Financial constraints to hurt trade finance in 2012

The good news is, in Asia the outlook is not as gloomy as in the Euro area.

This is according to new research by the International Chamber of Commerce and the International Monetary Fund.

Ranil Salgado, Division Chief, Trade, Institutions, and Policy Review, IMF, said recent developments in European financial markets and their impact on global trade finance called for a market snapshot survey.

The survey report noted:

Based upon inputs received from 337 financial institutions responding to a joint ICC-IMF survey, the findings also show a two-speed financial system: For emerging Asia the outlook is the strongest, while the Euro area is the weakest.

“Around 60% of the respondents indicated that the demand for trade in Asia will show improvement in 2012, while close to 50% of respondents predicted a further deterioration for the Euro area,” said Thierry Senechal, ICC Senior Policy Manager for Banking.

Factors contributing to the negative outlook for 2012 were primarily financial constraints which were reducing the availability of trade finance. This was particularly acute for large banks and those with business in developing countries.

Some 90% of respondents indicated that “less credit or liquidity available at counterparty banks” would affect their trade finance activities either to a “large extent” or to “some extent.” This share is substantially higher than the just over 50% that noted the same during the 2008-2009 financial crisis.

The financial constraints appeared to reflect the large share of trade finance coming from Euro area banks. The survey showed that recent European bank deleveraging has led to tighter lending guidelines and reduced availability of credit/liquidity.

In addition, US dollar funding for non-US financial institutions may exacerbate the situation, since trade remained largely denominated in US dollars.

Many respondents noted that one of the challenges facing the global economy was a more stringent regulatory environment – as represented by the new Basel capital framework – which may impede a trade-led recovery. This was of particular concern, as many countries were attempting to export their way out of their currently dire economic conditions.

Recent measures taken by multilateral development banks (MDBs) and central banks to facilitate trade were perceived to be of some help. For instance, on the issue of the reactivation of central bank swap lines, close to 60% of respondents indicated that the swap lines have helped, but about one fifth were not sure.

Preparation for the implementation of Basel III seems to be already adding pressure on the cost of funds and the availability of liquidity. Close to three-quarters of respondents said they felt impacted either to some or to a large extent.

Specifically, by not treating trade finance as a low-risk asset class from a regulatory perspective, the new Basel capital framework could make trade finance less accessible and less affordable to exporters and importers, especially small- and medium-sized enterprises.