Related News

Berne Union forms climate change action working group

West African Development Bank wins more funding

Support grows for African factoring firms

UPDATE: More EU countries to join AIIB

WTO back in the game?

Keeping credit lines open for the financing of trade was one of the key topics at the IMF and World Bank meetings held in October.
IMF’s managing director Dominique Strauss-Kahn spoke of his concerns about the impact of the financial crisis in the advanced economies on trade in the emerging markets. Speaking at a press briefing ahead of the meetings, he disputed that the theory of decoupling was ever a likely scenario, before adding: “But to the traditional channel of transmission of a crisis, namely trade, for instance, and the decrease in growth in advanced economy, we have now to add something different, and the different thing is the cut in credit lines, or even worse, the repatriation of capital that traditionally came to support the balance of payments of an emerging country. This situation creates a lot of imbalances in many emerging countries.”

In response to these mounting problems, Strauss-Kahn affirmed that the IMF was on hand to help with financing resources of up to US$200bn, adding that they are also in the process of building a new “liquidity facility” to fill the widening financing gap.
In response to an audience question, Strauss-Kahn added that the IMF has had some “preliminary discussions” with the IFC and private commercial banks on the possibility of creating a fund aimed at supporting the recapitalisation of banks in the developing world. He explained that perhaps the World Bank’s IBRD (International Bank for Reconstruction and Development) could also play a role in this fund, as it would involve public capital going into governments to recapitalise institutions.
He elaborated on the motivation behind these initial plans, remarking that there is a real need to “get ahead of the curve, and not necessarily for big banks in to the developing countries, but for some of the small banks that could be under stress, could take losses, need capitalisation.”

Strauss-Kahn’s comments follow a press briefing given the previous day by Guido Mantega, finance minister of Brazil and chairman of the G-20, who spoke of his country’s problems with accessing loans for exports. The Brazilian government has announced it will open new credit lines for exporters by tapping into its foreign reserves.

Mantega also discussed the need for emerging markets such as Brazil to maintain the growth of their economies, highlighting the importance of supporting a strong domestic market in the event of a retraction of world trade.
However, he warned against the implementation of protectionist policies, remarking: “When I say that we should take advantage of our domestic markets that should not be done to the detriment of world trade. On the contrary, I think that global trade should continue to expand on a global scale, because it is good for all countries.”

IFC increases ceiling for trade finance
Strauss-Kahn’s comments follow news that the IFC has decided to increase the ceiling of its global trade finance programme by a further US$500mn to US$1.5bn. The IFC sees the expansion of its programme as a means of fulfilling its anti-cyclical role in international markets, helping support trade with emerging markets when other forms of liquidity are drying up.
With banks reducing their exposure, short-term trade lines could start to tighten. However, through the IFC’s trade programme, the multilateral can guarantee the payment risk of issuing banks up to the full value of the transaction. This means that trade credit can be maintained in the market at a time when imports may well be of critical importance to a region and where a country’s exports can generate much-needed foreign exchange.

“The extended capacity of the programme comes at a critical time of severe credit constraints in the market, making IFC a highly valued partner in trade financing,” comments Georgina Baker, short-term finance, global financial markets department, at the IFC.
To date, 126 issuing banks in 66 countries and over 145 confirming banks in 70 countries are members of the IFC programme. In its first three years of operation, over 2,300 guarantees have been issued for over US$3bn in commitments.

Miga maintains support for emerging economies
The Multilateral Investment Guarantee Agency (Miga) has also stepped in to help maintain foreign direct investment into emerging markets, and the credit crunch tightens its grip on liquidity sources. In its annual report, it reveals that for the year ending June 30, it has issued US$2.1bn in guarantees to support foreign direct investment in developing countries, and expects to continue this level of support as the credit crunch tightens its grip on sources of liquidity.

“Developing countries continue to rely on private sector investment and FDI to support economic growth. But with liquidity drying up, the risk appetites of international investors for projects in emerging economies may be tested,” comments James Bond, acting executive vice-president and chief operating officer of Miga, on the release of its 2008 report.
“Miga can play a critical role in helping these economies grow by supporting projects that generate jobs and build essential infrastructure, allowing governments to focus funds on urgent social needs,” he adds.

The US$2.1bn-worth of guarantees (calculated for the year ending June 30, 2008) marks the largest amount of new guarantee coverage issued in Miga’s history. The insurer also recorded an active portfolio of over US$6.4bn at the close of the year. These results bring the total guarantee coverage issued since Miga’s establishment in 1988 to US$19.5bn.