The current credit crunch has led to a substantial reduction in capital flows to emerging market countries. This has manifested itself in a lack of liquidity to these markets and a subsequent drying up of funding for many financial institutions and corporate in these regions dependent on wholesale borrowings. In addition, the impact of reduced demand for exports from the developed world – mainly US and Western Europe – has led to markedly slower economic growth for many countries in these markets. Credit squeeze and slow-down in demand will likely result in increasing defaults for all commercial lending activities. These effects will have adverse consequences on the leasing industry in emerging markets throughout 2009 and are forecast to continue for some time thereafter.

The immediate consequences of the crisis will be that leasing companies that are part of a solid bank with a stable source of retail deposit funding will have more chances of surviving the crisis while those stand-alone leasing companies dependent on whole-sale borrowings will inevitably suffer. This is due to the fact that a stand-alone leasing company without secure financing can find its sources of funding totally disappearing and, even if it can have access to finance, its cost of funds will inevitably rise, not only affecting its profits but also its ability to on-lend at a reasonable cost. A secondary consequence of the crisis will be that leasing companies will experience a fall in demand as their clients cannot afford to enter into new equipment leases, preferring in some cases to stretch out the use of their existing equipment, or also suffer from lack of funding due to the crisis. Nevertheless, even having said this, leasing companies located in countries and regions with strong capital markets that have not dried up - perhaps because they are less inter-connected globally than some other markets - should see less of an impact of the global credit crunch.

To counteract the effects of the global downturn, and, in some cases, to even ensure survival, leasing companies can do several things. Firstly, they can try and find a strong banking group in the region as a sponsor, preferably one that has a stable retail funding base and can benefit in a business sense from leasing. Alternatively, if a leasing company is lucky enough to already be in a position of having a strong bank in its shareholder structure, it can consider incorporating itself as part of the bank group. Another strategy for a stand-alone leasing company would be to try to partner with a strong institutional investor which can give it stable access to funding.

On the assets side, priority will be given to strengthening early recoveries, bad debt management and workouts. In crisis times, every dollar collected on a provisioned lease becomes an invaluable contribution to the bottom-line. As deleveraging and tightening asset and liability mismatch will become critical, a new focus will need to be put on pricing lease operations, differentiating from traditional banking competition, and developing value-added services that do not consume economic capital.

Finally, even at times of crisis, the strongest leasing players will continue looking for good business opportunities. Sustainable Equipment Financing (Energy Efficiency, Cleaner Production, Renewable Energies) are a safe bet. Not only do they benefit from a strong political push, but they offer a fantastic opportunity for leasing players to differentiate from other financial players through their specific asset management and cash-flow lending skills.