The International Chamber of Commerce (ICC) has said a large proportion of a possible US$5 trillion of trade credit that will be needed to enable a rapid recovery from the coronavirus crisis will be needed to provide capacity in the bank-intermediated market, including letters of credit (L/Cs) and bank guarantees.

The chamber also warned that trade financing gaps risk hampering a global recovery - impacting the survival chances of small businesses, particularly in less developed markets.

Rapid recovery

With the World Trade Organisation estimating a potential decline in global merchandise trade in the order of 13-32 per cent in 2020, the ICC reckons that something in the order of US$1.9-5.0 trillion capacity in the trade credit market will be required to enable a rapid recovery as demand returns to the global economy.

The chamber says this will potentially encompass an estimated US$0.8-1.9 trillion of required capacity in the bank-intermediated market alone, which includes L/Cs and guarantees, if merchandise trade volumes are to return to close to 2019 levels in 2021.

International support needed

The ICC cautions that a rapid economic recovery will only be possible if sufficient credit is available to bring trade close to pre-pandemic levels over the next 18 months.

It is calling on policymakers to proactively scale support for trade finance transactions to prime the market ahead of demand returning to the global economy.

Small business impact

The ICC points out that after the 2008 financial crisis, the provision of trade credit did not return to normal in main trading routes until 2012 while micro-, small- and medium-sized enterprises (MSMEs) have faced sustained challenges accessing trade credit over the past decade.

Data from a recent ICC survey shows that around 50 per cent of MSME applications for trade finance are rejected by global banks, while the Asian Development Bank has estimated that the global shortfall in trade finance stood at around US$1.5 trillion in 2019.

The chamber says that this gap is particularly concentrated in developing and least-developed economies, and it is MSMEs in these countries that may once more find themselves marginalised in the trade finance market.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.