AVAILABILITY OF TRADE FINANCE IN DEVELOPING COUNTRIES: REMAINING GAPS

Marc Auboin, WTO

Trade Finance and Trade: a systemic relationship, but with little statistics

Trade credit matters for international trade – it has been taken for grantedLittle trade paid cash, according to surveys, only 20% as a result of different interests of importers and exporters. Hence it seems that 70-80% of world trade relies on trade credit and/or guarantees. Mostly a short-term market (90-120 days) – hence subject to money market conditions

The drop in international trade flows was

Growth in World merchandise exports trade by region 2007Q1-2014Q2(Year to year % change in dollar values)

severedrop in trade 12 times the decline in real GDP

sudden9 months vs 24 months during the 1930s Great Depression

synchronizedall countries and all product categories affected

THE GREAT TRADE COLLAPSE

What are the possible causes of the trade collapse ?

Demand shock largely responsible ≈ 60 to 80% of trade collapse (Eaton and Al.)

• concentrated in consumer durables and capital goods

=> leaves some 30% unexplained

Severe inventory adjustments (Kortum)

The supply chain channel (Baldwin and Al; Freund; Levchenko)

•explains the synchronicity and speed of collapse in global trade

The “Trade Finance Hypothesis” (Manova/Chor; Amiti/Weinstein; Auboin/Engemman) ≈ 15 to 20% of trade collapse• Very safe… but subject to dislocations during financial crises

US$ 100–300 billion shortfall in 2008-09 (particularly for SMEs and in LDCs)

•Coordinated policy interventions were necessary to restore confidence => London G-20 $250 billion support “package”

rising interdependence rapid transmission of shocks along supply chains

THE GREAT TRADE COLLAPSE

Trade Collapse and Decrease in Trade Credits

5

London G-20 Trade Finance Package

G-20 Plan’: “to ensure at least $250bn in new TF capacity (credit or insurance)” from 3 sources

• ECAs from OECD and non OECD stepping in: programmes for SMEs; working capital; ST trade insurance; ECAs to conduct operations regionally (supporting chain supply)

• RDB and IFC enhanced trade finance facilitation programmes. Ceilings roughly doubled.

• Creation of an IFC Global Trade Finance Liquidity Pool with commercial banks; a review of Basle II rules

• The mobilization of large public actors (ECAs, multilaterals) helped restore market confidence

• Objective of mobilizing $250bn of extra capacity in 2 years well underway. At Pittsburgh & Toronto, 70% of targeted capacity used –Insurance & guarantees mostly. Bank run for “cover”, normal in acute part of crisis.

• Lead times to set up the IFC trade liquidity pool. Disbursements started after Pittsburgh.

Has the G-20 Package been successful?

2. Structural problem at low-end of market

• Return of liquidity in main markets (north-north, BRICs, also South-South) in 2010, with ups and downs since.

• Structural difficulties encountered by developing countries in accessing international trade credit (and credit in general) worsened: sovereign risk re-evaluation; reduction in correspondent banking hit access of smaller players in world trade: smaller countries, smaller traders, often SMEs. Cost of business higher: KYC in difficult regions, regulation costs. Need more trade credit insurance too

Lack of Trade Finance: an obstacle to inclusion in Supply chains

G-20 Mandate

• Seoul Summit Document

–Paragraph 44:"To support LIC capacity to trade (...), we note our commitment to (…) support measure to increase the availability of trade finance in developing countries, particularly LICs. In this respect, we also agree to monitor and to assess trade finance programs in support of developing countries, in particular their coverage and impact on LICs, and to evaluate the impact of regulatory regimes on trade finance.“

Follow-up in Cannes and St Petersburg

• The G-20 adopts recommendations of WTO Report. Ask regional development banks and the World Bank group to expand in low-to-middle income countries (including also significant traders such as Bangladesh, Pakistan, Nigeria, Sri Lanka, Kenya).

• Two priority regions are clearly set out: Africa and Asia. With support from the WTO, Asian Development Bank and the IFC, the African Development Bank approved the creation of a permanent facility for trade finance in February 2013, with a risk capacity of $1 billion. The first transactions have been signed on the margin of the African Development Bank in May 2013. Other steps have been taken, such as expanding the EBRD's trade finance facilitation program to countries in the middle-east (so-called MENA countries), and to expand further the IFC's own program into other low-income countries.

• All in all, in 2013 roughly $US 30 billion in trade transactions have been supported by these programs. Although this may not seem large, the average transaction is of less than $350,000, meaning that a lot of trade transactions are supported by these programs every year.

The International response

The extent in which access to trade finance forms an obstacle to company exports, broken down by region, CBI – Netherland Development Ministry

The most problematic factors for exporting in Africa, World Economic Forum Report 2013

Africa trade credit pricing (annual interest rate), from Omni Bridgeway

Country Price range as of April 2013 May 2011

Angola* 65% 70% 60% 65%

Cameroon 18% 24% 14% 20%

Congo 22% 26% 22% 26%

DR Congo 22% 27% 16% 20%

Ghana 74% 78% 78% 82%

Kenya* 39% 49% 39% 49%

Mozambique 20% 26% 20% 26%

Senegal 12% 16% 12% 16%

Sudan 9% 14% 15% 19%

Tanzania 25% 35% 10% 13%

Uganda 16% 18% 14% 16%

Zambia 13% 20% 13% 20%

The most problematic factors for exporting in Pacific Alliance and in Latin America and the Caribbean, WEF 2014

Global Public views on the main barriers in connecting firms to value chains, WTO-OECD Aid for trade survey, 2013

Table 4.1 Overview of the main trade facilitation programs

EBRD IFC IDB ADB

Program title

Trade Facilitation Program (TFP)

Global Trade Finance program (GTFP)

Trade Finance Facilitation Program (TFFP)

Trade Finance Program (TFP)

Number of countries in operation

23 96 21 18

Program commencement

1999 2005 2005 2004

Number of transactions since commencement (year end 31.12.2012)

15,508 31,600 4,457 8,338

Value of transactions in 2013

EUR 1.2 billion

US$22 billion

US$1.21 billion

US$4.03 billion

Number of confirming banks

800+ 1,100 297 124

Claims to date 2 – no losses zero zero zero

Note: ADB = Asian Development Bank, EBRD= European Bank for Reconstruction and Development, IDB = Inter-American Development Bank, IFC = International Finance Corporation.

Source: ICC. 2014. Rethinking Trade and Finance, ICC Global Survey on Trade and Finance. ICC Banking Commission. Geneva.

DIRECTOR-GENERAL Roberto Azevêdo delivers the opening remarks at the WTO Meeting on “Trade Finance in Developing countries at the WTO on March 26, 2015

Highlights of DG’s remarks – 26 March 2015

• “In many countries, there is a lack of capacity in the financial sector to support trade, and also a lack of access to the international financial system. Therefore the ability of these countries to use simple instruments such as letters of credit is limited. The impact of these limitations on a country's trading potential can be very, very significant. After the financial crisis, the supply of trade finance has largely returned to normal levels in the major markets — but not everywhere and not for everyone. The structural difficulties of poor countries in accessing trade finance have not disappeared — indeed the situation may well have declined due to the effects of the crisis.

• These findings are particularly striking as Africa and developing Asia are two areas of the world in which trade has grown fastest in the past decade. But the potential evolution of new production networks is faster than the ability of the local financial sectors to support them.

• In this way the lack of development of the financial sector can be a significant barrier to trade. It can prevent developing countries from integrating into the trading system and accessing further trade opportunities. And it can therefore prevent them from leveraging trade as a powerful source of development. So we need to respond to this problem.

• Of course, there is no magic bullet. This is a complex issue. However, that should not discourage our efforts. The cooperative, inter-institutional approach has yielded some concrete results and [will be pursued].

• In July this year the UN's major 'Financing for Development' conference will take place in Addis Ababa. And I think it is essential that we put trade finance on the agenda there. “