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Export in a storm: Government-backed trade financing surges

Export credit agencies (ECA) have their work cut out for them as businesses scramble to bridge their trade costs in the face of supply chain chaos and risk-averse banks.

Governments rely on these agencies in times of crisis to plug any financing gaps left by the private market, which in turn keeps trade levels up and supports economic growth. Inevitably ECAs have been in high demand amid the pandemic.

Almost half (43%) of these agencies have reported a surge in demand for their short-term products, which help defer payment for less than a year, according to the OECD. The good news is that companies are tapping necessary capital. Less positive is that this rise in demand for support indicates access problems.

1/ Could this be a lifeline for business?

Unlike the global financial crisis, banks are now highly liquid and don't face cash constraints on their lending. But their risk appetite is not what it once was, forcing businesses to seek recourse from government-supported ECAs.

These agencies are a lifeline for businesses. According to the World Trade Organization, the global goods trade in 2019 totalled about US$19 trillion, nearly half of which was backed by trade finance. Guaranteeing an appropriate supply of trade finance could be critical to global trade by helping enterprises deal with operational shutdowns and ongoing supply-chain disruptions.

2/ Is this just a short-term fix?

While ECAs have seen short-term financing demand spike, it's a different story for medium- and long-term lending. The OECD has reported a 34% fall in the volume of export credits and a 15% drop in the number of transactions, illustrating the challenges that businesses are up against.

Longer-term trade finance is typically used for capex and projects, indicating that businesses currently have short-term horizons and are less willing to take on big risks that may take years to pay off. The pandemic has dampened demand for this type of financing as the pipeline of projects has dried up.

This puts big exporters with ample liquidity to cover their working capital requirements at an advantage. They should find no difficulty in accessing financing for longer-term projects, if not from banks then in the form of government-backed support.