New players such as hedge funds should be welcomed into the trade finance market to fill the liquidity gap, according to a senior banker.
“Let’s embrace the hedge funds and pension funds,” remarks Tan Kah Chye, global head of trade and working capital at Barclays.
There are a number of funds already active in the trade finance market, but Tan tells GTR that more are needed to keep the cost of trade finance under control.
“They are part and parcel of a broader community of financiers and we need more of them.”
“Because of the existence of the funds we are able to plug that [current liquidity] gap, otherwise pricing would be a lot higher than it is today.”
Tan’s comments come as the International Chamber of Commerce (ICC) launches its global survey on trade and finance. The report found that current economic turmoil is dampening prospects for trade growth in 2012.
According to the report, annual trade growth for 2012 is set to be 5.2%. In 2011, annual trade volume was 6.6%, slightly above forecasts by the World Trade Organisation (WTO). The report predicts trade to increase to 7.2% in 2013.
Trade in the eurozone has been particularly affected by the ongoing economic crisis, with the report showing the highest annual decrease in export traffic of -5.85%. Trade in Asia continues to grow, but the rate of growth is slowing.
As of October 2011, exports from developing countries stood at 9.2% above their former peak. South Asian exports, driven by growing Indian trade with China, outdid other developing regions in the first three-quarters of 2011, but then plummeted, the ICC report states.
Talking specifically on the UK economy, Tan says that the banks are ready to lend trade finance to both small and medium-sized companies and the larger corporate exporters, but the demand is dwindling due to the underlying economic slowdown.
“We [the industry] extended out more credit limits than before. The issue is lack of demand. Our utilisation rate is not moving.”
“The banks are there, but the problem is that countries keep saying they are going to have an export-led recovery, but we have not had a country that says that we are going to have an import-led recovery. So who are you selling to?”
He went on to urge UK firms to start exporting to new markets, not just the traditional export markets in Europe.
The cost of doing trade finance has lowered compared to the end of 2011.
Speaking at the press conference, Tan said that the cost of trade finance for India almost doubled in the fourth quarter rising to 215 basis points, but has since been reduced.
The ICC report found that 65% of respondents anticipated that their fees for the issuance of bank undertakings would not rise in 2012.
The reduction in the cost of trade finance has been partly put down to the injection of €1trn into the financial system by the European Central Bank (ECB) last year.
The concern is that the ECB funding is only artificially keeping trade finance costs under control, and in the long-term what is needed is better recognition of trade finance under Basel III regulations as well as more players financing the market.
The ICC report also found that the number of court injunctions and refusals still remain high.
According to the survey, 26% of respondents had seen an increase in the number of court injunctions barring payment under letters of credit. Almost 50% of respondents experienced an increase in the number of refusals by issuing banks in 2011.