Global trade is in the spotlight, but what is happening across Asia to shape future trade flows and what are trade financiers operating across Asia doing to adapt and support these flows?
In times of almost unprecedented uncertainty, it is important for all of us to be open to new perspectives on market trends, and we, the GTR Asia editorial board, are delighted to play a part in sharing these important perspectives. It gives me great pleasure to open this inaugural Market View on behalf of the newly formed board.
Recent surveys have suggested that the balance of availability and demand for trade finance in Asia and OECD markets are quite different. The studies suggest that there is sufficient availability of trade finance in Asia. But in Europe and the US, there is a shortage of capacity, both from banks and trade credit insurance cover, possibly as a result of liquidity and capital reductions in OECD markets, though this has been less prevalent across Asia.
From an Asian perspective, while the capital capacity has been relatively unaffected, we have only recently seen the gradual re-emergence of secondary market investors and mainly those located in Singapore, Malaysia, China and Hong Kong SAR.
While a smaller number of Asian-based players remained active right through the end of 2008 and the first half of 2009, most have been relatively quiet. However, they are now starting to re-enter the market, buying assets on a selective basis. For certain categories of readily acceptable bank risk, there is substantially more credit capacity than assets at present and this is inevitably impacting pricing, with margins for China and India risk, for example, falling significantly over the past couple of months.
Short-term vanilla trade
Capacity for more niche risks or longer tenors remains relatively scarce and pricing remains higher as a result. There may therefore be some sense that things are returning somewhat to normal. But the reality is that beyond short-term plain vanilla-type risks, investor appetite is still very low and has a long way to go before it can be considered sufficient or stable enough to support the trade market without being supplemented significantly by other forms of credit risk coverage. As we have seen before, market capacity for risk can come and go quickly, and as it does, pricing levels and support for trade business are impacted.
So what other types of risk coverage capacity is available to trade financiers and their clients in Asia to smooth the ups and downs and fill the gaps?
Certainly private credit insurance has been of increasing importance over the past years and this trend continues. However the sudden downturn of consumer activity in OECD markets in particular has put great pressure on companies there. This has led to an increase in delays and defaults on payments of open account exports going from Asia to OECD markets, which in turn impacts insurance companies which have the greatest exposure to OECD markets.
The future for trade credit insurance, however, is certainly very bright as open account financing in Asian markets is still in its infancy stage. Growth rates for open account business over the next five to 10 years will far outstrip both documentary trade in Asia as well as OECD open account trade volume growth. It is already well-documented that insurance premiums have increased as a result of the short-term losses the insurers are incurring, but as we move towards stabilisation and see the growth of regional and global trade flows, those companies able to capture a piece of the huge open account growth in Asia will stand to benefit.
Securitisation of trade assets, whilst still relatively new to the market, is also something that has become more accepted by sophisticated investors who may not have been previously familiar with trade as an asset class. There are some good public examples of trade securitisation deals which have been launched in the past few years and I would expect to see more such deals going forward – after all, even George Soros talks about trade finance these days.
Governments and public entities have also been taking different steps to help address credit and liquidity capacity issues and there are some good examples of active partnerships between the public and private sector, such as the World Bank/IFC partnership with Standard Chartered and other banks with the global trade liquidity programme (GTLP), which will provide around US$5bn of additional capacity to support global trade flows.
The secondary investor market, and to some extent the private credit insurance market, by their nature will experience ebbs and flows. But initiatives such as the GTLP and others which are in discussion within the public sector across the world will provide a relative level of constant support to the global trade market, both now and into the future.
It can be argued that for the longer-term stability of world trade, more programmes that are counter-cyclical in nature need to be established in order to provide fast and ready stability in future times of need. We see this aim being discussed more frequently at government level, both across Europe as well as in Asia. Certainly this would make sense, but the more likely reality is that many, if not all programmes will come to a natural conclusion.
Therefore, it is still critical for trade financiers to continue to build or have access to a broad range of risk distribution and capital management tools, and for these disciplines to form an ongoing and key part of not only the trade finance strategy but also that of the bank as a whole.
The right tools and capacity management strategy should allow an organisation to plan for the growth of its clients and to be able to fully support the increase and changes of risk and funding support that these clients will require – even before these opportunities and needs are apparent to the clients themselves.
A well-built capital and risk distribution infrastructure will allow the institution to continue to support its clients through their growth and provide a good buffer against market shocks. The goal is to remain open for business for clients and to do so at a price level for risk that is sustainable for the trade financier, and at the same time not a barrier to the growth of clients’ business.
Compared to the late days of 2008, there is certainly more comfort and relative stability, but we are still operating in an environment where risk and liquidity capacity is reduced and pricing remains volatile. There is strong evidence in Asia that there is sufficient capacity to handle the regular vanilla trade risks and the picture in OECD markets seems to be improving.
Ultimately however, confidence and consumer consumption still needs to pick up before the balance of capacity and demand will be properly tested once again. Perhaps the next problem trade financiers will face is not being ready for the upturn.