In the latest episode of Trade Talk, we delve into the critical role of trade credit in stabilizing emerging economies amidst monetary shocks from the US Federal Reserve. Join Mélina London, economist and researcher, on how inter-company credit can be a buffer against financial instability.
In a world where financial markets are increasingly interconnected, the ripple effects of decisions made by central banks in developed economies can be felt across the globe. Nowhere is this more evident than in emerging markets, where monetary tightening in the United States can trigger a cascade of economic consequences.
In this episode of Trade Talk, we sit down with Mélina London, economist and scientific advisor at the European Union’s Joint Research Centre, to explore how trade credit—often overlooked—can serve as a powerful stabilizing force in such turbulent times.
What is it to take in this episode?
If you prefer to read rather than listen, we have summarised the main ideas from this episode below.
Whether you’re a business leader navigating uncertain markets, a policymaker crafting economic strategy, or simply someone interested in global finance, this episode of Trade Talk offers invaluable insights:
- How US interest rate hikes affect emerging markets
- Why trade credit is a vital financial tool during monetary shocks
- What makes suppliers more willing to extend credit than banks
- How Coface’s data is helping researchers uncover new economic dynamics
And most importantly, you’ll gain a deeper understanding of how businesses can build resilience in an unpredictable world.
Listen now!
The domino effect of US monetary policy
When the US Federal Reserve raises interest rates, it doesn’t just affect American borrowers. As Mélina explains, these decisions often lead to capital outflows from emerging economies. Why? Because higher interest rates in the US offer better returns with lower risk, prompting investors to pull their money out of riskier markets like Brazil, India, or South Africa.
This capital flight weakens local currencies and forces central banks in emerging countries to raise their own interest rates to stem the outflow. The result? A tightening of financial conditions that these countries didn’t initiate and wouldn’t have chosen under normal circumstances. It’s a classic domino effect—one that can severely restrict access to traditional bank credit for businesses in these regions.
Enter Trade Credit: a buffer in the storm
While much has been written about the impact of US monetary policy on capital flows and bank lending, Mélina and her co-author Maeva Silvestrini noticed a gap in the literature: the role of trade credit. Also known as inter-company credit, trade credit is when a supplier allows a buyer to delay payment for goods or services. For example, a bolt manufacturer might deliver products to a furniture maker and allow them to pay in 90 days.
This form of credit is especially important in emerging markets, where access to bank loans can be limited even in stable times. During periods of monetary tightening, trade credit can become a crucial alternative source of financing.
Stabilizing vs. amplifying: two possible outcomes
Thanks to access to nearly a decade’s worth of data from Coface, Mélina London and Maeva Silvestrini were able to analyse trade credit flows between foreign suppliers and clients in six major emerging economies: South Africa, Brazil, India, Indonesia, Turkey, and Mexico.
Their goal? To determine whether trade credit acts as a stabilizer or an amplifier in response to US monetary shocks.
- Stabilizing effect: When bank credit becomes scarce, companies turn to trade credit. This helps them maintain operations and smooth out the financial shock.
- Amplifying effect: If suppliers themselves are affected by the monetary shock—due to tighter global financial conditions—they may be less willing or able to extend credit, worsening the situation for buyers.
So which effect dominates?
According to Mélina London, the data shows that the stabilizing effect is stronger. In times of US monetary tightening, companies in emerging markets increasingly rely on trade credit to fill the financing gap left by retreating bank loans.
Who Benefits Most?
The research also revealed that the stabilizing effect is most pronounced among financially constrained companies—those already heavily indebted or with limited access to traditional financing. These businesses are often the first to be cut off by banks during a credit crunch. But suppliers, who have more intimate knowledge of their clients and a vested interest in their survival, are more willing to extend credit.
Suppliers have two key advantages over banks:
- Better Information: Suppliers often operate in the same industry as their clients and have a clearer understanding of market dynamics and client reliability.
- Leverage: If a client fails to pay, the supplier can withhold future deliveries—an effective incentive for repayment.
This dynamic creates a unique ecosystem where trade credit becomes not just a financial tool, but a strategic partnership.
A global perspective: supplier origins don’t matter
One of the most fascinating aspects of the study is that the stabilizing effect of trade credit holds regardless of the supplier’s origin. Whether the supplier is based in the US or Europe, the response to US monetary tightening is the same: an increase in trade credit extended to clients in emerging markets.
This suggests that the mechanism is robust and not limited by geography. It also underscores the importance of trade credit as a global financial instrument that can help cushion the blow of economic shocks.
Why this matters now
The timing of this research couldn’t be more relevant. As Mélina points out, we’re living in a period of heightened economic volatility. Political uncertainty, shifting trade policies, and inflationary pressures—particularly in the US—could prompt the Federal Reserve to raise interest rates again.
If that happens, emerging markets could once again face the same challenges studied in this research. But now, thanks to Mélina and Maeva’s work, policymakers and business leaders have a clearer understanding of how to respond.
A Call to Action for policymakers and financial institutions
The key takeaway from this episode is simple but powerful: trade credit should be part of the conversation when developing strategies to mitigate the impact of global monetary shocks. Policymakers, financial institutions, and business leaders must recognize the value of inter-company credit and incorporate it into their planning.
By doing so, they can help ensure that companies—especially those in vulnerable emerging markets—have the tools they need to weather financial storms and continue growing.
🎧 Ready to dive deeper?
Trade Talk is in every podcast platform, subscribe so you don’t miss out any business insights.
