Processes surrounding the financing of global trade have been in need of a revolution for quite some time. Trade finance drives societal progress and prosperity, and before the advent of the global pandemic, it was beginning its rise to meet this onerous responsibility. But, has COVID-19 rained on the parade?
One of the most impactive repercussions of the global pandemic on society has been physical absence. The segregation of people. For businesses relying on face-to-face customer or client interaction, the compromise forced on them has been - for some - catastrophic. Many business owners who thought they were only shutting up shop temporarily have never been able to go back and reopen. Others have been forced to reduce the size of their enterprise by laying off staff, and perhaps shrinking their client lists. Employees who thought they were temporarily on furlough, came to understand it was but the first step on the path to unemployment. In August 2020, the Oxford Review of Economic Policy indicated that as early in the pandemic as March, there was a stark decline in export trade from the major nation players in the industry. It indicated that in France there was a 38% decline, an approximate 25% decline in Turkey and Germany, and a 12% decline in the US.
The Organisation for Economic Co-operation and Development estimated a global contraction of trade in 2020 to be 10.9% (with a decrease of global GDP of 3.4%). In September 2020, the Wall Street Journal reported an increase of 60% of rejected applications for trade credit insurance. The ICC estimates that somewhere in the region of USD 1.9-5 trillion capacity in the trade credit market will be necessary to bring about a world-wide recovery and return to business as usual.
Ropes
As discussed by the ICC Global Survey on trade finance, financial entities have attempted to assist their customers weather the coronavirus storm by softening the regulations framing financial terms, relaxing documentation rules, and foregoing the necessity for ‘live’ or ‘wet ink’ signatures. By alleviating the tightness, these entities have potentially eased the way for the digitalization of trade finance processes. The cloud of a global pandemic may well have a silver lining in this regard. By physically removing agents from the workplace through lockdown, no one has been present to rubber stamp the paper that has traditionally flown back and forth. Paper that has proven to be the ropes impeding trade finance from realizing its potential.
But has paper removal been a blessing or a curse? Again, according to an ICC report, the biggest disturbance to the smooth running of trade finance has been the lack of people physically present to conduct and oversee the transfer of paper-based processes to digital ones. This opens the dialogue to an interesting question. Has COVID-19 forced a weakening of traditional measures by financial entities to gain finance, and paved the way for a digital makeover, or has isolating staff from their workplaces hindered the paper-based system and shrunk the trade finance sector?
Despite the digitalization leaps forward that have been prompted by the pandemic, there are still entities in the trade finance flow that require paper records for legal or regulatory purposes. Unfortunately, this frustrates the wider process because, at least in part, the paper trail must exist from the beginning of the whole of the transaction. Signatories must ratify originating documentation with wet ink from the outset. The whole chain becomes only as strong as the weakest link, and in that culture, one must ask why banks and financial entities should be expected to devote time and resources to revitalizing the trade finance food chain if any party in the chain is still bound to paper?
The Broader Picture
It is widely acknowledged, and set out by the World Trade Organization’s paper Trade Finance, Gaps and the Covid-19 Pandemic: A Review of Events and Policy Responses to Date, that there is a profound paucity of reliable data concerning trade finance, and therefore, accurately assessing the impact that COVID-19 has had on the sector is problematic (indeed the lack of universal data for public consumption is considered to be a major issue in need of resolution to improve and update the industry).
Stop Start
Not surprisingly either way, is the fact that since the beginning of the pandemic, importers and exporters have had difficulties in obtaining finance, and as outlined by the WTO, this has occurred in phases. In the initial lockdown going into the spring of 2020, documentation that was critical to trade finance was not initially transmitted or was greatly delayed due to paper-based processes and personnel shortages. This saw a move by more advanced economies to digital alternatives. Less developed ones however found the transition far harder. In some areas, trade excelled (such as medical supplies and essential goods), compared to others (such as goods to small retail outlets who were forced to close their doors at least temporarily). In less developed economies, the already reduced lack of liquidity was exacerbated by COVID-19’s advent and the shortfall in required goods. Wider liquidity issues arose in undeveloped economies such as continental Africa, Latin America, and Central Europe, as the supply of USD fell.
Figure 1: Diagram showing phases throughout the pandemic.
Into the summer of 2020, and on came a seeping into the consciousness of the trade finance community that there was increased risk, which in reality was indeed, a result of the deterioration of actual wider credit risk. At this point, lockdown measures around the world had largely been eased as the first wave of the pandemic let up. This is not to say however, that warnings were not being uttered by experts in the global health arena about a coming second wave. As the pandemic persisted, banks started to anticipate increases in defaults from parties within the trade finance chain outside of those originally affected by the first lockdown. Ultimately bank’s, and associated financial entity’s, willingness to provide finance contracted.
Phase three saw an uptick of the trade finance markets. The international financial system stepped into the void to assist in promoting trade demand going into the third quarter of 2020 and into the fourth. Governments pledged money to prop up local businesses and protect employees. Both the trade and trade finance communities have adapted to the new ebb and flow cycles of demand that has emerged with the proliferation and retreat of the disease. It is a possibility that as vaccine programs progress around the world, trade finance may recover at a slower pace due to the general risk aversion that has become ingrained during the virus’ initial propagation.
It seems evident that the pandemic has exercised a far-reaching influence over the mindset of financial entities in the trade finance sector. For the industry to take steps out of the fog of COVID-19 and into a braver future, not just the availability of money is at stake. So too, is the mindset of those in the community.