Global trade and finance trends now centre stage in minds of stakeholders and policymakers

With 482 respondents from 112 countries across the world, the record response rate to this year’s 2015 Global Survey on Trade Finance by International Chamber of  Commerce shows that developments and trends in international trade and finance are now centre stage in the minds of stakeholders and policymakers.

In last year’s survey, we pointed towards a slowdown in Asian market led growth, increased geo-political risks and forthcoming structural changes in international trade and finance. These forecasts are now coming to pass and while later than we anticipated, will most likely also impact economic growth and development more significantly than originally anticipated.

In the last quarter of 2013 and as we reported in the 2014 survey, the tide was turning with a slowdown in China and other emerging markets. In recent years we can see that trade growth has averaged about 3% a year, compared with 6% a year from 1983 to 2008. It will be major challenge to reach the 3% level for 2015 due to unfolding global developments.

It is entirely credible that the recent devaluation of the yuan is predominantly directed towards a market-oriented Chinese currency and inclusion in the IMF’s Special Drawing Rights basket. However, when China, the second largest world economy accounts for 15% of Global GDP and 50% of growth and perhaps more acutely, close to 45% of Asian GDP, the fallout in terms of trade impact can be expected to be significant. 

The trade-related impact is obvious, for example, the currencies of previously high performing emerging markets of Russia, Colombia, Brazil, Turkey, Mexico and Chile have fallen between 20 and 50% against the US$. The Indonesian rupiah and Malaysian ringgit are at their lowest level since the Asian financial crisis of 1998. Even Australia, one of the 10 largest advanced economies has been impacted with the Australian dollar at its weakest level since April 2009. 

Trade finance demand is still growing: Good news amongst the turmoil

Given this slowing pattern of trade growth, is it curious to see that 63.3% of survey respondents reported an overall increase in trade finance activity? It transpires that, given the turbulence in the international trade markets, there is a clear rise in demand for trade finance instruments to cover potential default risk under cross-border commercial contracts. 

Increasing demand for trade risk coverage products means increased business and fee income for trade finance banks, but the underlying key message is that there is an increased perception of commercial, bank, and country risks in global trade markets.

At first sight it may appear positive to see that 71.9% of the survey respondents experienced an increase in trade finance net income during 2014. Interestingly, the majority of respondents expect fees and fee income to increase going forward in 2015 and beyond. The ICC Surveys of 2013 and 2014 reported flat trends in relation to fees, so why are increasing fees now being anticipated? It has become clear from the 2015 Survey that with the increased costs of operations, and in particular increased compliance charges, fees charged by trade banks to customers must now be moving into an upward cycle.

Trade finance demand for factoring and export credit insurance moves forward

It is encouraging to see positive news from both the factoring and export credit insurance sectors. Overall, factoring grew by 6.3% in 2014 to EUR 2.34 trillion. Domestic factoring grew marginally at a rate of 1.6% whereas cross-border factoring grew at an impressive 22%, generating over EUR 490 billion in cross border factoring business. Export credit insurance also saw positive growth rates with Berne Union members reporting a 4% increase in new cover during 2014 to reach a total amount of $ 1.875 trillion. Claims paid out by Berne Union members amounted to $ 4.432 billion, which represents an increase from the previous year. 

With the lapse in US EXIM Bank’s authority, as of 1 July 2015, the US EXIM Bank is unable to take on new trade-facilitating business for US exporters. This is a practical concern going forward when we see that US exports dropped 5.6% to $ 895.7 billion in the first seven months of 2015.

Without the US EXIM Bank in the market, thousands of US export oriented SMEs will not be able to access export credit insurance or working capital loan guarantees. The withdrawal of these important trade finance tools will hamper US SMEs in their efforts to expand into international markets where risks are on the rise.

Multilateral development banks continue to keep supply chains open during challenging times

The positive work of the multilateral development banks continues to keep supply chains open in what can be considered high risk emerging markets. At the time of writing this report, collectively the EBRD, IFC, IDB and the ADB have facilitated trade finance transactions in challenging markets to an impressive level of $ 70 billion. The International Islamic Trade Finance Corporation (ITFC), part of the Islamic Development Bank (IDB), was established in 2008. However, in its short period of operation, the ITFC has achieved more than $ 34 billion of targeted financing.

We have also seen newly formed institutions focused on infrastructure and cross-border cooperation projects. The Asian Infrastructure Investment Bank (AIIB) and the New Silk Road Fund were established in Beijing. The New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA) have been set up in Shanghai. These institutions will no doubt have trade facilitation as part of their strategy for development. 

ICC Trade Register continues to expand role with enhanced granular data to facilitate trade

The work initiated in 2009 by the Asian Development Bank at the peak of the global crisis through ICC partners has provided stakeholders and policy makers with focused data on credit-related risks and default data in respect of international trade finance transactions.

The 2015 ICC Trade Register Report covers a total exposure of over $ 7.6 trillion. This report makes for interesting reading when considering the risk profile of trade finance banking. For example, data in the register illustrates a customer default rate of 0.72% for loans (import and export) involving bank and corporate risk. Furthermore, the ICC Trade Register Report also provides an obligor view of default rates with export letters of credit coming in with a very low default rate of 0.04% and import letters of credit coming in at 0.29%.

Commodity prices deterioration brings new issues on the trade finance radar

When commodity prices fell after the 2008-2009 financial crisis, we encountered a spike in damaging trade finance issues such as court injunctions, allegations of fraud and an increase in contractual disputes and resultant claims under guarantees and standby letters of credit. 

We are again seeing these issues being highlighted by survey respondents.

In this year’s survey, 18.5% of respondents reported experiencing an increase in allegations of fraud, 16.1% reported an increase in court injunctions barring payment of bank undertakings. It is also of concern that 23.9% of respondents reported an increase in claims under bank guarantees.

Trends in SWIFT messaging are consistent with respondents’ insights

Overall SWIFT trade traffic volumes showed a decrease of 1.79% in 2014, which was more than double the decrease of 0.65% reported in 2013. The importance of changes in trade patterns in Asia are also underscored by the fact that Asia Pacific continues to register far greater volume of MT 700 traffic (issue of documentary credit), namely 70% import and 76% export. Perhaps most fascinating of all the trends in SWIFT trade messaging in this report is the rise of the renminbi, which is the second most used currency on the SWIFT platform, accounting for 10.17% of total value in 2014, up 9% from 2013. Of course, the United States Dollar remains the dominant currency for trade messaging being used for 82.51% of the MT 700’s (issue of documentary credit).

SMEs hardest hit by the trade finance gap and compliance challenges

The perception of a shortfall of trade finance globally has become evident and an increase in rejection of trade finance proposals or applications has hit SME applicants. 

Overall it was reported that 45.75% of proposed trade finance applications had been submitted by SMEs, 39.63% by large corporates and 14.62% by multinational companies. Many of these trade finance proposals were declined by banks. Of all the declined trade finance proposals, over half of them (53%) were submitted by SMEs. By way of contrast, 79% of large corporates had their trade finance proposals approved. 

It is of concern to see that 70% of this year’s respondents report declined transactions due to Know Your Customer (KYC)/Anti-money-laundering (AML) regulations, with 46% of respondents reporting experiencing termination of correspondent relationships due to related costs and complexities. Going forward, it is worrying to observe that 91% of respondents expect compliance requirements to increase over the next year, up from the 81% in 2014. 

Furthermore, the International Trade Centre reports that a lack of financing for SMEs impedes their ability to access information, skilled labour and technology, all of which are vital for innovation to create new exporters around the world.

Compliance is now part of the global financial system but difficulties remain due to differing standards being applied: 53% of respondents consider that the lack of compliance harmonisation between jurisdictions is a great challenge to the trade finance industry. 

Latin America and the Caribbean (LAC) focus: The trends of the rest of the world are borne out in the Americas 

Through research interviews with key regional trade finance professionals, we found that many of the emerging global trends are also evident in LAC. Regulatory issues are challenging, with many senior trade bankers concerned about the possible negative impact on costs and liquidity in the region. 

“De-risking and regulatory changes are adversely affecting trade finance flows and financial inclusion, particularly in higher risk emerging economies in Latin America,” says Mauri Cavalcanti de Albuquerque, Head of Global Transaction Banking of Santander Brazil, adding that Basel III reforms have ‘created some unintended consequences in Latin America, where a risk weight of up to 150% may be required on short term loans related to trade finance’.

Reported research from the Florida International Bankers Association (FIBA) correlates the 2015 Survey’s findings on the cost of regulation. FIBA maintains that the risk weighting rules around Basel III will unfairly penalise trade in LATAM, where a risk weighting of up to 150% on short-term loans related to trade finance may be required, compared with a figure of 20% weighting in some developed markets. 

Equally, macroeconomic issues are a deep concern in LAC. The Inter American Development Bank (IDB) revealed that LAC exports fell by 9.1% over the first three months of 2015, with Mercosur exports falling by 41.3% in 2014. 

Further concerns regarding the financing of SMEs are also apparent in the region, where 80% of companies are small-sized, but just 15% of trade finance is financing these actors of the market. 

International trade and finance is predominantly short-term business with long-term benefits

We are now at a mission critical point in the evolution of an inclusive world of international trade and finance, which is inherently linked to economic development in both the advanced and poor countries. Without trade finance, there will be no expansion of trade; without trade, there is no need for trade finance. 

Recent global events such as the devaluation of the yuan and structural changes in China were not unexpected. The negative consequences have brought the importance of advancing trade and trade finance in this globally connected world into sharp focus. Remember, before the yuan devaluation, the pressure on Asian currencies was already in play and driven by the expectation of a pending upward movement in US interest rates. 

No doubt, emerging market nations, including the BRICS – Brazil, Russia, India, China and South Africa – who met at the G20 finance chiefs’ meeting in Turkey earlier this month, encouraged a moderate approach to raising US interest rates.

Holding off on raising interest rates is for now the correct approach. Despite the current pressures in international trade markets, the creeping upward trend in protectionist trade barriers must be resisted. Countries must also show unity in resisting competitive currency devaluations and the ongoing positive dialogue, facilitating open secure trade enhancing the world trading system, must be continued.

Important for policy makers to think right and do things right 

International Chamber of Commerce Sri Lanka Chairman Keerthi Gunawardane said it was important for policy makers to think right and do things right.

“Sri Lanka should learn from the trends and the experiences in the other parts of the world and make the correct strategies to achieve good results,” he said in response to latest trends in global trade and finance report issued by the ICC.

He said this recent report from the International Chamber of Commerce speaks about the current difficulties in the world starting from the recent devaluation of the Chinese Yuan.  China, the second largest world economy accounts for 15% of Global GDP and 50% of growth and perhaps more acutely, close to 45% of Asian GDP, the fallout in terms of trade impact can be expected to be significant.  

Previously high performing emerging markets of Russia, Colombia, Brazil, Turkey, Mexico and Chile have fallen between 20 and 50% against the US$. The Indonesian Rupiah and Malaysian Ringgit are at their lowest level since the Asian financial crisis of 1998. Even Australia, one of the 10 largest advanced economies has been impacted with the Australian dollar at its weakest level since April 2009. 

With the lapse in US EXIM Bank’s authority, as of 1 July 2015, the US EXIM Bank is unable to take on new trade-facilitating business for US exporters. This is a practical concern going forward when we see that US exports dropped 5.6% to $ 895.7 billion in the first seven months of 2015.

“Sri Lanka should learn from the trends and the experiences in the other parts of the world and make the correct strategies to achieve good results. Every change in the world can create opportunities or threats to us. It is very important for the policy makers to think right and do things right for the benefit of the country rather than looking from a political eye,” Gunawardane said.