Trade finance default rates expected to rise with Covid-19 disruption
Naveed Sultan, head of treasury and trade solutions at Citi, says the overall default risk from coronavirus will remain low and will be limited to the SME sector.
Leaders are making uncompromising decisions to close national and regional boundaries to limit the spread of the coronavirus. Sudden limits to freedom of movement have slashed trade volumes and ruptured supply chains, forcing businesses to overhaul treasury functions at lightning speed to stay afloat.
Some banks are stepping up, supporting clients in their search for liquidity and credit to prop up their working capital. But trade finance – which was building momentum as a safe and solid asset class over the last few years – will become riskier as default rates inevitably rise, says Naveed Sultan, global head of treasury and trade solutions at Citi.
According to the International Chamber of Commerce (ICC), default rates between 2008 and 2018 across all trade finance products and regions were low, averaging 0.37% for import letters of credit, 0.05% for export letters of credit, 0.76% for import and export loans and 0.47% for performance guarantees.
"This will be especially the case for small to medium businesses that may not have the capacity to deploy working capital," says Sultan.