The current global financial crisis and the sharp reduction in trade flows have raised questions about the extent to which access to capital affects the ability of companies to produce and sell exports and to buy imports. There is a clearly identified channel between a crisis and a fall in export and import volumes, namely the concurrent impact on foreign and domestic output. This paper looks at whether banking and financing crises have an additional impact over and above the impact of output.
Although trade credits are self-liquidating, typically backed by receivables, with low transfer and convertibility risks, they often collapse during banking crises. One reason may be that trade credits often involve only a limited relationship between the company and the bank. In the height of a crisis, banks typically reduce overall country exposure following a decision to cap an institution’s country limit.2 Since trade credit lines are usually short-term, can be redeemed at par, and involve limited reputational risks, they are an easy asset class to cut in times of crisis. Indeed, trade credits declined by as much as 50 percent during the peak of the recent crises in Argentina and Brazil, and fell by a comparable magnitude during the Korean crisis of 1997–98.
Surprisingly, given these magnitudes, the economic literature on the linkages between trade volumes and financing is very thin. One of the few papers written on the issue is by Ronci (2004), who considers the effects of constrained trade finance on trade flows for 10 emerging market countries experiencing financial crises. He considers three years before and after the crisis year and finds that the change in financing (defined as outstanding short-term trade credit for each country) has a significant positive effect on domestic export volumes even after controlling for changes in world export volumes and relative prices. Similarly, the change in financing has a significant positive effect on domestic import volumes even after controlling for domestic growth and relative import prices.
This note expands the analysis of Ronci by including a larger set of countries for a longer time period to assess whether the linkages between external trade finance and trade volumes remains robust in less distressed times and for a wider sample. It also assesses whether distress in domestic financial markets adds additional stress based on a database developed by Laeven and Honohan (2005). The country sample used in this paper is the same one that was used in the IMF book entitled Exchange Rate Analysis in Support of IMF Surveillance (2008) except that oil exports are excluded (as they are generally thought to be financed by retained earnings). It comprises 36 emerging market economies (classified as middle-income countries according to the World Bank’s World Development Indicators) and two low-income countries (India and Pakistan, chosen for their importance in world trade and their access to market financing).
