Article

by Mark Ford

The global credit crunch is entering a new phase in some locations but not in others.

Support measures from governments and multilateral development banks (MDBs) have helped enlarge liquidity pools and improve trade finance flows in many Western European countries, but credit flows in parts of Eastern Europe remain in the doldrums. In Asia, notably in China and India, traders are finding credit easier to come by, but not in Bangladesh, Pakistan, Malaysia and Vietnam. There are no real signs of recovery in Africa, but some home-grown solutions are emerging there.

Europe

In April, the G20 leaders charged export credit agencies with the job of providing support to counteract the global credit crunch and revive trade flows. Several European countries, through their export credit agencies (ECAs), have already taken steps to provide insurance cover or guarantees for short-term export credits.

The Czech Republic and Hungary have temporarily increased insurance cover for up to 99 per cent of an export contract value for risks related to letters of credit and other export financing instruments. France has targeted small- and medium-sized enterprises (SMEs) in its state guarantee programme, simplifying its L/C confirmation cover, which can now support 95-100 per cent of an export transaction. For the first time, Germany is providing cover for risks in L/C confirmations. And the British government is to go ahead with a new insurance scheme to confirm L/Cs for exporters selling into developing countries.

Within the European Union, ECAs in several countries are obtaining increased government support to become direct lenders or to provide short-term cover for trade finance. Denmark and Luxembourg have won EU approval to re-enter the short-term trade underwriting market following the European Commission's 22 January Directive that would allow European ECAs to provide short-term cover provided at least three commercial credit insurers have turned down the risk. Six more European ECAs - in Austria, the Czech Republic, Finland, Germany, Netherlands and Sweden - have also applied.

But while Western European countries appear to be revitalizing trade finance, the ICC Interim Survey on Trade Finance (IISTF) has found that in some Eastern European Countries, trade remains way below precrisis levels, and no stimulus measures have yet proved effective.

Australasia

In Australasia, the New Zealand Export Credit Office (NZECO) has broadened its mandate to offer short-term trade credit insurance and reinsurance in support of commercially sound transactions that private sector trade credit insurers or banks will not cover. Hong Kong's HKEC has raised its capital limit to HK$15 billion, and Japan is providing cover for loans to support global supply chains.

Australia says several policy options are under consideration, including support for trade-backed L/Cs, especially from issuing banks in emerging and developing economies.

Government policies urging China's state-run banks to ease lending requirements seem to have helped restore L/C flows there, although smaller firms are still reportedly struggling to persuade their banks to start discounting L/Cs - traditionally a key plank in Chinese SMEs' financial strategies.

The availability of L/Cs in India is improving, according to local media. The Business Standard reports that improved US dollar availability is inspiring banking sector confidence and, since May, banks have been finding it easier to provide short-term credit. India's widely read business daily says the country's banks are witnessing a surge in demand for L/Cs and other short-term trade finance facilities.

A senior executive at a Singapore-based bank with an extensive network that extends throughout Southeast Asia said his bank saw around 20 per cent more L/Cs issued in the second quarter than in the first quarter of 2009.

In other parts of Asia, the situation remains dire. Bangladesh has reported a massive drop in L/C openings. According to Bangladesh Bank data, the values of L/Cs opened for imports of capital machinery and industrial raw materials were respectively 30.21 per cent and 11.12 per cent lower in April 2009 than in the same month last year. According to the IISTF survey, other Asian economies still suffering from the crisis include Pakistan, Malaysia and Vietnam.

Americas

Measures amongst ECAs in the Americas to improve trade finance flows include Export Development Canada's (EDC) raising its ceiling to C$1.5 billion, while supporting working capital has become a priority in the US. The Export-Import Bank of the US is specifically improving access to warranty L/Cs, and it has created the Korea Short Term Letter of Credit Initiative, a US$2.9 billion facility designed to support short-term L/Cs issued by 11 Korean banks and confirmed by US banks.

But there were concerns in the US over a steadily increasing amount of Latin American debt tied up in outstanding L/Cs. These concerns are easing, however, and may improve future L/C flows. Outstanding L/Cs of Latin American countries confirmed by 11 reporting banks declined by US$5.6 million during June to US$255.4 million, a turnaround from increases in the previous four months that had hardly inspired confidence in L/C deals with Latin American countries.

Emerging markets and MDBs

Emerging markets are generally finding it more difficult to restore trade finance flows. The MDBs are responding. The International Finance Corporation (IFC) doubled its existing Global Trade Finance Programme ceiling to $3.0 billion, and specifically targets banks in some of the world's poorest countries, while its new Global Trade Liquidity Pool Programme (GTLP) could eventually mobilize US$8 billion to "underserved" clients. The European Bank of Reconstruction and Development (EBRD) has increased its Trade Facilitation Programme's (TFP) budget from EUR 800 million to EUR 1.5 billion for the year 2009, targeting banks in Eastern Europe, Central Asia, Russia and Ukraine, all of which have been substantially affected by the recession.

Respondents to the IISTF noted the importance of the IFC and EBRD programs and praised the decision of the Asian Development Bank (ADB) and the Inter- American Development Bank (IADB) to share access to their trade finance programs, thereby connecting more than 100 financial institutions in the Asia/ Pacific region, Latin America and the Caribbean.

Africa

According to the ICC survey, the African continent is not showing signs of recovery, and some countries are reporting very tough times. Over the summer, the National Bank of Ethiopia said both public and private sector applicants have had to wait more than three months to open L/Cs due to a lack of foreign exchange reserves.

Some African traders have eschewed traditional L/C sources. The Bank of Uganda (BoU) says local banks are meeting demand from corporates as Ugandan business people steer clear of Western banks, where credit remains both tight and costly. The bank says local sources of credit are cheaper and liquidity is higher. A senior bank official at Uganda's Orient Bank reports that its credit market "remains huge with a high risk appetite".

Improved access to L/Cs may soon be available within the Common Market for Eastern and Southern Africa (COMESA) following the announcement by the COMESA Clearing House that it aims to provide a regional payment system allowing African countries to trade without going abroad for L/C confirmation. Traditionally, L/Cs within the trading bloc have been confirmed in London and New York. COMESA is mainly comprised of southern and eastern African countries, but extends to Libya, Egypt, Sudan, Eritrea and Djibouti.

Such home-grown solutions are encouraging, but global support for Africa's banks and traders is still lacking. Africa, therefore, is a key target area for the IFC, which announced in May that, along with other international financial institutions, it would mobilize at least US$15 billion over the next two to three years to lessen the impact of the global financial turmoil on the continent. The IFC says it is particularly targeting countries where it has previously been less active. As examples, IFC last year committed its first investments in São Tomé; and Principe and opened new offices in the Central African Republic and Ethiopia.

In sum, these developments reflect a slowly improving international outlook for L/Cs, but it's clear, particularly in certain regions, that a full recovery is still some way off.