Trade Finance Overview and Evidence on the Current Financial Environment

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Trade FinanceOverview and Evidence on the
Current Financial Environment

• BAFT
• Trade Finance Summit II
• April 29,2009
• Whitman E. Knapp
• President, FImetrix, LLC

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IMF Staff Working Assessment The General
Environment

• The decline in economic activity is having a
  disproportionate effect on trade, consistent with
  normal business cycles.
• There is a general financing problem for emerging
  markets, not limited to trade finance.

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Value of Trade Finance

• The value of trade finance transactions declined
  markedly between October 2008 and January 2009.

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Changes in Value of Trade Finance
Product Line
Export Credit Insurance
Short-term Export Working Capital
Letters of Credit
Overall Change in Value Oct 07 vs. Oct 08 ?
2 Oct 08 vs. Jan 09 ? 4
Overall Change in Value Oct 07 vs. Oct 08 ?
7 Oct 08 vs. Jan 09 ? 3
Overall Change in Value Oct 07 vs. Oct 08 ?
8 Oct 08 vs. Jan 09 ? 11
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Changes in Value of Trade Finance
Geographic Region
Latin America
Industrialized Countries
Central Europe
Eastern Europe
Overall Change in Value Oct 07 vs. Oct 08 ?
4 Oct 08 vs. Jan 09 ? 9
Overall Change in Value Oct 07 vs. Oct 08 ?
1 Oct 08 vs. Jan 09 ? 9
Overall Change in Value Oct 07 vs. Oct 08 ?
6 Oct 08 vs. Jan 09 ? 13
Overall Change in Value Oct 07 vs. Oct 08 ?
lt1 Oct 08 vs. Jan 09 ? 11
South Asia
Sub-Sahara Africa
Middle East Maghreb
Emerging East Asia
Overall Change in Value Oct 07 vs. Oct 08 ?
10 Oct 08 vs. Jan 09 ? 5
Overall Change in Value Oct 07 vs. Oct 08 ?
5 Oct 08 vs. Jan 09 ? 9
Overall Change in Value Oct 07 vs. Oct 08 ?
1 Oct 08 vs. Jan 09 ? 8
Overall Change in Value Oct 07 vs. Oct 08 ?
3 Oct 08 vs. Jan 09 ? 10
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Changes in Value of Trade Finance
Corporate Customer Segment
Multi-National Corporate
Large Corporate
SMEs
Overall Change in Value Oct 07 vs. Oct 08 ?
1 Oct 08 vs. Jan 09 ? 6
Overall Change in Value Oct 07 vs. Oct 08 ?
9 Oct 08 vs. Jan 09 ?13
Overall Change in Value Oct 07 vs. Oct 08 ?
3 Oct 08 vs. Jan 09 ? 6
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Trade Finance versus Trade

• Trade finance fell in all regions, but
  merchandise trade fell much more sharply.

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Value of Trade Finance TransactionsPercent
change, January 2009 vs. October 2008

• Trade Finance Exports 1
• Industrialized - 9 - 26
• Latin America - 9 - 45
• Central Europe - 11 - 40
• Eastern Europe - 13 - 55
• Middle East/Maghreb - 5 - 26
• Emerging East Asia - 10 - 37
• South Asia - 9 - 13
• Sub-Saharan Africa - 8
• 1Export values for larger countries in the region
  for which data are available (Argentina, Brazil,
  and Chile for Latin America Czech Rep., Poland,
  and Romania for Central Europe and Russia for
  Eastern Europe Jordan for Middle East China,
  Indonesia, Korea, Singapore, and Thailand for
  Emerging East Asia and Bangladesh, India, and
  Pakistan for South Asia)

IMF Staff Estimates, national trade data, and
IMF-BAFT Survey
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Composition of Trade Finance

• IMF/BAFT surveys indicate a shift from open
  account (i.e., corporate to corporate) to bank-
  intermediated trade finance.
• IMF/BAFT surveys also indicate a shift from
  bank-intermediated trade finance to cash in
  advance.
• Both shifts indicate an increase in risk aversion
  by corporates.

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Change in Composition of Trade Finance (IMF/BAFT
survey)
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Cautious Views on Trade
Have Trade-related Guidelines Changed Since
October 2008
How Guidelines Have Changed

• More cautious with certain countries 83
• More cautious with certain sectors 77
• Requested shorter tenors 67
• Requested more collateral 47
• Requested more DC or LC 43
• Requested more Export Credit Insurance 37
• Requested stronger covenants 20

Have Seen a Change in the Probability of Defaults
in Trade Finance Instruments (Jan 09 vs. Oct 08)
How Do You See Trade Finance Evolving in 2009?
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Trade Finance and the Recovery of Trade

• The relative buoyancy of trade finance in the
  face of the decline in trade suggests higher risk
  aversion by exporters.
• The relative buoyancy of trade finance in the
  face of both tightened lending standards and the
  decline in the value of trade suggests new demand
  for bank-intermediated trade finance for
  companies that had previously worked through open
  account.
• Taken together, the increase risk aversion
  reflected in these data, suggest that provision
  of bank intermediated trade finance or other
  forms of risk mitigation (e.g., ECA guarantees)
  may be important in slowing the decline and
  promoting the recovery of merchandise trade even
  if trade finance wasnt the cause of the decline
  in trade.

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What the IMF is Doing

• Surveillance Increased focus in multilateral
  and regional surveillance on trade finance.
• Lending IMF lending is for general balance of
  payments support this could include trade
  finance but no reservations of funds or
  restrictions relating to trade finance.
• Quota-based arrangements up from 2 billion at
  end-October 2008 to well over 100 billion by
  end-April 2009.
• Some special information gathering and analysis
  (e.g., surveys of banks, discussions with market
  participants, economic analysis).
• IMF/BAFT survey in December 2008/January 2009
• IMF/BAFT/FImetrix survey in March 2009 and
• Discussions on collaboration with ICC for future
  surveys

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50 Thousand Foot View

• Extraordinary times call for extraordinary
  measures.
• The banking industry may be challenged in terms
  of financial capital at this juncture, but it is
  still rich in human capital.
• This is a time when we, as an industry, need to
  harness that rich vein of human capital through
  increased cooperation. Some examples
• BAFT outreach to IFIs and establishments of
  Private/Public partnerships
• The Trade Finance Services study one study not
  two
• Others
• The recent establish of the BAFT Financial Supply
  Chain Management working committee to develop a
  set of common terms for supply chain products.
• IFCs Global Trade Finance Program and the new
  Export Supply Chain Finance program
• The TSU

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Thank You