Lamy urges more trade finance for developing countries
10 Jun '10
6 min read
The question therefore should not be whether trade in commodities is important to global recovery efforts, but how do we ensure that commodities play their expected role in these efforts. Part of the answer lies in the availability and affordability of commodities trade finance, in all regions of the world, particularly those which are more commodity trade dependent. The other part of the answer has to do with the multilateral trade rules that regulate global commodities trade.
Trade finance is the oil that keeps the wheels of global trade running; hence our active interest and ongoing participation in global initiatives to address the impact of the global financial crisis on the availability and cost of trade finance. The fact is that around 80 per cent of world trade is financed by some form of credit.
You all know that in the midst of the financial crisis the supply of trade finance had fallen short of demand, both in volume and value, in a context of liquidity shortage and re-assessment of counterparty risk, hence raising fears that this would deepen the collapse of trade and hence the recession. We have received reports that the financing of some important commodity trade deals in developing countries, in particular in Africa, had been difficult to syndicate, such as, for example, in 2009 the pre-export financing of Ghana's cocoa crop.
Since the second half of 2009, though, the global trade finance market situation has eased up. According to trade finance experts which last met on 18 May 2010 at the WTO, liquidity has returned to the bulk of trade markets. Despite this overall positive assessment, experience differs widely across regions, with emerging markets leading the recovery. And although liquidity is less of an issue, the problem remains one of aversion to risk, particularly in smaller players in smaller markets
While our experts tell us that there is a large appetite for risk and ample liquidity to finance trade from China, India, Brazil and Korea, at the lower end of the market, there continues to be strong constraints. This is particularly true for Sub Saharan Africa where some financing capacity seems to have been lost. At this stage it is not possible to determine whether this is permanent or temporary. The explanation given by global commercial banks is that the cost of collecting information on counterparty risk is high and that coupled with the low profitability of small operations in the region, trade financing remains unattractive, particularly on the import side.
Given the commodity dependence of these countries, this remains a serious matter for concern: financing commodity exports and not imports would be a short-sighted strategy. Import financing is also allowing for essential inputs to make future exports, be it commodity-based, competitive. Should you wish to be regarded as long-term partners for their development, you might wish to remain involved in the financing of substantially all trade of low-income countries, and keep your lines of credit open, not just for the most profitable commodity deals, where I guess competition for offering financing will tighten when commodity prices start to go back up again.
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