Additionally, national lockdowns and global travel restrictions have sent commodity prices tumbling – Brent crude oil prices fell below US$20p/b in April – putting further pressure on trade finance margins.
Trade finance and its recovery
Although it may take a significant period of time for the global economy to fully recover, trade finance expects a relatively fast rebound. There are several reasons for this confidence.
One reason is history: while the rest of the financial world collapsed in 2008, trade finance emerged largely unscathed. In fact, surveys of commercial banks2 by the International Monetary Fund found that while bank-intermediated trade finance fell in value during the crisis, the share of world trade supported by trade finance increased, despite higher pricing margins.
Furthermore, the COVID-19 crisis was not prompted by the fragility of the financial sector, but by external factors: a pandemic, and the logistical shutdown of economic activity. Although this has placed severe strain on organizations and banks around the world, the gradual lifting of lockdowns should be enough to bring trade back to seemingly normal levels. In fact, over half the attendees polled during our webcast believe it will only take 12-24 months for trade financing demand to return to pre-COVID-19 levels.
However, with most organizations still reeling from unexpected closures, credit and counterparty risks have risen. As a result, it is likely that a percentage of previously open account trade will move to more structured trade finance instruments as importers and exporters look to add security to their transactions.