Speech:
20 August 2009
Financing exporting in good times and bad
Introduction
Thanks to MC John O’Shaughnessy, the Deputy CEO of the Investment and Financial Services Association, IFSA.
Welcome everyone to this morning’s breakfast which will include a panel discussion on the importance of trade finance for our exporters.
The panel’s distinguished members include:
Chris Vonwiller, the joint Chief Executive Officer of Appen.
John Russell, the managing director of Russell Mineral Equipment.
Doug Austin, the managing director of Divex Asia Pacific Pty Ltd.
I’d also like to acknowledge two representatives from our sponsors this morning:
- Michael Reidy, Executive Manager, Commonwealth Bank
- Andrea Govaert, Executive Director, Export Finance and Insurance Corporation, EFIC
Before we get to the panel and their valuable insights I’d like to say a few words about how the GFC has affected trade finance and what the Australian Government is doing about it.
Trade Finance and the GFC
As many of you undoubtedly already know, access to finance is the lifeblood of trade for exporters and importers.
Truism or not, trade finance is one of the most critical issues facing small to medium sized exporters, especially during a global downturn.
The World Trade Organization estimates that between 80 to 90 per cent of global trade is dependent, in some way, on access to finance.
The impact of the GFC on trade has been severe, with the WTO forecasting a 10 per cent fall in 2009, the biggest since World War 2.
Doubts about the stability of global trade have also had an impact on trade finance as banks and other lenders start reassessing their risks on old and new loans.
Trade finance is a typically low-risk, well-collateralised financial product.
But despite this, there is now evidence that the global credit squeeze has hit the US$10 trillion global trade finance industry hard as a result of skyrocketing refinancing costs.
In fact one estimate is that spreads on short-term trade credit above the LIBOR, the London Interbank Offered Rate, rose by up to 600 basis points in 2008.
The LIBOR is the cost of unsecured lending between banks, so the size of the premium here for trade finance is a good indication of just how tight the credit market had become for exporters.
In fact, the usual spread in normal times was between 10 and 20 basis points above the LIBOR.
This squeeze resulted in a gap of up to US$25 billion in trade finance funds in November 2008, according to the WTO.
It is not difficult to imagine the impact these higher rates had on the investment plans of exporters.
Small to Medium Firms and Trade Finance
Unlike start-ups or smaller firms, bigger companies often have easier access to trade finance. Their size and assets and track record often make them a safer bet for lenders.
Small to medium sized companies, especially those just starting out in exporting, often face greater obstacles when it comes to securing finance and convincing lenders they have a viable business model or worthy product.
I am sure many of you here today would know exactly what I’m talking about if you think back to the early days of your business development.
One problem, however, which the global community faces in better understanding the trade finance system and improving the access to credit of small and medium exporters is a shortage of solid statistics about the market.
As the WTO has noted, greater cooperation among the world’s financial institutions could help provide a clearer picture of the trade finance situation.
After all, it’s difficult to make good policy if you don’t have all the facts at hand.
This issue will hopefully be raised at the G20 meeting in Pittsburgh next month, where participants are expected to talk about global financial governance and financial reform.
With a global recession and the widespread difficulty of raising trade finance for smaller firms, there is a role for government agencies, like Austrade and EFIC, to provide assistance.
How Austrade and EFIC Can Help
The Australian Government has done a lot to stimulate the economy during the GFC with a major fiscal stimulus package that has put a floor under the economy with a major nation-building program.
So too have we tried to make the global community more aware about the importance of shoring up the supply of trade finance during the current crisis.
For example, the communiqué from the London Leaders’ meeting of the G20 in April explicitly called on the G20 to ensure the availability of up to US$250 billion in trade finance to help exporters cope with the GFC.
About 80 per cent of trade finance comes from private banks, with the rest coming from export credit agencies and regional banks.
At Austrade and the Export Finance Insurance Corporation, or EFIC, we believe these exporters often need assistance with their financing, in good and bad times.
EFIC offers a variety of programs to help with credit, including tailored finance and insurance, and we have responded to emerging trends which require new financing ideas.
Austrade, as well, offers Export Market and Development Grants which can help exporters cover their costs.
For example, exporters no longer just build and ship goods. They also integrate their exporting activities into elaborate global supply chains beyond the Australian border.
New forms of supply-chain financing have become necessary to help these exporters cope with these complicated arrangements.
EFIC also helps exporters in quite targeted ways. EFIC, for example, is working with Austrade to develop the Government’s Clean Energy Trade and Investment Strategy.
Access to finance and insurance is critical for many clean energy companies with global ambitions, and EFIC has a strong record of supporting Australia’s clean energy and renewable energy companies.
Moreover, I’m proud to say that Austrade and EFIC have got together to develop the Navigator program, a new way for exporters to navigate the complexities of export finance.
This new information service for small-to-medium sized firms was first proposed in 2008 and represents a whole-of-government approach to providing assistance.
Conclusion
The Australian Government understands the problems of trade finance and we are determined to do the best we can to help exporters gain access to the capital and information they need to make good investment decisions.
I have outlined this morning some of the ways in which the GFC has affected the supply of trade finance, and also what Austrade and EFIC are doing to help.
I’d like to thank everyone for coming along for breakfast and I now look forward to the panel discussion.
I am sure the accumulated wisdom of all the exporters and financiers in the room this morning will be an enlightening experience.
Thank you.
ENDS