Default rates across all trade finance asset classes dropped in 2021 compared to the previous year, defying the turmoil of the Covid-19 pandemic, according to the latest International Chamber of Commerce (ICC) trade register.

In some asset classes, loan performance exceeded pre-pandemic levels. Export finance default rates in 2021 were the second lowest in the history of the trade register, according to the report, released today in conjunction with Global Credit Data and Boston Consulting Group (BCG).

The trade register gives an overview of the credit risk profiles of trade finance, supply chain finance and export finance transactions in 2021. It uses data from 24 trade finance and export finance banks for over US$21tn of exposures from over 42 million global transactions, which the ICC says captures approximately a quarter of global traditional trade finance flows and 9% of all global trade flows.

The pandemic had a marked effect on default rates in 2020, causing defaults to jump across most asset classes as global trade volumes fell.

To gain a better picture of the scope of trade finance defaults, the ICC calculates defaults by total exposure to a certain asset class, by the number of obligors and by the number of transactions.

Default rates per obligor for 2008-2021 are all lower in comparison with last year. The default rates for import letters of credit (LCs) decreased from 0.64% in 2020 to 0.29% in 2021, and fell slightly for export LCs, from 0.06% to 0.05%.

For supply chain finance (SCF), default rates per obligor fell from 0.93% in 2020 to just 0.06% in 2021 and from 0.15% to 0.05% for defaults as a proportion of total exposure. Based on the number of transactions, though, defaults increased in 2021 versus 2020, rising from 0.09% to 0.13%. This was “potentially driven by the default of a corporate with a high-volume, low-value SCF programme”, the ICC says.

Defaults per obligor for performance guarantees fell from 0.49% in 2020 to 0.26% in 2021 – the lowest since 2015 – and dropped for import/export loans from 0.92% to 0.36%. The export finance default rate decreased from 1.01% for 2007-20 to 0.97% for 2007-21.

Despite the “low volatility of trade finance”, the report warns of a small rise in defaults over the next two to three years, “depending on the severity of any recessions in certain regions”.

“This may give rise to a short-term increase in demand for the risk mitigation properties of documentary trade,” it adds.

International goods trade flows recovered last year, reaching US$20.8tn, up 22% from 2020 and exceeding 2019 levels, though growth varied by region. Goods trade between the US and China grew by 16%, for instance, and trade between the EU and China grew by a quarter over the same period.

Given the recovery in trade volumes, BCG estimates that nominal trade and supply chain finance revenues grew by 28% from 2020 to 2021, reaching US$55bn and exceeding 2019 revenues by 15%.

Trade and supply chain finance revenues are forecast to grow 5.8% annually and reach US$97bn by 2031, according to the report.

Though a drop in default rates compared to 2020 was likely, the ICC says that “it is even more reassuring that in many cases 2021 default rates are below pre-pandemic averages”, probably driven by “the deployment of effective Covid-19 vaccinations combined with continued government stimuli across many markets”.

The report warns however that “the notion of a return to normalcy in international trade must be discarded” following the war in Ukraine.

“While trade will continue to grow, the shape and patterns of that growth will be affected by non-market factors to a greater extent than at any time since the Cold War,” it adds.

ICC secretary general John Denton says: “These findings reinforce the findings of previous iterations of the trade register: trade finance products continue to be resilient and represent banks with low levels of credit risk, even during times of macroeconomic uncertainty.”

The ICC also says it intends to adjust future versions of the trade register report to include introducing a sustainability lens and the capacity to distinguish between SMEs and corporates.