The Effects & Implications of Structural Gaps
Financing Trade
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The trade finance gap was measured at US$1.7 trillion in 2020.
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Credit institutions help facilitate trade by bridging the gap between exporters’ and importers’ differing expectations about when payment should be made. However, this is a luxury many aren’t privy to in developing countries, leading to a disproportionate trade finance gap between developed and developing countries. This disproportion is also observed with SMEs. Estimates project that half of SME trade finance requests are rejected, compared with only 7% for multinational corporations.
Further issues that exacerbate the trade finance gap:
- Lack of access to knowledge and skills required for trading
- High rate of rejection for funding for SMEs
- Periods of crisis that can disrupt trade finance
Outlook
Threat
The structural gap in finance trade may be further derailed from increasing political instability and lack of resources / high barriers to entry for SMEs.
Opportunity
Fintech and Blockchain adoption could be an essential component in closing the trade gap.
Infrastructure
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Infrastructure is a primary driver in facilitating sustainable trade performance and green growth. However, the gap between countries with good infrastructure and those without is estimated to reach US$15 trillion by 2040. Ongoing political conflicts concerning inflation and economic fallout from the COVID-19 pandemic have stunted infrastructure development.
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Developing countries need to invest approximately 4.5 per cent of GDP1 to achieve infrastructure-related Sustainable Development Goals (SDGs) and stay on track to limit climate change.
1 https://www.worldbank.org/en/topic/publicprivatepartnerships/publication/beyond-the-gap---how-countries-can-afford-the-infrastructure-they-need-while-protecting-the-planet
Further issues that exacerbate this are:
- Investor risk aversion
- COP26 announcements and climate commitments
Outlook
Threat
Not addressing infrastructure will hinder global trade with cost pressures.
Opportunity
2022 could be a path-breaking year for renewable energy investment.
Blended Finance: Closing The Gap
The Asian Development Bank puts the global trade finance gap at US$1.7 trillion dollars.
- SME’s see rejection rates as high as nearly 60%.
- Emerging economies attempting to access trade finance are deterred by structural difficulties and weaker economies.
- This is where blended finance - government and/or philanthropic funding leading to corporate investment – is important.
Blended Finance Can:
Address investor risk aversion. The blending of investment funds on commercial (private sector-led) and concessional (public sector-led) terms can catalyse investments that would have otherwise not been made due to its lower risk.
Help address the growing gender gap in trade through driving gender-framed climate finance deals and investment. Approximately a quarter of blended climate-finance deals had incorporated some gender component into the overall transaction structure.
Play an essential role in improving financial and economic resilience for future crises. This is done through cutting costs for basic and medical goods by allocating blended finance into digital infrastructure thanks to its strong profit and revenue projections.
Key Catalysts for Blended Finance
Strategic Thinking
Major insight and understanding will be required to assess the scale of blended finance required to meet sustainable investments needs in emerging countries.
Supporting Transactions at the Portfolio Level
Helps create larger deals to increase diversification to reduce risks.
Standardisation in the blended Finance field
Allows for less complexity, lower transaction costs, and greater transparency.
Policy Recommendations
Businesses
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Move from individual transactions towards the adoption and utilisation of blended-finance funds.
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Strengthen transaction advisory and business-development advisory services as a key component of the trade ecosystem to help generate blended-finance transactions.
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Encourage transactions at the portfolio level to create larger deals to increase diversification and reduce investor risks.
Governments
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Governments need to align and strengthen the investment ecosystem with climate-change mitigation policies to spur green investment.
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Governments should promote trade tools and resources for women-owned SMEs and women-led exporting firms.
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Investing in automating border processes in relation to trade would help SMEs by eliminating costs and unnecessary formalities.
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Pushing for improved standardisation in blended finance would simplify and lower transaction costs, as well as promote transparency and growth.
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Energy, Markets, Trade & Transition
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