State of the Market: Trade, Finance and Development
Numerous trends and developments shape the evolution of the global economic and trade environment currently, including the substantial and growing level of unmet demand for trade financing. Asian Development Bank survey results point to a gap in global trade finance of approximately USD 1.6 trillion annually – primarily in developing markets and particularly developing Asia.
The trade finance gap is troubling because it is increasingly obvious that banks will be unable to close this gap, and that there is a misalignment in the availability of funds and liquidity, at least as far as identifying the greatest areas of need. The global economic system has largely recuperated pre-global financial crises levels of liquidity; however, it is mainly available to multinationals and large corporations and reliably absent in the micro, small and medium-sized enterprise (MSME) segment.
Financial Technology (FinTech) companies have recognised significant opportunities in the financing of international trade, and have the potential to play an important role in progressing a collective effort to narrow the global trade finance gap.
Boston Consulting Group has highlighted the evolution of trade flows and the shift Eastward of the geopolitical centre of trade, estimating that trade flows will grow at an annual rate of about 4.3% to reach nearly USD 19 trillion by 2020. Inter-regional trade in APAC, between Asia and Europe and within Europe is likely to be a major area of growth.
[Source: ICC, 2017]
Most current projection models predict that trade finance revenue growth will outpace projections on trade growth by almost half a percentage point to grow at 4.7% annually, from USD 36 billion last year to USD 44 billion in 2020. These are based on growth projected in markets where trade is conducted mostly by traditional trade finance methods.
Other significant trends include, protectionist rhetoric as well as trade-restrictive initiatives in major G20 economies which are having a dulling effect on prospects of trade-driven growth. This is also coupled with a slowdown in import-based economic activity globally.
Given Brexit and the Trump administration’s reluctance to engage in the Trans-Pacific Partnership, China and Europe will likely aim to fill a leadership gap in international trade relations. And should hasten a shift Eastward.
Regulatory requirements around banks’ level of knowledge about counter parties with which they interact and conduct business have been such that the costs of maintaining simple correspondent relationships have risen by in some cases 250% per relationship, driven largely by compliance costs. At the same time, there is reputational risk associated with non-compliance by partner banks, and the financial exposure that might arise as a result. The result is a drive to and global consolidation of correspondent relationships, with some institutions reducing their networks by hundreds, even several thousand partner institutions – mostly, those based in developing markets – as part of a broader move to “de-risk” by exiting particular markets.
Sources
International Chamber of Commerce., 2017. Rethinking Trade and Finance. The World Business Organisation. Paris: France.
Oxhill Trade Finance., 2017. [Available at https://www.nordea.com/en/our-services/tradefinance/ ]
USG Professionals., 2017. [Available at http://www.usgprofessionals.fr/ ]