JUNE 2013Click the links on the left for archived newsletters by month.
EU EASES BASEL III BURDEN ON TRADE FINANCE
In December, IIG Trade Finance Insights reported that U.S. and European Union regulators had delayed implementation of Basel III banking regulations. Now, the European Union has taken a step toward Basel III implementation with some important and welcome changes affecting the treatment of trade finance. So far, there is no word whether U.S. regulators will be taking similar action. The Basel III regulations are slated to go into effect January 2014.
These European Union changes, contained in the Capital Requirements Directive IV (CRD IV), address several key concerns about the treatment of trade finance under the Basel III banking regulations. CRD IV will implement Basel III throughout the European Union in a way that recognizes the low–risk, short–term nature of trade finance products. In doing so, the European Union has taken steps to prevent trade finance from becoming more expensive and difficult to obtain for businesses involved in global trade, particularly small– and medium–size enterprises (SMEs).
BAFT–IFSA released a summary of the trade finance–related provisions in CRD IV that focus on several key areas — the definition of trade finance, maturity, leverage and liquidity inflows and outflows. For example, CRD IV provides specific definitions of what is considered to be trade finance and sets a lower Credit Conversion Factor (CCF) for trade finance. “The Regulation applies lower conversion factors to trade–related off–balance sheet items than those initially provided in the Commission’s initial proposal,” the European Commission wrote in a list of frequently asked questions. “This intends to mitigate the impact of the leverage ratio on trade finance operations and lending to SMEs.”
Under the European Union’s stated CCF, banks will only need to keep in reserve 20% of the value of medium/low risk off–balance sheet trade finance products and 50% of the value of medium risk off–balance sheet trade finance. These percentages will be used in the Basel III leverage ratio calculation throughout the European Union. This step alone is likely to help keep the cost of trade finance down in the region.
With a lower CCF and lower required reserves on trade finance products, banks will be able to provide much more competitive pricing on trade finance and keep the cost of this financing lower than it would have been under the CCF in the full proposed Basel III regulations. In addition, CRD IV requires the use of the actual maturity of trade finance products when calculating exposures.
“Through these amendments the European Union has taken significant steps to alleviate the regulatory burden for trade finance and to ensure it remains available and affordable to importers and exporters,” says Tod Burwell, president and CEO of trade finance association BAFT–IFSA. “This is a positive outcome for the real economy, and we ask the G–20 and the Basel Committee to recommend that these Basel III changes be adopted in all member jurisdictions around the world.”
The full BAFT–IFSA summary of CRD IV is available for download here.
Global Trade Forecasts Show Growth for 2013 and 2014
Global trade volume is expected to grow at a stronger pace (3.3%) this year than in 2012, driven largely by continued stronger economic and trade growth in developing economies, according to the World Trade Organization’s latest projections. While developed economies limp along with projected growth for both imports and exports of 1.4%, developing economies are expecting a much more robust growth rate of 5.4% in exports and 5.9% in imports in 2013.
Looking ahead to 2014, the picture gets a bit brighter. Barring unexpected developments, overall global trade volume is expected to grow 5.0% overall next year, with developing economies once again leading the way. Developed economies are projected to see export growth of 2.6% and import growth of 3.2%, while developing economies are on track to post growth of 7.5% in exports and 7.4% in imports.
Figure 1 shows how current growth rates in global exports and GDP compare to longer–term averages from 1992 through 2012. If current projections hold, both export and GDP growth this year will be approaching those averages for the first time since 2010.
Figure 1: Growth in volume of world merchandise trade and GDP, 2000–14a
a Figures for 2013 and 2014 are projections.
Source: WTO Secretariat
However, it will still take some time for the global economy to make up the ground lost during the 2008-2009 recession as illustrated in Figure 2.
Figure 2: Volume of world merchandise exports, 1990–2014a, Indices, 1990=100
a Figures for 2013 and 2014 are projections.
Source: WTO Secretariat
Figure 3 illustrates annual percentage changes in both worldwide merchandise trade and GDP over the past four years and with projections for this year and 2014.
Figure 3: World merchandise trade and GDP, 2009–14a, Annual Percent Change
| 2009 | 2010 | 2011 | 2012 | 2013P | 2014P | |
|---|---|---|---|---|---|---|
| Volume of world merchandise tradeb | -12.5 | 13.9 | 5.2 | 2.0 | 3.3 | 5.0 |
|
–15.2 –7.4 |
13.1 15.3 |
5.1 5.4 |
1.0 3.3 |
1.4 5.3 |
2.6 7.5 |
|
–14.3 –10.5 |
10.7 18.2 |
3.1 8.0 |
–0.1 4.6 |
1.4 5.9 |
3.2 7.4 |
|
–2.5 –3.8 2.1 |
3.8 2.7 7.3 |
2.4 1.5 5.3 |
2.1 1.2 4.7 |
2.1 1.1 5.0 |
2.7 1.9 5.1 |
a Figures for 2013 and 2014 are projections.
b Average of exports and imports.
Source: WTO Secretariat for trade, consensus estimates of economic forecasters for GDP.
Country and Regional Insight
Looking at specific country and regional data shows where growth is coming from, as well as the areas where growth is anemic. China remains a growth stalwart and is projected to continue to grow faster than the other major economies. On a regional basis in 2012, Africa’s growth led the way at 9.3%. China on its own was in second place at 7.8% growth; however, Asia in total saw growth of just 3.8% due to below average results from Japan (1.9%) and the region’s newly industrialized countries of Hong Kong (China), the Republic of Korea, Singapore and Chinese Taipei (1.8%).
Figure 4: Real GDP and merchandise trade volume growth by region, 2010–12, Annual % Change
GDP |
Exports |
Imports |
|||||||
|---|---|---|---|---|---|---|---|---|---|
2010 |
2011 |
2012 |
2010 |
2011 |
2012 |
2010 |
2011 |
2012 |
|
| World | 3.8 |
2.4 |
2.1 |
14.1 |
5.2 |
2.1 |
13.6 |
5.1 |
1.9 |
|
2.6 2.4 |
2.0 1.8 |
2.3 2.2 |
15.0 15.4 |
6.6 7.1 |
4.5 4.1 |
15.7 14.8 |
4.4 3.8 |
3.1 2.8 |
|
6.2 |
4.3 |
2.6 |
5.2 |
6.1 |
1.4 |
22.7 |
12.0 |
1.8 |
|
2.3 2.1 |
1.7 1.5 |
–0.1 –0.3 |
11.0 11.7 |
5.5 5.7 |
0.6 0.3 |
9.4 9.1 |
2.8 2.4 |
–1.9 –2.0 |
|
4.7 |
4.8 |
3.7 |
6.1 |
1.8 |
1.6 |
18.8 |
17.1 |
6.8 |
|
4.5 |
0.7 |
9.3 |
5.4 |
–8.5 |
6.1 |
8.1 |
4.5 |
11.3 |
|
4.9 |
5.2 |
3.3 |
7.5 |
5.5 |
1.2 |
8.2 |
5.1 |
7.9 |
|
6.7 10.4 4.5 10.1 8.2 |
3.3 9.2 –0.6 7.9 4.0 |
3.8 7.8 1.9 5.2 1.8 |
22.7 28.1 27.5 25.7 20.9 |
6.4 8.8 –0.6 15.0 7.8 |
2.8 6.2 –1.0 –0.5 1.6 |
18.2 22.0 10.1 22.7 17.9 |
6.7 8.8 4.3 9.7 2.7 |
3.7 3.6 3.7 7.2 1.5 |
|
2.7 |
1.5 |
1.2 |
13.1 |
5.1 |
1.0 |
10.7 |
3.1 |
–0.1 |
|
7.3 |
5.3 |
4.7 |
15.3 |
5.4 |
3.3 |
18.2 |
8.0 |
4.6 |
a Includes the Caribbean.
b Includes Northern
Africa. GDP growth was higher for Sub-Saharan Africa as a whole in 2011 at 4.4% and lower in 2012 at 4.0%.
This discrepancy is mostly due to strong fluctuations in Libyan output.
c Hong Kong, China;
Republic of Korea; Singapore and Chinese Taipei.
Source: WTO Secretariat.
Among developed economies, U.S. growth is picking up once again. In 2012, U.S. growth of 2.3% was nearly twice the growth rate of 1.2% for developed economies as a whole. Japan also outpaced the average for developed economies with 1.9% growth last year. However, nonexistent growth in the European Union (–0.3%) was and continues to be a drag on the global economy and global trade growth.
The possibility of continued recession within the European Union remains this year, largely due to the continuing euro crisis. In fact, the euro crisis is the main wildcard in these forecasts for this year and 2014. Although there is a chance that the crisis will begin to ease and growth will begin again, the WTO analysts note that the “risks to the forecast are firmly rooted on the downside.”
Let us know what you think!
We, at IIG Trade Finance LLC, welcome your feedback. If you have any comments and suggestions about IIG Trade Finance Insights and the topics we are covering, please drop us a note at insights@iigtradefinance.com. We want to make sure we are providing useful information on the most important topics affecting our clients and welcome your input.
IIG Trade Finance LLC publishes this newsletter and site. IIG Trade Finance LLC and/or its affiliates do not guarantee the reliability of all sources of information used. Investment advisory services are provided solely by The International Investment Group L.L.C., an affiliated investment adviser registered with the Securities and Exchange Commission. Loan servicing and origination are performed by IIG Trade Finance LLC, and/or other affiliates.
IIG TRADE FINANCE LLC, ©2013. All rights reserved.