Crisis constrains trade finance for exporters and importers

MANILA, Philippines - The lingering global financial crisis has constrained trade finance for exporters and importers in developing countries, including the Philippines, in 2008 and early 2009, a World Bank (WB) survey indicated.

The survey on trade and trade finance developments was conducted during the first quarter of 2009 among 425 firms and 78 banks in 14 developing countries across five regions which also include Indonesia in East Asia; Turkey and Ukraine in Europe and Central Asia; Brazil, Chile and Peru in Latin America; Egypt and Tunisia in Middle East and North America; India in South Asia; and Ghana, Kenya, Sierra Leone and South Africa in Sub Saharan Africa. 

The WB study Phase 1 found that the impact varied by the firm size, sectoral activity and countries’ integration into the global economy.

At the firm level, firms that rely to a large extent on the banking system for trade finance have suffered from more risk averse and selective local banks. On the contrary, firms that mostly rely on inter-firm financing and self-financing have been mostly affected by the slowing global economy, the lack and cancellation of orders, delays in buyer’s payments, and shorter maturity imposed by suppliers, it said.

The small and medium enterprises (SMEs) were affected most by high increases in the cost of trade finance instruments.  

A number of these firms operating in global supply chains and/or in sectors that have been most affected by the slow global economy have reported as being constrained both through the banking system and the drop in export revenues and buyers’ liquidity.

“Drop in demand has emerged as the top concern of firms. The lack of export revenues was putting pressure on firms’ cash flow and, therefore, their capacity to fund their export and import transactions,” the WB stressed.

Study results also revealed that banks made lending standards and guarantee requirements more stringent for exporters.

To improve exporters and importers’ access to trade finance and ease trade finance costs, governments and central banks of surveyed countries implemented various actions during the crisis.

For one, it cited the Bangko Sentral ng Pilipinas expansion of its rediscount window to raise loans for banks; increasing the value of loans to rediscounted loan papers; lowering interest rates charged on rediscounting; and setting at below-market rates or 0.5 percent below the reverse repurchase agreement rate.   

The Philippine government passed an amendment to the Magna Carta for SME Law requiring banks to allocate up to 10 percent of their loan portfolio for SMEs.

It also planned to provide the P1-billion Export Support Fund meant to help exporters cope with the impact of the financial crisis.

For its part, the WB’s International Finance Corp’s Global Trade Finance Program provided guarantee coverage in excess of $2.9 billion. It added 25 new banks to a total of over 180 issuing banks in 76 countries.

Trade financing gap was expected to persist this year as pickup in exports would raise demand for trade credit, but access to trade credit will improve at a slow rate due to banks’ balance sheet problems and weak credit growth in the economy.