Global exposure-weighted default rates for import L/Cs almost doubled from 2021 to 2022, according to the International Chamber of Commerce's (ICC's) latest market forecasts for global trade and trade finance in the emerging macroeconomic climate.

Yet the ICC Trade Register Report 2023, led by the ICC's banking commission in collaboration with Boston Consulting Group and Global Credit Data, reports just a small increase in default rates across documentary trade and open account offerings and demonstrates the low risk nature of the transactions that enable global trade.

The register is probably the most comprehensive examination of credit risk performance of trade finance under the lasting effects of Covid-19 on the global economy.

L/Cs, loans and guarantees

Trade data for 2022 reveals that default rates across four trade finance products -import L/Cs; export L/Cs; loans for import/export, and performance guarantees -increased in 2022 relative to 2021 on almost all measures.

But default rates remain below the levels reported for 2020, for almost every product and every measure - the exceptions being the exposure-weighted default rate for import L/Cs and the transaction-weighted default rate for export L/Cs.

Pandemic impact not significant

Default rates also remained in line with the pre-pandemic historical trends seen in previous editions of the Trade Register.

This year's data therefore supports the view that the immediate aftermath of the Covid-19 pandemic has not seen a significant increase in defaults of trade finance transactions.

Geographical differences

Default rates increased marginally on an obligor-weighted basis, although the rates remained lower than levels seen in 2018 and 2020 respectively, whereas default rates declined modestly in 2022 compared to 2021 on a transaction-weighted basis.

These trends suggest that default rates in 2022 were likely to result from a small number of high-value defaults relative to historical trends, the vast majority on an exposure-weighted basis emanating in Asia-Pacific, particularly China, as well as Central and South America.

The ICC Trade Register Report 2023 can be found here.

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