The US dollar has been the lifeblood of international trade for decades, but fears are emerging that coronavirus-induced “strains” in dollar liquidity could hit businesses in emerging markets particularly hard.

Nearly 90% of international transactions in 2019 involved US currency, according to the Bank for International Settlements. But even before Covid-19 struck, banks operating in trade finance in emerging markets had – in some instances – struggled to gain dollar access.

In a 2019 Asian Development Bank (ADB) trade finance survey, for instance, banks from nearly 50 different countries were asked what the largest barriers to expanding trade finance operations were. Nearly 30% identified US dollar liquidity as an obstacle.

As such, there are fears that the coronavirus will only exacerbate any dollar shortage issues, and hinder trade for some countries.

The Business 20 (B20) – a voice for the private sector to the G20 – sent a letter to the G20 in April calling for the international forum’s members to put in place a global action plan to mitigate the shocks of Covid-19.

The document puts forward a list of measures that could help, including a request for central banks in emerging markets, the International Monetary Fund (IMF), the World Bank and the US Federal Reserve to co-ordinate as they “may be needed to address the issue of US dollar liquidity”.

Its reasoning was “the importance of USD currency in financing global trade flows”.

ADB’s head of trade finance, Steven Beck, tells GTR that coronavirus is creating additional dollar liquidity concerns. One reason is that companies are hoarding cash, thereby making it more expensive.

“Cash is king at a time like this, because the whole cash conversion cycle – the time it takes someone to produce something and get it to market, before selling it and getting paid for it – has slowed down dramatically. At the same time, companies still have expenses,” Beck says.

He adds that the situation is compounded by the fact companies are exporting less, and so earning less in US dollars.

The shuttering of supply chains and a drop in global demand due to distancing measures could mean trade as a whole falls by as much as a third this year, the World Trade Organization (WTO) said last month.

Meanwhile a drop in remittances – money sent back by workers to their home countries – has also hampered US dollar liquidity in emerging markets.

For the meantime, Beck says ADB is only seeing “some strains” on the US dollar liquidity front and is watching the situation closely.

However, he notes that emerging markets with heightened risk profiles are more “vulnerable” to potential shortages.

The European Bank for Reconstruction and Development (EBRD) – which provides support to 38 countries in Europe, Asia and Africa – is another development bank monitoring for potential dollar liquidity issues.

According to Rudolf Putz, head of the EBRD’s Trade Facilitation Programme, nations with high country risk ratings are feeling the pain.

“In Lebanon, for instance, it’s very difficult currently for importers in Lebanon to get access to US dollars, because they do not have sufficient exports to generate dollars. And they have problems in getting international banks to lend US dollars, which makes it difficult to import any merchandise,” he tells GTR.

Lebanon has been dogged by US dollar liquidity issues for months, as underlying economic problems and growing national debt snowballed into a dollar liquidity crisis last October.

Coronavirus has only added to those liquidity pressures, with Reuters reporting that some banks have stopped dispensing dollars to depositors since March.

However, according to Putz, EBRD countries across the board are struggling to access trade finance support in any foreign currency – not just dollars.

He adds: “It’s not only in US dollars, but this is the most critical currency, given that most of the foreign trade in emerging markets is done in US dollars, and US dollars can only be provided by a limited number of large international banking groups.”

Putz says currency concerns are symptomatic of a deeper issue, which he categorises as a “general unwillingness of international lenders, exporters and foreign banks to provide [EBRD countries] with trade finance facilities”.


IMF action

Not long after the B20 sent its letter to the G20, the IMF moved to boost US dollar liquidity in emerging markets, launching a new short-term liquidity line (SLL) in mid-April.

Geoffrey Okamoto, the IMF’s first deputy managing director, wrote in a blog post the following week that it was launched to fill “a critical gap in the global financial safety net”.

He said that the US Federal Reserve’s decision to open up swap lines the month prior – in March – had done much to ease the US dollar liquidity situation after a rush by financial institutions around the globe to buy the currency sent it rising rapidly in early March.

With the dollar rising sharply, the US Federal Reserve slashed the pricing on existing US dollar liquidity swap lines with major central banks – including the Bank of England, the European Central Bank and the Bank of Japan.

Not long after, it opened these swap lines up to a host of other countries, including emerging nations like Brazil, to boost US dollar funding. That enabled central banks in developing markets to exchange domestic currency for US dollars from the Fed, offering a temporary boost to liquidity.

Meanwhile, the Fed also brought in a temporary repurchase (repo) agreement. This let central banks and other international monetary authorities temporarily swap their US Treasury securities, held with the Federal Reserve, for US dollars.

However, Okamoto said that a US dollar liquidity risk remained for developing countries, commenting: “The Fed and other central banks cannot provide swaps for all countries.”

He added: “Many emerging market members of the IMF are still experiencing liquidity shortages or will face the risk of occasional ‘sudden stops’ for some time to come, and well after the swap lines are terminated.”

The IMF says the new SLL is designed to act as a liquidity backstop and is cheaper to access than the existing flexible credit line (FCL).

However, the SLL comes with the same qualification criteria as the FCL and is made for members with “very strong policy frameworks and fundamentals”.

Colombia, Mexico and Poland are the only three countries to have used the FCL to date. Chile is set to receive approval in the coming weeks, having applied for a two-year FCL arrangement equivalent to SDR17.4bn (US$23.8bn).