Trade finance: Walking a balance beam to recovery

With mainstream financial news focusing almost exclusively on all the world’s monetary woes, from potential bankruptcy in western Europe to a downgrading of US credit rating, to political unrest in the Middle East and more, it’s easy to understand how optimistic news can get lost in the emotional tsunami of perceived economic crisis.

And that’s exactly what has happened with trade finance.

According to the ICC Global Survey on Trade and Finance there was significant, if not universal, growth in trade financing in 2010, with the trend predicted to continue through 2011. The survey reflects data gathered from 210 banks representing 94 countries, a 30 per cent increase in the number of countries responding when compared to the 2010 survey.

Generally speaking, 2010 was a year that saw rapid recovery from the financial crisis of 2008/2009 –a time when global trading fell by 23 per cent or some US$3.5 trillion. While still below pre-2008 levels, financing for both imports and exports is at near normal conditions in many advanced economies, both in terms of liquidity and pricing of credit. The World Bank has stated that recovery is proceeding at twice the rate of growth as global trading between 2002 and 2008, though still 18 per cent below the high point reached before the crisis of 2008.

The emerging economies of east and south Asia, particularly those of India and China, led the globe in rebuilding international trade and are currently at or near pre-crisis volume. Developing countries saw their export volume increase by over 15 per cent in 2010 compared with 10.4 per cent for high income countries.

However, that growth experience is not universal. Low income countries (LIC), particularly those in Africa, still have difficulty finding affordable trade finance particularly for imports. While trading of commodities such as minerals surged (a generally positive trend for African nations) the difficulty in accessing import financing hampers the ability of the typical LIC to develop its infrastructure and production capacity, which in turn limits the amount of exports it can market.

The ICC survey predicts that the bulk of international trade for 2011 will occur regionally within North America, Europe and Asia and by Asia trading with the rest of the world. Demand for trade financing continues to be strong, indicating that the market is viable and that the real recovery is dependent on an affordable supply of credit.

Among regulatory agencies there still persists the incorrect assumption that financing imports and exports is a riskier business than it actually is. As a result, banks have had to deal with larger reserves, which in turn reduce the amount of capital available to fuel international trade. The ICC contends that trades are short term, self-liquidating transactions with exceptionally low default rates, and thus not deserving of restrictive regulations typically applied to the riskiest of transactions.

The problem in the past has been the lack of reliable data to support the ICC’s claim. In 2007 the ICC set out, with partners, to develop a comprehensive database on trade transactions and today these can point to solid information to support their position. In this regard, the ICC strongly encourages the adoption of the recommendations of the G-20 to liberally interpret the requirements of the Basel III regulations.

Regulations aside, another challenge to the continuing recovery of international trade is the prevention of protectionism. High tariffs on imports, unfair devaluation of currencies and restrictive trade finance regulations will not only damage domestic economies in the long run but can have a serious impact on global economies as well.

Avoiding the temptation to protect domestic economies, particularly in developing countries, is key to continued international trade growth.

That trade finance has recovered globally to some extent is definitely encouraging but there are many challenges to be overcome in the immediate future if the recovery is to be sustained. Not the least of these is the need to create a fully transparent and achievable set of regulations that are both reasonable and enforceable.

There are two immediate concerns: the Basel III regulations and the completion of the Doha negotiations. Fortunately, pressure from the World Trade Organisation and the G-20 is being applied to mitigate the Basel III impact and to expedite the negotiations that will lead to multilateral agreement on trade financing operations.

The industry is walking a narrow path to prosperity and that path needs to be widened to accommodate the entire global community if prosperity is to become sustainable.

The author is president of the FimBank Group. She has written numerous articles on banking, international trade and business, and has travelled the world to speak at international conferences. She is considered an authority in trade finance, particularly in factoring and forfaiting.