Removing trade finance constraints can prompt an annual increase in merchandise trade in Vietnam of $55 billion, according to the International Finance Corporation (IFC) and the World Trade Organization (WTO).
A report on the findings of a joint study by the two institutions titled, “Trade Finance in the Mekong Region,” says simulations from data collected from banks and traders in the Mekong-3 (Vietnam, Laos, and Cambodia) and analyzed with the “WTO Global Trade Model” show that increasing local trade finance coverage by an additional 20 percentage points while reducing the cost of loans and letters of credit to match international benchmarks would raise imports by 6% and exports by 9% annually.
According to a report on study results released in Hanoi Thursday, local trade finance in Vietnam is “scarce, costly, and segmented and offers just traditional services.”
The trade-to-GDP ratio in 2022 was particularly high in Vietnam at 185%, several times higher than the global average of 62%.
The value of total trade flows has tripled in Vietnam in the past decade as the country benefited from: relocation of production away from economies with higher manufacturing costs; trade diversion linked to trade conflicts between large countries; and the fostering of foreign investment.
However, the trade growth has not been even. It has followed a two-speed trajectory with exports from subsidiaries of foreign-owned firms far outpacing that of locally owned supply chains.
Foreign investments, most notably in the electronics and garment sectors, have in the past decade shifted the structure and direction of imports and exports in favour of these products towards large suppliers (China) and buyers (the U.S.) who now jointly account for over 40% of the region’s total trade.
As a result, exports in a narrow set of activities controlled by foreign subsidiaries outpace exports from locally owned supply chains, for example in agrifood and fisheries, industrial parts and manufactures, where growth has also been strong, triggering economic diversification.
Vietnam’s import and export product basket is the largest and most diversified, expanding recently into chemicals, machinery and electric batteries, the report says.
Huge potential for trade finance expansion
In 2022, Vietnamese banks supported 21% of the country's total merchandise trade of $731 billion, with funds representing 22% of the country’s total banking assets.
“These numbers are low, not only compared to developed country levels of 60-80% but also relative to the coverage of trade recorded in other developing regions, such as West Africa.”
“Notably, banks are more likely to support local enterprises engaged in intra-regional trade than large multinationals engaged in global trade,” the report finds.
It says subsidiaries of multinationals in high-growth high-value sectors such as electronics and garments rely less on local bank-intermediated trade finance.
The value of Vietnam’s local trade finance market is estimated at $150 billion, the report says, adding that distribution of trade finance between imports and exports is relatively balanced in Vietnam, with assets concentrating on intermediate goods and inputs.
Improving the coverage of trade by bank-intermediated finance holds the greatest potential to expand trade, the report contends.
It says sectors carrying the greatest potential are textiles, wearing apparel and leather.
“The electronics sector plays a moderate role in this expansion owing to large shares of related-party trade (i.e. trade with subsidiaries of multinational enterprises and large conglomerates), which are less likely to use domestic trade finance.”
The report shows that only a small fraction of the banks surveyed - 29% - fund climate-related trade activities.
Innovative trade finance instruments are still nascent, although a quarter of banks surveyed envisage expanding its provision within the next two years.
Supply chain finance currently supplied by local banks in Vietnam accounts for just 2% of available trade finance.
“Since local trade finance in Vietnam is currently concentrated in domestic manufacturers, greater coverage of local trade finance will not only help improve the competitiveness of Vietnamese importers and exporters but more importantly, will boost production, deepen global supply chain integration and spread the benefits of trade more evenly across local producers,” said Thomas Jacobs, IFC country manager for Vietnam, Cambodia and Laos.