The Bankers’ Association for Finance and Trade (Baft) sees some stabilisation in the trade finance markets, according to data from a joint Baft and IMF survey.
The report suggests there have been some small improvements in the market, but most market dislocations remain and the majority of public-private sector partnership programmes have had “beneficial but limited” effects.
“There is only a slight improvement in the availability of credit since our last survey, and this remains an obstacle in the overall recovery of trade finance markets,” comments Donna Alexander, president of Baft.
“As the global demand for goods and services returns, it will be more important than ever to ensure that credit facilitation programmes are operating at maximum efficiency. As we’ve noted many times in the past, global trade cannot fully recover in this climate if credit availability does not improve.”
The survey has revealed that the rising price of trade instruments seems to be slowing.
More than 80% of banks surveyed report that the decline in total value of trade finance activities is due to fall in demand for exports and imports. This decline was seen across all three product lines surveyed: letters of credit; export credit insurance; and short-term export working capital. Respondents highlighted industrialised countries and Latin America as the worst affected regions.
The data shows that from the fourth quarter 2008 to second quarter of 2009, close to two-thirds of banks saw a drop in total value of trade finance activities.
Over this time, there have been well-publicised efforts by multilateral development banks to plug this gap in credit and liquidity. The Baft report has found that while the market has welcomed these “stop-gap” measures taken by public sector groups, there is still a need for some of the programmes to be improved.
Banks also estimated that open account transactions shrank, making up 40% of total business volumes in Q2 2009, as opposed to 45% at the end of 2007.
The survey noted an increasing tendency toward cash-in-advance financing that has in part contributed to the declining share of open account transactions. This trend reflects the growing risk aversion by the banks and non-financial corporations.
The probability of default appears to be stabilising, with the majority of respondents indicating that there was no change in the probability of defaults, and only 11% reported an increase in default risk. This compares to 40% reporting a likely increase in defaults in a survey carried in March this year.
Baft has also issued a paper outlining the detrimental effects of Basel II capital standards on trade finance. To better support a recovering trade finance market, Baft believes that a more rational treatment under Basel II for trade instruments, given their fixed, short-term self-liquidating nature, will have a positive effect.
Copies of the trade finance market survey and the Basel II paper have been sent to the G-20 finance ministers, multilaterals and other key leaders and institutions.
Other Key Findings
• Six out of 10 banks surveyed said that their trade-related guidelines have changed since 2008 Q4. Guidelines now generally call for greater caution with certain countries and sectors, as well as increasing the need for collateral and shorter tenors.
• Over 75% of banks reported that they could meet the increased demand for trade finance. However, 41% said that less credit availability in their own bank/institution means they can’t do as much business as they liked.
• Among those banks that reported an increase in their capital requirements, 43% said Basel II has had a negative impact on their ability to provide trade finance.
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