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How trade finance is adapting to crisis

27 April, 2020Ouida Taaffe

Ouida Taaffe talks to Alexander Malaket about what the current crisis means for trade finance, including digitalisation, supply chains and what the markets and regulators can do.

Shipping containers from aboveThe global financial crisis of 2007/2008 was painful for every segment of financial services because it was a liquidity and credit crunch. In trade finance, it led to higher costs of capital, increased risk aversion and a reduction in correspondent banking relationships as regulators tightened compliance requirements.

The COVID-19 crisis is not a financial crisis in the same way – but its impact will be much more profound, says Alexander R Malaket, President of OPUS Advisory Services International, and a long-time senior adviser on trade and trade finance.

“There was no disaster recovery plan that envisaged this,” says Malaket. “It goes way beyond anything seen in 2008.”

Trade finance is about more than money

That does not mean that trade finance faces major constraints.

“Systemically, the sector is moving along and liquidity overall seems to be OK,” says Malaket. “There are some strains in the correspondent banking network – mostly because of demand for US dollars – but nothing critical so far. We are monitoring carefully through efforts led by the World Trade Organization (WTO), the International Chamber of Commerce (ICC) and other key market players.”

Part of that liquidity is thanks to the speed with which major central banks turned on the taps. Export credit agencies have also stepped in, Malaket says.

But he points out that trade finance has many issues to consider that go beyond financial market problems. Global manufacturing trade has stalled because of lockdowns. Laid-off workers are spending less, which reduces demand for imports. And workers on lock-down – as they are in India – are finding it difficult to process paper-based trade transactions. 

“The whole scope of disaster recovery and business continuity in trade has changed,” says Malaket.

“The scope of six months ago would not be acceptable now.” He points out that a lot of financial services firms have offshore processing of trade documentation.

“When certain markets went into lockdown, documents in those major processing hubs could not be couriered between local offices. Some had to be couriered out of the country and back in. No one envisaged that.”

Digitalisation will speed up

Traditional trade finance still relies largely on paper documentation. That is partly because e-documents are not recognised as documents of title to goods in the way that paper documents are. And partly because many emerging markets employ a lot of people to physically stamp and process documents.

The transition to fully digital trade finance was expected to take many years.

“There is a real debate now around the new normal,” says Malaket. “This includes teleworking and new approaches to professional development, but it will also mean complete process redesigns. This may be a good time to ramp up and accelerate the development of digital trade finance.”

Supply chains will change

The trade war between the US and China had already led to debates about globalisation and to moving production from China to other parts of Asia, Malaket points out. But the questions are now much more urgent.

“There are massive discussions about reconfiguring supply chains,” he says.

However, this is not likely to lead to onshoring.

“The trade war, concerns about the carbon footprint of trade flows, the need for sustainable trade, and Covid-19 are all used to underpin arguments for a reconfiguration of supply chains. But the economics of low-cost production and low-cost labour will not go away. Also, not many developed markets would be able to rebuild manufacturing capability, even in the medium term.”

Supply chain management and optimisation practices, including just-in-time supply chains will, however, come under more scrutiny.

“There is some discussion both of the mechanics and of the concept,” Malaket says. “In uncertain times, people are looking at holding less inventory and they can’t project demand well.”

What regulators and markets can do

Exporters in emerging markets already had less favourable access to financing than those in developed markets – partly because of tighter regulations following the 2008 crisis.

Will regulators move to ease conditions now?

“The Bank for International Settlements has taken measures to ease capital requirements. Are there opportunities to ease other regulatory and compliance expectations – without enabling money laundering (which has links to human trafficking, narco-terrorism, the poaching of animals and a host of other crimes) and terrorism financing?

“At a minimum, the unprecedented reality of the moment argues for more dialogue between regulatory authorities and industry, to ensure the right balance is achieved,” says Malaket.

But he points out that it’s not all in the regulators’ hands.

“Africa is facing an absolute existential threat from the virus. This is life and death, and it puts other parts of the crisis very much in perspective.

“Whatever we can do while authorities and medical professionals lead us to a solution should be considered with the bigger picture in mind – and with the sense of community and shared responsibility that will see us emerge together from this crisis.”

Malaket calls for “courageous, principled leadership on all fronts – leadership that recognises what this virus has reminded us all of: that we are interconnected and much more closely linked than we often realise”.

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