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Export hopes as CBI paints a more optimistic picture21 October 2009The latest Quarterly Industrial Trends Survey from the CBI indicates that the decline in UK manufacturing output has eased considerably in the past three months, and the sector prospects look brighter, with sentiment improving and modest growth expected in the three months ahead. The survey also revealed that the weakness of sterling is helping export competitiveness, although stocks are still being run down and difficult access to finance is constraining output and investment.
Helped by a weakened sterling, the contraction in demand for exports was less than expected and firms expect export orders to grow over the coming three months. Indeed, sentiment about export prospects for the year ahead is, at a balance of +16%, the strongest since July 1995 (+21%). And a net 10% is now more optimistic about the overall business situation than they were three months ago, which is the first improvement in sentiment since April 2007. CBI chief economic adviser, Ian McCafferty believed firms were finally benefiting from a weakened pound as global markets recover, helping to lift demand for UK exports.
"However, the recovery from the downturn will be protracted and weak - investment will remain constrained and unemployment will continue rising,” he warned. “The tight flow of credit to many manufacturers remains a worry, and firms that are unable to get funding to meet orders could see their hopes of recovery stall."
But while manufacturers remain worried about the cost and availability of finance here in the UK, there is a glimmer of hope for exporters seeking more secure forms of payment from their overseas buyers – particularly those in emerging economies. The UK's Export Credit Guarantee Department (ECGD) has launched a letter of credit guarantee scheme to assist UK exporters by boosting the availability of short-term export finance.
One of the most secure payment mechanisms for foreign trade transactions is a confirmed letter of credit. Under this, a bank in the UK guarantees payment to its exporting customer, provided documents stipulated in the letter of credit issued by the buyer’s overseas bank are presented to it. In this way, the UK exporter is able to eliminate the risk of non-payment by its buyer.
By sharing with banks the credit risks associated with confirmed letters of credit, ECGD aims to increase the amount of short-term export finance which the banking sector can make available to UK exporters. This is particularly important at a time when the overall risk appetite of the trade market has been reduced due to the recent difficulties in the financial sector.
To start with, five banks – Barclays, RBS, HSBC, Lloyds TSB and Standard Chartered – are supporting the scheme and will be making arrangements in the coming weeks to allow exporters to participate. Initially, it will cover 282 overseas banks in 36 export markets.
Launching the scheme, UK Minister for Trade, Investment and Small Business, Lord Davies of Abersoch said he believed it could provide real help to UK exporters, particularly smaller companies exporting to emerging markets, which is where letters of credit are most used and where new opportunities can be found.
“Letters of credit are a very well established method of securing payment and an alternative to credit insurance,” he said. “This scheme should increase banks’ capacity, and is an excellent step forward." The ECGD will share up to 90% of the risk on individual letters of credit.
Les Hunt
Editor
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