# 4. <u>Evidence of a trade finance “gap”?</u>

Trade finance has tended to be highly vulnerable in times of crisis. For instance, trade finance to developing countries collapsed during the 1997–98 East Asian financial crisis. Bankfinanced trade credits declined by about 50 percent and 80 percent in the Republic of Korea and Indonesia, respectively, in 1997–98. In Indonesia, for instance, Auboin and Meier-Ewert (2008) report that, at the peak of the crisis, "cross border" international trade finance for imports became a particular problem, where international banks reportedly refused to confirm or underwrite L/Cs opened by local banks because of a general loss of confidence in the local banking system. Given the high import content of exports (over 40 percent in the manufacturing sector), Indonesia's growth of exports was seriously affected by the difficulty of financing imported raw materials, spare parts and capital equipment used in its export sectors. The financing of exports became an issue for enterprises which bear the exchange rate risk or the risk of non-payment from their clients. Argentina and Brazil found themselves in similar situations during the 2001–02 crisis episodes, as trade credits declined by as much as 30–50 percent (Allen, 2003). Liquidity and solvency problems encountered by the local banking systems made it difficult for local producers to get pre- and post shipment finance, open L/Cs, or obtain advance payment bonds and other forms of "domestic" trade finance.

With no comprehensive and reliable data on trade finance available, an overall assessment of trade finance developments in 2008-09 remains difficult. Historical precedents and selected information indicates that – along with global demand – trade finance flows declined in the last quarter of 2008. According to Dealogic, “structured” medium- and long-term trade finance instruments (such as syndicated loans) contracted by about 40 percent in the last quarter of 2008 compared with 2007.<sup>9</sup> While structured trade finance represents only a fraction of medium- and long-term global trade finance, it appears to be indicative of a broader trend. On short-term trade finance, data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) indicate that the number of trade finance messages declined by 4.8 percent in December 2008, compared with the same period in 2007. This covers collection and cash letters as well as documentary credits and guarantees.

The IMF/BAFT survey of global banks (FImetrix 2009) indicates that 71 percent of banks reported a decline in the value of their L/C business, with an overall 8 percent decline in the year to October 2008 (versus 2007), accelerating to 11 percent during the period October 2008 to January 2009. This was significantly greater than the declines for export credit insurance and short-term export credit working capital (4 percent and 3 percent respectively in the latest quarter). While 73 percent of banks recognized the role of falling trade demand on the decline in trade finance lines, more than half also attributed to a decline in available credit (i.e., a decline in supply). Overall, as can be seen in the table below, the IMF estimates that the decline in the value of trade finance transactions has been far less than the decline in export value in the period October 2008 through January 2009.

> 9 In total only 116 trade finance loans (excluding aircraft and shipping) were signed in the last quarter, the lowest quarterly count since 2004.

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