RSS FeedBy M. Isi Eromosele
As the global and economic crises continue to run its course, many countries are struggling to secure much needed short-term financing and protection against rising commercial risks.
The higher costs and limited availability of trade finance has prompted action by international financial institutions, as the threat it poses to regional economies is significant. In Asia, a 10 percent decline in trade finance would result in a drop in total trade of $129 billion in developing Asia.
There has been an increase in the price of letters of credit – a trade finance instrument where by the bank of the importer guarantees payment to the exporter or its bank upon satisfactory delivery of a shipment.
Countries with high risk ratings have suffered the most from the drying up of trade finance, as financial institutions have reduced coverage for transactions considered as high risk. Country risk is the minimum for setting minimum risk premium rates for transactions covered by many export credit agencies.
A country’s sovereign default risk directly affects an individual exporter’s ability to get trade financing. Least developing countries such as Afghanistan, Laos and Nepal are classified in the highest country risk category.
Some countries in the Asia region have had difficulty accessing trade finance because of a general liquidity shortage in their economy. Some others have been affected because of increased risk aversion of financial institutions towards enterprises and to the higher counterparty risk of banks.
Strong interventions by Central Banks have markedly improved the situations in many economies, even as a general lack of information about trade finance has contributed to uncertainties about the solvency of counterparties in foreign markets and increased the perceived risk of trade finance products relative to other products.
Increased capital requirements have become an important factor in the rising cost of trade finance and there is a clear possibility that governments will impose tighter controls on banks’ international operations.
At the regional level, the Asian Development Bank has agreed to a significant expansion of its trade finance program, which is expected to generate up to $15 billion in support until 2013 to help counter an export slump that has been exacerbated by the reluctance of commercial banks to lend.
At the national level, many Asian countries have implemented new or enhanced trade finance schemes in response to the crisis, most of which are focused on providing export credit insurance and guarantees to help enterprises and banks to manage their risks.
These global, regional and national initiatives will ultimately to increased availability of trade finance in the near-term.
Many of the smaller and less developed Asian countries have very limited capacity to address trade finance shortfalls on their own and may not fully benefit from global and regional schemes since they lack the required national trade finance institutions and infrastructure.
Establishing or strengthening national trade finance institutions should be made a priority, since the absence of such institutions put traders at a distinct disadvantage, especially in times of crisis.
The focus should be placed on establishing government-backed but self-sustainable organizations that offer particular risk assessment and management programs to support and build the capacity of Asian countries with export potentials.
Additionally, governments need to focus on strengthening the quality and availability of credit information by supporting the development of domestic credit rating services.
Given the large gap in the availability of trade finance between countries in the Asia region, deepening cross border cooperation on trade finance and pooling resources and expertise in this area could be an effective way to mitigate bottlenecks in trade financing.
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
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