markedly: SCF programs are not
created equal. To understand why this is the case, it is useful to focus on some of
the ways that SCF programs have evolved in recent years.
Firstly, innovation is critical to delivering value. SCF increasingly leverages new

technologies to improve efficiency and ease of use. Global banks have digitized the
end-to-end environment to accelerate the onboarding process and have partnered
with FinTechs to enable electronic tracking of inventory and logistics. Technology
has also allowed banks with a global presence, and deep local regulatory and
business environment knowledge, to help corporates make rapid changes to their
supply chains in response to current macroeconomic and geopolitical conditions.
Secondly, multilateral partnerships are playing more of a role in SCF. As the profiles
later in this report highlight, multilaterals can provide critical risk mitigation, such as
credit guarantees, that enable banks to support SME suppliers further down the
supply chain, including last-mile suppliers in developing countries. Multilaterals are
also valuable to improving environmental, social, and governance (ESG)
performance throughout the supply chain, which is an increasingly important goal
for many corporates. For instance, the International Finance Corporation has
partnered with Citi and McCormick & Company to provide suppliers of McCormick's
herbs and spices with financial incentives linked to improvements in measures of
social and environmental sustainability.
Thirdly, for SCF to deliver the greatest possible benefit, it is increasingly important
that providers have the flexibility to expand programs in response to demand.
Clearly, providers must be willing to utilize their balance sheets to support clients.
However, as SCF programs have grown in scale, this is no longer enough:
Traditional relationship banks cannot do it alone. Instead, providers differentiate
themselves through their commitment to develop short-term SCF liquidity as an
asset class in order to augment capacity.
© 2023 Citigroup
Advanced technology and automation can also make it easier to market and
distribute these assets by improving liquidity and transparency, so that they can
reach a wider audience. By developing these channels — and access to the
secondary markets — it is possible to decrease financing costs for suppliers and
help to restrain the inflationary pressures on cost of goods sold. Broader distribution
of SCF assets also means programs can endure regardless of conditions in the
financial markets or problems with any one investor.
Looking Beyond Disruption

Given the uncertain outlook, both suppliers and buyers are focused on
strengthening and expanding their physical supply chains to counter disruption.
Trade ecosystems remain fragmented, and innovative platforms can play an
important role in digitalizing the physical supply chain and improving the efficiency
of the financial supply chain.
By reinforcing existing supplier relationships and offering incentives to new

suppliers, SCF also has a critical role in building resilience. A stronger financial
supply chain results in a more robust physical supply chain. Yet SCF can do even
more to overcome the many supply chain challenges afflicting both suppliers and
corporates. For instance, it can help to reduce the pressure that results from a
company’s need to hold high levels of inventory, as well as the damage resulting
from accelerating inflation and a higher rate environment.
Moreover, SCF can help extend financing deeper and earlier into supply chains and
provide financing at the pre-shipment stage with products such as purchase order
financing. By utilizing partnerships with FinTechs, platform providers, and
multilaterals, it is possible to reach all parts of the client value chain. Citi is working
with Stenn, for instance, to provide deep-tier supplier financing, as well as with
British International Investment to target SME suppliers in Africa. Innovations such
as dynamic discounting, which enables corporates to use excess short-term cash to
fund early payment of approved supplier invoices, can also create additional value.
SCF is clearly a tool for our time. A strong balance sheet and a robust risk and
control framework are important if banks are to be able to provide dependable
funding and sustainable investment in SCF technology. Similarly, a global footprint,
deep local understanding, digital technology, and diversified funding sources
(through the creation of marketable assets and the building of distribution channels)
can give corporates the agility they need to minimize disruptions to their supply
chains and pursue their operational objectives. Partnerships with development
agencies or national governments can add further value and help to extend SCF
deeper into the supply chain so that its benefits are accessible to an ever-wider
universe of suppliers, including critical SMEs. Innovation and partnerships with
FinTechs can enable purchase order financing and deep-tier financing, as well as
consolidate supply chain data to make it easily accessible to both buyers and
suppliers so they can enhance their working capital management. By leveraging
reliable SCF programs, both buyers and suppliers can build resiliency, access
efficient liquidity, and strengthen relationships so that they endure and prosper
during these turbulent times.
© 2023 Citigroup
The State of Supply

Chains
© 2023 Citigroup
Supplier & Large Corporate Surveys

The pandemic and the subsequent reopening of global economies highlighted the
fragility of highly efficient and complicated supply chains. In response, corporates
began to shift supply chain management strategies. To get a better sense of how
they are managing their supply chains in the current environment, Citi
commissioned two separate surveys to gather insights about the current state of
supply chains.
 Citi Research conducted a survey of 1,169 corporates who are suppliers

participating in Citi-managed supply chain finance programs. The survey was
conducted across Asia Pacific; Europe, the Middle East and Africa (EMEA); Latin
America; and North America from September to October 2022. The suppliers
provided company-level information such as company size, industry, and location
and answered questions about both their role as suppliers and as buyers
regarding their own supply chains. Of the total, 92% were from small and
medium-sized enterprises (SMEs), 87% had fewer than 500 employees, and
68% had 2021 revenue of less than $20 million.5 SMEs are a key part of the
broader supplier ecosystem and often face the greatest challenges accessing
financing. The suppliers surveyed had customers predominantly located in North
America and Western Europe.
 Citi partnered with East & Partners, a global B2B financial markets research firm,
to conduct primary, voice-of-the-corporate research on large corporates’ supply
chain challenges, resiliency, and futures. The research was executed August to
October 2022 across nine markets in Asia Pacific and multiple markets in North
America; Europe, the Middle East, and Africa (EMEA); and Latin America. The
population consisted of the top 100 annual revenue-ranked corporates in each
country market, and a total of 1,327 corporates were interviewed. The research
was detailed in nature, with video interviews averaging an hour in length. The
average revenue of companies that participated was $1.7 billion.
The surveys yielded powerful insights into the challenges facing companies large
and small around the world. Five themes emerged from the two surveys.
1. The effects of rising prices, rising interest rates, and high inflation are impacting
supply chains globally. Chief financial officers (CFOs) and treasurers are taking
steps to ensure the resilience of their financial supply chains.
2. Corporates and their suppliers want to strengthen relationships to mitigate

further disruption. Shifts in order patterns have complicated demand
forecasting. Both have embraced track and trace technologies, but tools to help
forecasting future sales remain immature.
3. Disruptions caused by the pandemic have given way to geopolitical tensions as

the primary threat to supply chain funding stability.
4. Despite economic headwinds, respondents from both surveys are optimistic

about the prospects for exports and international sales growth in the next six
months.
5. ESG is an area of focus at the head office level. However, a lack of clarity
around ESG definitions and measures has impeded meaningful progress.
5An SME is defined as having under 500 employees and/or less than or equal to $100
million in revenue.
© 2023 Citigroup
Figure 14. Citi Supplier Survey
© 2023 Citigroup
Figure 15. East & Partners-Citi Survey of Large Corporates
Source: East & Partners, Citi Treasury and Trade Solutions, Citi GPS
© 2023 Citigroup
Figure 16. Five Themes Emerging from Citi Surveys of Suppliers and Large Corporates
© 2023 Citigroup
To address these top supply chain challenges, corporates and banks are working to
focus on accessibility of efficient liquidity to suppliers, and particularly SMEs. Supply
chain finance (SCF) and dynamic discounting (DD) programs are tools to support
supply chain resilience. Citi continues to digitize and simplify outreach and
onboarding for this purpose.
To help inject liquidity further into supply chains, and in all parts of the world, banks
and corporates can partner with development agencies and FinTechs. These
partnerships can help enable purchase order financing, deep-tier financing, and
ESG financing programs. By leveraging these supplier finance tools, buyers and
suppliers can build resiliency and strengthen relationships.
What Suppliers Are Saying

Suppliers globally have experienced material disruptions to their businesses over
the past two years. There is an increasing emphasis on mitigating future supply
chain shocks by implementing new working models and re-evaluating the
prerequisites for success.
Respondents most commonly identified rising costs as the greatest disruption or

challenge experienced by their organization. This was consistent across small and
large suppliers, location, and customer industry. Additionally, suppliers frequently
cited difficulty in forecasting buyer demand. Over the past year there were
significant shipping delays and demand fluctuations, which limited market visibility.
Such factors can leave suppliers vulnerable to future shocks, leaving them unable
to meet demand or having an excess of inventory.
Figure 17. What Supply Chain Challenges Has Your Organization Faced in the Past Two Years?
Source: Citi GPS
© 2023 Citigroup
In the current inflationary environment, addressing rising cost of goods sold (COGS)
is critical for suppliers. Globally, 46% of respondents indicated they are passing
costs directly on to customers. Notably, that number rose to 71% for North American
suppliers, highlighting higher pricing power in the region.
Figure 18. Strategies to Counter Supply Chain Disruption
Globally, suppliers that cited rising COGS as a challenge are addressing it with a
multi-pronged approach, accepting the inevitability of reduced profit margins as well
as passing on a portion of the costs directly to their customers. Many suppliers are
also looking for ways to cut costs and streamline their business processes.
© 2023 Citigroup
Figure 19. Impact of Increase in Cost of Goods Sold
Over 50% of respondents expect some level of disruption to persist into 2023. In
response, they are implementing new practices to embed resilience into their
businesses. These include diversifying and expanding downstream supplier
networks and seeking financing earlier in the production cycle. Taking financing at
the purchase order stage enables suppliers to more effectively manage and
optimize their working capital. Difficulty in forecasting order sizes and lead times
due to fluctuations has intensified this need.
Figure 20. Strategies to Counter Supply Chain Disruptions
© 2023 Citigroup
At the time of the survey (September to October 2022), suppliers’ forward-looking

orders remained strong. Two out of three suppliers indicated 2023 orders were at or
above their expectations. This, paired with the expectation that disruptions will
remain, explains why many suppliers are adopting new business practices.
Interestingly, suppliers in China and those supplying to the consumer sector are the
most pessimistic about 2023 sales volumes, perhaps reflecting ongoing COVID-19
disruption in China and fears for consumer spending as economic growth slows.
Figure 21. Sales Order Volume in 2023 vs. Expectations
The View from North America
While suppliers around the world face many similar challenges, there are also important regional differences. For instance,
suppliers in North America are disproportionately impacted by labor shortages. Labor force participation has remained below
pre-pandemic levels, as confirmed in a Bureau of Labor Statistics report from December 2, 2022. The high number of job
openings also reflects hiring difficulties faced by corporates.
In addition to labor-related issues, North American suppliers face two additional challenges that are less important to
suppliers elsewhere:
1. A reliance on imports across large networks of downstream suppliers.
2. The need to navigate complex global trade routes.
Effects experienced downstream are often amplified upstream to the end-recipient of goods. These contingencies can leave
suppliers more susceptible to supply chain shocks, and sudden increases or decreases in demand can be difficult to respond
to.
© 2023 Citigroup
When asked about the likelihood for disruptions to continue into 2023, North
American suppliers had a significantly more pessimistic outlook than those in other
regions. Suppliers in North America were more likely than those in other regions to
seek longer lead times to help address future disruptions. More positively,
compared to those in other regions, North American suppliers felt less impacted by
rising rates, and fewer have experienced difficulties in accessing financing.
Corporates are placing increased emphasis on ESG goals and practices.
Engagement is often top down, being instigated by large buyers and cascading
down to their supplier networks. Our survey showed that North American suppliers
are less likely to be asked about ESG practices by their buyers than suppliers
located in any other region. Adopting ESG practices can improve buyer-supplier
relations, or even lead to incentivized pricing.
Figure 22. Frequency of Customers’ Request for Supplier’s ESG Goals and Practices (n=993)
What Large Corporates are Saying

Over 75% of respondents across all regions indicated they are experiencing higher
inventory costs. To help alleviate the burden of higher COGS, corporates are
borrowing against their balance sheets and pushing inventory onto their suppliers’
balance sheets.
As a result, 80% of respondents in all regions were concerned that customer credit
profiles are weakening as margin compression strains profitability. Over one in five
corporates with predominately large suppliers felt they were being impacted by
rising interest rates; that share increased to 33% for smaller suppliers. To help
reduce pressure, large corporates may seek bank financing against their
receivables to the extent possible, but this option may not be available to smaller
entities with weaker credit profiles. Irrespective of the funding mechanism, over nine
out of ten global corporates said that working capital finance is a key tool in helping
them stimulate revenue growth and bridge short-term cash flow constraints.
© 2023 Citigroup
Figure 23. Are You Seeing Weakening Customer Credit Profiles?
20%
80%
Do not see material weakening of customer credit profiles

See material weakening of customer credit profiles
Source: East & Partners-Citi Large Corporate Survey, Citi GPS
To ensure resilience, corporates are focused on solidifying relationships, with over

50% prioritizing greater integration/communication with existing suppliers. Suppliers
are seeking shorter payment terms and longer-term contracts as they contend with
the challenges of forecasting demand in an era of just-in-case inventory practices.
Three-quarters of all corporates have adopted technology to track goods; North
American corporates were twice as likely as EMEA corporates and three times as
likely as Latin American corporates to have digitized supplier onboarding.
Distributed ledger technology (DLT) and demand forecasting solutions provide an
opportunity to enhance the buyer-supplier relationship.
© 2023 Citigroup
Figure 24. Top Strategies to Improve Supply Chain Resilience, % of Total Responses
All regions (apart from Latin America) view geopolitical tension as the top risk to
supply chain funding stability, with roughly 25% of all respondents signaling that this
is their chief concern. In comparison, concern related to continued disruption from
COVID-19 or another “black swan” event is now minimal in comparison, with only
7% of respondents saying this is their top concern. Respondents in Asia Pacific
were most likely to voice concern about disruption from COVID-19, which is
unsurprising given that the region has endured some of the most persistent
lockdown measures. Organizations see value in diversifying their supplier bases as
a way to mitigate further disruption.
While corporates viewed geopolitical tension as the most likely catalyst for
disruption, economic pressures also loomed large: 23% of respondents in Latin
America felt a major supplier collapse represented the biggest threat to supply chain
funding stability. Corporates are almost at the point at which further costs cannot be
passed onto consumers. Both small and large suppliers are passing on carrying
costs, with large suppliers more likely to do so.
© 2023 Citigroup
Figure 25. Next Biggest Supply Chain Funding Stability Challenge, % of Total Responses
Globally, 50% of corporates expected their sales of goods internationally to increase

in the coming six months. North American firms expected exports to grow by 11.6%
on average, followed by 10.2% in Asia Pacific; 9.3% in Latin America; and 7.7% in
EMEA. These results are broadly in line with the Citi supplier survey, which showed
that two-thirds of respondents’ saw orders at or above expectations. However, only
one in ten corporate CFOs or treasurers felt their supply chain partners were ready
to expand at their pace without additional support. CFOs and treasurers in Asia
Pacific were the exception to this, with 45% confident that their suppliers were able
to grow with them. These findings underpin the importance of buyer-led financing
programs and their role in supporting suppliers.
Figure 26. Anticipated Change in Exports, Next Six Months
© 2023 Citigroup
Against a backdrop of supply chain disruption and a rising interest-rate

environment, corporates have not lost sight of their ESG goals. Globally, 25% of
respondents cited increasing the proportion of renewable energy used by their
business as their top ESG initiative. Benchmarking sustainability credentials against
the market and accessing government funding and tax relief related to ESG were
also important to respondents. The slow adoption of ESG measures is due to
multiple factors, but one stood out for survey respondents. As a treasurer from one
large wholesale trader in Singapore noted: “One big issue for us is the shifting set of
standards around ESG; given the level of investment this is going to take, not
having consistency around these is a real barrier to moving forward.” Overall
complexity and a lack of consistent definitions continue to be a drag on corporates’
ability to meet their ESG goals. Embedded ESG solutions represent an opportunity
to help corporates make progress on their ESG mandates.
Figure 27. Most Important ESG Aspects, Global
Conclusion
Amid high inflation and a rising interest-rate environment, our surveys show that
buyers and suppliers recognize they are in it together. U.S. Federal Reserve
Chairman Jerome Powell has signaled that while rate increases may slow, they are
likely to continue; similar trends are likely, to varying degrees, in many other major
economies. The disruption of highly complex supply chains for myriad reasons in
recent years has highlighted the interconnectedness of buyers and suppliers’
ecosystems. Should credit availability begin to dwindle, both parties will want to be
sure they are able to access all the funding channels available to them. For buyers
and suppliers, supporting each other’s physical supply chains means supporting
each other’s financial supply chains.
© 2023 Citigroup
The Role of International

Finance Institutions in
Supply Chain Finance
© 2023 Citigroup
The Role of IFIs in Supply Chain

John Finnigan
Head of Development Organizations,
Finance
Public Sector Group, Citi International trade finance is essential to global commerce and often referred to as
the lifeblood of the global economy. It powers innovation, stimulates efficiency and
competitiveness, and spurs economic growth and social development. Access to
trade finance is especially important for small and medium-sized enterprises
(SMEs) in emerging markets and developing economies. Becoming part of
international supply chains is a proven way for companies to increase their
operational sophistication and scale, foster new relationships, and access
opportunities that drive growth and deeper integration into the global economy.
Global trade faces significant headwinds as it recovers from the economic

consequences of COVID-19, including ongoing logistics problems, accelerating
inflation in many countries, high commodity prices, and a complex geopolitical
environment that threatens to fragment some important trade routes that have
emerged in recent decades. Despite this, the International Chamber of Commerce,
working with Global Credit Data and Boston Consulting Group, expects global
goods trade to grow at a 5.6% compound annual rate over the next 10 years on a
nominal basis.6
If that goal is to be achieved, then more finance must be made available. Solutions
such as supply chain finance (SCF) have become increasingly important for many
suppliers in developed markets over recent years. SCF programs decouple the
moment a supplier receives payment from the buyer making that payment; a bank
acts as a bridge between the two and provides financing to enable suppliers to be
paid faster than usual. Moreover, by using the superior credit quality of the buyer,
the supplier’s cost of funds is lower than would ordinarily be possible.
But companies in developing countries often face greater challenges than their
counterparts in developed markets when it comes to accessing finance, including
SCF. While global banks, including Citi, have relationships with thousands of
suppliers in emerging markets, there are necessarily limits to the scale of the
support they can provide, especially to SMEs.
It is in such situations that multilateral agencies (MLAs) and development finance

institutions (DFIs) can play a crucial role. These highly specialized institutions,
established by one or more sovereign governments, are mandated to support the
public policy of their owners. In developing markets, these goals include promoting
economic and social development, reducing poverty and improving living conditions,
addressing climate change, increasing financial inclusion, enhancing governance
standards and building market capacity, supporting infrastructure improvements,
and facilitating and expanding cross-border trade.
Critical Risk Mitigation

Many MLAs and DFIs invest directly in private sector projects in low- and middle-
income countries to promote job creation and sustainable economic growth,
leveraging the creditworthiness derived from their sovereign support to access the
international capital markets and provide financing on competitive terms. But these
institutions also play a critical risk mitigation and support function, enabling banks
and other financial institutions to lend and provide solutions such as SCF to
companies in developing markets that would otherwise be limited in scale.
6International Chamber of Commerce (ICC), “Credit Risk in Trade, Supply Chain and
Expert Finance Back to Pre-Pandemic Levels, ICC Confirms,” October 19, 2022.
© 2023 Citigroup
Inflationary pressures and rising interest rates are putting additional pressure on
suppliers’ working capital. To prosper in this new environment, suppliers —
especially in developing economies — will need greater assistance. Support from
MLAs and DFIs, especially regarding their ability to amplify the efforts of the private
sector, will therefore become more important. Many institutions have an explicitly
countercyclical mandate: They increase their activity as macroeconomic and
financial conditions become tougher for the companies they target. MLAs and DFIs
are already stepping up their involvement and expanding their balance sheets given
today’s challenges, while carefully managing their risk to maintain their triple-A
credit ratings.
While MLAs and DFIs can do much to shore up global trade, they need to leverage
the capabilities, networks, capital, and distribution capabilities of global banks with
ambitions to expand their engagement with companies that have traditionally been
challenging to finance due to credit ratings or market risk. Citi acts as a counterparty
to MLAs and DFIs, supporting their access to debt capital markets and providing a
broad range of solutions around treasury, trade, security services, and markets. Citi
also leverages these institutions’ risk defeasance solutions (such as grants,
guarantees, and co-lending structures) to create capacity and enable lending to the
private sector, financial institutions, sovereigns, and state-owned enterprises.
While the capabilities of MLAs and DFIs will be essential to many developing
countries as economic conditions worsen, their commitment to longer-term
economic and social development is equally important. Finance linked to efforts to
strengthen the ESG characteristics of companies in developing countries is critical
in this regard. All MLAs and DFIs have made commitments to embed ESG criteria in
their lending — aligning with the UN Sustainable Development Goals (SDGs) and
the Paris Agreement on climate change — and many are rapidly transitioning their
loan portfolios.
There is a $2.5 trillion average annual funding gap for the world to achieve its 2030
SDG agenda.7 MLAs and DFIs will be instrumental in helping to bridge that gap —
and SCF can play a role in helping institutions to achieve their ESG targets.
SCF (and similar solutions such as dynamic discounting) can be tailored to reward
suppliers that meet specific ESG criteria with discounts on their cost of funds.
Independent providers of sustainability assessments are used to evaluate suppliers’
performance, with specific ESG targets (usually linked to UN SDG criteria)
established for each supplier depending on their characteristics. ESG-linked SCF
programs help corporates to manage and mitigate their ESG risks by finding ways
to improve ESG performance throughout their supplier ecosystems. With the
support of MLAs and DFIs, banks can inject liquidity at the grassroots level via
ESG-linked SCF programs, helping SMEs and last-mile suppliers in developing
countries strengthen their working capital and their ESG credentials.
7United Nations, “Citing $2.5 Trillion Annual Financing Gap During SDG Business
Forum Event, Deputy Secretary-General Says Poverty Falling Too Slowly”, September
25, 2019.
© 2023 Citigroup
Case Study: British International

Investment
Countercyclical Strategy Swings Into Action
British International Investment (BII) — formerly known as CDC Group — is the
U.K.’s development finance institution. It leverages its experience of impact
investing and a deep-rooted knowledge of the markets in which it invests to solve
global development challenges by deploying flexible capital to support private sector
growth and innovation. One way it does this is by supporting financing to last-mile
suppliers.
“Working with global banks, we have a toolbox we can use to achieve these
objectives,” explains Admir Imami, Director and Head of Trade and Supply Chain
Finance at BII. “Different banks need different things: Some simply need liquidity but
for others credit guarantees and risk participations are important. Whatever the
need, the goal is to enable financing to those last-mile suppliers, which are the
foundation of any sustainable economy, but which often have limited access to
Admir Imami working capital or trade facilities.”
Investment Director, Head of Trade &
Supply Chain Finance
To this end, BII has a $100 million risk sharing facility for supply chain finance with
British International Investment plc
Citi, enabling the bank to target SME suppliers in Africa, as well as boosting Citi’s
volumes in the region by up to $400 million. BII also operates the Trade Access
Program, which directly funds SMEs and trade intermediates, such as AgriTech;
FinTechs; and alternative trade financiers whose technological and digital solutions
help BII to reach much smaller borrowers that are part of local supply chains. “It’s
important that we have the tools to target both ends of the value chain,” says Imami.
As a patient, long-term investor, BII has a deliberately countercyclical strategy with

the objective of providing greater stability and certainty to supply chains. During
challenging periods, such as the COVID-19 pandemic or today’s unsettled
economic environment, it seeks to extend its partnerships with global banks and
other institutions by increasing its provision of risk mitigation products.
One challenge in the current environment is that many banks’ limits for particular
countries or counterparties have remained the same while inflation has raised
prices, increasing working capital requirements for SMEs. As a result, without BII’s
support, fewer imports could be financed. “We aim to provide greater comfort to
providers so that they can increase their limits and do more to support suppliers in
developing countries (and especially in countries with a higher risk profile),” says
Imami.
Many suppliers also now find they need to allow for longer lead times — and
therefore longer financing periods — given shipping delays and resource
constraints. This further increases SMEs’ working capital requirements. Again, BII
endeavors to mitigate risk so that banks and other providers have sufficient comfort
to deploy their working capital tools.
A Sustainable Development Agenda

BII is committed to inclusive and sustainable development and specifically targets
SMEs that are led by women or operate in sectors that support a response to
climate change. “Again, our objective is to help our partners in the financial sector to
boost their limits and risk appetite for these companies so that these SMEs have
competitive access to credit for trade,” says Imami. “The program is extremely
flexible, so banks can decide when they need to use us and when they don’t.”
© 2023 Citigroup
Most recently, BII has targeted companies in the food value chain in an effort to
improve food security in developing countries by supporting food imports and
distribution throughout Africa in the wake of higher food prices and uncertainty in the
global agriculture industry. In March 2022, BII also announced support for the
implementation of the African Continental Free Trade Area, which is the largest free
trade area in the world, encompassing 54 member states. It is expected to lift 30
million people out of extreme poverty, create jobs, and provide new commercial
opportunities for businesses across Africa.
BII seeks to support trade because it believes it is a critical way to create modern,
stable, and flourishing economies. However, economic growth should not come at
the cost of environmental or social progress, according to Imami. “Our aspiration is
to uphold the environment and social (E&S) agenda across all of our investments by
applying robust environmental and social standards as set out in our Policy on
Responsible Investment,” he says. BII monitors its trade book and pays particular
attention to high-risk commodities.
Applying E&S standards can be difficult in supply chain finance because transaction
tenures are short and transaction volumes are high. It is particularly challenging
when considering complex nuanced risks like labor and human rights.
BII works with its financing partners to enhance their E&S practices, by providing
either training or technical support to its partner banks and FinTechs so that their
trade teams can better identify and manage ESG risks. “For example, in the last
year, we have run two training programs for our trade partner banks: a general E&S
training to help trade teams understand how to identify and manage E&S risks in
their transactions and a second to help trade teams understand the risks associated
with gender-based violence and harassment in their transactions with the ready-
made garment sector in Bangladesh,” says Imami. “Using this training and support,
partner banks can put in place the systems, policies, and processes to promote
strong ESG practices and manage environmental and social risks through their
supply chain and be selective about the suppliers that they in turn finance.”
© 2023 Citigroup
Case Study: European Bank for

Reconstruction and Development
Achieving Net Zero in Supply Chains: A Major Challenge
While not the only challenge, addressing climate change is one of the biggest
challenges of our times. The enormity and urgency of the task is increasingly
coming into focus for policy makers and business leaders alike. In the latest Global
Risks Perception Survey (GRPS) by the World Economic Forum, respondents
ranked “climate action failure” as the number one long-term threat to the world and
the risk with potentially the most severe impacts over the next decade.8 Climate
(in)action is connected to several other environmental (extreme weather and
biodiversity loss) and societal (social cohesion erosion and livelihood crises) risks.
This should put climate change mitigation at the center of attention for policymakers
and business communities.
However, actions to combat climate change also need focus on areas that are
harder to address. One of these is the decarbonization of supply chains. Emissions
Paolo Monaco in supply chains (i.e., Scope 3 emissions) often exceed those created by a
Director, Financial Products - SME Finance company’s own operations. In some industries, including food, fashion, and
& Development electronics, Scope 3 emissions represent multiples of Scope 1 and 2 emissions.9
European Bank for Reconstruction and However, to date, most firms have focused on emissions reductions that are within
Development (EBRD) their direct remit. While shifting attention to supply chains will have a bigger impact,
it will also require greater efforts — one challenge is supply chains’ spread across
Note: The contents of this publication reflect actors, industries, and jurisdictions. Another is the necessary change in the way
the opinions of the individual author and do many larger corporates work with suppliers: Cascading standards through a supply
not necessarily reflect the views of the chain and ensuring adoption requires significantly more support and monitoring than
EBRD. many large corporates have been prepared to provide in the past. Although some
supply chains are based on close collaboration with features such as pre-financing
and suppliers’ training, many are characterized by a more hands-off approach, in
which technical requirements and pricing expectations are passed down along the
chain, with little visibility at the buyer’s level of the standards by which inputs are
actually produced.
Pressure from regulators and consumers to adopt more sustainable standards is

also increasing, as awareness of supply chain-related issues gain wider public
attention. Initiatives in large consumer markets can have ramifications for producers
globally. For example, as the European Union (EU) is one of the largest trading
partners globally, its new policy initiatives will put pressure on larger buyers, and
hence their suppliers, to improve ESG standards. Two initiatives stand out: (1) the
introduction of the Carbon Border Adjustment Mechanism (CBAM), which
internalizes carbon cost into goods produced outside the EU; and (2) the new
upcoming Directive on Corporate Sustainability Due Diligence, which establishes a
due diligence duty to address negative human rights and environmental impacts in
a company’s own operations, as well as their value chains.
Therefore, access to lucrative markets with (potential) price premiums will

increasingly depend on the incorporation of sustainability considerations into
production processes. The resulting requirements in terms of adoption by
multinational companies (MNCs) will lead to a commensurate increase in
requirements for SMEs to integrate into global value chains (GVC).
8World Economic Forum, The Global Risks Report 2022 17th Edition, January 2022.
9World Economic Forum, Net-Zero Challenge: The Supply Chain Opportunity, Insight
Report with Boston Consulting Group,” January 2021.
© 2023 Citigroup
This puts increasing responsibility on buyers to know who their suppliers are and
how they operate, reaching into deeper tiers of their own supply chain. For many
products, supply chains consist of a large number of smaller, specialized
companies. In the pursuit of cheaper production costs, over the past 30 years, many
of these suppliers have been de-localized to emerging and developing economies,
where regulation and monitoring with regards to production standards have
traditionally also been less stringent. However, it is exactly those suppliers that tend
to struggle more with the adoption of better standards. In the context of supply
chains, this puts more onus on buyer requirements to effect change.
SMEs and emerging markets are lagging when it comes to the

adoption of ESG standards
On a global scale, representative data about the extent to which companies, in

particular SMEs, apply ESG standards is lacking. However, some selective
evidence exists, especially regarding environmental standards and carbon
emissions reduction. First, firms need to know what they emit in order to identify the
best way to reduce those emissions, but awareness tends to be low among SMEs.
A recent survey of business customers by NatWest in the U.K. suggests that close
to 90% of SMEs are unaware of their carbon emissions.10 Similarly, a survey by the
Turkish Enterprise and Business Confederation (TÜRKONFED) found that 77% of
Turkish suppliers who participated do not measure their carbon footprint and those
who do are mainly large companies.11 Typically, the know-how around
decarbonization and the adoption rate for green technologies is lower in emerging
markets. This means that a huge number of businesses are only at the very
beginning of the journey.
Even when firms are aware, taking action is not straightforward. Another survey, of
mainly U.S. and U.K. businesses, suggests that key reasons for delaying climate
action are a lack of skills, funding, and time.12 These constraints tend to be even
stronger in emerging markets. For instance, the sixth round of the Business
Environment and Enterprise Performance Survey (BEEPS VI) — conducted by the
European Bank for Reconstruction and Development (EBRD), European Investment
Bank (EIB), and World Bank Group (WBG) — suggests that even those firms
located in emerging markets that are good at data collection (in the Eastern
neighborhood region or the Western Balkans, for example) struggle to translate this
monitoring activity into specific targets.13 When it comes to the actual application of
ESG standards, firms in middle-income economies performed significantly worse
(especially on environmental and governance metrics) than peers in Southern
Europe.
10 NatWest Group, ”9 out of 10 SMEs Don’t Know Business Carbon Emissions,” March
21, 2022.
11 TÜRKONFED and Konrad-Adenauer-Stiftung Turkey, Risks, Opportunities and
Expectations in Green Transition, September 2022.

12 SME Climate Hub, New Data Reveals Two-Thirds of Surveyed Small Businesses
Concerned Over Navigating Climate Action, February 23, 2022.

13 European Bank for Reconstruction and Development (EBRD) and European
Investment Bank (EIB), Business Resilience in the Pandemic and Beyond: Adaptation,
Innovation, Financing and Climate Action from Eastern Europe to Central Asia,” 2022.
© 2023 Citigroup
Building more dependable relationships with suppliers is a

prerequisite for improving standards
Against this backdrop, and with increasing responsibility for raising sustainability
standards, buyers face a challenging task of fostering awareness, improving
monitoring across the supply chain, and encouraging suppliers to adopt better
standards. Therefore, disseminating higher ESG standards in supply chains
requires major efforts from both buyers and suppliers. Stable buyer relationships
that encourage improvement are more likely to evolve when buyers commit to
suppliers through training, capacity-building, or financial support for implementation
of standards and/or certification. Therefore, supplier programs that provide technical
assistance and capacity-building can be important contributors to productivity
improvements and standard raising at the supplier level.14
Access to finance is a key factor in facilitating the adoption of ESG

standards in emerging markets
However, access to finance is crucial to be able to upgrade machinery, implement

energy efficiency measures, and shift to less carbon-intensive technologies. This
naturally disfavors SMEs that lack the structured credit history and collateral to
access finance, including short-term finance to plug the regular working capital
shortfalls that are often associated with supplying to MNCs that are able to leverage
their stronger negotiating positions to dictate longer payment terms.
An estimated $25 trillion to $50 trillion of the more than $100 trillion investment
needed globally to deliver net zero supply chains will have to be directed towards
SMEs.15 This represents a substantial challenge in terms of market access for
suppliers and an ambitious risk appetite for financial institutions. This challenge is
even greater in emerging markets, where SMEs face difficulties in accessing
finance at reasonable terms.
In the region where EBRD operates, around half of SMEs are credit constrained,
compared to 25% of larger firms, according to the BEEPS VI survey. 16 In some of
these economies, nearly four out of five SMEs report issues obtaining credit, owing
to high interest rates and collateral requirements. This paints a particularly stark
picture that also applies to working capital needs. For instance, the same survey
shows that on average, firms only finance around 10% of their working capital
through banks. Customer or supplier credits are also a potential source, but their
use varies widely from, for instance, 2.9% of businesses in Uzbekistan to more than
50% in Serbia. Therefore, making external sources of funding more accessible or
reducing the cost of existing sources is a central objective for improving access to
finance for SMEs.
14 International Trade Centre (ITC) and European University Institute (EUI), Social and
Environmental Standards: Contributing to More Sustainable Value Chains, September
22, 2016.
15 BCG and HSBC, Delivering Net Zero Supply Chains, October 2021.
16 EBRD invests in 36 economies across Central and South-eastern Europe, Eastern
Europe and the Caucasus, Central Asia, the Southern and Eastern Mediterranean and
Turkey. A credit-constrained firm is defined as a firm that says it needs a loan but was
either rejected or discouraged from applying. See EBRD, “Business Environment and
Enterprise Performance Survey VI, 2018-20 (BEEPS VI),” October 2020.
© 2023 Citigroup
Again, scrutiny from policymakers regarding the alleviation of pressures on

suppliers is increasing. In 2013, a Late Payments Directive came into force in the
EU, capping days payable to 30 days for public entities and 60 days for private
businesses. However, globally, the power balance between large buyers and small
suppliers often still favors the former. In addition to this, the compounding crises of
the COVID-19 pandemic and the war in Ukraine have placed an enormous strain on
supply chains, with companies in nearly every country affected. A shift from “just in
time” to “just in case” is leading to higher inventory levels, which in turn means that
more working capital is tied up.17 The SME credit shortfall also weakens the ability
of firms to comply with international sustainability standards turning sustainable
supply chain finance into an important instrument to address various challenges.
The challenges are clear
If we want to successfully tackle the issue of improving ESG standards across the
globe, it is paramount to raise the necessary funding, help buyers to re-think how
they engage with their supply chains, and support SMEs to adopt better practices.
Therefore, expanding the reach of supply chain finance opportunities and
embedding sustainability targets into these structures could be a powerful way to
address the challenges highlighted in this report.
How Can International Financial Institutions (IFIs) Help?

There are several ways in which international financial institutions (IFIs) can support
the roll-out of sustainable supply chain finance (SCF) solutions to reach smaller
suppliers in emerging and developing markets. Combining their knowledge of
emerging markets with their long-standing experience in outcome-based and
blended financing, IFIs can be a major driver of encouraging private sustainability-
linked investment in less developed markets. More specifically, IFIs can help
expand the access to sustainable supply chain finance solutions in emerging
markets in three major ways: by using blended finance to mitigate risks and
encourage private investment, by facilitating legal and regulatory reforms, and by
encouraging the use of outcome-based financing mechanisms to incentivize the
adoption of ESG standards in a credible way.
Encouraging private investment through risk mitigation
Supply chain financing is a promising tool for financing small businesses, but
concrete data on the extent of available funding is difficult to obtain. The most
recent estimates by BCR, a market intelligence provider, suggest that SCF volumes
have increased to $1,803 billion globally in 2021, compared to $330 billion in 2016.
Activity is skewed toward Europe and North America, whereas in developing
markets, SCF solutions are often only at a nascent stage or completely absent: The
share of funding available in Africa and Asia represents only 20% of the global
total.18 There is significant potential to expand this kind of financing to developing
markets, but private investors often shy away due to the uncertainty that
investments in these markets usually entails. At the same time, the ability to access
a stable funding solution for working capital needs can be transformative in these
economies, where access to finance tends to be expensive and operating
conditions more volatile.
17 BCR, World Supply Chain Finance Report 2022, April 2022.

18 Ibid.
© 2023 Citigroup
Working with finance providers, IFIs can provide liquidity or take on risk in a way
that allows banks and other SCF providers to expand their programs, both to new
clients and new markets. By using blended finance options, such as first-loss risk
covers and similar risk mitigation mechanisms, IFIs can mobilize private capital
flows and facilitate investments in emerging markets. They can do so unilaterally, or
in cooperation, by sharing risk together where market circumstances and country
coverage are conducive. IFIs can also reduce uncertainty by sharing expertise,
which is often more readily accepted coming from a non-commercial organization
seen as impartial. On the one hand, they can introduce local stakeholders to the
concept of SCF where it is not yet present to encourage take-up. On the other hand,
they can facilitate the entrance of new finance providers by sharing their knowledge
of the market.
Facilitating legal and regulatory reforms required for supply chain

financing
In order for SCF solutions to thrive, it is important to have a robust legal framework
for secured transactions and to adjust regulation in order to realize the full benefits
of SCF. For instance, secured transaction laws that allow for the collateralization of
movable assets, a modern legal framework for factoring, and effective enforcement
mechanisms in case of default support the implementation of SCF. EBRD, as well
as a number of other IFIs such as the World Bank, have worked in developing
countries to support legal reform. In a more recent example, EBRD has supported
governments in Georgia and Uzbekistan to update their legal frameworks for
factoring to reflect international best practice and provide a more predictable legal
and regulatory environment that would encourage uptake. In addition, the
availability of e-invoicing and e-signatures can make the reverse factoring process
more efficient. For reverse factoring in particular, it is also crucial that the banking
regulator recognizes the difference in risk profile between payables finance based
on the creditworthiness of a buyer compared to traditional lending products, and
capital and provisioning requirements should be adjusted accordingly.19
These activities can accompany advocacy to raise awareness among market

participants, particularly SMEs. In markets where SCF is absent or at a nascent
stage, outreach to stakeholders and facilitation of dialogue around this new product
can be important factors to help increase confidence and uptake. IFIs such as
EBRD can leverage their existing networks among banks, business associations,
SMEs, government authorities and other stakeholders, domestically and
internationally, to facilitate cooperation and transfer of knowledge and know-how.
Activities can include trainings, issuing of guidelines, advisory services, and
providing a framework for cooperation among market participants. Reaching out to
SMEs is particularly important, as they tend to show less awareness of different
financing products, and targeted awareness-raising is key to build confidence in a
new product. Based on decades of advisory work with SMEs through its Advisory
for Small Business program, EBRD has built extensive outreach capacity to be able
to engage with SMEs, either directly, or in partnership with local business
associations.
19International Finance Corporation (IFC ), Supply Chain Finance by Development

Banks and Public Entities, 2021.
© 2023 Citigroup
Embedding ESG objectives into supply chain financing
Based on their extensive experience in linking investments with impact, IFIs can
also contribute to turning SCF into outcome-based financed mechanisms that help
deliver on ESG targets. Climate change mitigation is a priority objective that many
IFIs pursue, and they have built a track record of incorporating greening objectives
into investment activities over decades. EBRD, for instance, set up a department
dedicated to energy efficiency improvements in 1994 and added a mandate to
specifically combat climate change in 2005-06. Since then, the bank has built
extensive experience in helping clients, large and small, to green their operations.
The EBRD’s focus on greening was further strengthened by the launch of the Green
Economy Transition approach in 2016. Under this approach, the EBRD is
committed to achieving a green finance ratio of more than 50% by 2025 and
aligning its activities with the Paris Agreement by the end of 2022.20
In the context of SCF, buyers can act as an important anchor for incentivizing
suppliers to improve their carbon footprints. IFIs can support buyers in re-designing
their supplier programs in a way that sets greening targets in line with robust
frameworks (such as the Science Based Targets initiative). However, there are
challenges: To begin with, buyers often lack the kind of data from their supply
chains that would allow them to identify high-emissions sources and set targets for
abatement. In addition, simply setting a target will likely not be sufficient to induce
change. Although strong advocacy and governance mechanisms at the buyer level
can help, many suppliers — especially SMEs — will need support to implement
change. They often struggle to identify the most promising technologies to invest in
and to set up an internal management system for the monitoring and improvement
of their carbon footprint on a continuous basis.
To address these challenges, EBRD has partnered with Citi to incorporate

sustainability targets into a pilot SCF program in Turkey. Under this program, the
buyer, Citi, and EBRD agree on appropriate key performance indicators (KPIs) for
the greening of the buyer’s supply chain. Based on its extensive experience in
providing advisory services for SMEs, EBRD is building a dedicated advisory team
to help suppliers achieve their individual greening targets. Advisors will be able to
review existing processes to pinpoint sources of high emissions, advise on required
investments and appropriate technologies, and help build internal green
management systems. To further incentivize change at a time when carbon
emissions are typically not priced into production costs, the SCF incorporates a
pricing mechanism whereby the achievement of greening milestones results in a
discount on the supplier’s SCF interest margin. In this case, we combine stricter
requirements with dedicated support and incentives to achieve an overall better and
more sustainable outcome. However, applying selected elements of this approach
may be enough to bring about change, depending on the specific circumstances of
a supply chain.
20 EBRD, Green Economy Transition Approach 2021-2025, 2020.
© 2023 Citigroup
The way forward
Working in partnership with private finance providers and leveraging public funding
and IFI experience, EBRD aims to scale up its engagement significantly over the
coming years. Doing so will require developing a better understanding of the current
SCF situation in emerging markets and identifying key obstacles to the development
of this product. The ultimate aim is to find a scalable and replicable model that will
enable the expansion of sustainable supply chain financing to other countries,
buyers and suppliers, including those in deeper tiers of the supply chain. Given IFIs’
track record of supporting the development of new funding mechanisms and the
adoption of sustainable practices, they are uniquely positioned to help market
players in the SCF space expand to new markets, reach new clients, and do so in a
way that addresses a core challenge in today’s world: achieving net zero.
© 2023 Citigroup
Case Study: International Finance

Corporation
How IFC Makes Supply Chain Finance Work
for Developing Markets
International Finance Corporation (IFC) is the private sector investment arm of the
World Bank Group (WBG) and supports the organization’s goals of ending extreme
poverty and boosting shared prosperity. IFC’s mandate is to advance economic
development and improve the lives of people — creating jobs and raising living
standards — by encouraging and supporting the growth of the private sector in
emerging markets.
To this end, IFC established a Global Trade Finance Program (GTFP) in 2004 to
extend and complement banks’ capacity to deliver trade financing by providing risk
mitigation in new or challenging markets where trade lines are constrained. Over
the past 18 years, IFC has issued guarantees covering over 68,000 transactions
totaling more than $66.5 billion in over 100 countries.21 Its focus is on low income
and fragile countries: Over 70% of the IFC’s investments go to the world’s poorest
Nathalie Louat economies.
Director, Trade and Supply Chain Finance
International Finance Corporation
In 2012, IFC launched its Global Trade Supplier Finance Program (GTSF) to
provide short-term, post-shipment capital to suppliers in emerging markets
immediately after the buyer agrees to pay. IFC’s GTSF program has disbursed
about $3 billion to almost 1,000 suppliers across 14 countries. The average invoice
size financed is approximately $13,000, reflecting the IFC’s commitment to support
SMEs globally.
A Growing Need
There is a consensus among market participants that demand for supply chain
finance (SCF) is increasing, especially in emerging markets. “There are several
reasons for this, including COVID-19-related supply chain disruption, complications
resulting from the war in Ukraine, and the worsening macroeconomic environment
— including accelerating inflation, which will increase production costs and erode
real incomes — across emerging markets,” explains Nathalie Louat, Director, Trade
and Supply Chain Finance at IFC.
At the same time, many international and domestic banks are seeking ways to
further expand their engagement with companies that have traditionally been
challenging to finance due to credit ratings or market risk. SMEs, which account for
around 90% of all global companies according to IFC, fit this description —
especially those in developing countries. More than half of the SMEs in Africa, for
example, currently do not have access to finance.
“That’s where we step in,” says Louat. “Our priority is to support SMEs and last-mile
suppliers, and we bring various parties together to mitigate risk and facilitate
finance.” As trade receivables account for 40% of their assets on average, deferred
credit payment terms are the largest driver of financial uncertainty for SMEs.
“Supply chain finance can address this uncertainty and provide a financing solution
for SMEs and last-mile suppliers,” adds Louat.
21 IFC, “Global Trade Finance Program,” accessed November 28, 2022.
© 2023 Citigroup
IFC encourages and facilitates SCF in three ways:
1. Working with regulators alongside the World Bank to help countries institute
effective legal and regulatory frameworks for SCF and digitalization. In several
countries, IFC has supported the creation of national supply chain finance
programs by working with central banks.
2. Providing support for capacity building by offering technical assistance to banks

as well as directly to suppliers. IFC has a SCF advisory program to help banks
develop solutions (including onboarding, if required) and organizes workshops
for SMEs.
3. Partnering with institutions to share the risk of SCF portfolios to help drive
volumes. This enables global banks to expand their emerging markets
financing while increasing IFC’s ability to reach small suppliers in developing
economies.
Aligning SCF with IFC’s Evolving Development Agenda

Sustainability has become a more important focus for the WBG in recent years. Its
climate change action plan aligns with the Paris Agreement by bolstering efforts to
promote biodiversity, improve access to renewable energy sources and clean water,
and support a just transition to a low-carbon economy. In line with the WBG’s green,
resilient, and inclusive development approach, IFC promotes three critical goals:
1. The deployment of energy-efficient technologies that can cut carbon emissions

in emerging markets and promote sustainable operations and supply chains.
2. The development of sustainable commodity supply chains. IFC does this by

partnering with the Banking Environment Initiative to support banks in directing
capital towards environmentally and socially sustainable finance.
3. The promotion of greater gender inclusion, by supporting companies that are

owned or led by women.
IFC uses SCF and trade finance to advance these objectives by supporting price
discounts to suppliers that implement strategies that align with its goals. “For
instance, we support supply chain finance linked to sustainability or gender so that
supply chains begin to reflect those priorities,” says Louat. “The first step is to work
with partner banks to identify the characteristics of the SMEs they work with so that,
for example, women-led organizations can be identified and targeted with trade and
supply chain finance that supports their growth.”
IFC works with Citi on a number of SCF programs. For example, IFC has partnered
with Citi to finance suppliers in developing countries selling herbs and spices to
McCormick & Company. The solution, which is part of IFC’s GTSF program,
rewards suppliers with preferential finance rates in return for meeting criteria
relating to labor conditions, health and safety practices, crop management,
environmental impact, farmer resilience, and women's empowerment; an
independent provider of sustainability assessments is used to evaluate suppliers’
performance.
© 2023 Citigroup
“Partnering with Citi adds value to our Trade Supplier Finance Program, as its
network aligns with the supplier base we are targeting in order to achieve our
development objectives,” says Louat. “And Citi’s relationships and ability to broadly
distribute supply chain finance assets enables us to increase the scale of programs
and ensure an attractive cost of finance and the widest possible benefits for SMEs
and last-mile suppliers in developing countries.”
© 2023 Citigroup
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NOW / NEXT
Key Insights regarding the future of Supply Chains
INFRASTRUCTURE Amid disruption and the uncertain geopolitical landscape, shifts in the geographical
distribution of global production remain unclear. / Although we expect some “re-
shoring” to take place, most firms will likely seek increased geographical diversity
among their suppliers and will prepare for worst-case scenarios.
SUSTAINABILITY There is a $2.5 trillion average annual funding gap for the world to achieve its 2030
Sustainable Development Goal agenda. / Multilateral agencies and development
finance institutions will be instrumental in helping to bridge that gap.
POLICY The effects of rising prices, rising interest rates, and high inflation are impacting
supply chains globally. / In this current inflationary environment, addressing rising
cost of goods sold is critical for suppliers while large corporates are concerned that
customer credit profiles are weakening as margin compression strains profitability.
© 2023 Citigroup
Citi GPS: Global Perspectives & Solutions © 2023 Citigroup
www.citi.com/citigps

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SUPPLY CHAIN FINANCE

Uncertainty In Global Supply Chains Is Going to Stay

Citi GPS: Global Perspectives & Solutions

Nathan Sheets Robert Sockin

+1-212-816-2991 | nathan.sheets@citi.com +1-212-816-1658 | robert.sockin@citi.com

Aaron Liu Chris Cox

John Finnigan Admir Imami

Nathalie Louat Paolo Monaco

SUPPLY CHAIN FINANCE

A year ago, Citi published a comprehensive report examining The Complicated

Enterprises are now focusing on inventory management strategy, diverse and

Source: Bloomberg, Haver Analytics, Citi GPS

Std Dev Std Dev

Benefits of Supply Chain Finance: Uses the higher rating

Extends finance Improves efficiency

46% of suppliers globally indicated they are

71% of North American suppliers indicated they

67% of suppliers indicated 2023 orders were

50%+ expect some level of supply chain disruption

Suppliers are pursuing a number of strategies to counter supply chain disruptions:

62% are expanding second-tier supplier networks

41% are seeking financing earlier in the commercial

34% are seeking longer lead times to produce

THE STATE OF SUPPLY CHAINS: WHAT LARGE CORPORATES ARE SAYING

75%+ 42% 50% 70% 50%+ 10%

Global Supply Chains — Signs of

While a rapid fall in goods inflation would be a welcome development, it is a

Several important trends are likely to emerge, including a reconfiguration of supply

A Closer Look at the Components of the Index

As highlighted in Figure 7, the overall improvement in global shipping costs has

Figure 7. Global Shipping Costs

Implications for Inflation

Looking Ahead: Lessons for the Long Run

First, supply chains are likely to go through some process of reconfiguration.

Inventory management is also likely to shift. Pre-pandemic, firms largely employed

Longer term, this episode of historic supply chain disruptions is unlikely to be

The Role of Supply Chain

The Role of Supply Chain Finance

What is Happening to Global Flows?

Q1-Q3 2022 Versus Q1-Q3 2021

Source: Citi Treasury and Trade Solutions, Citi GPS

Source: Citi Treasury and Trade Solutions, Citi GPS

Figure 12. Quarter-on-Quarter Growth in Flows Across Industries

Source: Citi Treasury and Trade Solutions, Citi GPS

Rising Interest Rates and Financing Costs Threaten

Note: IG = Investment Grade, HY = High Yield, OAS = Option-Adjusted Spread.

Boosting Resilience is Key

Onshoring/nearshoring is also a goal for some corporates amid geopolitical and

However, in addition to these physical supply chain responses, companies want to

Ensuring the Financial Health of the Supply Chain

The Role of Supply Chain Finance

In an increasing interest rate and inflationary environment, the differential between

SCF also delivers a number of additional benefits. Participation in an SCF program

Another favored response among corporates seeking to bolster their financial

Innovation and Partnerships Matter

Firstly, innovation is critical to delivering value. SCF increasingly leverages new

Looking Beyond Disruption

By reinforcing existing supplier relationships and offering incentives to new

The State of Supply