Trade finance revenues take a hit, but industry remains bullish, says report

Onome Amuge

The International Chamber of Commerce (ICC) says trade and supply chain finance revenue is expected to decline by 7.4 per cent in 2023 compared to last year due to a slowdown in trade flows and businesses turning away from higher-priced financing products.

The ICC Banking Commission’s latest trade register, created with support from Global Credit Data and Boston Consulting Group, analysed data from 22 banks worldwide and covered trade finance and export finance transactions with a total value of over $23 trillion.

The report says that 2023 is a more challenging year for trade finance, despite a 2.2 per cent growth in inflation-adjusted goods trade. Businesses prefer to forgo financing products rather than pay higher costs, leading to lower trade finance volumes despite a healthy global economy, the report notes.

Trade and supply chain finance revenues have been in decline since a post-pandemic surge in 2021, the report says. In 2021, trade finance revenues jumped by 28.2 per cent year-on-year, followed by a 6.3 per cent rise in 2022. Despite the gains, the ICC says these figures were inflated by inflation, rather than underlying growth in volumes. The ICC says goods trade volumes grew just 3 per cent in real terms in 2022.

The report says that spikes in commodity prices led to a 26.3 per cent increase in nominal trade and supply chain finance revenues for the energy, metals and mining sector in 2022, but this growth was more moderate in real terms. Overall, trade finance remains a “low-risk asset class,” the report says. Default rates in 2022 were higher across all trade finance products compared to the previous year, but the report suggests this was due to high inflation rather than high levels of risk.

With the exception of two categories, default rates for all trade finance products in 2022 remained lower than in 2020. However, the report shows that import letter of credit defaults, based on exposure, reached their highest level since 2009. Export letter of credit defaults also increased, largely due to exposure to Russian banks. Supply chain finance payables finance defaults increased for smaller SMEs, suggesting a weakening credit environment as financing costs increased.

Inflation and interest rates are expected to remain high in the short term, while excess inventories are expected to reduce demand for trade and supply chain finance. However, the report predicts revenues will return to growth by 2024, averaging 3.8 per cent year-on-year until 2032 to reach an estimated $91 billion.

The report noted that industry players are shifting away from documentary trade and SCF, with a preference for open account products. This is partly due to uncertainty around new disclosure rules, with corporates expressing increased concern about the changes.