MAY 2012Click the links on the left for archived newsletters by month.
CONCERN ABOUT SMEs PROMINENT AT DOHA
TRADE FINANCE MEETING
Concerns that small and medium-size enterprises (SMEs) are being left out of trade finance was a key issue being discussed at the International Chamber of Commerce (ICC) Banking Commission bi-annual meeting in Doha, Qatar in March. The meeting drew more than 400 banking and business executives from 50 countries.
Although the economic crises over the past few years have slowed the flow of trade finance, SMEs in developing countries have been particularly hurt by the lack of access to trade finance. "SMEs could be the engine of economic growth if given better access to investment through new regulatory frameworks for trade finance," says ICC Banking Commission Chair Kah Chye Tan.
A key focus of the Doha meeting was to rethink the future of trade finance in a bid to encourage governments, regulatory bodies and G20 leaders to remove obstacles, particularly regulatory obstacles, to trade finance. The ICC is urging governments to take measures that make trade finance more accessible and affordable, and to avoid drafting regulations that may penalize trade.
For example, the Commission warns that any regulation related to trade finance should be based on an objective assessment of trade finance's low risk, self-liquidating character. In essence, the group argues that trade finance should receive a more favorable treatment under the financial regulations now being considered that are in line with the Basel III framework. The group warns that classifying trade finance as a high-risk financial instrument, subject to higher capital adequacy requirements, could have an adverse impact on both the pricing and supply of trade finance.
A policy consultation among Banking Commission members held during the Doha meeting focused on trade and finance market constraints. The meeting covered demand, risks, pricing, and availability of trade finance, as well as a list of other topics, including currency exposure, U.S. liquidity issues, financial regulation and reform, and the impact of Basel III. The ICC will be using these discussions to create business recommendations regarding trade finance for inclusion in the G20 Summit of Los Cabos, Mexico in June.
Throughout the meeting, issues related to SMEs continue to be prominent. For example, to support trade activity among SMEs, the Commission argues in favor of:
- simplified regulatory and bureaucratic requirements for setting up and doing business;
- incentives that encourage the financial sector to lend to SMEs; and
- better access to capital markets among SMEs and other innovative ventures.
SLOWER TRADE GROWTH THIS YEAR
A potential recession in Europe and slow growth in China are proving to be a drag on trade growth prospects this year. As a result, the World Trade Organization expects trade growth to slow down to 3.7% this year, well below the long-term average of 6.0% for the 1990-2008 time period and the 5.5% average over the last 20 years that includes the last recession. However, the WTO notes that these forecasts, like the initial 2011 forecasts, could still change, particularly if there is a steeper than expected downturn in Europe, the financial contagion related to the sovereign debt crisis spreads beyond the euro zone, oil prices increase rapidly, and geopolitical risks become reality.
If the WTO's numbers hold, the anemic growth expected this year and potentially next year would not bring the trade growth trend back to the trend line prior to 2009. In fact, the gap between the current growth trend and the long-term trend would only become larger. "Eliminating this divergence would require faster than average growth at some point in the future," notes the WTO report. "Conceivably, this could happen after governments, businesses and households in developed countries reduce their debt burdens to more manageable levels, but this process of deleveraging (reducing reliance on debt) and fiscal consolidation (reducing budget deficits) is likely to take years. In the meantime, the world may have to resign itself to a long period of slower-than-average growth in international trade."
As a result of their long-term growth, developing economies are now responsible for the highest share of total world exports (47%) and imports (42%) since this data collection began in 1948. Moreover, these developing economies are expected to continue to outperform developed economies in the near future albeit at a slower pace than they have historically. Still, these developing economies could still be affected by global risks, such as higher oil prices and potential regional risks, including political changes, natural disasters and unexpected supply chain interruptions.
Volume of world merchandise exports, 1990-2013
As we reported in the March issue of IIG Trade Finance Insights, the euro zone sovereign debt crisis has been a drag on growth in many parts of the world. Considering this and the other risk factors stated earlier, the WTO notes that "the most likely outcome remains a mild recession in Europe, slower growth in developing countries and moderate recoveries in the United States and Japan."
Looking ahead to the rest of 2012 and into 2013, WTO economists project the following:
World merchandise trade and GDP, 2012 and 2013 projections
| 2012 Projected | 2013 Projected | |
|---|---|---|
| Merchandise trade volume growth | 3.7% | 5.6% |
| Export growth —developed countries —developing economies |
2.0% 5.6% |
4.1% 7.2% |
| Import growth —developed countries —developing economies |
1.9% 6.2% |
3.9% 7.8% |
| Real GDP at market exchange rates —developed countries —developing economies |
2.1% 1.1% 5.0% |
2.7% 1.8% 5.4% |
Source: WTO Secretariat
TOWARD AN INTERNATIONAL MONETARY SYSTEM THAT FACILITATES INTERNATIONAL TRADE
The international community should reform the international monetary system while avoiding unilateral attempts to change or to retain the status quo, according to Pascal Lamy, World Trade Organization (WTO) Director-General. "We need an international monetary system which supports cross-border investment and a better allocation of capital across nations and which 'facilitates international trade' — as laid out in the aims of the International Monetary Fund," Lamy told a WTO seminar on exchange rates and trade in March.
Lamy noted that the international monetary system currently lacks a system to create a sense of organized governance when it comes to foreign exchange rates. "Trade needs exchange rate stability," said Lamy. "The problem for business is one of excess volatility — i.e. when exchange rates behave in a disorderly way, and do not adjust to economic fundamentals."
Instead, the global monetary system should inspire confidence, offer stability and monitor exchange rates more efficiently. It should also provide the means to address any global imbalances that could endanger stability. "Trade cannot become the scapegoat for the pitfalls and drawbacks of the international monetary system, or current non-system," said Lamy. Instead, there needs to be cooperation among many involved parties that impact the financial system and the domestic policies of individual countries in order to avoid the situation devolving into "tit-for-tat trade measures (that) would be a recipe for protectionist crossfire," he said.
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