Despite the abrupt drop in exports, 55 percent of firms have not changed and did not foresee changes to their destination for exports or origin of imports. Main reasons for not changing export destination or import origin for most firms are threefold: (i) Firms are still assessing the impact of the financial crisis; (ii) Companies still rely on existing clientele for business; and (iii) Companies prioritize profitability and remaining competitive over shifting business strategies to explore new markets. Still, some firms that are highly integrated in supply chains and relying on very few markets have reported or expect a substitution for destination of exports. Some Philippines firms have declared they are shifting from the U.S, South America, and EU markets to mainly China and Taiwan. Firms in Turkey expect to export more to China, and regionally to Algeria, Egypt, UAE and Qatar, while they expect exports to U.S. and EU markets to decline. In Egypt, surveyed firms indicated a slight substitution from the U.S. and the EU to China, and Arab and African countries. Moreover, some of these firms that have been relying extensively on the export market might explore new opportunities on the domestic markets.

# **II. Firms’ perspective on scarcity of trade finance: Who is affected and why?**

Along with the rapid decline in trade and the reported freeze of trade finance, a critical question has emerged for policy makers in developing countries and development organizations about the extent to which exporters and importers in developing countries are being constrained by the trade finance freeze. The hypothesis is that the financial crisis may have reduced the supply of trade finance, and that the lack of it may deepen and prolong the recession, halting the economic growth of emerging economies and many poor countries already vulnerable. The trade finance “gap” was estimated using various methodologies (e.g., bank surveys, and drop in trade flows combined with an estimation of trade financed by trade finance instruments) and there seems to be a global convergence towards a “gap” of $250 billion<sup>8</sup> . In this perspective, the World Bank survey of 425 exporters and importers in 14 developing countries conducted six months after the beginning of the crisis sheds some light on the firms’ assessment of the crisis and the origin of their constraints.

## _A._ **_SMEs most affected by tightening trade finance; yet mainly worried about global demand_**

While most firms have reported a tightening in trade financing since September 2008, SMEs<sup>9</sup> were the most affected **_._** The most often cited constraints relate to the increase in cost of trade financing instruments, banks’ more stringent selectivity and guarantee requirements, and delays in payments from buyers. SMEs are more vulnerable due generally to their low credit standing (low capability to provide collateral) and the tenuousness of their remaining viable in the face of the sharp and possibly prolonged

> 8 Chauffour, J.P. and Farole, T. (2009). _“Trade Finance in Crisis: Market Adjustment or Market Failure?”_ Policy Research Working Paper 5003, World Bank

> 9 New firms are also affected as reported by banks – see section III reporting finding from the banks survey

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