The demand for trade finance products will wane in 2012, according to research by the International Chamber of Commerce (ICC) and the International Monetary Fund (IMF).
The research is based on a joint ICC-IMF survey among 337 financial institutions which indicated the emergence of a two-speed financial system with the outlook for emerging Asia being the strongest, and the eurozone lagging behind as the weakest.
“Around 60% of the respondents indicated that the demand for trade in Asia will show improvement in 2012, while close to 50% of respondents predicted a further deterioration for the Euro area,” says Thierry Senechal, ICC senior policy manager for banking.
Ranil Salgado, IMF’s division chief, trade, institutions and policy review adds: “Recent developments in European financial markets and their impact on global trade finance called for a market snapshot survey. Joining force with ICC has produced first-rate market research to help both the industry and policymaking communities to monitor emanating risks and provide timely input into ongoing regulatory and G-20 discussions.”
Factors contributing to the negative outlook for 2012 were primarily financial constraints reducing the availability of trade finance, particularly for large banks and those with business in developing countries.
90% of respondents indicated that “less credit or liquidity available at counterparty banks” would affect their trade finance activities – a figure substantially higher than the just over 50% recorded during the 2008-09 financial crisis.
Naturally, the financial constraints appeared to reflect the large share of trade finance coming from eurozone banks. The survey indicates that recent European bank deleveraging has led to tighter lending guidelines and reduced availability of credit and liquidity. In addition, US dollar funding for non-US financial institutions may exacerbate the situation, since trade remained largely denominated in US dollars.
Additionally, many respondents noted that one of the challenges facing the global economy was a more stringent regulatory environment represented by the new Basel capital framework which may impede a trade-led recovery. Preparation for the implementation of Basel III seems to be already adding pressure on the cost of funds and the availability of liquidity.
With an urgent need for durable solutions to be forged at an international level, Tan Kah Chye, chair of the ICC banking commission explains that “the pursuit of essential public finance and regulatory reforms is crucial in 2012 and beyond.”
“We caution the use of uncoordinated national initiatives and the layering of regulatory requirements which may pressure trade flows and eventually negatively impact on growth worldwide. This new ICC-IMF research calls on standard setters and policymakers to carefully study the potential unforeseen impact of proposed Basel III changes on trade finance,” he adds.