What has been the impact of COVID-19 on trade finance?
Frictionless trade is essential to save lives. During a crisis, food, medical supplies, and equipment must be delivered unhindered. The current pandemic has highlighted how vulnerable our supply chains and connections are. Recent food and medical supply shortages were proof of this.
COVID-19 worsened the already present drivers of the trade finance gap. The lack of trade financing available continues to hamper the recovery of the economies around the world. Although organisations worldwide have started taking measures to slow down the widening of the trade gap, according to the ICC, a possible $5 trillion is needed to enable rapid recovery from COVID-19 and help small businesses survive.
OECD countries, alongside their Export Credit Agencies, have taken multiple measures to tackle the situation. These measures have primarily been used to secure existing transactions and support specific industries that have been hit hardest by the pandemic, such as the travel and hospitality sectors.
Investing in trade finance creates a fertile foundation for global trade to recover. A recovering economy is the world’s prime goal now and will benefit consumers, traders, financial institutions, and investors alike. In the current environment, when various organisations, including the World Trade Organisation (WTO), are lobbying governments to support SME’s to help facilitate quick recovery from COVID-19, maximising trade finance facilities to small and medium-size enterprise’s is critical.
With innovative tools and resources, private entities and non-banking financial institutes are best equipped to support this growing demand and help investors mitigate the risk and generate stable returns. Unlike the banking sector, these entities are less bound by stringent banking regulations or additional trade complexities. Their services are accessible to a broader range of global businesses, including SME’s.
Why is trade finance an interesting opportunity for investors today?
As COVID-19 further spreads the trade finance gap caused by the last financial crisis, banks have become increasingly reluctant to fulfil demand. This provides a unique opportunity for the alternative finance sector to invest in an attractive asset class called: trade receivables. Discounting receivable, also called factoring, is a beautiful fixed income-like asset class with low default rates, low volatility, and stable returns.
As of today, and even with the Greensill case in the papers, trade finance has never sparked a financial crisis. But trade finance supply has always been affected by any financial market turmoil. The re-growth in supply contributes to a healthier economy. The trade sector, especially SME’s, are an integral part of the UN’s sustainable development goals. Investments made into this particular asset class of factoring benefits investors significantly, even during the disruption of COVID-19, and has a lasting impact by helping the world recover from the pandemic.
What is the historical performance of trade finance?
According to the 2019 ICC report, global trade finance transactions have low default rates below 1% and corporate lending is statistically riskier than trade finance lending.
With a surge of intangible asset valuations, investors are becoming increasingly aware of this asset class’ benefits, particularly if the invoice discounting is combined with credit insurance.
Trade finance is self-liquidating, recession-proof, and uncorrelated to the central bank’s interest rates policy. According to Eurekahedge, a research firm, the trade finance sector has proven to be resilient to geopolitical turbulence, much less likely with other asset classes.
In short: Trade finance is considered one of the safest asset classes to invest in, even during geopolitical or macroeconomic-related turbulence.