Global trade finance boom leaves out emerging economies

Oil prices, sanctions and regulatory concerns cited as key transaction deterrents in report from Asian Development Bank

Availability of trade finance is on the rise throughout the world – but emerging economies are not feeling the benefits, according to a new global survey.

In a poll of 253 banks across 86 countries, the NGO-style Asian Development Bank (ADB) found that poor access to trade finance last year continued to “put a brake” on commercial growth and economic value creation – particularly for SMEs – undermining the effectiveness of work to alleviate poverty.

Geographically, the data shows that the widest gaps have formed in sub-Saharan Africa, South America and within developing Asia.

Broadly, respondents reported levels of trade finance sufficiency that were similar to those seen just before the start of the financial crisis in 2008.

More than 80% of banks reported that they had either maintained or increased the number of credit lines they offer to financial institutions and corporate clients. While most of those increases were moderate, about 15% of banks reported increases of between 25% and 50% for their corporate clients.

There are also encouraging signs that the quality of trade finance deals has been strong, with International Chamber of Commerce figures for 2014 putting the average default rate at less than 0.25%.

However, the surveyed banks also revealed that emerging economies – specifically the People’s Republic of China, India and the Russian Federation ¬– faced the highest rejection rates for proposed trade finance transactions.

Deals for organisations in the Russian Federation/Commonwealth of Independent States (CIS) accounted for 6% of proposals last year and 17% of rejections, with Africa and the Middle East together registering 12% of proposals and 19% of rejections.

In the ADB’s view, that reflects two main forces: in the case of the Russian Federation/CIS, lower oil prices and sanctions impacted last year’s trade finance activity, while 38% of bank respondents reported that regulatory compliance concerns were also a deterrent.

For 31% of banks, that second factor also affected proposals that stemmed from Africa and the Middle East.

Firms in Africa were also more likely to report insufficient levels of trade finance (47%) than companies in the overall sample (29%) – and the continent’s trade landscape presents difficulties in other areas, too.

For example, SWIFT data on annual volumes of commercial trade showed that Africa had the highest decrease in the study period, falling by more than 18%.

Turning to Asia-Pacific, the report notes that the region is particularly diverse, with complex financial terrain. “It includes some of the world’s most streamlined financial markets,” it adds, “as well as emerging economies at varying levels of financial development.

“The increasing geographic concentration of trade finance gaps in the least-developed markets affects the overall, regional trade finance environment.”

ADB head of trade finance Steven Beck said: “The global trade finance gap was estimated at $1.4 trillion for 2014 – of which around half was in developing Asia.

“Trade continues to be the engine of growth and employment in the region, so addressing the financing gaps will be critical to promote growth and job creation – especially in the more challenging markets.”

Download the full ADB report.

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