'The stark reality is that developing countries must prepare for a drop in trade, capital flows, remittances, domestic investment, as well as a slowdown in growth.'
The words of Robert Zoellick, President of the World Bank, are as realistic as they are ominous. Although not at the centre of the world's economy, developing countries are at its mercy, dependent on trade, investment and aid; never is this felt more than in times of crisis.
Trade finance, fundamental to the working of the global financial system, is about four things: payment facilitation, financing, risk mitigation and the timely flow of information. The effects of the global financial crisis have been felt on all counts. And naturally, with the current emphasis on risk-avoidance, the consequences of reduced trade finance are most severe for small and medium-sized enterprises (SMEs) and emerging markets.
Relationships between banks, export credit agencies, investment banks and other providers of trade finance are critical to its timely availability. These relationships are built on trust in the integrity and financial viability of trade finance providers; trust that has evaporated in the current climate. Consequently the trade financing gap, estimated at US$25 billion, is affecting developing countries around the world.
Offshore banks, which previously provided credit, have collapsed. Even the increased recourse to export credit agencies, and the higher-profile involvement of International Financial Institutions (IFIs) and their various trade facilitation programmes, cannot fully address the problem.
A further concern, common among developing countries, is a lack of diversification in export markets. A small handful of industries tend to make up the bulk of each country's exports, and the problem is compounded by limited export markets, with the European Union, the United States and Asia the key players. As these markets face economic crisis, so too do the developing countries that rely on their trade. Consumer demand is decreasing, and there's a threat of growing protectionism in the West. The repercussions are felt by every link in the supply chains.
But the impact of the financial crisis isn't limited to export markets; national incomes are threatened on several fronts. Developing countries are being told to prepare for steep declines in aid donations and remittances. In Tonga in the Pacific, for example, there has been a reported decline of 40% in remittances since the beginning of the global crisis. Foreign investment is slowing, driven by the desire to minimize spending and mitigate risk. Even those developing countries whose future projections looked healthy a matter of months ago, can expect trade and investment to weaken in the face of the worsening crisis.
'The global credit crunch has worsened an already bad situation,' comments Chinyemike Torti, CEO of the Federation of Nigerian Exporters. 'Even when Nigerian banks were sitting on a cornucopia of funds, credit was not made available to exporters, due to an ingrained suspicion of SMEs. Now that the squeeze is on, the consequences for the sector will be devastating.'
Despite the concern, some experts already speak of a return of liquidity, and the combined efforts of IFIs, export credit agencies and some non-traditional providers of trade finance, will facilitate access to financing in support of global commerce. Many developing countries are looking toward strategic planning and restructuring of financial systems, to bolster their economies in difficult times.
Lack of diversification needs to be managed
Ceylon Chamber of Commerce, Sri Lanka
Like most developing countries, Sri Lanka has a poorly diversified basket of exports, with four sectors accounting for around 70% of exports: apparel (41%), tea (13%), rubber and rubber products (8%), and gems and jewellery (7%). …