4 Severity of Export Constraints due to 2008–09 Crisis, by Country

180



Trade Finance during the Great Trade Collapse



Figure 10.5 Sources of Export Market Constraints

a. By firm size



b. By sectoral activity



90



90



percentage of respondents



100



80

70

60

50

40

30

20

10



80

70

60

50

40

30

20

10

0



0

SMEs



large



respondent firm size



co

m

m tec pu

an h te

uf no r o

a lo r

ag ctu gy

ric rer

ul

tu

r

m ea

in nd

i

m c ng

an on

uf su

ac m

tu er

re

m

in r

an d

uf u

ac str

tu ial

re

r



percentage of respondents



100



respondent firm sector

other



lack of finance from banks



lack of finance on company’s part



lack of finance on buyer’s part



lack of orders

Source: Author’s data from 2010 firm survey.

Note: SMEs = small and medium enterprises. Number of respondents = 257. “SMEs” have up to 250

employees; “large” firms have more than 250 employees.



Trade finance prices are reportedly still high and have even increased since the

economic recovery started. As figure 10.6, panel b, shows, 42 percent of the

respondents declared that prices had further increased by the last quarter of 2009

over the last quarter of 2008, when prices had been presumably at their crisis peak.

A similar portion of respondents said prices remained the same, while a minority

noted that prices decreased over the same period.

Although firms felt fewer trade-credit constraints from suppliers or buyers

after global demand picked up, in particular from emerging markets, many

respondents complained about the lack of access to bank-intermediated trade

finance. Many firms—especially in Egypt and the Philippines, where banking

intermediation is important—claimed that banks were still imposing stringent

eligibility criteria for trade finance transactions, and 45 percent of firms reported



World Bank Firm and Bank Surveys in 14 Developing Countries



181



Figure 10.6 Trade Finance Changes and Effects on Export Firms

a. Effects on plans



b. Price changes



Did you cancel or postpone a planned

transaction because of lack

of trade finance?



How have prices changed between

Q4 of 2008 and Q4 of 2009?



yes

12%

same

40%



increase

42%



no

88%

decrease

18%



Source: Author’s data from April 2010 firm survey.

Note: Number of respondents = 257.



that banks remained as risk averse in the fourth quarter of 2009 as they had been

in the fourth quarter of 2008.

Small and medium enterprises (SMEs) and firms operating in the sectors

most affected by the slower demand (such as in Egypt, the Philippines, and

South Africa) were those most often reporting that banks were still risk averse,

as figure 10.7 shows. Financially weaker exporters, for which letters of credit

(LCs) and documentary collection are the common payment method, were also

finding it harder to access bank-intermediated trade finance.

Access to bank trade finance remained problematic because of heightened

risk and the overall deterioration of traders’ creditworthiness. It is worth noting that liquidity has not been identified as a constraint. Surveyed banks, even

in low-income African countries, reported that liquidity was not an issue and

that they could meet increased demand for short-term credit. These reports

converge with those from the World Trade Organization (WTO) Expert Meeting on Trade Finance in April 2010, where participants noted that liquidity has

returned to the trade finance market.

However, the cost of trade finance remained high in some markets. And the

prices of trade finance instruments and spreads, although narrowing, remained

higher than precrisis levels, even in macroeconomically sound economies such



182



Trade Finance during the Great Trade Collapse



Figure 10.7 Constraints on Bank-Intermediated Trade Finance, by Country

Is your bank still imposing more stringent credit

eligibility criteria for trade finance transactions?



percentage of respondents



100

90

80

70

60

50

40

30

20

10



Eg



e

in



y



ra

Uk



rk

e



sia



Tu



ric



ni



a

Tu



s



Af



in

e



ut

h



pp



So



Ph



ili



Pe

ru



ya

Ke

n



di

a

In



na



p.



ha

G



Re

b



yp



t,



Ar

a



Ch



ile



0



country of respondent firms

no



yes



Source: Author’s data from April 2010 firm survey.

Note: Number of respondents = 223.



as Chile. Regulatory issues—such as Basel II—remain a concern and have

reportedly affected the degree of exposure banks can assume in a given

transaction.



Other Bank and Firm Survey Findings

Other recent bank and firm surveys indicate a recovery in the trade finance

market as a result of the recovery in trade, but access to bank trade finance

remains difficult for small firms. An April 2010 survey of 93 major banks in

53 countries indicated an improvement in the trade finance market compared with

previous surveys conducted in March and July 2009 (IMF-BAFT 2009; IMF and

BAFT–IFSA 2010).

The results of an April 2010 International Chamber of Commerce (ICC)

survey of 161 banks in 75 countries were somewhat less sanguine. It reported

that the supply of trade finance remained constrained in both value and volume: 60 percent of respondents indicated that the value of trade finance activity



World Bank Firm and Bank Surveys in 14 Developing Countries



183



had decreased between 2008 and 2009; 43 percent of respondents noted a

decrease in export LC volume (ICC 2010). Trade finance pricing remained

higher than precrisis levels, raising the problem of affordability for exporters.

Banks had also intensified due diligence processes and scrutiny of documents,

leading to more refusals and court injunctions. The survey noted that existing regulations placed low-risk trade finance instruments in the same category as higherrisk balance sheet items, constraining the trade finance market.

Overall survey findings suggest that trade finance was not the primary culprit;

global demand was. Moreover, interfirm trade credit has been more resilient than

bank trade credit. However, trade finance constraints were not insignificant in

some instances: in countries where bank intermediation is predominant, for

small and financially vulnerable firms, and for new firms without established

business partners.

Indeed, trade dropped mainly because of the spillover to the real economy,

drop in economic activity and global demand, decline in export revenues, delays

in payment terms by buyers, and shorter payment terms by suppliers. The trade

decline, in turn, squeezed exporters’ and importers’ capital base, working capital,

and capacity to self-finance their transactions.

Although interfirm trade credit picked up with the economic recovery, banks

remained risk averse and continued to apply more stringent requirements, and

prices remained higher than precrisis levels. That interfirm trade credit has been

more resilient than bank trade finance is consistent with the determinants of trade

credit. The latter can be a superior option to trade finance when suppliers have an

advantage over banks because of their access to information on the financial

health of clients and because providers can more easily liquidate the goods in the

event of nonpayment.

Country-Level Trade Finance Trends

One of the side objectives of this follow-up survey was to collect country-level

data on trade finance value and volume because global and country-level data on

trade finance have become illustrious for their scarcity. The dearth of data has

seriously constrained policy makers in establishing an informed analysis of the

impact of the financial crisis on trade finance.

An indication of the seriousness of this problem is that the WTO Expert Group

on Trade Finance agreed to improve data collection through surveys under ICC

leadership. The ICC and the Asian Development Bank (ADB) also established the

ICC-ADB Register on Trade & Finance to collect performance data on trade

finance products so that banks have better information on trade finance transactions and may treat them preferentially to riskier short-term transactions.4



184



Trade Finance during the Great Trade Collapse



Some countries do publish trade finance-related data, although under different formats and covering different aspects of trade finance (value of LCs,

short-term suppliers, credit, and so on). The data for India and South Africa (shown

in figure 10.8) and for Turkey (in figure 10.10 later in this chapter) show a drop in

trade finance value starting in fall 2008, bottoming out in the second quarter of

2009, and picking up in the second half of 2009.

Figure 10.8 Export and Import Trade Finance, India and South Africa



10

2

Q



Q



1



4



FY



FY



10



09

FY



09

Q



Q



3



FY



09



Q



2



FY



09

FY

1

Q



Q



4



FY



08



US$, millions



a. India: Quarterly supplier’s foreign currency credit

4,000

3,000

2,000

1,000

0

–1,000

–2,000

–3,000

–4,000

–5,000



quarterly change

supplier’s credit above 180 days

supplier’s credit up to 180 days



Se



p

O 200

ct 8

N 200

ov 8

D 200

ec 8

Ja 200

n 8

Fe 200

b 9

M 200

ar 9

Ap 200

r 9

M 200

ay 9

Ju 200

n 9

Ju 200

l 9

Au 200

g 9

Se 200

p 9

20

09



R, billions



b. South Africa: LC value

240

235

230

225

220

215

210

205

200

195

190



value of LCs per month

Sources: Reserve Bank of India; South African Reserve Bank.

Note: LC = letter of credit. R = South African rand.



World Bank Firm and Bank Surveys in 14 Developing Countries



185



Trade Finance Data from Africa

Data for low-income African countries are of greater interest because concerns

about liquidity constraints in these countries drew particular attention from

policy makers and development institutions. The data indicated that trade

finance increased in both Ghana and Kenya, as figure 10.9 shows.

However, the financial crisis has exacerbated the fragility of these economies’

economic growth. In Ghana, banks increased import and export finance during

the financial crisis, possibly reflecting the increased capital base in line with the

new capital requirements, which also led to improved buffer for risk absorption in

the banking sector. However, credit conditions tightened somewhat throughout

the year because of the high interest rates and deterioration in the quality of

banks’ lending books.

In Kenya, commercial banks delayed credit in general, particularly export

and import credit, with credit volume increasing sharply during the peak of the

crisis but then stabilizing around an average value in 2009. In addition to

domestic factors such as postelection violence and drought, external shocks

(high commodity prices, the global financial crisis, and the subsequent global

economic slowdown) exacerbated Kenya’s negative economic performance and

resulted in low demand for, and supply of, bank credit.

Liquidity was reportedly not a constraint in Sierra Leone, where bank finance

remained available to creditworthy borrowers, the larger established banks still

tend to be underlent, and the influx of new banks has increased competition to

book credit facilities.



Trade Finance Data from Turkey

A closer look at the Turkish data—the most detailed in terms of trade finance

instruments and available monthly from January 2008 to December 2009—

indicates a drastic dive in trade finance value across most instruments, primarily for the most-used ones, as shown in figure 10.10. Export finance using cash

against goods and cash on delivery (the riskiest methods of payment) and LCs

dropped the most. The import finance decline was more proportional across

instruments, although advance payment methods, followed by cash against

goods and on delivery and LCs, are the most-used instruments.

Turkish trade finance value picked up starting in January 2009 and remained

on a positive trend until December 2009. These developments tend to support the

idea that demand played a more important role than trade credit constraints.

Moreover, it is worth noting that the value of trade finance increased in the

months before the crisis, for exports more than imports.