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ICC Annual Survey: Trade Financing Improving But Not Quite Recovered

Global trade financing is headed back to normal after the trade collapse of 2008-09 — but it’s not there yet. That’s according the data from 298 banks in 127 countries that were surveyed for the International Chamber of Commerce Banking Commission’s annual report on cross-border trade financing.

In the report, the ICC Global Trade and Finance Survey 2014, 68 percent of the banks said availability of trade finance increased in 2013, but most said the improvement was only slight. Meanwhile, 41 percent reported that they still perceive a shortfall of trade finance globally.

That’s despite the fact that 80 percent of the banks reported that trade finance pricing is lower or unchanged. Those costs, especially fees for trade risk, rose alarmingly after the 2009 trade collapse, but that appears to have abated. And 69 percent said they saw a decline in reported court injunctions barring payment under trade finance instruments, which the report’s authors say indicates “a return to relatively normal trading conditions.”

Two-thirds of the banks said supply-chain finance has become more important for their business, and 58 percent reported an increase in overall trade finance activity.

How that trade is financed continues to head in the direction of open account financing. On the import side, commercial Letters of Credit, which dropped from 44 percent of activity in 2011 to 39 percent in 2012, continued down to 36 percent in 2013. Guarantees to cover the risk of default or non-performance under commercial contracts jumped from 16 percent in in 2012 to 20 percent in 2013.

Meanwhile, cross-border open account financing grew almost twice as fast (24.8 percent) as domestic factoring (13.1 percent). That rapid shift away from traditional import financing puts importers in a stronger negotiating position when it comes to terms of trade and terms of payment.

But new regulations are continuing to get in the way of trade financing business. Almost 40 percent of banks said they had closed correspondent account relationships in 2013 due to the increasing cost and complexity of compliance. Those include more stringent anti-money-laundering regulations and “Know Your Customer” (KYC) rules designed to block terrorist access to financing. Two-thirds of the banks reporting having declined transactions due to compliance issues with these regulations, and 41 percent said complying with sanctions restricted trade finance operations in 2013 more than in previous years.

Small and medium-size enterprises (SMEs) were hit hardest by compliance issues, because they often lack resources to deal with compliance challenges as they arise and banks are unable to complete the necessary KYC and due diligence activity, the report said.

Sustainability has also become an issue for trade finance, with 69 percent of banks saying that sustainability is very important to their bank.

The ICC report also included an analysis of traffic over the SWIFT, the large network used by banks to exchange financing documents. The SWIFT statistics show that Letters of Credit are still heavily used in the Asia-Pacific region, which transferred 68 percent of the world’s Letters of Credit for import and 75 percent of the world traffic for export. The top countries for Letter of Credit volume are China, Bangladesh, Hong Kong, Korea and India. In contrast, North America showed the highest annual decrease in Letters of Credit, with the Euro Zone not far behind.

The average value of a Letter of Credit was US$653,000, up 6 percent from 2012’s average of US$616,000. And China’s Renminbi became second most used currency in trade finance at almost 9 percent of traffic over SWIFT, overtaking the Euro at less than 7 percent. The U.S. dollar remains the leading currency at 82 percent.

Meanwhile, Bangladesh was the huge winner for growth in both import and export financing activity in 2013. According to the SWIFT data, the top importing countries were Bangladesh, China, Korea, Hong Kong and India. Highest transaction growth rates were in Bangladesh (61 percent), Ethiopia (23 percent), Sri Lanka (16 percent), Poland (14 percent), Nigeria (7 percent), Kenya (6 percent) and Qatar (6 percent). Biggest decreases in SWIFT traffic volume in 2013 belonged to Canada: (down 14 percent), South Africa (-13 percent), United States (-12 percent), Australia (-12 percent), United Kingdom (-11 percent), Jordan (-10 percent) and Peru (-8 percent).

The top exporting countries according to SWIFT traffic were China, Hong Kong, Bangladesh, India and Singapore. Highest export growth rates in 2013 were Bangladesh (111 percent), Qatar (14 percent), Saudi Arabia (10 percent), India (7 percent), United Arab Emirates (5 percent), Vietnam (5 percent) and Indonesia (2 percent). Biggest drops in export growth were in Switzerland (down 10 percent), Sweden (-10 percent), Belgium (-10 percent), France (-9 percent), Turkey (-6 percent), Korea (-6 percent) and United States (-6 percent).

And when the ICC surveyed banks on their top trade finance markets, the biggest borrower market by far was Russia with 36 percent of responses, trailed by Turkey (16 percent) and Brazil, Indonesia and India (12 percent each).



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