The European Bank for Reconstruction and Development (EBRD) has published a new podcast titled Trade finance during the coronavirus crisis, which features EBRD chief economist Beata Javorcik, Mark Auboin from the World Trade Organization (WTO) and Shannon Manders, GTR’s editorial director.

The discussion (link below text) debates a series of important industry questions, such as what role trade finance plays in re-energising world trade, and what trade finance instruments can be used to build trade resilience. It touches on the trade finance gap, which has remained stubbornly at US$1.5tn for the last few years, how much worse the situation has become since the outbreak of Covid-19, and what the international community can do to boost the supply of trade finance.

The International Chamber of Commerce (ICC) has warned that as much as US$5tn of trade credit market capacity (a third of which is required capacity in the bank-intermediated market) will be needed to return trade volumes back to 2019 levels in the wake of the Covid-19 crisis, and that without rapid interventions, the market may not be able to meet this demand.

During the EBRD podcast, Auboin, who is the counsellor in the WTO’s Economic Research and Statistics Division and responsible for the institution’s trade and finance agenda, says that the pandemic has led to an increased aversion to risk by international banks, which may further increase the shortages in trade finance.

He outlines that, according to WTO estimates, trade is currently down globally by approximately 10 to 11%, and that while one would expect the situation around the availability of trade finance to improve as a result of a reduction in demand, in fact the opposite is true.

“When there is an economic shock…. what 2008/09 taught us is that financial institutions, the very large ones, tend to retrench and to select their risk. There is a so-called flight to quality, which means essentially that they serve their clients first,” he says.

As a result, since the outset of the crisis, countries where there is a high perception of risk have been cut off from international credit lines. “In other words, when they wanted to import Covid-related material and equipment, they could not get letters of credit confirmed by international banks. Likewise, when they wanted to export, they could not get pre-export finance, which means they could not… finance the essential goods and commodities they would normally export, which in turn provides them with the foreign exchange they need to buy the Covid-related material. You can see the link between the availability of trade finance and the balance of payment situation for many countries,” Auboin says.

As such, not only is the industry experiencing a drop in demand, but also a reduction in supply by the financial system, where credit lines – initially for developing countries – have been cut, which is why multilateral development banks have had to “immediately open their safety nets to allow at least the minimum livelihood-based goods to flow”, he explains. What is more worrying, Auboin adds, is “we are getting into a second stage whereby demand for trade is picking back up again, so there is a pick-up in demand for trade finance, and while some of the banks are meeting that demand, [others] have permanently closed their windows of supply, and that is starting to affect middle-income countries”.

Elsewhere in the discussion, Javorcik shares her observations about how, in times of uncertainty, exports insured by trade finance instruments tend to be more resilient – as outlined in her recent research Trade finance matters: Evidence from the Covid-19 crisis, as well as how the reshaping of global value chains may lead to increased demand for trade finance as new trading relationships tend to be more risky.