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Post-GFC challenges for Australian exporters

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At the time of writing, the trade results for the June 2010 quarter show Australia's balance of payments deficit at its smallest since 2002. This is a great headline result, made possible by strong demand and price increases obtained by our mining sector. In the agricultural sector prices are also holding up, a positive for farmers who have battled droughts for a number of years. However, behind the headline we are aware that many SME exporters are battling against strong headwinds. The Australian dollar’s strength is a key headwind, and this is reflected in the June DHL Export Barometer which reported the highest negative impact on export sales was the exchange rate-higher even than the GFC. Unlike mining, many export industry sectors can’t lift prices at this stage of the world economic recovery and have seen their profitability plummet, even though sales may have held up reasonably well. The wine industry has certainly been affected by the high Australian dollar, battling strong competition from new players from South America and South Africa while demand in major European markets is on hold. The intake of international students to our universities is also affected, with universities in the USA turning to offshore markets to cover a domestic downturn due to the GFC. Similarly our inbound tourism operators have seen the value proposition of an Australian holiday eroded by the high dollar. The Barometer also indicates the top five sources of expected export orders over the next 12 months are South and Central America, South East Asia, China, India and Africa. Regions like South America and Africa would not have figured in the top five previously and indicate exporters are seeking out new markets to counter the downturn in the US and Europe. And support to market to these new destinations has been diminished by the reduced amount available through the Export Market Development Grant scheme. Although exporters surveyed remain positive about future orders, 48 percent report orders below the pre-GFC level. SME exporters provide strong employment opportunities in their communities (one in five jobs is export dependant) so it is in everyone’s interest to ensure this sector stays strong and continues to grow. Our balance of payments outcome and, by extension, standard of living depend on it.

A significant barrier for smaller exporters is access to finance to fund their growth. Typically small businesses do not have a lot of assets to pledge. The GFC, while not impacting our banks to the extent seen overseas, has still had the effect of pushing up the ‘risk premium’ on borrowings from the capital market and hence the total cost of funding. And in this environment there is a lot of caution regarding who the banks will lend to. To protect against payment risk, exporters have to insist on up-front payment or a bank issued letter of credit, or take out credit insurance. The high level of payment defaults is stabilising after a pretty horrendous 2009, however, the premium cost of protection products like credit insurance has risen and available lines by industry and country remain constrained. Banks issuing letters of credit are demanding full collateral, and this has restrained trade to certain markets. What this means for exporters is that it can be difficult to obtain payment protection via a letter of credit from the overseas buyer or, alternatively, credit insurance on the buyer. Another concern is the push in certain jurisdictions for more government intervention. As noted by Kimberly Wiehl, Secretary General of the Berne Union which represents export credit agencies and credit insurance companies globally, in a recent press release, "An emerging concern for our members is the changing regulatory landscape. "Proposed changes to capital requirements relating to trade and export finance could have significant implications for our members’ ability to support trade and consequently for trade volumes and the global economy". So we have optimistic exporters faced with barriers to overcome to realise their ambitions. So what can be done to help? Well, we are aware that the Export Finance and Insurance Corporation is undertaking some innovative financing arrangements to help SME exporters. And it would be wonderful to establish a strong local investment fund to support smaller businesses with great international potential, possibly via a limited time horizon equity investment. Perhaps small business needs a ‘future fund’. The government can help by lobbying hard to eliminate the ‘behind the border’ barriers that discriminate against Australian businesses. Australia’s exporters have proved to be a remarkably resilient lot and, with a bit more support, I’m confident they can fight through these latest headwinds.

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