Greetings from the UK, where warehouses are filling up with delayed shipments of goods that retailers are no longer able to sell — just as in much of the rest of Europe.
Not a welcome sight for banks involved in trade finance, or developing countries struggling to secure essential supplies. We examine the problem in today’s main piece.
Policy watch returns to the US-Mexico-Canada trade agreement, while our chart of the day looks at German export sentiment.
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Finance dries up as international banks reassess risks
The sight of pallets piling up in ports is a nerve-racking prospect for banks involved in trade finance — credit, insurance or other guarantees extended to provide working capital or to cover the risk that an exporter will not receive payment for goods they have shipped.
This is generally thought of as a low-risk business: most transactions are short term, well-documented, and underwritten by good collateral — and default rates, as tracked by the International Chamber of Commerce, have historically been low.
Yet trade finance rapidly became scarce in the aftermath of the 2008 financial crisis. In many developing countries, its scarcity has been a barrier to trade ever since, after many global banks cut correspondent banking relationships with countries seen as risky on reputational grounds.
Trade finance appears to be drying up even more rapidly now, as international banks reassess risks and local lenders in some countries struggle to access dollar liquidity.
For developing countries struggling to secure essential supplies, this is potentially just as much of a problem as the export bans on food and medical equipment that some governments have put in place. Last week, the IMF and World Trade Organization sounded the alarm, saying they were tracking developments as trade finance was “important to ensure that imports of food and essential medical equipment reach the economies where they are most needed”.
Some argue that the decline simply reflects the sharp contraction in global trade volumes. Ebru Pakcan, global head of trade at Citigroup, said that with Chinese factories reopening as orders from European clients declined, “this will create cash flow challenges and those cash flow challenges will turn into credit challenges . . . that will impact credit availability for some of those companies”.
But others say that the scarcity of finance is now itself a barrier to trade taking place.
“I can absolutely confirm that the trend is real,” said Francis Malige, who leads the European Bank for Reconstruction and Development’s investments in the financial sector. Coronavirus lockdowns had hit trade volumes, he said, but “the financing available for trade flows in emerging and frontier markets has dropped even more than the volume of trade”.
Euler Hermes, one of the biggest providers of trade credit insurance, acknowledges that in many cases it is now reassessing risk, cutting credit limits and increasing the cost of cover.
“The current crisis brings with it a significant increase in late payments and additional risks that our clients may face unpaid invoices as certain buyers may present heightened levels of risk of non-payment and deteriorated credit worthiness,” the insurer said.
Multilateral institutions and governments are now stepping in.
The EBRD already partners with local banks in the countries where it operates, guaranteeing political and payment risks for trade transactions that the local banks finance. Malige said many of these banks — even in countries such as Turkey, previously in no need of help with trade finance — were approaching the EBRD asking it to increase its support.
The EBRD said the value of transactions supported under its Trade Facilitation Programme in March, at €385.6m, was the highest ever for a single month, and included backing for imports of ambulances from Portugal to Morocco, and of medicines from Switzerland to Jordan.
The World Bank is taking similar steps to enable private sector imports in developing countries. And several governments — including France, Germany and most recently Belgium — are setting up schemes to guarantee payment risks for their own exporters.
But with unmet demand for trade finance already estimated at $1.5tn a year even before the crisis hit, their efforts will hardly be enough to fill the gaps. That will only happen once economies are up and running again.
Even then, Pakcan noted, although banks were still providing some support to help companies bridge short-term liquidity needs, they would be “more careful” about financing trade flows in the worst-hit sectors for some time to come.
Charted waters
Germany’s export order sentiment survey hit a record low for April, according to data released on Monday. The only sector reporting stable business in Germany, unsurprisingly, was healthcare.
Policy watch
US president Donald Trump signs the US-Mexico-Canada Agreement at the White House in Washington in January © Bloomberg
The US government notified Congress on Friday that the US-Mexico-Canada trade agreement would go into effect on July 1, despite opposition from some business leaders and lawmakers, writes Aime Williams.
In a statement, the US trade representative’s office said it had completed taking measures necessary to comply with the deal, which would be enforced from the summer.
“The crisis and recovery from the Covid-19 pandemic demonstrates that now, more than ever, the United States should strive to increase manufacturing capacity and investment in North America,” said US trade representative Robert Lighthizer.
Earlier this month, the majority of senators sitting on the chamber’s influential finance committee signed a letter calling for a delay to the deal’s implementation.
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