Accelerating the Region’s Recovery through Trade Finance

About 90% of global trade depends on some type of financing, mainly in the short-term. Today more than ever, companies in Latin America and the Caribbean need to finance their trade operations to be more resilient and sustainable in the long-term.

Financing trade to accelerate the economic recovery of Latin America

Trade has been and continues to be vital for the growth and development of Latin America and the Caribbean (LAC). This activity involves a large number of actors – small, medium and large companies – connected in value chains, which generate employment and contribute to the well-being of their countries. Clear evidence is that without this, the region would not have experienced the additional 40% growth in GDP per capita that occurred between 1990 and 2010, during the so-called "great liberalization" period.

The impact of the COVID-19 pandemic has been profound in this sector. In the first semester of 2020, exports of goods fell by 16%, while services decreased by almost 30%, according to IDB’s 2020 Trade and Integration Monitor Report. Intra-regional trade flows declined in the region, representing only 13% of the total (compared to 65% of the European Union and 47% of East Asia). And the crisis isn’t over yet.

Around 90% of world trade depends on some type of financing or credit insurance, mainly short-term, according to the World Trade Organization. Therefore, LAC companies that participate in international trade need, more than ever, to finance their operations. Not only so they can grow again, but also to become more resilient and sustainable, and will have a greater share in regional and global value chains.

But, why is this dependency? Why do we need financial intermediaries?

The importance of financing international trade

Exporters need financing to supply, process, store, distribute and sell their products, and furthermore, they need to receive payment for their sales as soon as possible. On the other side, importers need credit to finance their purchases of raw materials, intermediate and capital goods, among others, and want to extend payment terms as much as possible.

For these transactions to take place in mutually beneficial terms, there exists a set of financial instruments, such as loans, insurance and payment guarantees. It happens because the majority of operations are paid in installments, and typically business partners assume the risk of operating with a specific counterpart in the country. In addition, these instruments stabilize the flow of company staff, improving their competitiveness and service as a negotiating tool with customers and suppliers.

For this reason, both actors need financial intermediaries, and depend on banks to access financial products and services.

Close the gap to boost recovery

Globally, according to the Asian Development Bank, the financing gap for this sector amounts to $1.5 trillion, of which $350 billion corresponds to LAC. Of all foreign trade transactions rejected by financial intermediaries, 40% are small and medium-sized companies (SMEs).

This gap affects, to a greater extent, certain countries, and the perception of their regulatory risks and compliance, which is why some international banks are applying certain restrictions to work with them. It's what the market calls ‘derisking’.

All this is making it difficult for companies, particularly small ones, to be able to enjoy the benefits of foreign trade and to connect with global value chains, often associated with improved productivity, specialization, efficiency in resource allocation, innovation and technology transfer and knowledge.

In response to this, 15 years ago IDB Invest created the Trade Finance Facilitation Program (TFFP), with the objective of promoting access of LAC financial intermediaries to trade finance in Latin American and, through it, expand and diversify the funding sources available to importers and exporters, the final beneficiaries.

During these years, IDB Invest has created a network of local, regional and international banks that has promoted more than $12.3 billion available in foreign trade operations, 62% from less developed countries in the region.

TFFP finances banks in the region and in many cases, allows them to establish new relationships with international banks to support their customers to export and import. In parallel, these latter assist their clients in making their LAC operations viable, thanks to the payment guarantees provided by IDB Invest under this program.

Examples of the operations this year include: in the Caribbean, we issued a guarantee in favor of an Italian bank that facilitated the creation of another bank in Belice, which made it possible to import food to this country from Trinidad and Tobago. In the context of the pandemic, in El Salvador we supported the export of medicines to Guatemala, with a guarantee issued in favor of a Spanish bank that provided funding for its salvation.

But the road does not end here. IDB Invest will continue to work to close the gap in this type of financing, giving priority to the support of the PYME - including those led by women - and the internationalization of green products and services. In turn, IDB’s Integration and Trade Sector will also continue to promote and support this program, through channels that bring together exporting companies in the region, such as the ConnectAmericas business network. It will continue to prioritize the reduction of other costs that also prevent the growth of trade, particularly logistics and transportation, information and regulations.

This is a new opportunity to reconfigure the trade, increase regional integration and build on the legacy of “great liberalization” to revitalize this great engine of growth, development and well-being.

To find out more about our Trade Finance Facilitation Program (TFFP), visit our website here: https://idbinvest.org/tffp/en

Authors

Fabrizio Opertti

Fabrizio Opertti is the Integration and Trade Sector Manager of the Inter-American Development Bank (IDB). Previously, he directed the IDB Division

Gema Sacristán

Gema Sacristán is IDB Invest's Chief Investment Officer. She joined the Inter-American Development Bank in 2008 as an Investment Officer in the Str

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