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 back to 2019 levels in the wake of the Covid-19 crisis.

In a new report, titled Priming the market to drive a rapid economic recovery, the global business organisation says that the uncertainties created by the pandemic will result in an increased need for trade finance products over the medium term – but that without rapid interventions, the market may not be able to meet this demand.

“With the World Trade Organization (WTO) estimating a potential decline in global merchandise trade in the order of 13-32% in 2020, we hypothesise that something in the order of US$1.9-5tn capacity in the trade credit market will be required to enable a rapid V-shaped recovery as demand returns to the global economy,” the report says. The ICC has calculated that this figure will potentially encompass an estimated US$0.8–1.9tn of required capacity in the bank-intermediated market alone, including products such as letters of credit (LCs) and guarantees.

But finding the credit necessary to return merchandise trade volumes to close to what they were before the virus hit will be challenging.

“We see a risk that the impacts of Covid-19 could compound longstanding gaps in the provision of trade finance – potentially leading to a chronic shortage of the very credit that will be needed to power a rapid economic rebound,” says John Denton, secretary general of the ICC.

Globally, unfinanced trade finance requests – which the Asian Development Bank (ADB) puts at US$1.5tn – have remained stubbornly stable for a number of years. According to the ADB’s research, SMEs make up the largest proportion of the trade finance gap, with 45% of their trade finance applications being rejected, compared to 39% for mid and larger-sized firms and 17% for multinational corporations.

In its report, the ICC says that lifting the barriers to access to trade finance and getting more capacity into the market will be vital to powering an economic rebound post-Covid-19. It has identified a series of what it calls “proactive interventions” which will be required to prime the trade finance market in anticipation of demand returning to the global economy.

Building on a recommendation it made last month, the ICC has underlined the need to void pre-existing legal requirements for key trade documents to be presented in hard-copy paper format in order to get trade finance to where it is most needed.

“Covid-19 has exposed the arcane reliance of global trade flows on physical documentation,” says Denton. “With social distancing requirements expected to continue for the foreseeable future, it’s imperative that policymakers enact emergency reforms to allow trade transactions to be processed using digital documents. Unnecessary delays in cross-border trade can strain small companies at the best of times – in the current environment they risk proving fatal.”

Regulatory treatment of trade finance is also in the ICC’s sights. Banks have long pushed for trade finance to be treated differently to riskier assets from a capital requirement perspective, and in this latest communiqué, the ICC calls for a reduction in risk weights for exposures to MSMEs from 100% to a range between 75% and 85% as proposed by Basel III.

“We recommend consideration be given to adjusting risk calculations for key products, as appropriate, in line with the established low-risk profile of this asset class and benchmarked against performance data in the ICC Trade Register,” the report says.

Another recommendation centres around getting more liquidity into the market and freeing up banks’ balance sheets to lend to more exporters. For a small number of banks, including Deutsche Bank, Standard Chartered, Citi and Santander, repackaging trade finance assets for investors through securitisations has been one way to do this, and the ICC now wants to see governments and central banks step in with large-scale purchases of trade assets.

“All governments have financial arms allowing them to invest – these can play the role of investor in the vehicle that would be packaged by banks,” Olivier Paul, director of finance for development at the ICC, tells GTR.

Adding to these measures, the ICC would also like to see export credit agencies (ECAs) equipped to provide adequate support for short-term trade transactions. “The idea here is to allow ECAs to provide guarantees to trade transactions being used as risk mitigation from a risk assessment perspective, encouraging banks to develop credit lines,” says Paul. “This can be focused on particular regions that we know will be deeply impacted – Africa and certain parts of Asia and Latin America are good examples.”

If all of the ICC’s proposed measures are implemented, the organisation believes trade finance capacity could be sufficiently boosted to bring trade close to its pre-pandemic trend over the next 18 months. To garner further support for its recommendations, the ICC says it will now take its agenda to world leaders at the upcoming G7 summit, to be held in June.