Trade Finance Stumbles

• Author: Thomas Dorsey
• Position: Division Chief in the IMF's Strategy, Policy, and Review Department
• Pages: 18-19

Page 18

The rising cost and declining availability of finance for imports and exports is taking a toll, especially in emerging markets

Global trade has plunged in recent months during what is proving to be the worst worldwide economic slump since World War II. Part of that decline in trade refl ects the sharp drop in global demand. But the fall in trade that began in the final quarter of 2008 [see "Deep Impact," page 13, in this issue] appears to be far greater than would be expected given the decline in global economic activity. That suggests that part of the fall refl ects a disruption of financial intermediation, in which institutions, banks, and corporations facilitate global trade.

Anecdotal evidence indicates that the cost of trade finance has risen rapidly, while in some cases its availability has fallen. But there have been few hard data on trade finance. To fill in this gap, the IMF, in conjunction with the Bankers' Association for Finance and Trade, surveyed major banks in advanced and emerging economies to find out about current conditions in and expectations for trade finance (see Box 1).

The survey results tended to support the anecdotal conclusions. Trade finance is costlier and somewhat harder to get in emerging markets-where much of the intraregional trade is in low-profit-margin items that are part of the manufacturing supply chain for exports to advanced economies. The banks anticipate these trends to continue in 2009. But it is difficult to disentangle cause and effect. Some of the decline in trade finance is the result of the plunge in trade spawned by the recession, while some of the rise in costs is due to the higher probability of defaults from falling trade.

Box 1 Surveying banks

In response to the dearth of information about trade finance, the IMF worked with the Bankers' Association for Finance and Trade (BAFT) to survey advanced, emerging market, and developing country banks about current trade financing conditions compared with a year ago and expectations about 2009. The survey focused on bank-intermediated forms of international trade finance such as letters of credit and trade lending. BAFT and the Latin American Federation of Banks, trade associations of globally active financial institutions, sent a questionnaire to a long list of banks, of which 40 responded-roughly evenly split between advanced countries and emerging...