Duarte Pedreira, global head of trade finance at Crown Agents Bank, discusses the importance of accessing hard currency to soften the effects of the trade finance gap.
In our previous note earlier this year, we highlighted the critical role that development financial institutions (DFIs) play in tackling the US$2.5tn annual trade finance gap, by taking the lead in underwriting non-payment risks arising from providing trade finance to SMEs in emerging markets. We also encouraged the definition of clear roles and responsibilities between the public and private sector participants of our industry, thereby fostering the ability of the private sector to be an enabler of solutions through the provision of liquidity, technology, structuring and training, amongst other factors, to the structures underwritten by the DFIs.
We are, therefore delighted that ITFA, the global trade finance industry body, of which Crown Agents Bank is a proud member, is championing the organisation of the ‘Trade and Supply Chain Finance Gap Summit – TF COP1’, which will be hosted by the International Finance Corporation (IFC), a member of the World Bank Group, later this year in Washington. This event will bring both the public and private sections of our industry together, under one roof, to drive the design of truly collaborative solutions to tackle the trade finance gap.
As such, we would like to continue bringing our intrinsic knowledge of African, Latin American, Eastern European and Asian trade finance to the fore, and play our part in examining the potential solutions that can, and will, make a difference in the narrowing of the trade finance gap. These will then meaningfully contribute to attaining the United Nations Sustainable Development Goals (SDGs) by unlocking growth and development in emerging markets, in line with our B-Corp status. We are looking forward to joining our peers on this quest, contributing our knowledge and experience, rooted in our decades of commitment to trade finance in these exciting and complex regions.
Foreign exchange challenges
Clearly, one of the main issues underpinning the availability of trade finance and ease of access to trade finance facilities in the regions where we work is the availability of foreign exchange. While the primary driver of the trade finance gap remains the limited appetite for non-payment risk, access to foreign exchange is a significant factor that affects the availability of trade finance.
We are currently experiencing a period of significant shortages in the availability of foreign exchange in emerging markets. Among the most affected are Argentina, Venezuela and Bolivia in Latin America, Ukraine and Belarus in Eastern Europe, Nigeria, Kenya, Egypt, Zimbabwe, Ghana and Zambia in Africa, and Sri Lanka, Pakistan and Bangladesh in Asia. These shortages have been caused by a combination of factors, including high import prices, increased debt servicing requirements and disruptions in export revenue due to global economic conditions.
Bolivia is facing foreign exchange shortages, partly due to falling commodity prices and economic policies that have strained the country’s financial reserves.
The government has been struggling to maintain sufficient foreign currency to meet its international obligations and support its economy.
In Nigeria, the foreign exchange crisis is driven by falling oil revenues, increased debt payments and political uncertainties. The country has faced difficulties maintaining adequate foreign reserves, impacting its ability to import essential goods and service foreign debts.
Sri Lanka, too, has been grappling with severe foreign exchange shortages, leading to difficulties in importing essential goods like fuel and medicine. This crisis is partly due to a high debt burden and reduced tourism revenues.
Fostering our clients’ access to foreign exchange is at the core of what we do at Crown Agents Bank.
We achieve this by facilitating access to local currencies in emerging markets for global and regional development institutions, governments and both bank and non-bank financial institutions. Additionally, we provide central and commercial banks in these same emerging markets with access to so-called hard currency, reflecting our strong commitment to serving these regions.
How does this work in practice?
Imagine a global development organisation needing to send funds to 20 different countries in one go.
They turn to Crown Agents Bank to leverage the multiple relationships we have established with central and commercial banks in each one of those countries, which supply us with the necessary local currency. These central and commercial banks then receive the hard currency being sold by the global development organisation in exchange for the local currency they provide.
Why is trade finance crucial for accessing foreign exchange in countries where hard currency is scarce?
At Crown Agents Bank, we can use the demand for local currency in emerging markets from these development organisations, governments, banks and non-bank financial institutions to foster a netting mechanism. This mechanism matches the demand for local currency with the demand for hard currency from local central and commercial banks, which need to repay their international trade finance obligations. By doing so, we enable issuing banks and borrowers in emerging markets to draw on trade finance facilities in hard currency, while matching their repayment needs with those who wish to purchase local currency. This allows them to effectively repay their trade finance obligations in local currency without independently sourcing the hard currency, which is instead provided by institutions like Crown Agents Bank, which have access to these currency flows.
In summary, while access to hard currency alone won’t close the trade finance gap, it can significantly enhance trade finance in emerging markets. By using inbound money flows from those seeking to purchase emerging market currencies to offset the hard currency needs of those repaying trade finance obligations, we help remove a key barrier to increasing the supply of trade finance facilities.
