Discussions about trade finance do not rightfully take place without the tacit understanding that certain things have to be mentioned, such as the 2007/8 global financial crisis, and of course, THE pandemic. This is understandable since the financial crisis represented another episode in the continuing global economic pitch and roll, and each time it gets choppy it overtly impacts all manner of monetary sectors in all manner of different ways. Financial instability is inevitable as well as intermittent. A worldwide pandemic, however, is something shinier and newer. The last time a similar event happened was a century ago when the world had recently exited a global conflict. The ensuing upheaval has arguably exerted its influence up to this very day. What then, lies ahead for us, in the tailwind of this pandemic?
Much is made of the last financial crisis of 2007-8. And perhaps it should as some experts maintain it has been the worst since the Great Depression of the 1930s. These parallels are hard to make because one has to correlate the social climate of then and now, and in many regards the world of today bears little resemblance to the one of then.
Observing recent history – from the beginning of the twentieth century say - there have been many financial downturns, crises, and depressions. They have varied in their scope: some were deemed to be localized and short-lived (e.g. in Chile in 1982) while others have affected the world and lasted much longer (such as the Great Depression itself some 50 years before).
How these have impacted the world, where, and their root causes, are varied to say the least. The Great Depression itself is thought to have begun with the US stock market crash of 1929.
By 1932, worldwide GDP had fallen by 15% and the impact of the crisis had spread around the world. America’s dust bowl, the rise of fascism, and WWII were all consequences. Variously, in the early 1990s, an economic recession set in throughout the western world with knock-on effects around the globe.
Reasons given for the recession include a mixture of banks imposing restrictive monetary policies due to inflation, the loss of wider confidence due to the 1990 oil price shock, the end of the cold war, and a shortfall in office-based construction projects. Banks and their associated entities were either forced, or chose, to restrict credit and the consequences for a sector such as trade finance were obvious.
Sadly, and as noted by Park, Simar, and Zelenyuk in 2020, no mathematical model has ever been successful in predicting an oncoming downturn. We know they are on their way, but how and when is always a bit of a surprise.
When in the midst of a financial storm, much of the damage is done by the loss of confidence. Strange as it is, businesses and people stop speculating in an economic slump because they are concerned about retaining capital for fear that the crisis will worsen.
Unintuitively, in attempting to stave off crisis, further spending, risk, and speculation is restricted, and the problem escalates. A financial dip gathers momentum into a crisis, and if profound enough, expands across geographies as well as sectors.
Contrastingly, the coronavirus pandemic – as with similar ones before it – has had an impact on the financial sector, but which is an indirect repercussion of society’s struggle to hamper the virus.
For instance, supply chains in trade finance suffered because people could not physically visit their workplaces: governments had been forced to remove all personnel from all but the most critical work environments to curb the viral spread. Equally contrastingly is the regularity of global pandemics.
In the twentieth century, there has been Spanish Flu, the 1957-8 Flu epidemic, Hong Kong Flu, the spread of HIV, and coronavirus. Arguably only Spanish Flu is analogous with COVID-19 in the sheer chaos it has inflicted on societies and their economies.
In a sense, the coronavirus pandemic somewhat exacerbated latent problems that existed previously. In terms of trade finance, the need to move to full digitalization and adopt new technology has been arrantly framed.
COVID or not COVID
So pervasive has been coronavirus, that it is almost impossible to describe any event that hasn’t been directly influenced by it. Either way, a key development during the chaos has been the transition from the Republican US President Donald Trump to the Democrat Joe Biden.
Trump’s departure means a move away from isolationism and unilateralism and to Biden’s more measured cooperation and multilateralism. What can be expected is fewer solo proclamations and surprises in US intentions (and the international impacts these bring) and more advance warning of shifts in policy.
Notwithstanding, the resuming of fruitful relationships with conventional partners is also expected, as well as unified coordination with such partners to meet foreign policy goals.
In essence, this will reopen opportunities for international trade and increase demand for finance. As outlined by Shailesh Kumar in Trade Finance Global, however, even though Donald Trump’s term has come to an end, the new administration is not expected to instantly reverse the predecessor’s policies and sanctions.
This is because China is a dyadic issue in the US with some anxiety over topics like security, business, trade, intellectual property, labour standards, and investment. As the US modifies its stance on China though, other groups and nations will potentially look to cultivate a relationship with Beijing such as Pakistan, Iran, the EU, Turkey, Russia, and some African principalities.
Keeping it Local
In the forecast too, is a possible increase in regionalization. There are a number of reasons for this. Firstly, it is no secret that vaccine production and distribution has been uneven across the world. With its sporadic global application of it, further lockdowns are inevitable, and recovery will be delayed.
Moreover, where mistakes and unanticipated hurdles arise while nations are climbing out of the pandemic, economic recovery will be impacted, and regionalization of trade and its financing will result.
Further still is the possibility of price inflations in commodities and assets due to protracted financial aid from governments. Market volatility will become more likely as a consequence. Also, as time passes and economic growth steps up, governments will gradually withdraw monetary aid. As this happens, markets will recalibrate back to their positions before the pandemic arrived.
Any financial entities that have become reliant on the artificial stimulus, or that cannot readapt to the latest changes, will likely fold. What’s more, since emerging markets are less affected by localized lockdown measures (with lower mortality rates), there will be fewer financial support mechanisms, and recovery is thus expected to be faster.
Indeed, moving from 2021 into 2022, emerging markets may well outperform expectations, but with rises in the regionalization of trading partners while economies continue to find their feet again.