John Danilovich is Secretary General of the International Chamber of Commerce
Trade finance is widely recognised as a vital instrument in the workings of a healthy global economy. Yet, as a technique, it has been under enormous pressure in recent years as banks have fought with risk-oriented constraints and been potentially fenced in by regulatory tightening.
Given this, over the past six years, the International Chamber of Commerce (ICC) Banking Commission has worked to inform the debate surrounding trade finance by offering hard data and survey-based evidence. The findings of our two most recent reports – the ICC Global Survey 2014: Rethinking Trade and Finance1 (the ‘Survey’) and the Trade Register Report 20142 (the ‘Register’) – have produced some of the best evidence yet that trade finance is a technique worth supporting.
The Register – an empirical study of more than 4.5 million transactions totalling an exposure in excess of US$2.4 trillion – reveals that trade finance is a very low-risk banking discipline. Meanwhile, the Survey – involving responses from 298 participants in 127 countries – represents the widest survey ever of market practitioners, and brings attention to a shortfall in the availability of trade finance. Together, they shed light on the impact of both regulations and the continued perceived market risk on trade finance, and therefore on the potential for global economic growth.
Certainly, of the Survey’s findings, the most significant was the global shortfall of availability of trade finance. Some 41% of respondents believe that additional liquidity is required to support current trade flows. To be competitive in trade, firms must have access to financial support that offers a choice of appropriate instruments to support trade and growth. And it is this access to finance that has become increasingly strained.
This is especially the case for small- and medium-sized enterprises (SMEs) and those in emerging markets. Indeed, in the developing world, access to affordable hard-currency finance is still one of the most problematic factors for companies trying to grow internationally. Certainly, such access can help boost productivity and generate sustainable jobs.
Despite the continued squeeze, growth in trade is forecast to pick up to an annualised 4.7% in 2014, against 2.1% in 2013. However, this performance is still weak compared to the pre-crisis years when trade tended to grow at close to double the pace of GDP growth – compared to around the same rate of GDP growth since the crisis, despite the more recent pick up.
The Survey’s findings also reveal that Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations globally are having an impact – causing 68% of respondents to decline transactions, and more than a third to close down correspondent account relationships due to regulatory concerns.
Additionally, the Survey also brought to attention other potential constraints – notably the claim by 68% of respondents stating that Basel III regulations are affecting their cost of funds, as well as the overall liquidity of trade finance. Also, 87.5% of respondents stated that Basel III had impacted their operations, with nearly three quarters reporting that Basel III regulations had generated a rise in the cost of export-credit agency backed financing.
Signs of prosperity
What is encouraging, however, is the emergence of new trade corridors. Although emerging market growth may be decelerating, the importance of south-south trade (ie. trade between emerging markets) has grown more significant since the crisis. Since 2010, south-south trade has accounted for over half of developing country exports, and has grown by 17% since 2001. South-south exports now represent 46% of global exports, up from 35% in 2001 with the trend expected to continue, though perhaps at a slower pace.
What’s more – with the WTO agreement reached at the Ninth Ministerial Conference in Bali in December 2013 – a long-awaited breakthrough in trade facilitation appears to have been achieved, which should give a significant boost to demand for trade finance, even if supply remains problematic.
Supply, however, should be encouraged by the Register. Brought out just prior to the Survey, the Register provides robust evidence that banks and regulators have little to fear. Default rates across trade finance instruments range from 0.0332% to 0.241% – a fraction of the default rates reported by Moody’s for all corporate products (which average at 1.38%), and even better than AAA corporate credit default rates.
While the Survey provides a consensus that there is a significant shortfall in trade finance supply, the Register should help convince financiers to join fray. Certainly, through data-driven analytics and powerful surveys, we hope that trade finance will enter a new age of prosperity that will consist of appropriate regulation and continued growth.