6 minute read 20 Jul 2020
Tugboats assisting container cargo ship to harbor

How trade finance can operate effectively in the wake of COVID-19

By

Dai Bedford

EY Global Banking & Capital Markets Consulting Leader

Transformation leader. Talent developer. Family man. Welsh rugby fan.

Contributors
6 minute read 20 Jul 2020

During the recent EY webcast on global trade finance, we discuss how global trade has been disrupted and redefined by the pandemic. 

The effects of the COVID-19 crisis on trade finance have been immense. Organizations are battling to survive the impact of the pandemic and are anxious to determine how they can persevere during this tumultuous time.

During our recent webcast with the International Trade and Forfaiting Association, EY banking and supply chain professionals, as well as other industry participants, we discussed this critical topic.  Already viewed by over 7,000 executives across the financial services, energy, consumer, manufacturing and health care sectors, the webcast, How global trade finance is being disrupted and redefined, comes at a critical time for trade finance and the wider global trade industry.

The World Trade Organization estimates that world merchandise trade could decline by between 13% and 32%1 in 2020, a much steeper drop than the 9% contraction observed at the height of the 2008-09 global financial crisis.

This, in turn, has affected the trade finance sector, with banks contending with significant operational continuity challenges, and completing fewer letters of credit and invoice discounting transactions than usual.

Operational challenges

50%

of attendees polled say operational continuity has been the biggest challenge of the COVID-19 crisis.

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.

How global trade finance is being disrupted and redefined

Watch the EY NextWave Global Trade webcast on demand to understand the challenges and risks facing trade finance.

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Reevaluating supply chain risk

The widespread impact of the COVID-19 pandemic, along with the ongoing threat of the virus, are driving companies to reevaluate their supply chain risk. Generally, complex global supply chains have been tuned for cost and speed, but COVID-19 has revealed their brittleness.

In their path to recovery, trade organizations will likely experience three different phases:

  • Protecting existing activities
  • Rebooting their supply chains
  • Operational transformation

In this extreme business environment, executives have realized that while their own supplier base may be diverse in terms of geography and size, there may be unknown concentration risks further down the chain. As a result, they are bound to look beyond their own supply chains and focus on supplier visibility to truly understand their risks in the new normal.

As corporates look for ways to better balance costs – and increase efficiency, speed and operational resilience – they may look at various options such as onshoring or re-shoring part of their production. Additionally, they may rethink their inventory-stocking strategy to improve resilience in case of further short-term, localized lockdowns.

How corporates will orchestrate their global supply chains, with lockdowns easing in different phases and horizons, will be crucial to operational resilience.
Matthew S. Burton
EY EMEIA Consulting Center Partner and Digital Operations Leader

To achieve these long-term improvements, their immediate focus will be on digitalizing their supply chains from end to end, and increasing visibility through user-friendly dashboards that can provide real-time data on inventory, supply and demand. Crucially, they will need the support of innovative trade finance solutions that can adapt and connect to such new digital approaches.

The future is digital: what trade finance can expect next

Many global trade finance banks have already started to invest in digitalization, with technologies such as optical character recognition (OCR), artificial intelligence and blockchain being used to develop innumerable use cases and proofs of concept. Now, lockdowns have resulted in a dramatic step up in corporate digital adoption: transactions that were always done face to face are now suddenly done electronically. This is set to continue beyond the crisis, leading to questions over traditional paper processes, and propelling trade’s digital transformation over the coming months and beyond.

The crisis has led to renewed energy around taking out paper, going beyond OCR, and fully digitalizing origination.
Andrew Gilder
EY Asia-Pacific Banking and Capital Markets Leader

Once the threat of the pandemic begins to dwindle, end-to-end supply chain visibility and digital interoperability will become much higher priorities for companies, forcing banks to accelerate the digital transformation of trade finance. In turn, by addressing roadblocks such as data automation, deep-tier supplier financing and digital silos, trade finance has the potential to unlock new opportunities, particularly around e-commerce and marketplace procurement, as well as sustainable trade.

All this means that despite the initial slowdown, the economic consequences are likely to make trade finance more relevant than ever. In fact, 45% of attendees believe that the pandemic has upended their business priorities, with more organizations now focusing on workforce size, skills and location, along with capital efficiency, cost management and customer engagement.

Nonetheless, the deep transformation likely to take place in global supply chains will require banks to increase their digitalization efforts and make end-to-end connectivity a reality.

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Summary

Despite the global economic impact and supply chain disruption, the demand for trade finance will return – but banks will miss crucial opportunities unless they prioritize end-to-end digitalization.

About this article

By

Dai Bedford

EY Global Banking & Capital Markets Consulting Leader

Transformation leader. Talent developer. Family man. Welsh rugby fan.

Contributors