Trade finance shows post-pandemic resilience with fall in defaults

Thu 20 Oct 2022
Posted by: Phillip Adnett
Trade News

UK Trade Finance Pound sign

Credit risk in trade, supply chain and export finance has fallen back to pre-pandemic levels for the first time, according to a new report.

The International Chamber of Commerce (ICC) 2022 Trade Register noted the resilience of global trade with a better-than-expected return to growth and total trade flows reaching nearly 20% above where they were before Covid-19.

This recovery in global trade has been supported by trade finance products offering risk mitigation for importers and exporters, the report states.

Global growth

Despite current macroeconomic uncertainty, Boston Consulting Group (BCG), which partnered on the report alongside Global Credit Data (GCD), expects global goods trade to continue to grow at 5.6% compound annual growth rate (CAGR) over the next 10 years on a nominal basis, and 2.3% in real terms.

Default rates across all trade finance asset classes dropped in 2021 compared to the previous year, and export finance default rates in 2021 were the second lowest in the history of the register, GTR reports.

International goods trade flows recovered last year reaching $20.8tn, up 22% from 2020 and exceeding 2019 levels, though growth varied by region.

Finance boom

Given the recovery in trade volumes, BCG estimates that nominal trade and supply chain finance revenues grew by 28% from 2020 to 2021, reaching $55bn and exceeding 2019 revenues by 15%.

Trade and supply chain finance revenues are forecast to grow 5.8% annually and reach $97bn by 2031.

Despite the “low volatility of trade finance”, the report warns of a small rise in defaults over the next two to three years, “depending on the severity of any recessions in certain regions”.

It also warned that “a return to normalcy” in international trade would not be a given due to the war in Ukraine.

ICC secretary general John Denton said: “These findings reinforce the findings of previous iterations of the trade register: trade finance products continue to be resilient and represent banks with low levels of credit risk, even during times of macroeconomic uncertainty.”

UKEF Africa export support

The news comes as the UK’s export credit agency, UK Export Finance (UKEF), announced support for new deals worth a combined £174.5m to finance construction projects in Benin and Togo.

UKEF has guaranteed a landmark £106.5m loan from Deutsche Bank to the Benin Government to fund construction in Benin, which will unlock £35m in export opportunities for UK businesses to supply equipment.

Trade minister James Duddridge announced the deal and a £68.6m UKEF-guarantee for MUFG Bank to build a new road between Benin and Togo to accelerate inter-Africa trade, and unlock £47m worth of UK exports to the region.

“This landmark finance package will help businesses capitalise on investment prospects, support high-value jobs and provide new opportunities for UK exporters in some of the world’s fastest-growing markets,” he said.

The UK was Europe’s top investor in Africa this year, according to the UN Conference on Trade and Development’s 2022 world investment report.

The latest UKEF deals build on £3.2bn of UK support for projects across Africa in the past two years.