As we approach the end of a truly turbulent year, the role of trade finance in enabling the proper functioning of global supply chains during a period of intense strain has become increasingly clear – although whether or not it has sufficiently risen to the challenge is still up for debate.
Anecdotally, we’re hearing that traditional trade finance instruments are faring well again after having initially plummeted with the downturn in economic activity brought on by Covid-19. In some regions, such as Asia, there’s been a strong uptick in demand for core trade products over the last few months, and transaction volumes have reportedly reverted back to 2019 levels. It would seem that, in certain pockets of the industry at least, 2020 may not pan out quite as terribly as had originally been anticipated.
In fact, a new report from data analytics provider Greenwich Associates – published just as this publication goes to press – finds that a relatively rapid rebound in transaction banking revenues is expected in 2021, following revenue drops this year of 8% and 12% for trade finance and cash management services respectively.
But the link between trade finance and the real economy lays bare some very real concerns for the broader industry.
According to World Trade Organization (WTO) estimates, trade volumes are currently down globally by approximately 10 to 11% as a result of the pandemic. While one would expect the situation around the availability of trade finance to improve as a result of a drop in demand, in fact the opposite is true: the trade finance gap, which has remained stubbornly at US$1.5tn for the past few years, is at risk of widening even further because of the increased aversion to risk and flight to quality by international banks in response to the pandemic.
Since the outset of the crisis, countries where there is a high perception of risk have been cut off from international credit lines. As demand for trade finance begins to pick up, middle-income countries may now be facing the same fate as some banks continue to reduce their exposure.
Tackling this issue has become an urgent priority. The International Chamber of Commerce (ICC) has warned that as much as US$5tn of trade credit market capacity will be needed to return trade volumes to 2019 levels, with up to US$1.9tn of that coming from the bank-intermediated market alone. However, without rapid interventions, there are growing fears that the industry may not be able to meet this demand.
And so, while we look forward to a gradual return to normality and a restoration of the business to its growth trajectory, the industry will need to continue to do the groundwork already underway in terms of improving market infrastructure and legislation as well as other basic measures to ensure that trade finance reaches those that need it most.
Throughout this Q4 publication, we investigate the ways in which the export finance market in particular has been dealing with the pandemic and the impact that lockdown restrictions have had on transaction flows and project activity levels; we also highlight the actions taken by export credit agencies around the world to help address the critical shortages in liquidity. The next few months are likely to be a testing time for all as the government-led financial measures that have been extended to companies worldwide in the wake of the pandemic are phased out, bringing increased strain to businesses that have been relying on this support.