Financing Trade during COVID-19

Foreign exchange, trade credit and a ‘matter of time’

Earlier this month the International Chamber of Commerce (ICC), the World Trade Organization (WTO), and B20 (international business summit) issued a joint release to sound the alarm regarding the widening trade financing gap being experienced during the COVID 19 pandemic. The release notes that while trade credit is pivotal, there are concerns if the conservative estimates of trade credit demand of USD$2 trillion to US$5 trillion can be adequately satisfied.

The trio noted: “As the greater need for trade finance materializes with increased demand for trade transactions, providers of trade finance will face deterioration of the risk and of its perception, which in turn could further deteriorate supply and lead to increased gaps in provision.” They added, “We are concerned that further gaps will have a disproportionate effect on actors in the global economy hardest hit by the economic effects of COVID-19: micro-, small- and medium-sized enterprises (MSMEs) and businesses in developing and least-developed countries.”

Now, when we speak of trade financing, there are different financing options such as Trade Credit or Cash Advances, with the former possibly being the most recognized method. Essentially, Trade Credit is simply an arrangement between the supplier (exporter) and importer. The supplier provides the goods to the importer, who, in turn, would have an average of 30 to 60 days to make the post-shipment payment. The greatest risk in this type of arrangement clearly would rest with the supplier, as there is the danger that the buyer would not make good on his commitment. As a result, this commonplace method is also heavily reliant on the relationship and trust between the exporter and the importer. This trust-based relation is often founded on years of interaction and partnership.

Of course, even with decades of trust building in some instances, it is still business. Therefore, as pragmatic businessmen, some suppliers may choose to mitigate the risk by purchasing trade credit insurance (TCI) that protects them in the event of default on the part of the importer. In turn, the TCI providers also develop risk profiles which govern their policies. This system, which is a subset of a much larger and intricate network, works fairly well for the most part.

However, enter a global pandemic like COVID 19 and its unprecedented challenges, and even the long-standing trade finance mechanisms (which had its own pre-pandemic imperfections) are threatened. Inherent in the alarm sounded in the trio’s joint release is the fact that COVID 19’s global economic impacts have served to undermine the liquidity of this system, causing even TCI providers to take a second look at their risk profiles, as well as inspiring traditional trade financiers to tighten their terms.

And like all things in the Global Village, Belize enjoys absolutely no immunity, especially when one considers our challenges with accessing Foreign Exchange (FOREX). As has been discussed in this forum before, the Tourism sector—arguably the hardest hit by the “Great Lockdown Recession”—single handedly contributed more than 40% of this country’s foreign current inflows. Add to that the depressed inflows from other sources such as Foreign Direct Investment (FDI), or merchandise exports, and the likely grim denouement of this complex story becomes all too apparent.

The simple truth is this: Our importers who benefit from Trade Credit must repay their suppliers in Foreign Dollars, and therein we find the added layer of intricacy to an already complex global situation. How can the local importing MSMEs satisfy their 30-to-60 days (sometimes 90 days) obligations to suppliers in foreign markets if they cannot readily access the foreign dollars with which to pay? This, unfortunately, is not merely hypothetical scenario: Several importers have already begun to feel the pinch of this new reality.

As access to FOREX slows, importers are likely left to rely on the “currency” of trust and goodwill they’ve built with their suppliers over the years. However, as the global value chain has been disrupted even for the exporter, the trust capital may not be able to withstand survival considerations for very long. Consequently, while it may vary from supplier to supplier, the pragmatic view is that in a context of continued deterioration of access to FOREX it may all boil down to a matter of time before trade credit relationships begin to fall away.

Actually, while hitherto limited in number, there are reported instances to the Belize Chamber of Commerce and Industry (BCCI) that some relationships have already either been lost or otherwise on the proverbial ropes. Some members of the private sector have already indicated that a few suppliers have begun calling for “pre-payments”, a pre-export payment arrangement that is in essence the mirror opposite to the post-export nature of Trade Credits.

This, of course, is not a surprising development, because unlike the Global Recession of 2008, the Great Lockdown has disrupted cash flows and simultaneously augmented risks. Therefore, exporters are beginning to place a higher premium on efforts aimed at shoring up their own cash flows while mitigating risks, especially in a global context where anecdotal reports indicate that even TCIs are being curtailed.

Thus far, all indications are that companies that provide “essentials” such as food products or medical supplies have been provided with a logical priority access to FOREX; therefore, supermarkets are likely to continue with food on the shelves, and pharmacies are expected to continue operating unhindered. Even among the ostensibly non-essential sectors the access to FOREX continues; however, at present it has been severely slowed. As one importer worded it, it has decelerated to a virtual “trickle”.

Like the troika’s joint release, the BCCI notes that this problem has already begun to manifest in Belize. So far, this brewing issue has been managed with limited impacts; however, it is advisable that plausible remedies be explored before what is currently a relatively contained issue overflows its banks on account of other factors. To that end, it is useful to conclude this entry with the same concluding words of the joint release: “Timely interventions will be especially vital to ensure that MSMEs have continued access to reliable, adequate and cost-effective sources of trade financing—not only to weather the crisis, but hopefully to emerge from it stronger than ever.”