Asked if the worse of the crisis is over, Georgina Baker, the brains behind the IFC’s trade finance programmes, is doubtful, “What we think is that we are at the bottom. Whether we are going to stay at the bottom for some time, I don’t know.”
Faced with this rather gloomy prospect, Baker sees the IFC’s new global trade liquidity programme and its trade finance facilitation programme as vital tools to help provide liquidity and risk mitigation support to the still fragile trade finance market.
Baker has a solid background in trade finance, having run IFC’s trade initiatives for five years, starting the global trade finance programme (GTFP) in September 2005.
This saw IFC guaranteeing payment risks of local emerging market banks. It was a programme that Baker admits to shamelessly copying from European Bank for Reconstruction and Development (EBRD), which had been using the same format in Europe for years before. One of IFC’s first responses to the crisis, the fall in world trade volumes and the widespread retraction of trade credit, was to increase the GTFP ceiling from its original ceiling of US$1.5bn to US$3bn.
But as market conditions worsened, Baker and her team quickly saw that lack of risk appetite was not the only problem emerging from the crisis. A lack of liquidity had emerged as the main obstacle and the IFC needed to do more than just cover credit guarantees.
So in May 2009, IFC launched the global trade liquidity programme (GTLP), which aimed to raise US$5bn to be directly lent to emerging market importers and exporters to support global trade. The programme would mobilise a mix of government, development finance institutions (DFI) and private sector bank funds and then on-lend the money through global banks to local banks, which in turn would lend to SMEs in their countries.
So far GTLP has raised US$2.5bn from the public sector and US$3.6bn from the private sector. The programme generally sees private sector banks committing 60% of the total and 40% coming from GTLP. This total is then lent on to the global banks’ local bank networks.
The first banks to join the programme were Standard Bank and Standard Chartered. Both banks adopted different approaches to the scheme. Standard Bank received a credit line of US$500mn by the IFC, to be used by the bank to on-lend to its clients in Sub-Saharan Africa. In Standard Chartered’s case, the agreement was a US$1.25bn funded partnership between the IFC and the bank. In this programme, Standard Chartered is originating trade finance transactions from emerging market banks, which then extend trade finance to their clients. The IFC is investing up to US$500mn in these transactions, and Standard Chartered will invest US$750mn. The aim of this scheme is not to pump money into Standard Chartered, which is adequately liquid, but rather it allows Standard Chartered to share some of the risk out, and pump liquidity into the local banks and regions that need it.
Since these first agreements, Rabobank, JP Morgan, Citibank and Commerzbank have come on board, with Citi, Rabobank, and Commerzbank making commitments to date of US$750mn apiece.
The GTLP programme has an expected life span of three years and supports trade finance facilities with an average life of 180 days. In this way, each dollar has the capacity to be lent out five to six times. By the end of the programme, up to US$50bn of trade will have been mobilised.
But obstacles lie in its path. Some may question why the IFC should be lending money to major global banks, institutions that are seen by many as the culprits behind the financial meltdown.
There will also be concerns about the practical application of the programme, and whether the committed funds will be quickly and efficiently drawn down and used effectively to revive trade finance markets.
Other potential problems lie in the somewhat slow response of the global banking institutions to the programme and their natural reticence to work with DFIs.
However, Baker sees the programmes as a means of filling the liquidity gap and supporting the beleaguered risk appetite of banks. She expects that trade flows and bank liquidity will rebound before the facility runs out. Banks think with their bottom line in mind, she argues, and as soon as they are happy to take their own risks, they will do so. Then, the IFC’s job is done.
GTR: It has been a year since the crisis got into full swing. Are we over the worst?
Baker: I don’t think so. What we think is that we are at the bottom. Whether we are going to stay at the bottom for some time, I don’t know. But I would like to think that we are coming out. The reason I say that is that the GTLP programme was created to help, and now banks are really drawing down on it.
If there was no trade going on, they would not be taking the money. However, they are not taking the money in huge slugs; rather they are tapping into it in a cautious manner. The large global banks are much closer to the global trade market than I am, and they would not be taking it if they did not see business rising.
GTR: So are they taking a smaller percentage of the facility than you would want them to be taking?
Baker: Citi has drawn down US$150mn from their US$750mn allocation. I will know things are picking up when they take more.
GTR: The two main trade programmes have been widely praised from the outside, but have they met your expectations and achieved what you wanted them to achieve?
Baker: The trade facilitation programme is an unqualified success. It has been going for five years and we have never had a claim. The increase [in IFC’s allocation to GTFP] means that it is being used about 300% more than it was being used.
The GTLP has been an enormous amount of work to put together and I wouldn’t call it an unqualified success until all the money is drawn down. We may not get to a stage where the facility is fully dispersed because the market moves so quickly.
GTR: World Bank president Robert Zoellick has said that 90% of the collapse in trade has been due to a collapse in demand, not due to an absence of credit. You have done a lot to help on the financial side, but is there anything you could do on the demand side?
Baker: There is very little we can do on that. Trade is very much demand driven and even though manufacturing companies have started to build up inventories again, it may take some time for trade to pick up to the levels that existed pre-crisis.
GTR: How do you see the IFC’s role evolving during this crisis period?
Baker: We are adapting. GTLP is a funded programme because we saw that liquidity was the issue. Now banks are saying they have liquidity but they need risk mitigation. Can you take local issuing bank risk? Can you take country risk? So we are now doing an unfunded version [of GTLP]. In particular, we are trying to create a regional solution for Eastern Europe with three international banks. Many of the governments we approached to help us with GTLP didn’t have the liquidity themselves but were happy to help us with guarantees. So we are now looking at a new batch of risk mitigation guarantees we can offer to Eastern European banks. We are taking that to our board in November, so we can roll it out quickly after that.
GTR: Will this not be in direct competition with ECAs and private credit insurers?
Baker: No I don’t think so. Most ECAs are there to support exports from their own countries and they are quite specific about that. So we have gone to governments and said that this is a global problem and asked what they can do to help. Many want to help but don’t actually have the cash. This is a way to stimulate the trade market without costing a lot of money upfront.
GTR: Generally we are seeing much more trade growth between developing countries than to the West. Your mandate is to support developing countries, so what can IFC do to promote this trend?
Baker: Certainly on the GTLP funded side, one of our first projects was with Standard Bank and that helped intra-Africa trade. So absolutely that was in support of South-South transactions. While we do try to support it, I always come back to the fact that trade is demand driven. The reason this programme works is that it is completely fluid and people will use it as they see fit. If we start trying to make people do things, they will stop using it. So I see the only way we can help on the demand side is by making the programme as easy and flexible to use as possible.
I was in the Democratic Republic of Congo the other day, talking to banks in Kinshasa and I started talking about trade with China. They said they didn’t have any relationships there and while they had been thinking about expanding their existing, liquid business with the West, they saw that this programme could help them expand into new areas, such as China trade.
GTR: Are you worried about a rise in protectionism?
Baker: Personally yes. If governments start to meddle and demark trade corridors, it makes people on the other side nervous and deters people to trade the other way. I’m a strong believer in free trade and I don’t think it is healthy to start putting limits on prices and volumes.
GTR: What lessons have you learnt over the past year?
Baker: Well mainly that people can be very responsive. I usually deal with private sector banks and then we found ourselves sitting in front of governments, asking for their help and they responded. We are happy to have created a product that meets peoples’ needs. We saw a gap in the market, that there was no secondary market and we able to step in to do it. Banks that I have enormous respect for – Citibank, Standard Chartered, Commerzbank, JP Morgan, Rabobank, Standard Bank – the fact that they have signed up for such large chunks makes me very proud.
GTR: Will this stop people questioning the relevance of development financial institutions working in private sector trade?
Baker: Internally in IFC, we feel we are generally there for the long term, which translates into long-term lending. So how does trade finance fit into that? I had a lot of arguments at the beginning – before GTLP but with GTFP – where we looked at countries that had nothing and they needed short-term funding more than long-term funding. If we had gone in with our normal long tenure programmes, then there wouldn’t have been any traction. And so I brought many people around to the view that trade finance is relevant for a DFI because of the way it helps SME importers and exporters. If we can reach those in any way, then that is good.
Sometimes people question why we are giving US$400mn to Citibank. And I talk at length saying that lending to Citi is a quality way for us to help SMEs globally. They have an enormous footprint, and if we can work through that and reach the end users then we should.
GTR: When will you know the GTLP has been successful?
Baker: I know that banks will stop using us the minute they don’t need us and that is absolutely fine.