ICC On Rethinking Trade and Finance

Thierry Senechal

The International Chamber of Commerce (ICC) 2013 survey on trade and finance, released on June 24th, has found that a continued shortage of trade finance for international trade remains a major challenge for economic recovery and development, with many traders depending on overdraft and other corporate loans to finance exports and imports.

According to the survey, nodes of uncertainty over the US presidential election results, crises in the Middle East, and Sino-Japanese tensions all contributed to the lacklustre pace of world trade which fell back to 3.8% growth in 2012, down from 6.1% the previous year. Sluggishness in the Eurozone economy prompted weak global demand by midyear, as economies in China, India, Brazil and other emerging markets slowed down in turn.

The proliferation of new regulation in recent years has increased cost pressure on financial institutions and depressed markets. Some 65% of surveyed experts said implementation of Basel III regulations is to some extent or a large extent affecting the cost of funds and liquidity for trade finance. While many regulatory changes have already been implemented or proposed, the regulatory future remains unclear as harmonization of regulatory principles remains a major problem for trade financiers and their clients.

The survey positively indicates that despite uneven performance around the world in 2012, the market for trade finance does show signs of slow and steady growth, with temporary trade measures imposed during the financial crisis – including the rise in fees for trade – slowly being removed.

“This shows that financial intermediaries are continuing to satisfy the demand for financing and that investing in trade assets is part of a more sustainable model of banking,” said Pascal Lamy, Director-General of the World Trade Organization, in the survey’s foreword.

Entitled Rethinking Trade and Finance – An ICC Private Sector Development Perspective, the ICC survey reveals that developing economies remain the drivers of international trade growth despite the ever-rising level of regulation in the wake of the financial crisis and a clear trade finance gap for small- and medium-sized enterprises (SMEs) in the southern hemisphere. Yet the resilience and increasing importance of developing countries has become more evident, according to the survey, which says that although developing country exports fluctuated throughout the year, they surpassed pre-crisis levels rising to 8.5% in 2012.

Trade facilitation programmes by multilateral development banks (MDB) also increased in 2012 according to the survey, which predicts the role of MDBs will become even more instrumental in supporting global recovery, economic development and poverty alleviation in future years.

The survey includes analysis of trade traffic data, from financial messaging service provider SWIFT, indicating that by the year 2020, a third of global trade will likely be South-South. The data reveals a signature shift in the Asia-Pacific region where 73% of all export transactions took place in 2012 together with a rise of 2.32% in import traffic. By contrast, import traffic decreased most noticeably in the Europe-Euro zone: a drop-off of 13.5%.

“We are encouraged by the continuing effort to fine tune various capital treatments for trade finance whether at the supranational level, or in national implementation. It is important for the business community to press on with the current dialogue with regulators as there is still a lot to be done. On the macroeconomics front, we also expect to see a credible plan in place for the budget issues that are plaguing certain countries, leading to restored confidence but perhaps with a longer drawn out and bumpier recovery than we hope for,” said Kah Chye Tan, Vice-Chairman, Corporate Banking, Barclays, and Chair of the ICC Banking Commission.

Providing a detailed statistical analysis of the regional and global trends in trade finance, Rethinking Trade and Finance 2013 received responses from representatives of 260 banks in 112 countries. Expanded in scope, the 2013 Survey includes a new section on potential market developments, which includes the views of some of the world’s leading experts in global trade finance on the drivers and potential solutions to a more robust and resilient market.

The 2013 survey also received the participation of two new partners: the International Trade Centre (ITC), to cover credit constraints and non-tariff measures in trade; and Factors Chain International (FCI), providing business trends in factoring.

Rethinking Trade and Finance 2013 fulfils ICC’s commitment to bridge the information gap on trade finance through market intelligence reporting and monitoring that leads to a better understand and markets worldwide.

Thierry Senechal, ICC Banking Commission Senior Policy Manager said: “Trade finance is the oil that powers the engine of global economic growth but despite encouraging signs, this stellar image of the industry is imperilled as trade finance faces headwinds that may completely upend the global landscape in which it operates in the next five years. This includes a welter of regulations, a two-speed financial system, a disruptive deleveraging process and new SME entrants starved of trade finance in several emerging countries.”