Wednesday, 22 July 2020 04:36

How COVID-19 is changing trade finance needs

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Economic statistics for growth (or should we say contraction) look like something from another era: Eurozone -5,5%[i], advanced economies -6,1%[ii]. World merchandise trade volumes are expected to decrease between -13% and -32%, depending on the scenario laid out by the WTO[iii].

The importance of trade finance front office digitization

It’s the kind of events that we will be telling our grandchildren about. But right now, we are not reminiscing. It’s all very real.

Clients and prospective clients are suffering a lot: there’s a fear in the market that is tangible and we need tools now.

The threat of repeated non-performance under contracts will seriously impact business. And, unavoidably, the COVID-19 crisis is driving an increase in demand to cover our clients’ trade finance exposures. So, while there’s a dip in trade volumes, active Mitigram clients continue to put significant transactional volumes on the platform.

The reasons are multiple, of course, but there is always a viscous circle that ensues a credit event, that inevitably exacerbates the symptoms:

Increase of counterparty risk

Mitigram clients have reported they already see an increase in perceived counterparty default risks, this is driving of the need to get cover for risks on obligors and geographies where it was not previously the case.

Reduced risk appetite

At the same time that sellers perceive higher risks, it’s an unfortunate truth that so do the institutions offering the credit protection. So, demand for cover goes up while, simultaneously, the supply of cover goes down; plus ca change! But it’s a difficult situation that needs a solution.

In the meantime, while economies are struggling and emerging market banks look to developed markets for support, the opportunity exists for banks everywhere to act as agents of positive change by driving trade finance as a tool for supporting economic growth while also maintaining and building their balance sheets around an asset class that benefits from proven lower risks.

There are social schemes that can offer assistance. In Europe, we see ECAs exceptionally responding by offering cover for short term private risks. This underlines how much the market has moved to avoid the increase of trade risks globally and the need to expand the ways to mitigate these.

https://ec.europa.eu/competition/state_aid/what_is_new/covid_19.html

Going forward, corporates and their financial partners need to get closer. With people working remotely, the need to save time and improve processes has never been greater. The digitization of the trade finance front office is key. Mitigram brings participants closer, making business easier, and delivering better visibility, availability and efficiency in these troubled times.

Using the corporate clients’ chosen digital channel, Mitigram will ensure the bank remains relevant and can grow trade finance assets. And building on this theme, our Open Market module goes live next month, it’ll act as a matchmaker helping corporates find financial institutions keen to back their trade businesses.

Read 546 times Last modified on Tuesday, 11 August 2020 08:07
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Team Mitigram

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  • Time to move beyond frauds
    Time to move beyond frauds

    Join Mitigram's Head of Asia Johan Egnell discussing the latest Trade Finance developments in Asia with Sales Director Toh Bee Lian.

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    • Time 3:30PM SGT
    • Duration 45 minutes
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