Bloomberg News

Europe Woes Hit Asia Trade Finance as ADB Loan Demand Soars

December 07, 2011

(Updates with comments from ANZ Bank in 16th paragraph.)

Dec. 6 (Bloomberg) -- The Asian Development Bank is preparing for a surge in demand for its trade financing, with a pull-back in lending by European banks risking a greater credit squeeze for some Asian nations than seen in 2008.

“The trade-finance program is filling persistent market gaps, but it will become even more important,” Steve Beck, who heads the Manila-based ADB’s unit that provides credit and guarantees for imports and exports, said in an interview. “With some major European banks retrenching from the trade-finance business, we see that the gaps are increasing,” he said, without naming the lenders.

Beck sees growth in his $3 billion operation accelerating from a pace already in excess of 25 percent this year, with a credit crunch having the biggest impact on poorer emerging markets including Sri Lanka, Bangladesh and Vietnam. At stake is averting a 2008-style collapse in trade that impairs growth in the continent that led the world out of the global recession.

European banks are rushing to raise their capital ratios as the euro-region’s debt crisis continues unabated. The lenders are likely to de-leverage by 1.5 trillion euros ($2 trillion) to 2.5 trillion euros, Morgan Stanley estimated last month. Among the non-core assets at risk is trade finance in Asia, where nations outside Japan exported $4.1 trillion last year.

“European banks that had exposure in Asia have had to repatriate some of the money from Asia, and that’s why you see volatility” in the region’s exchange rates, said Iwan Azis, who heads the ADB’s Office of Regional Integration.

Signs of Stress

Currencies from the Philippine peso to Indonesian rupiah and Indian rupee tumbled in September, when European debt woes deteriorated as Greece teetered toward a potential disorderly default. During the week of Sept. 19, Asian currencies tumbled the most since the region’s financial crisis in 1998.

Beck said another sign of distress is a jump in the number of companies refusing to do business without trade finance, where banks insure that exporters will get paid for their products.

“There are a lot of people in the industry who are predicting that it’s going to be worse than 2008,” he said, referring to import-export financing.

“Demand for our products is already affected,” said Thomas Patrick, director of finance at Duferco SA, which is based in Lugano, Switzerland and estimates that it’s the world’s largest steel trader. “We have a healthy order book but it is at reduced levels.”

Customers Squeezed

European banks with Asian operations are scaling back, causing medium-sized companies that purchase Duferco products to find less readily available credit lines or payment guarantees, Patrick said.

“A lot of companies particularly in distribution and trading are holding low stock levels -- to make sure to avoid having exposure if there is a major crisis,” he said. “We all had a very difficult experience in 2008 and we don’t want it repeated.”

A European retreat offers opportunities for lenders from Asia and other regions, including the U.S., said Richard Jerram, chief economist at Bank of Singapore Ltd.

“They will be interested in filling the gap,” particularly if borrowers are prepared to pay higher interest rates on loans, according to Jerram. “But life’s never perfect in the sense that you can always find a substitute. There’s going to be some stress.”

Banks That Benefit

HSBC Holdings Plc and Standard Chartered Plc -- U.K.-based banks with large Asian operations -- may be among the “key beneficiaries,” Barclays Capital regional bank analysts led by Thomas Quarmby in Hong Kong wrote in a Nov. 29 note to clients.

Among others expected to benefit are Mitsubishi UFJ Financial Group Inc. of Japan, Australia & New Zealand Banking Group Ltd., Singapore’s DBS Group Holdings Ltd. and Taiwan’s Mega Financial Holding Co., Barclays Capital analysts said.

“There are more companies coming to us,” said Mark Evans, ANZ Bank’s Sydney-based global head of trade and supply chain. “The numbers of customers and transactions have increased significantly. I am optimistic we will continue to see opportunities coming our way as a consequence of what’s going on in Europe.”

ANZ Bank’s trade finance revenue from Asia rose 58 percent in the financial year through September from the same period a year ago, Evans said.

Cost of Borrowing

Even with others stepping in, the price of the financing will likely increase as European lenders downsize.

“The cost of borrowing will go up -- there’s no doubt about it,” said Azis, who previously taught at Cornell University and testified to U.S. lawmakers during the Asian financial crisis.

A more broad-based exit by Europe’s banks, should the sovereign-debt crisis worsen, could pose a deeper economic threat, because of an influx of capital into Asia since the 2008-2009 global recession spurred by its faster growth rates, according to the World Bank.

Trade data already point to a darkening picture for Asian exports, hit by diminishing European demand as the euro-region veers toward a recession. That’s particularly troubling for countries from Thailand to South Korea, where shipments make up the equivalent of half or more of gross domestic product. Exports out of both China and South Korea increased at the slowest pace since 2009 in October, while Japan’s slid the most since May.

Threats Deepen

Asian economies are facing “much greater downside risks” now because of the possibility of a recession in the U.S. and Europe and the threat of destabilizing capital flows, the ADB said in a report today. Emerging East Asian economies may grow 7.2 percent next year after expanding 7.5 percent in 2011, less than the lender’s September forecast, according to the report.

Credit outstanding from European lenders to developing East Asia was $427 billion, or the equivalent of 6 percent of GDP, in June 2011, according to the World Bank. Almost 70 percent of all loans from banks that report to the Bank for International Settlements was of shorter maturities, exposing Asia to “sudden-withdrawal” risk, the World Bank said in a Nov. 22 report.

Malaysia at Risk

Potentially among the most vulnerable is Malaysia, where loans from European banks amount to more than 25 percent of the nation’s GDP, World Bank data show. Other middle-income countries such as Indonesia, Thailand, the Philippines and Vietnam have exposures of between 7 percent and 11 percent of GDP to European lenders. In China, such funding totaled $268 billion, or 5 percent of GDP.

Asian nations have fiscal scope to respond to a global slowdown, with government borrowing levels lower than other regions, the World Bank said in its report.

Even so, that ability of policy makers to respond hasn’t defused concern about the outlook for exports.

“2012 will be very difficult for us, it won’t be easy to get financing,” Sofjan Wanandi, chairman of the Employers Association of Indonesia, said in an interview. “Until the end of this year, everything will still be doing well, as all our contracts are through month-end, but we’re really concerned about next year,” he said, referring to averages for members of the group -- Indonesia’s most representative business lobby, incorporating industries from mining to retail.

--With assistance from Novrida Manurung in Jakarta and Sophie Leung in Hong Kong. Editors: Chris Anstey, Stephanie Phang

To contact the reporters on this story: Aki Ito in Tokyo at aito16@bloomberg.net; Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net; Stephanie Phang at sphang@bloomberg.net


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