Trade and supply chain finance revenues are expected to fall by 7.4% in 2023 versus last year due to a slowdown in trade flows and businesses foregoing higher-priced financing products, the International Chamber of Commerce (ICC) says.

The ICC Banking Commission’s latest trade register, created with support from Global Credit Data and Boston Consulting Group, analysed data from 22 banks worldwide and covered global trade finance and export finance transactions with exposures in excess of US$23tn.

The report says that 2023 is proving to be “a more challenging year for trade finance”, despite inflation-adjusted goods trade growth of 2.2%, echoing results posted by Singapore banks earlier this year.

“Both a slowdown in trade flows and a further decline in product penetration are driving the lower volumes, as businesses prefer to go without financing products rather than pay the higher costs,” the report says.

This downturn marks a reversal of two years of post-pandemic revenue growth for banks’ trade finance business. In 2021, nominal trade and supply chain finance revenues surged by 28.2% year-on-year, while 2022 saw a further 6.3% increase to  US$63bn.

International goods trade flows rose 10.7% to US$23.8tn in 2022 – nowhere near the 25.5% spike in 2021 – but this was largely driven by inflation, not volume increases, the ICC says.

“In real, or inflation-adjusted, terms, goods trade flows grew only 3% in 2022 versus 2021,” the report says.

Jumps in commodity prices meant the energy, metals and mining sector grew 26.3% in nominal terms, while real trade growth in the sector was 12.4% in 2022. Commodities have since experienced deflation, the report says.

The 2023 edition of the annual trade register reiterates previous years’ findings that trade finance is a “low-risk asset class”, as part of the ICC’s ongoing bid to provide the evidence for this claim.

Default rates across all four trade finance products – import letters of credit (LCs), export LCs, loans for import and export and performance guarantees – increased in 2022 compared to 2021 “on almost all measures”.

They mostly remained below 2020 levels, except for the exposure-weighted default rate for import LCs – which reached its highest level since 2009 – and the transaction-weighted default rate for export LCs.

Both were regionally concentrated, the ICC says, with import LC defaults largely in China and Central and South America, and export LC defaults related to exposure to Russian banks.

Default rates for supply chain finance (SCF) payables finance on a transaction-weighted basis fell compared to 2021 levels, but on an obligor-weighted basis, defaults for SCF payables finance in 2022 rose “considerably”. This, the report’s authors say, suggests a small rise in defaults among smaller SME obligors. “It is possible that this was related to a weakening credit environment, as financing costs rose”, the report adds.

Looking ahead, high inflation and interest rates are expected to continue for at least a short time, while excess inventories – due to stockpiling during the pandemic – could also mean a dampened appetite for financing.

The ICC says that trade and supply chain finance revenues are forecast to return to growth next year, rising by 3.8% every year until 2032 to reach an estimated US$91bn.

It also flags an “industry pivot” from documentary trade to open account products and a move away from SCF due to newly introduced disclosure rules.

“We are starting to see some shift away from supply chain finance, partly due to uncertainty in the market about the detail of the regulation,” the report says.

“The impact of this adjustment has been larger than expected in last year’s trade register, as corporates have reported being more concerned than initially expected.”