Recovery in Trade Finance: Proceeding with Caution
While it lasted, it was quite a boom. The level of global trade activity began climbing to unprecedented levels in 2006. In the first half of 2008, international merchandise trade was still increasing rapidly, although by mid-year there were signs of crisis. By the fourth quarter, trade volume had fallen more than 12% globally and, by the end of 2008, the boom was over and the deepest recession since World War II was setting in.
Trade within the North American region fell 10%. North American exports to other regions (i.e. outside Canada and Mexico) fell 7%, a drop not nearly as bad as those seen in other major trade countries, but still the first significant decline in over 30 years. The falling dollar bolstered this exceptionally weak performance, making US goods less expensive overseas. Imports shrank 4.5% in the same period.
After this very steep downturn, we began to see real signs of recovery in the global economy in the first quarter of 2010. Many of those signs were indications of increased trade activity and a related increase in the demand for trade finance. In the International Chamber of Commerce’s (ICC) recently published study, ‘Rethinking Trade Finance 2010’, the global financial institutions that participated reported improved volume of trade financing, but within a continued challenging economic environment. In March, the World Trade Organisation’s (WTO) economists announced that world trade is set to rebound in 2010 by 9.5%, but that is a long way from restoring trade to pre-crisis levels. So although today’s signs are encouraging, we still see rough seas ahead.
As we near the end of the second quarter, the projected outlook for trade import/export finance is an increase of up to 50% over the dismal levels of 2009. Much of this revival has been thanks to injections of liquidity from the International Finance Corporation (the lending arm of the World Bank) and similar government and multilateral programmes. We are now seeing the banking community’s primary lending and secondary liquidity markets come back from the virtual standstill in the first half of 2009, but we have yet to see trade activity or trade finance return to pre-crisis levels.
Unlike previous trade slumps, our most recent crisis does not seem to have been an epidemic. While many markets remain sluggish, some regions have remained relatively healthy, with intra-Asia markets showing the least wear and similar bounce-back on view in Latin America and in some eastern Mediterranean countries such as Turkey. Pre-export and post-shipment finance in Latin America and intra-Asia are being used to keep working capital at levels sufficient to support future sales. This year, commodity flows have increased, as the global economy’s ‘elephants’, like India and China, continue to require a steady diet of raw materials from countries such as Brazil and Australia. In addition, Latin America’s appetite for consumer goods from Asia continues to increase – another stimulus for trade and trade financing.
The mix in trade loans seems to be changing. At JP Morgan, we’ve seen an increase in financing of finished goods – aircraft and high-tech equipment being two categories that are picking up thanks to increased liquidity in the markets. We’ve also seen export credit agencies (ECAs), such as the US Ex-Im Bank, function as a safety net for trade; as demand for financing increases, the ECAs stand ready to fill the gaps when primary and secondary markets may not be able to step up, and government intervention in the form of stimulus slows or stops.
One risk for trade finance is the possibility that measures taken to limit excesses in the world’s banking system – new capital adequacy requirements, for example – could have a negative impact on the cost and availability of credit. The ICC has clearly expressed its concern regarding Basel’s latest capital adequacy recommendations, seeing further limits on bank leverage as contrary to the G20’s promotion of trade as an engine of global growth. Another risk is that concerns about credit and counterparties may slow the trade banking community’s progress towards simplified, harmonised, streamlined and paperless trade financing processes.
We are still in a ‘time will tell’ scenario in terms of this recovery, since employment, production and housing figures are still cause for concern. We have yet to see to a sustained job growth pattern, and although inventories are being replenished, demand across most sectors remains low. These statistics, which have been drags on the US economy, are now having an impact in Europe, with similar ripple effects passing through trade and banking sectors. Such challenges will be further compounded by the evolving euro crisis, which may cause constriction in the global credit markets and reduce the availability of import and export financing.
Now that the recession has been seemingly broken by the liquidity and stimulus pumped into the US economy, what we are looking for is sustained growth over the second half of 2010. Challenges still abound, and the risk of a second ‘dip’ is real but, at least from a US trade finance perspective, we see improvement through 2010 and into 2011.
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