Azevêdo says lack of trade finance can be a barrier

Azevêdo says lack of trade finance can be a significant trade barrier for developing countries

Director-General Roberto Azevêdo, in opening the seminar on “Trade Finance in Developing Countries” at the WTO on 26 March 2015, pointed to a recent WTO Secretariat paper that showed trade financing gaps are “the highest in the poorest countries, notably in Africa and Asia”. He said that “lack of development in the financial sector can be a significant barrier to trade”, and told participants “let’s redouble efforts to work together and resolve this problem”. This is what he said:

Mr Chairman, Ambassador Carim,

Excellencies,

Distinguished guests,

Ladies and gentlemen,

Good afternoon. It is a pleasure to welcome you here today and to open this seminar.

Up to 80% of global trade is supported by some form of financing or credit insurance.

Yet in many countries there is a lack of capacity in the financial sector to support trade, and also a lack of access to the international financial system. Therefore the ability of these countries to use simple instruments such as letters of credit is limited.

The impact of these limitations on a country's trading potential can be very, very significant.

The aim of this event is therefore to improve our understanding of the challenges in obtaining trade finance at affordable rates, particularly in developing countries — and to consider some potential solutions.

Over the course of this afternoon and tomorrow morning, you will have the chance to explore and discuss this very important topic. And we will hear from a range of different voices I'm sure.  

Along with WTO members and some delegations from capitals, we are also joined today by representatives from the private sector, from other international organizations, and from regulatory bodies.

So I think we have the opportunity for a very good discussion.

The Working Group on Trade, Debt and Finance has been in place for over 10 years. The same applies to the expert group of high level trade finance practitioners which reports to me and to this Working Group.

The expert group met this morning to give their insights and to help us understand the realities that they are seeing on the ground.

I think that most of the members of that group are here this afternoon, and I thank them for their commitment.

I think that this cooperative, inter-institutional approach has yielded some concrete results.

For example, we have been pleased to work with multilateral development banks to support the creation and the expansion of various trade finance facilitation programmes.

These programmes provide payment guarantees for small trade transactions for SMEs in countries where local banks find it difficult to receive confirmation from large, global bank partners.

The programmes therefore act to reduce the risk, or at least the perception of risk, of trading in those countries.

They enable thousands of small trade transactions to take place each year, almost exclusively in poorer countries — thereby supporting around 30 billion dollars of trade.

They were also a useful counter-cyclical tool during the financial crisis.

And, significantly, they do not cost taxpayers a single cent.

In recent years, these programs have spread from the European Bank for Reconstruction and Development to all multilateral development banks, to form a global network facilitating trade finance.

And I think there are other useful initiatives which have received inputs from our work here.

For example, our dialogue with the Basel Committee on Banking Supervision helped to establish fair and reasonable prudential treatment for trade finance in developing countries.

In addition, we are helping build capacity on trade finance through our e-learning programme, and through our participation in the creation of a new trade finance academy by the International Chamber of Commerce.

So I think we are engaged in a very positive way.

But of course there is still much to do.

After the financial crisis, the supply of trade finance has largely returned to normal levels in the major markets — but not everywhere and not for everyone.

The structural difficulties of poor countries in accessing trade finance have not disappeared — indeed the situation may well have declined due to the effects of the crisis.

There are indications that markets are even more selective now. Under increased regulatory scrutiny many institutions have lowered their risk-appetites and are focusing more on their established customers. Some are deliberately decreasing their number of clients in a so-called "flight to quality".

In this environment, the lower end of the market has been struggling to obtain affordable finance, with the smaller companies in the smaller, less-developed countries affected the most.

Members asked us to provide more evidence of this phenomenon last year.

The Secretariat document WT/WGTDF/W/74/Rev.1, which was published in November 2014 and updated in February, provides this evidence.

The document is available in the room today, and you will see that evidence compiled there. It is from a range of sources, but it converges towards the same message.

I was particularly struck by the fact that the financing gaps are the highest in the poorest countries, notably in Africa and Asia. And I was struck by the size of those gaps.

A survey by the African Development Bank of 300 banks operating in 45 African countries found that the market for trade finance was somewhere between 330 and 350 billion dollars.

It also found that this could be markedly higher if a significant share of the financing requested by traders had not been rejected.

Based on such rejections, the estimate for the value of unmet demand for trade finance in Africa is between 110 and 120 billion dollars.

This gap represents one-third of the existing market.

The main reasons for the rejection of requests for financing were:

• the lack of creditworthiness or poor credit history,
•
• the insufficient limits granted by endorsing banks to local African issuing banks,
•
• the small size of the balance sheets of African banks, and
•
• insufficient US dollar liquidity.
•
Some of these constraints are structural, and can only be addressed in the medium to long term. The retreat of global banks from Africa, and from other poor countries, is one such issue.

The Asian Development Bank conducted a similar survey in Asia, looking at countries like Viet Nam, Cambodia, Bangladesh, Pakistan and India.

According to preliminary estimates the unmet demand there is around 800 billion dollars.

Small and medium-sized enterprises are the most credit constrained as 50% of their requests for trade finance are estimated to be rejected. This is compared to just 7% for multinational corporations.

Moreover, two-thirds of the companies surveyed reported that they did not seek alternatives for rejected transactions.

Therefore these gaps may be exacerbated by a lack of awareness and familiarity among companies — particularly smaller ones — about the many options which exist.

A large majority of firms stated that they would benefit from greater financial education.

These findings are particularly striking as Africa and developing Asia are two areas of the world in which trade has grown fastest in the past decade.

But the potential evolution of new production networks is faster than the ability of the local financial sectors to support them.

In this way the lack of development of the financial sector can be a significant barrier to trade.

It can prevent developing countries from integrating into the trading system and accessing further trade opportunities.

And it can therefore prevent them from leveraging trade as a powerful source of development. 

So we need to respond to this problem.

The exchanges that we have here can form part of this response. We need to join together in order to advocate action in this area and to devise practical solutions.

Of course, there is no magic bullet. This is a complex issue. However, that should not discourage our efforts.

The trade finance facilitation programmes that I outlined earlier are one example of practical action that we can take.

Of course this only fills part of the gap — so our response needs to be more fundamental.

In July this year the UN's major 'Financing for Development' conference will take place in Addis Ababa. And I think it is essential that we put trade finance on the agenda there.

In this way we can ensure that this issue is given its proper prominence in the development debate — especially at a time when the all-important UN Sustainable Development Goals are being finalised.

At the WTO we are doing everything we can to help developing countries to integrate into the global trading system.

This is reflected in our technical assistance work.

It is reflected in the outcomes of the Bali Package, which we are implementing now.

And it is reflected in the current negotiations on the work programme to conclude the Doha Round.

But the effectiveness of all this work will be lessened if proper access to trade finance is not secured.

So I wish you every success in the deliberations here. I will be following your work very closely.

Let's redouble our efforts to work together and resolve this problem.

Thank you for your attention.

ENDS

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