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SBerne Union 2017
Contacts
International Union of Credit &Investment InsurersIncluding Berne Union Prague Club1st Floor 27-29 Cursitor StreetLondon EC4A 1LTUnited Kingdom
Tel: +44 (0)20 7841 1110Fax: +44 (0)20 7430 0375
www.berneunion.org
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Berne Union 2017
Contents
MEDIUM- AND LONG TERM EXPORT CREDITINSURANCE
OeKB: introducing Austria’s more flexiblenational content policy 37Ferdinand Schipfer, managing director ofexport guarantees, OeKB
Ten years of SERV: achievements and challenges 41Swiss Export Risk Insurance (SERV) reports
EXIM Hungary: supporting small and large 43Zoltan Urban, CEO EXIM Hungary
LOCAL CURRENCY FINANCING
Local currency finance: local support in a global marketplace 45Paul Radford, chief economist at UK ExportFinance
CGIF’s construction period guarantee: kick-starting greenfield project bonds 47Kiyochi Nishimura, CEO at the CreditGuarantee and Investment Facility (CGIF)
Innovative ways to invest in India 51Bill Brown, regional vice president, Asia,Export Development Canada (EDC)
A GUIDE TO POLITICAL RISK
How political risks have disrupted trade across the MENA region 55Karim Nasrallah, general manager of LCI
Growth opportunities high for political risk and credit insurance providers 59Daniel Riordan, president of global politicalrisk, credit & bond insurance at XL Catlin
The new normal of higher political risk 61Rouben Nizard, economist for sub-SaharanAfrica, from Coface’s Economic ResearchDepartment
SMALL AND MEDIUM-SIZED ENTERPRISES
A new model for driving Italian SMEs worldwide 65Alessandra Ricci, chief underwriting officer,SACE
Reaching out to exporting SMEs 67Carl-Johan Karlsson, head of the SMEbusiness area at EKN
Taking SME support to the next level 71Katja Keitaanniemi, executive vice presidentresponsible for SMEs at Finnvera
1 Introduction
3 Expert Analysis
2 Data and Statistics
Berne Union elected officials, committees and secretariat 6
Foreword 11Topi Vesteri, president, Berne Union
SG’s report: three challenges for the industry 16Vinco David, secretary general, Berne Union
Berne Union totals 22
Short-term export credit insurance
Medium- and long-term export credit insurance
Investment insurance
Prague Club Committee
Review of a year full of unexpected turns 29Laszlo Varnai, associate director, Berne Unionand Paul Heaney, associate director, Berne Union
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Building and operating an MSME export credit insurance facility in Brazil 73Marcelo Franco, CEO at ABGF, and co-authorPedro Carriço, ABGF´s credit underwriting &international relations executive manager
The importance of credit insurance for national SMEs 76By COSEC
PRIVATE CREDIT AND POLITICAL RISKINSURANCE MARKET
Time to stand up and be counted 77Peter Sprent, head of global financial risk atLiberty Specialty Markets and Audrey Zuck,director, A2Z Risk Services
The global opportunities for insurers prepared to embrace change 79Jérôme Pezé, CEO and founder, Tinubu Square
Surety market developments - from local market players to ongoing globalisation 81Rob Nijhout, executive director - InternationalCredit Insurance & Surety Association (ICISA)
BUSINESS OPPORTUNITIES, CHALLENGES AND CHANGES
The new landscape of sovereign debtrestructuring 84Paola Valerio, head of international relations atSACE (Cassa depositi e prestiti Group)
Iran: sanction-related uncertainty is still hanging in the air 88John Blackwell, senior communication andmarketing manager at Atradius
A Cinderella story: Côte d’Ivoire 91George Otieno, CEO, African Trade InsuranceCompany (ATI)
The Mozambique debt crisis – how it is unfolding and potential resolutions 95Benoit Fugah, head of the political, economicanalysis and research unit at ECIC South Africa
Argentina: opportunities for business andcooperation next door 99Pedro Carrico, executive manager, ABGF
Introducing the BECI Local ContractorsProgramme 101Bonani Dube, marketing manager, BECI
A new approach to mitigating offtaker risk in African power 103John Lentaigne, chief underwriting officer, ATI
Oil price developments and prospects 108Dr Rouben Indjikian, Webster University,Geneva
Risk aversion, financing and real services 111Professor Andreas Klasen, OffenburgUniversity, and Dr Simone Krummaker,University of Westminster
3 Expert Analysis continued
4 Member Directory
Berne Union members 118
Berne Union 2017
Berne Union 2017
1Introduction
President: Topi Vesteri (FINNVERA)
Vice President: Mandisi Nkuhlu (ECIC SA)
Short Term Committee Chair: Verena Utzinger (SERV)
Medium/Long Term Committee Chair: Beatriz Reguero (CESCE)
Investment Committee Chair: Christina Westholm-Schroder (SOVEREIGN)
Prague Club Committee Chair: Chris Chapman (NZECO)
Institutional Members:
■ ATRADIUS
■ COFACE
■ EULER HERMES
■ BPI FRANCE
■ NEXI
■ SINOSURE
■ ECGC
■ ECIC SA
■ EXIMBANKA SR
■ SOVEREIGN
■ UKEF
■ SERV
■ HBOR
The Management Committee consists of:
■ President ■ Vice President
■ 4 Committee Chairs ■ 13 Member Organisations
The 13 Member Organisations are institutional positions, held by the two largest volumemembers from each of the ST, MLT and INV Committees, plus seven additional members drawnfrom amongst all four Committees on a voluntary, rotating, basis. All positions are held for aterm of two years.
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Berne Union 2017
The Berne Union:Who’s Who 2017
Berne Union Leadership
President, Topi VesteriFINNVERA Finland | Deputy CEO, GroupChief Credit Officer
Topi Vesteri joined Finnverain 1998 as Executive VicePresident responsible forrunning Finland’s officiallysupported export credit andguarantee system. Havingmanaged Finland’s state
backed ECA business for almost 17 years,Topi assumed the position of Deputy CEOand Group Chief Credit Officer responsiblefor credit and analysis functions of bothExport Credit Agency (ECA) as well asdomestic SME financing business of Finnvera,in October 2015.
Topi is Chairman of the Board of FinnishExport Credit Ltd, the subsidiary of Finnveraresponsible for providing funded exportcredit solutions as well as Finnvera’s venturecapital subsidiaries Veraventure Ltd and SeedFund Vera Ltd. Topi also served as BoardMember of Finnfund (Finnish Fund forIndustrial Cooperation Ltd), Finland’s officialdevelopment finance agency and as a boardmember of Finnish Credit Insurance Ltd.
Before joining Finnvera, Topi had a 17-yearbanking career in Postipankki, one ofFinland’s leading commercial banks. Duringthis period he held various managerialpositions in Helsinki, Tokyo and Londoncovering debt capital markets, corporatebanking, leasing, international network andlending as well as general management ofthe bank’s overseas and domesticsubsidiaries and business units.
Within the Berne Union, Topi wasappointed President in 2015, was Chairmanof the Medium and Long Term (MLT)Committee in 2009 – 2011 as well as VicePresident of the Union in 2003 – 2004.
Topi holds a Master’s Degree in Law(LL.M.) from the University of Helsinki.
Vice President, Mandisi NkuhluECIC South Africa | Chief Operating Officer
Mandisi Nkuhlu holds theposition of Chief OperatingOfficer at the Export CreditInsurance Corporation ofSouth Africa SOC Limited(“ECIC”).
ECIC is the official ExportCredit Agency of South Africa and providespolitical and commercial risk insurance tofacilitate export trade and investmentsoutside South Africa.
Mandisi has worked for various financialinstitutions involved in the financing ofinfrastructure development. He spent fiveyears at the Development Bank of SouthernAfrica (“DBSA”) as the legal advisor to theProject Finance team responsible for cross-border private sector projects. During his stayat DBSA, he was seconded to Masons inLondon, a law firm specializing in PublicPrivate Partnerships.
Later on, Mandisi worked for the IndustrialDevelopment Corporation of South AfricaLimited (“IDC”) in the International FinanceDepartment dealing with export financetransactions. Prior to re-joining ECIC inFebruary 2011, he was a Director of ExportFinance at Standard Bank of South Africa.
Mandisi has worked on numerousinfrastructure and mining projects. He cut histeeth in the Mozal I and Mozal II projects andworked on the Nelspruit Water PPPConcession, the first bank financed water PPPConcession in South Africa.
Mandisi holds a B Iuris and the LLB degreefrom the University of the Western Cape. Heis an admitted attorney. He furthered hisstudies at Wits Business School –Management Advancement Programme,Senior Executive Programme and at the UCTGraduate School of Business – ExecutiveLeadership Programme. 7
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Elected Officials
Short Term Committee
ST Committee Chair, Verena UtzingerSERV Switzerland | Senior RelationshipManager
Verena Utzinger has beenworking for Swiss ExportRisk Insurance ‘SERV’ sinceSpring 2000. Initially shejoined the underwritingdepartment, withresponsibility for key
accounts, financial and various otherinstitutions in French-speaking Switzerland,as well as Ticino and a part of German-speaking Switzerland.
Verena is now responsible for relationshipswith financial institutions, new customers andbilateral chambers of commerce, as well ascoordinating collaboration with the privateinsurance market within the framework ofreinsurance agreements.
Verena is a Member of the Board of SABCSwiss African Business Council inSwitzerland.
As the Head of the Swiss Delegation atthe Berne Union, she represents SERV atvarious Berne Union meetings and alsoappears regularly as a speaker at otherexternal events.
ST Committee Vice Chair, Chunyi XiaoSINOSURE China | Deputy General Managerof Export Trade Credit UnderwritingDepartment
Ms. Xiao Chunyi, Deputy GMof ST Export Trade CreditUnderwring Dept, in chargeof large credit approval. Shehas been working inSinosure since itsestablishment in 2001.
Medium / Long TermCommittee
MLT Committee Chair, Beatriz RegueroCESCE Spain | Chief Operating Officer
Beatriz Reguero joinedCESCE, the Spanish ExportCredit Agency (ECA) in 1999as Deputy Director of theCountry Risk andInternational RelationsDepartment. In 2012, she
became the COO (Chief Operating Officer)of the State Account Business at CESCE.Between 1992 and 1999 she held differentpositions in the Spanish PublicAdministration, mainly within the Ministry ofEconomy, related to Trade responsibilities.
Within the Berne Union, she wasappointed Chair of the Short TermCommittee for the period 2010 – 2012.
Beatriz graduated in Economics from theUniversity of Madrid in 1989.
MLT Committee Vice Chair, Hendrik HoldefleissEULER HERMES Germany | Head of DivisionUnderwriting & Risk Management
Dr. Hendrik Holdefleissstudied economics at theUniversities of Regensburg,Barcelona, Muenster andholds a PhD in internationaleconomics of the Universityof Kaiserslautern. He started
his career at Deutsche Bank AG and joinedEuler Hermes in 1999. In the State ExportCredit Guarantee Division Hendrik Holdefleissheaded the Economic Research Departmentcarrying out analysis of trade policy andcountry risk.
He has been in charge of internationalrelations and cooperation in internationalinstitutions (EU, OECD) for several years.Later he was in charge of Public Relations ofthe Export Credit Guarantees at EulerHermes. Since 2011, as Head of Underwritingand Risk Management, he is responsible forthe global business of the German ECA.
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Berne Union 2017
Investment InsuranceCommittee
INV Committee Chair, Christina Westholm-SchroderSERV Switzerland | Senior RelationshipManager
Christina is responsible forall aspects of Sovereign’stransactional underwriting,with particular focus oncapital markets and financialinstitution business.Christina is also relationship
manager for a number of Sovereign’s ECAand Multilateral Agency clients. Christina hasworked in the political risk field for more than30 years. Prior to joining Sovereign, she waswith the Multilateral Investment GuaranteeAgency (MIGA) for 11 years.
She joined MIGA as one of its firstemployees in 1988 and worked in severalcapacities, including regional manager forAsia and Latin America and most recently asmanager for syndications and businessdevelopment. In this capacity, she was alsoresponsible for the Agency’s re- andcoinsurance activities.
Prior to MIGA, Christina worked as apolitical risk insurance broker in the Bank ofAmerica’s global trade finance department inNew York and as manager in the political riskdepartment at AB Max Matthiessen inStockholm, Sweden. Christina has an MBA ininternational business from StockholmSchool of Economics and BusinessAdministration and an MBA in finance fromNew York University.
INV Committee Vice Chair, Nuria GorogZURICH Switzerland | Senior VP – Head ofCredit & Political Risk, Continental Europe
Nuria Gorog joined Zurich inJanuary 2007 as Senior VicePresident and RegionalManager for ContinentalEurope – Credit & PoliticalRisk. Prior to joining Zurich,she served seven years as
Chief Underwriting Manager in ContinentalEurope for Unistrat Coface (Coface Group).Previously, she was Business DevelopmentManager -Credit & Political Risk- in the inhouse insurance broker of Natixis (Cauri).
Ms. Gorog holds a Master's Degree in Lawfrom the Universidad Autonóma of Madrid, a
Postgraduate Degree ("DEA") in InternationalProspective from the University of Paris V anda specialisation in International Trade from the"Ecole Européenne des Affaires"/EAP in Paris.
She is fluent in French, Spanish andEnglish. She is a former Chairman of theSingle Risk Committee of the InternationalCredit Insurance & Surety Association (ICISA)2014-2015 and an active participant in theBern Union.
Prague Club Committee
PC Committee Chair, Chris ChapmanNZECO New Zealand | Head of New ZealandExport Credit Office
Chris joined New Zealandexport credit agency 10years ago, when it was in itsformative stage, and hassupported NZECO’s growthboth in terms of anexpanded product range, as
well as increased exports and exporterssupported. Chris has previously practiced lawin New Zealand and holds a Masters inInternational Business, as well as a lawdegree, from the University of Otago.
Berne Union Secretariat
Vinco DavidBerne Union | Secretary General
Vinco David was appointedSecretary General in 2017. ADutch national, he has over30 years’ experience invarious aspects of credit andinvestment insurance,including more than 20 with
leading international credit insurer Atradius,in diverse roles across strategy, productdevelopment, economic research, projectfinance, underwriting and claimsmanagement.
Most recently Vinco served as aManagement Team Member of Atradius DutchState Business, the Export Credit Agency ofthe Netherlands. Prior to this he has heldpositions at the Berne Union Secretariat andthe Netherlands Ministry of Finance. He holdsan MA in political science and internationalrelations and a BA in economics and Italianlanguage and literature from the FreeReformed University of Amsterdam.
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Laszlo VarnaiBerne Union | Associate Director (MLT Committee Support)
Laszlo joined the Secretariatin June 2015, to advise it onlegal matters and to supportthe Committees (primarilythe ST Committee) andSpecialist Meetings. SinceApril 2017, Laszlo has been
supporting the MLT Committee.He gained focused experience in policy
analysis as he worked for EXIM Hungary formore than 5 years, leading the ECA’sinternational relations (OECD, EU and BerneUnion) and ensuring compliance with WTO,OECD and EU regulations, as well as theinternational sanctions.
Laszlo graduated in law from PeterPazmany University, holds a DipHE in Law ofEngland and Wales and the European Unionfrom the University of Cambridge, and adiploma of economic diplomacy from theKároli Gáspár University in Hungary.
Johannes SchmidtBerne Union | Associate Director (INV Committee Support)
Johannes joined theSecretariat in April 2016. Heis responsible for supportingthe chair and vice chair ofthe INV Committee as wellas its members (public,private and multilateral
insurers) with regards to their membership.In his role Johannes is also supporting theINV Technical Panel, a subcommittee wheretechnical underwriting issues are discussedamongst INV Committee members.
Before joining the Berne Union, Johanneswas an underwriter in political risk insuranceand untied loans for Berne Union memberPWC, managing the German Government’sInvestment Insurance and Untied LoanGuarantee Programmes.
Johannes holds a Masters Degree inInternational Business of MacquarieUniversity Sydney and a Diploma degree inEconomics at the University of Ulm.
Paul HeaneyBerne Union | Associate Director (Media & Outreach)
Paul manages internal andexternal communications atthe Secretariat, havingjoined in July 2016. Hisresponsibilities includemanaging the production ofthe 'BUlletin' Newsletter and
coordinating the Secretariat's involvementwith the Berne Union's Outreach Task Force.
He has 7 years of experience working incommunications, events and publicationsrelating to the trade finance and exportcredit insurance industry.
Prior to joining the BU, Paul worked as aConference Producer for Informa, one of theworld’s largest events and publicationscompanies, listed on the FTSE 100.
Paul holds a BA in Philosophy from TrinityCollege Dublin and an MA (also inPhilosophy) from King’s College London.
Nicole CherryBerne Union | Team Assistant (Logistics and Business Administration)
Nicole joined the Secretariatin July 2016. Nicole providesassistance to the SecretariatTeam, manages the officeand is a key player in theevents and logisticsmanagement of the Berne
Union meetings. She moved back to the UK in December
2015 after living in Tanzania for six yearsworking with NGO’s and running a volunteerorganisation.
Nicole holds a Bachelor of Arts Degree inFilm Production from RoehamptonUniversity, London.
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Berne Union 2017
2016 might well have zipped past as quicklyas a contactless payment.
A lot has happened, and a lot is stillhappening, both in the Berne Union and inthe wider world.
As is traditional for the President’scontribution to this Yearbook, I will take theopportunity to briefly survey the currentinfrastructure of international trade, commentupon the major themes influencing thebusiness of our members and provide asummary of some recent Berne Unioninitiatives.
I shall start slowly and close to home,however, with updated business figures and arough account of the ‘state of the industry’according to the Berne Union.
A sanguine 2016 marked byrebounding growth in new businessbut caution concerning claims2016 year-end results paint quite a healthypicture for our industry overall.
All Berne Union committees bar MLT1
reported growth in new business: a welcomereturn from 2015’s dip – which was largely aconsequence of the crash in commoditiesprices, and corresponding fall in the value ofworld trade.
$1.9 trillion of new business underwrittenby Berne Union members in 2016 means thatwe continue to provide support equivalent toover 11% of world trade.2
Prague Club Committee (PCC) membersshowed particularly impressive growth in2016, increasing almost 40% on 2015 levels.While new business of $38.7 billion is tiny incomparison to the other committees of theBerne Union, this reflects the positivedevelopment of PCC member companies, aswell as the business they support.
At the same time, 2016 saw high levels ofclaims across all Berne Union Committees –over $6 billion in total – sustaining the trendof 2015.
Paying claims is ofcourse a naturalprocess for insurers,and indeed rather agood advertisementfor the value of ourproducts. It isimportant howeverthat the levels ofclaims are sustainablerelative to the
premium income which supports thesepayments.
There is no indication so far that they arenot, but since we are still in a rather softpricing phase of the insurance cycle, withhigh competition in the private market, asustained period of high-claims without acorresponding rise in premium levels, couldsee loss-ratios rising to a level which affectsthe insurers’ businesses.
This is something members of the BerneUnion will keep a close eye upon in thecoming months.
Anticipating more growth in new business for 2017Looking into 2017, we can observe someindications of the direction of travel, on thebasis of initial reporting of results for the firsthalf.3
New MLT commitments reported for thefirst half of 2017 are around $70 billion –some 27% higher than in the same period lastyear. Since second half results tend onaverage to be 20% higher than first, we maysee MLT volumes for the full year reach $160billion – back up to the levels of 2013/2014.4
Volumes of new INV cover provided so farlook relatively stable and on currentindications we expect to see similar results to2016.5 The majority of growth in INV over thepast two years is reported under the INVOcategory, indicating (predominantly) cross-border medium/long-term export credit
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Berne Union 2017: President’s foreword
Foreword from theBerne Union PresidentTopi Vesteri, Berne Union President, Deputy CEO and Group Chief CreditOfficer at FINNVERA, reviews the developments through the past year andlooks to increased growth in business for 2017.
Topi Vesteri
insurance provided by private members ofthe Berne Union.6
Short Term business is the most fluid, andin some ways the most indicative of theimmediate health of the global economy.With credit terms of 12 months or less, it isalso less easy to draw inference from deal-pipelines ahead of time.
The fact that turnover business covered isonly calculated at year end makes it difficultto compare half year results in short termbusiness. Combined with recent changes tosome of the definitions used for Berne Uniondata reporting – more on this later – we don’tyet have a clear picture for new short termbusiness. However, based on initial reports ofaggregate credit limits, combined with theresults of the other committees, there iscertainly some indication of growth also inthe short term space.
Claims still high, but manageable2017 so far is showing a continuation of thehigh claims seen in 2016:
In MLT, $1.4 billion for 2017 H1 is 13% up onthe same period last year, indicating that wemay well exceed $3 billion for full year onceagain. Similarly, $200 million INV claims paidin the first half of 2017 is a full two thirds ofthe $300 million total paid in 2016 – againsuggesting another elevated year, withrespect to claims.7
However, it should be noted that claimsarising from business with the longer tenorsof MLT/INV are conspicuously ‘lumpy’ and itis difficult to make any accurate inferencefrom the results for a 6-month period only.8
One notable trend, also following on fromwhat we have seen in 2016, is that the vastmajority of MLT claims relate to commercial(as opposed to political) risks. In 2016 90% ofMLT claims paid related to commercial risksand 2017 is showing a similar ratio for the firsthalf.9
In short term, indications are that claimslevels will remain historically high, but still
lower for 2017 H1 than for the same periodlast year – a positive development. A roughexpectation from figures seen so far is thatthey might come in somewhere around $2.5billion by year end.
2017 so far then, appears to show a naturalcontinuation of the trends seen in 2016:positive growth in new business, healthydemand and a continued appetite for riskfrom our members, despite an elevatedclaims environment.
Trade infrastructure, trade barriers and political risksTaking a step back for a moment to assume amore external view, there is a correspondingmix of positive and negative factors at play.
With respect to trade, at least, the bankingindustry and broader infrastructure forinternational finance is in a fairly robust stateat present and there is generally goodavailability of funding.
Some new markets have opened (or re-opened, rather) and many of us have beenlooking with interest at opportunities arisingfrom renewed access to economies likeArgentina and Iran.
Welcome news in banking regulation hasseen (some) ECA-supported transactionsgranted an exemption to the Basel-mandatedLeverage Ratio and positive steps at TheInternational Working Group on ExportCredits are moving us at least a few smallsteps closer to establishing a set of universalguidelines for export credits, beyond theOECD framework.10
Despite this, however, there are a numberof real and concerning barriers to trade whichgive us pause:
Political shocks, leadership changes andthe emerging threat of nationalisticprotectionist forces in several countries allpresent significant challenges for harmoniousinternational trade.
Iran’s reintegration into the global tradesystem has faltered due to uncertaintysurrounding remaining sanctions. As well asthis, in some places political risks haveincreased substantially:
Nuclear threat, and the gulf between NorthKorea and the international establishment isas wide and as tense as it has been at anytime since the 1953 armistice; sectarianconflict and terrorism in the Middle East andin Europe disrupt ever more lives, occupygreater resources and feed more headlines.
The degree to which this environmentindicates or produces an increasing demand
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Berne Union 2017: President’s foreword
Prague Club Committeemembers showedparticularly impressivegrowth in 2016, increasingalmost 40% on 2015 levels.
for political risk insurance cover is debatable.As ever there is a delicate balance betweenthe forces driving demand and those settingcapacity.
Despite these challenges, most BerneUnion members have been relativelyoptimistic about the near future; a sentimentunderpinned by the early figures we haveseen, outlined above. Indeed, ours is anindustry which is more resilient than most
and while there is currently a lot ofuncertainty, the value of credit insurance in anuncertain environment is well understood.
Perhaps one of the most telling indicatorsof the health of our industry – and theimportance of credit and investmentinsurance in the current environment – is thenumber of governments and institutionscurrently expanding or setting up new exportcredit facilities. In the past year, The BerneUnion’s Prague Club Committee (ourseedbed for nurturing smaller and emergingexport credit insurers) has accepted threenew applicants and granted guest status to afurther two institutions just on the cusp ofestablishing their export credit business.11
Bringing together this global network ofindustry practitioners is the raison d’être ofthe Berne Union, and the more we invest inthe collective understanding of the industry,the more resourceful we all ultimatelybecome.
Advances in technologyGlobal partnerships and knowledge sharingmake more sense now than ever. Theunprecedented pace of technological changeand the immediate impact of this oneverything from high-level business practiceto the behaviour and expectations of end-consumers, have a huge impact on trade.
Digitisation, fintech, insure-tech,
blockchain etc. are both exciting and taxingat the same time. As we are now beginning tosee global banks and the biggest financialinstitutions stepping in to take the lead ondevelopment of these technologies in aserious way, it is clear that the so-called‘disruptive’ trends are now very much in themainstream; setting a standard for the futureof all of our businesses.
As ever, there is a need to keep up with thecurve and a great opportunity to improvebusiness flow and efficiency through some ofthese developments, but also a seriouschallenge – such changes come withconsiderable costs in terms of time, moneyand other resources and it is important toensure these investments achieve theirobjectives.
The inextricable symbiosis of trade andtechnology also brings other risks. Cybersecurity may well turn out to be the supremechallenge of our times and one we must takeserious heed of, both as insurers of trade riskand as financial institutions ourselves. Asbusiness leaders, even as we look to thefuture, we must also be prepared for thepresent.
Creative approaches to supporting SMEsWith its adroitness for efficiency and cost-reduction, one of the challenges this kind ofnew technology is set to tackle is the market-gap facing smaller business who, in aglobalised world, often find themselvescaught between the need to expandexternally, to export and to trade on globalhorizons, and a paucity of finance in anenvironment where exigent compliance andnarrow margins make small transactionsunprofitable for lenders.
Providing better support for SMEs is acritical objective of many Berne Unionmembers, especially those with a mandate tofill market gaps, and several colleagues havecontributed thoughtful essays on the subjectwithin this publication.
New technology certainly helps improveefficiency, and there is some great progressbeing made in this area. But it is also importantthat we find new ways of working. To betterunderstand and better serve these clients wemust first educate them to better understandus, and the environment they compete in.
Many ECAs are now actively originatingbusiness – stepping in to cover the gaps infinancial infrastructure which are usuallydenied to these sorts of clients.
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Some new markets haveopened (or re-opened,rather) and many of us havebeen looking with interestat opportunities arisingfrom renewed access toeconomies like Argentinaand Iran.
Direct lending is one way to circumventthe challenge for clients beneath thethreshold for reasonably-priced bank finance,and this is an approach taken by more andmore ECAs. For growth-oriented SMEs andmid-cap companies especially, where theinitial financing stage is so important to theirdevelopment, this can provide an essentiallife-blood.
Expedited applications, flexible riskpolicies, automatic claims processing andintegrated products are amongst othercreative solutions Berne Union members have
been implementing.The ultimate goal and the likely future of
service to these sorts of clients is to becomea genuine ‘one-stop-shop’ for all theirexporting needs – bringing together thevarious moving parts and demystifying thecomplexities of international trade.
Berne Union projects These are all important subjects for the BerneUnion. Through our meetings, webinars,publications and specialist working groups,we continue to apply our collective effortstowards tackling the biggest issues in tradefinance and at the same time, improvingaccess to knowledge and understanding ofthe industry.
Through the course of the past year theBerne Union has been pursuing a number ofsubstantial initiatives several of which arealready bearing significant fruit.
Getting the data rightData reform – an on-going BU project for anumber of years – has gained newmomentum under the direction of a specialistData Task Force, established towards the endof 2016.
The objective of the Task Force has beento improve the detail, quality, consistency andutility of Berne Union data, withoutsignificantly increasing the reporting burdenfor members.
Industry sector reporting will introduce afiner grain of detail and add depth to ouranalysis of data. By recognising andaccommodating the divergence betweenreal-world business lines and the artificialstructure of the Berne Union committees, weshould be able to present a better overallpicture of the industry and the business ourmembers are involved in.
This is a huge undertaking, presentingboth technical and pragmatic challenges:refining definitions, database structuring andsurveying the capability of members toaccurately capture and report the informationrequested. The progress we have made todate has been excellent and would simply notbe possible without the great effort anddedication of both members and theSecretariat – to whom I offer thanks andwarm congratulations.
There is still much work to be done in thisarea, but a proposed structure is ready to bepresented to the members for approval atour 2017 Belgrade AGM, and we expect tobegin reporting under the new scheme for alldata from 2018 onwards.
CommunicationsImprovements to our data are of courseincredibly valuable for Berne Union membersdirectly, but they also add extra colour andcredibility to our external communications –another area which has benefitted from highenergy and increased activity over the pastyear.
A project commenced within theSecretariat last year to improve ourcommunications strategy and to engagemore directly and more regularly with thewider industry. This has produced a numberof positive outcomes so far, including theestablishment of a regular Berne Unionnewsletter, the ‘BUlletin’, and the launchseveral months ago, of a brand-newassociation website.
The BUlletin, we hope, provides a hithertoabsent ‘voice for the industry’, providing afocal point to channel the expertise of ourmembers, share insights from Berne Uniondata, and present up to date research onimportant topics for the industry.
For a collective of 82 member companiesfrom 73 different countries across the globe,
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Berne Union 2017: President’s foreword
Bringing together thisglobal network of industrypractitioners is the raisond’être of the Berne Union,and the more we invest inthe collectiveunderstanding of theindustry, the moreresourceful we allultimately become.
the Berne Union has up until now existed witha quite minimalistic online infrastructure –perhaps it is a testament to the quality of ourmeetings that face-to-face communicationhas sufficed for so long! In any case, the trendof digitisation has not passed the BerneUnion by, and as of August 2017 we launchedour new online web platform, combining ourmembers only intranet with a revised externalwebsite.
The new BU web platform is both a tool ofconvenience and an instrument ofopportunity: a more accessible (mobilefriendly!) website makes collecting anddistributing information or organisingmeetings much easier, and at the same time,the ability to connect and collaborate withgeographically dispersed colleagues makesfor more fruitful and more efficientengagement.
We will continue to work to develop andfurther improve upon all of these initiatives.The endless objective is to reflect thecommunity and spirit of the Berne Union inall of our output.
Future plansNext year, the Secretariat will relocate to newserviced office space in London. The physicalrelocation itself will be the end of a lengthyprocess of research and deliberation, duringwhich we carefully considered the suitability ofa number of potential European domiciles. Forthe time being, London still offers the mostsuitable accessibility for both travel andemployment, but we are conscious that theunknown outcomes of Brexit may have a greatbearing on this in future. The shorter leaseterms standard in fully-serviced contracts allowus the flexibility to reconsider this decision indue course, when the facts become clearer.
Since March this year, the Secretariat hasbeen operating under the able direction of anew Secretary General, Vinco David. Vincowas previously the Chair of the INVCommittee, and has been an activeparticipate of the Berne Union for manyyears. Along with Vinco, I would like to giverecognition to the whole Secretariat team,who together are the embodiment of theBerne Union ethos: Associate Directors,Laszlo Varnai, Johannes Schmidt and PaulHeaney and Team Assistant Nicole Cherry. AsPresident, and indeed as a Member, I amdeeply grateful to all of these colleagues, andall others who support our Berne Unionfamily with great work and dedication.
We have seen a number of personnel
changes at the Berne Union in the past yearand I would like to also take this opportunityto pay tribute to some of those who haveworked towards building, improving andmaintaining our rich and unique association:
To Michal Ron, my Vice-President until lastyear – an exceptionally strong leader whotogether with my predecessor Daniel Riordaninitiated the reforms we are currentlyenjoying and who led the negotiations for ourgovernance reform; to Kai Preugschat, who inhis two years as Secretary General, recruitedthe current highly motivated and professionalsecretariat team, and who put the wheels inmotion to get our many initiatives to come tofruition; to Laura Lind whose positive energyand tenacity imbued the Secretariat teamand MLT committee with a great vitality; toElla Szukielowicz-Lindon, whose skill anddedication made possible the smoothintegration of the Prague Club; and toMassimo Sarti, without whom the data reformproject would never have gotten off theground – indeed to all of the elected officials,management committee, secretariat andactive members for helping to make theBerne Union special – thank you!
So, as we head into another year, there willbe new offices, new websites and some newfaces, but the same Berne Union. I hope youenjoy the commentary from my colleagues inthe coming pages and look forward to theview we see in the year ahead. ■
Notes1 MLT volumes have been declining fairly consistently
since a peak in 20112 According to WTO figures, total value of cross-
border trade for goods and services in 2016 was$-16.94 trillion. Since these WTO figures includeintra-company trade (which is uninsurable) the % ofcross-border trade for which relevant credit risks arecovered by Berne Union members is in factconsiderably higher
3 Figures quoted for 2017 are provisional4 Strong pipelines from several members could push
final figures well beyond this5 2016 cover provided reported by the INV
Committee was $112 billion – a record year, and 20%higher than in 2015
6 The same business is reported by ECAs in the MLTcommittee
7 In context, 2016 showed the highest INV claims inthe past 5 years - almost double any previous
8 With MLT claims occurring on average 5 years intothe tenor of a given transaction, volumes over shorterperiods of time can appear relatively high, or low
9 Historically, the ratio of commercial to politicalclaims paid is usually closer to 50%
10 The work of the IWG is especially crucial when onerealises that almost 2/3 of all ECA financing iscurrently conducted outside of the OECDFramework.
11 BANDEX (Dominican Republic); IE Singapore,ECGC Zimbabwe; AgeRE (Mongolia) and EXIMBP(Pakistan)
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The export credit andinvestment insuranceindustry is currently ina rather healthy state,both for private andpublic suppliers ofcover. However, thereare a number of risksthat could change thisbenign situation.These risks are
clustered around three themes: premiumlevels, claims and regulation.
Positive results for 2016But first the good news. 2016 was a positiveyear for most insurers. Business levelsincreased slightly to $1.87 trillion of insuredexports and foreign investments (includingguarantees and direct lending from a numberof ECAs – export credit agencies). BerneUnion members continue to provide supportfor a significant proportion of world crossborder trade: 11%, benchmarked against the$16.9 trillion figure recorded by the WTO for2016.
Applying a more fine-grained examinationhowever, we can observe some variation intrends between the different categories ofinsurers.
New trade-related business for 2016 wasmade up $1.63 trillion in short-term (ST)export credit insurance and $134 billion inmedium and long-term (MLT) cover providedby official ECAs. Private members insuringmedium and long-term exports and stateobligations reported $25.5 billion in new
business. Insured foreign investments from allBerne Union members meanwhile rose to $69billion.
On the one hand, private insurers of tradecredit and political risk insurance were able toexpand the volume of their business toalmost $1 trillion – approximately 9% higherthan in 2015 and accounting for the first timefor more than 50% of total Berne Unionbusiness. Public insurers of short term tradecredit, medium/long term export credit andforeign investments, meanwhile, generallysaw a small decline in volumes covered.However, at $900 billion, this total volume for2016 is still a strong figure, and a positiveindicator of a healthy industry.
Claims trendsClaims payments decreased in 2016,compared to the previous year. In 2015 thetotal volume of claims paid as a result ofinsolvency or political events was $6 billion:last year this figure was half a billion less.While this is a positive adjustment, it shouldbe noted that, in context, these figures arestill high – comparable in fact, to the levelsseen in 2009, at the depth of the credit crisis.This leads to some observations about therisks the industry is facing at the moment.
Premium levels compared to claimsPremium levels in the private market arehistorically relatively low, both for short termbusiness and for medium/long term creditand investment business. This is largely dueto strong competition between privateproviders of cover.
16
Berne Union 2017
SG’s report: threechallenges for export creditand investment insuranceBy Vinco David, secretary general, Berne Union.
Premium levels in the private market are historicallyrelatively low, both for short term business and formedium/long term credit and investment business. Thisis largely due to strong competition between privateproviders of cover.
Vinco David
In the short term area this is mainly seen incompetition between the world’s threelargest providers: Euler Hermes, Atradius andCoface, although other private or semi-private insurers also participate.
In the medium/long term credit andinvestment insurance area we have seen alarge increase of capacity over the last fewyears, while demand has remained stable.There are currently about 60 providers of thistype of insurance worldwide. Although thisbusiness has certainly proved to be profitableover the last few years, one can doubtwhether this is the main reason for growingmarket participation from both insurers andother capital market investors. Due to thesustained low interest rates for currenciessuch as the US Dollar and the Euro, investorsare looking for investments with higherreturns and one option is, indeed, credit andinvestment insurance.
We can see, then, that it is mainly driversfrom the supply side keeping premium levelsdepressed and once interest rates start toincrease one can expect the supply ofcapacity to wane, which may eventually leadto an increase in premium levels.
Figure 4. shows the total reportedpremium income for private members of theBerne Union (for both credit and investmentinsurance) between 2005 and 2016, alongsideclaims paid for the same period.
From the graph we can see that totalpremium income for this business hasdeclined almost 17% between 2011 and 2015.2016 figures suggest a stabilisation ofpremium income, but with claims peakingagain, the loss ratio for ST business followssuit; current indications put this at around43%.
While this data only represents a subset ofBerne Union members – and does nottherefore give a complete picture of absolutevolumes – it is illustrative of the general trendtowards softer pricing in the private market.
Figure 5. shows the average pricing –calculated as premium income / exposure –for each reporting line within the BerneUnion. In this graphic, INVS designates coverfor sovereign obligors, while INVO representscredit cover for other private buyers. ST andINVI are the short term credit and investmentinsurance lines described above.
This illustration confirms the observationthat it is pressure from the supply side drivingdown premium income, through pricingcompetition, rather than falling volumes ofbusiness.
17
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Figure 1
Berne Union figures on new business are seen to track trends in overall volumes of worldtrade and are regularly benchmarked against WTO figures. Comparing the two graphsalso shows the resilience of credit insurance and the tendency for insured volumes to fall less sharply than the overall economy – demonstrating the counter-cyclical function ofthe industry.
Figure 2
Figure 3
Berne Union New Business & World Exports 2006 – 2016
Berne Union New Business Private &Public 2006 – 2016
Berne Union Global Claims Paid 2005 – 2016
BU New business(USD billions)
World Exports (USD billions)
(USD billions)
(USD billions)
Claims levels The industry is currently profitable becauseclaims levels are under control. For thebusiness as a whole, average loss ratios arestable at around 30%, keeping risks
manageable and appetite high. However, as wehave seen above, strong competition and theresulting soft market (for private insurers) hasthe potential to disrupt one side of thisequation and the current, relatively benign,situation may change if high volumes of claimsremain sustained. If premium levels continue tofall, as claims rise, the resulting situation wouldnot be financially sustainable for insurers.
We have seen this situation before, i.e.during the credit crisis from 2008 andalthough a new crisis is not expected, claimspayments have been markedly high in both2015 and 2016. Indeed, combined claimsreported by Berne Union members across alllines of business – including both privateinsurers and ECAs – are higher for theseyears than at any time since 2009, as shownin the graph above.
Due to the relatively low prices of almostall commodities on the world market over thepast few years, countries in Africa and LatinAmerica, dependent on those commodityexports, are especially at risk. This situationhas a negative impact both on companiesactive in these sectors, as well as on theeconomies of these countries as a whole.Indeed, the top country for claims in 2016was Brazil, where Berne Union members paida total of $860 million in claims last year –around 16% of all claims paid worldwide.
Figure 6. also neatly illustrates this trend,with claims in the Americas showing highgrowth in 2016, especially for MLT business,which is generally speaking more closelycorrelated with the economic health ofemerging markets.
But there are of course also risks in highincome countries and despite a mildeconomic pick-up at the moment, claims hereare still significant. The agenda of the USadministration and Brexit will certainly impactinternational trade flows, but to what extentand in which sectors is not yet known.
These lead to the third theme: regulation.
RegulationTrade barriers have never been good fortrade. There is an abundance of evidencethat, on its turn, international trade is goodfor prosperity. Self-evident as this may sound,not all politicians enshrine this ideal in theirpolicies and calls for protection of nationalindustries are common these days. Whilethere are sometimes good reasons totemporarily protect selective nationalindustries in their cradle phase; or a verylimited number of industries deemed as
18
Berne Union 2017
Figure 4
Figure 5
* Average pricing is calculated as premium income / exposure
Figure 6
strategic for a particular country; in general,protectionist measures eventually lead to adecline in productivity.
Typically, these kind of political measuresrather lead to a misallocation of resourcesand ultimately harm the competitiveness ofthose industries they sought to protect. Goodexamples are the US shipbuilding industry orthe so-called ‘zombie companies’ in China.But also, of course, exporters to countriesthat build trade barriers are affected. If, forexample, the US administration wouldimplement trade barriers, then certainlycountries like Mexico and Vietnam will feelthe impact, given the large proportion of theirexports bound to the US.
Worryingly, the number of calls forprotectionist measures has increased of late,and notably in high income countries wherepreviously such sentiments have been ratherexceptional.
As said, protectionism is not good fortrade, and hence not good for export creditand investment insurers. Cross-border trademay decrease, impacting on the topline ofinsurers. But it may also lead to a riskierenvironment with more insolvencies. Thereare at the moment no signs yet that this isalready happening, but this is certainly adevelopment for our members to monitor.
Another area of regulation relevant to ourindustry is that of banks. Banks are essentialfor the financing of trade and exports, and forproviding working capital to exporters andtheir suppliers.
For very good reasons, this bankregulation – now Basel III (some say Basel IV)and its implementation at national or regionallevel – has become stricter, partly as aconsequence of the credit crisis. Banks havebecome better capitalised and in general thisis a good thing. But implementing theseregulatory measures with a broad brushcould lead to less capital being available forthe financing of export and trade. That would,obviously, not be a good thing for export andtrade, and thus, eventually, for prosperity and,more mundane, the topline of credit insurers.
Banks, in particular European banks, haveto some extent – and with support of theBerne Union – been able to demonstrate toregulators that the financing of export andtrade is not such a risky business at all;certainly if covered by (public) insurers. TheEuropean Commission, for example, hasrecently launched a proposal for theimplementation of Basel III whereby thefinancing of trade and export covered by
public insurers will attract lower capitalrequirements than originally proposed. This isa laudable development, but may not tackleall areas of insured export and tradefinancing. It is primarily up to the banks – asthe institutions that are regulated – to seewhether a broader capital relief is needed tofully continue financing trade and export, butas insurers of trade, members of the BerneUnion continue to stand behind the risktransfer products they provide.
On a more positive note: in the course oftackling these regulatory challenges, bankshave become more aware of the positiveimpact credit insurance can have on theirbalance sheets – not only for capitalrequirements reasons, but also by enablingthem to better manage their aggregates.
In summaryThe export credit and investment insuranceindustry has recovered remarkably well afterthe global credit crisis. It is currentlyreasonably profitable, largely due to the factthat claims are under control. But this maychange if claims were to continue at elevatedlevels for longer periods. Claims levels can beexpected to rise if commodity prices remainlow (affecting commodity exportingcountries) and if more trade barriers are putup, affecting countries with large exports tocountries implementing these protectionistmeasures.
Stricter bank regulation, too, can impacttrade and, hence, the results of our industry.However, both exporters and members of theBerne Union have shown quite someresilience and adaptability to a changingenvironment and despite these challenges,there are compelling reasons for an optimisticperspective on the future of the industry. ■
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We can see, then, that it ismainly drivers from thesupply side keepingpremium levels depressedand once interest ratesstart to increase one canexpect the supply ofcapacity to wane, whichmay eventually lead to anincrease in premium levels.
Berne Union 2017
Berne Union 2017
2Data and Statistics
22
Berne Union 2017
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2012 2013 2014 2015 2016
US
D m
illio
n
2,000,000
2,500,000
1,000,000
1,500,000noillm
iS
DU
500,000
1,000,000
0
2012 2013
2014 2015
2015 2016
New Business – during each year
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2012 2013 2014 2015 2016
US
D m
illio
n
2,000,000
2,500,000
1,000,000
1,500,000noillm
iS
DU
500,000
1,000,000
0
2012 2013
2014 2015
2015 2016
Exposure – at year end
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2012 2013 2014 2015 2016
US
D m
illio
n
6,000
7,000
3,000
4,000
5,000
noillm
iS
DU
1,000
2,000
0
2012 2013
2014 2015
2015 2016
Claims Paid – during each year
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2012 2013 2014 2015 2016
US
D m
illio
n
6,000
7,000
3,000
4,000
5,000
noillm
iS
DU
1,000
2,000
0
2012 2013
2014 2015
2015 2016
Recoveries – during each year
0
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
1,750,000
2012 2013 2014 2015 2016
US
D m
illio
n
1,500,000
1,750,000
750,000
1,000,000
1,250,000
noillm
iS
DU
250,000
500,000
750,000
0
250,000
2012 2013
2014
2015 2016
ST New Business – insured during each year
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2012 2013 2014 2015 2016
US
D m
illio
n
1,200,000
1,000,000
1,200,000
600,000
800,000
noillm
iS
DU
200,000
400,000
0
2012
2013 2014
2014 2015
2016
ST Credit limits – at year end
Berne Union: Short-Term Export Credit Insurance
Berne Union: TotalsKey■ PCC – Prague Club Committee■ INV – Investment Insurance
■ MLT – Medium/Long Term Export Credit Insurance■ ST – Short Term Export Credit Insurance
23
DA
TA A
ND
STA
TIS
TIC
SBerne Union 2017
0
500
1,000
1,500
2,000
2,500
3,000
2012 2013 2014 2015 2016
US
D m
illio
n
3,000
2,500
3,000
1,500
2,000
noillm
iS
DU
500
1,000
02012
2012 2013
2014
2015 2016
ST Claims Paid – during each year
0
100
200
300
400
500
600
2012 2013 2014 2015 2016
US
D m
illio
n
600
500
300
400
noillm
iS
DU
100
200
02012
2012 2013
2014
2015 2016
ST Recoveries – during each year
UNITED STATES
GERMANY
UNITED KINGDOM
FRANCE
ITALY
CHINA
SPAIN
NETHERLANDS
SWITZERLAND
BELGIUM
Other
TES
GERMANY
AATUNITED STTA
GERMANY
UNITED KINGDOM
Other
KINGDOM
FRANCE
Y
CHINA
ALLYITTA
BELGIUM
NETHERLANDS
CHINA
AINSPPA
SWITZERLAND
BELGIUM BELGIUM BELGIUM
ST Credit Exposure Paid 2016: Top 10 countries
UNITED STATES
BRAZIL
UAE
SPAIN
RUSSIA
INDIA
HONG KONG
CHINA ITALY
AUSTRALIA
Other
TESAATUNITED STTA
BRAZIL
Other
AE
AIN
U
SPPA
CHINA
ONG
RUSSIA
INDIA
HONG KO
CHINA YALLYITTA
USTRALIA A
ST Claims Paid 2016: Top 10 countries
UNITED STATES
BRAZIL
SINGAPORE
RUSSIA
ITALY
INDONESIA
VENEZUELA IRAQ
GERMANY
INDIA
Other
TES
BRAZIL
AATUNITED STTA
BRAZIL
Other
SINGAPORE
RUSSIA
Y
INDONESIA
ALLYITTA
INDIA
VENEZUELA Q
GERMANY
IRA
INDIA
ST Claims Recoveries 2016: Top 10 countries
24
Berne Union 2017
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2011 2012 2013 2014 2015 2016
US
D m
illio
n
Corporates Sovereign Other Public
Projects Banks Unspecified
160,000
180,000
200,000
80,000
100,000
120,000
140,000
noillm
iS
DU
0
20,000
40,000
60,000
0
2011
orpoC
ctejPro
2011 2012
setrao So
sct Ba
2013 2014
ngireveSo
ksnBa
2015 2016
cilbPur ehtO
dfieciespnU
2016
MLT New Business – insured during each year
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
2012 2013 2014 2015 2016
p y
Commitments -Before Reinsurance
Lending (Total Exposure)
700,000
pp y
400,000
500,000
600,000
200,000
300,000
400,000
0
100,000
2012 2012 2013 2014 2015 2015 2016
Commitments -BefCommitments
ance ore ReinsurefootalLending (TTootal Exposure)
MLT Exposure – at year end
UNITED STATES
ANGOLA
EGYPT
UNITED KINGDOM
QATAR
RUSSIA
OMAN
CHINA
INDONESIA KENYA
Other
TESAATUNITED STTA
ANGOLA
Other
UNITED KINGDOM
ANGOLA
EGYPT
UNITED KINGDOM
RUSSIA
OMAN
AR
RUSSIA
TTAQAAT
CHINA
INDONESIA AKENYYA
MLT New Business 2016: Top 10 countries
UNITED STATES
RUSSIA
TURKEY
SAUDI ARABIA
BRAZIL
UNITED KINGDOM
ANGOLA
INDIA
VIET NAM
CHINA
Other
TES
RUSSIA
AATUNITED STTA
ARABIA
RUSSIA
TURKEY
UDI SA ARABIA
UNITED KINGDOM
ARABIA
BRAZIL
UNITED KINGDOM
ANGOLA
UDI SA ARABIA
Other Other
VIET NAM
INDIA
CHINA
MLT Exposure 2016: Top 10 countries
Berne Union: Medium/Long-Term Export CreditInsurance and Lending
Commitments -Before Reinsurance Commitments -BefCommitments
ance ore ReinsureffoLending (Total Exposure) otalLending (TTootal Exposure)
25
DA
TA A
ND
STA
TIS
TIC
SBerne Union 2017
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2012 2013 2014 2015 2016
US
D m
illio
n
Political Risk Commercial Risk NPL
3,500
2,500
3,000
1,500
2,000noillm
iS
DU
500
1,000
02012
Po
2012 2013
skiRlcaitilPo
2014
skiRlarcimmeoC
2015 2016
PLN
MLT Claims Paid – during each year
0
1,000
2,000
3,000
4,000
5,000
6,000
2012 2013 2014 2015 2016
US
D m
illio
n
Political Risk Commercial Risk Lending
6,000
4,000
5,000
2,000
3,000noill
mi
SD
U
0
1,000
2,000
02012
Po
2012 2013
skiRlcaitil C
2014
skiRlarcimmeoC
2015 2016
Lending
MLT Recoveries – during each year
BRAZIL
RUSSIA
SPAIN
UKRAINE BERMUDA
IRAN
UNITED STATES
MEXICO
GERMANY
SLOVAKIA
Other Other
BRAZIL BRAZIL
AKIAVVASLO
RUSSIA
GERMANY
MEXICO
BERMUD
IRAN
UNITED
MEXICO
TESAATSTTA
UKRAINE A BERMUD
AINSPPA
MLT Claims Paid 2016: Top 10 countries
IRAN
RUSSIA
EGYPT
ARGENTINA
INDONESIA
IRAQ
PAKISTAN
CUBA
LIBYA
SERBIA Other
AN AKISTTAPPA
A CUB
ALIBYYA
SERBIA
A
Other SERBIA
IRAN
INDONESIA
Q IRA
INDONESIA
ARGENTINA
EGYPT
ARGENTINA
RUSSIA RUSSIA
MLT Recoveries 2016: Top 10 countries
26
Berne Union 2017
0
25,000
50,000
75,000
100,000
125,000
2012 2013 2014 2015 2016
US
D m
illio
n
INVI INVS INVO
125,000
100,000
125,000
75,000
noillm
iS
DU
25,000
50,000
02012
2012 2013
INVI
2014 2015
INVI INVS O INV
2015 2016
INV New Business - insured during each year
0
50,000
100,000
150,000
200,000
250,000
300,000
2012 2013 2014 2015 2016
US
D m
illio
n
INVI INS INVO
300,000
250,000
300,000
150,000
200,000
noillm
iS
DU
50,000
100,000
02012
2012 2013
INVI
2014
INVI INS O INV
2015 2016
INV Exposure - at year end
KAZAKHSTAN
UNITED STATES
INDONESIA
CHINA
TURKEY
UZBEKISTAN
RUSSIA
BRAZIL
EGYPT
VIET NAM
Other
AN
UNITED ST
KAZAKHSTTA
TES AATD STTA
Other
INDONESIA
CHINA
TURKEY
BRAZIL
EGYPT
AN
RUSSIA
BRAZIL
UZBEKISTTA
VIET NAM
INV New Business 2016: Top 10 countries
CHINA
RUSSIA
UNITED STATES
BRAZIL
VIET NAM
KAZAKHSTAN
INDIA
INDONESIA TURKEY
MEXICO
Other
CHINA
RUSSIA RUSSIA
Other
UNITED ST TES
BRAZIL
VIET NAM
AATNITED STTA
TURKEY INDONESIA
AN
INDIA
KAZAKHSTTA
MEXICO
INV Exposure 2016: Top 10 countries
Berne Union: Investment Insurance
INVI INVS INVO INVI INVI INVS O INV INVI INVS INVO INVI INVI INVS O INV
27
DA
TA A
ND
STA
TIS
TIC
SBerne Union 2017
0
50
100
150
200
250
300
2012 2013 2014 2015 2016
US
D m
illio
n
Transfer Political Violence Expropriation etc
Breach of Contract Unspecified
200
250
300
100
150
200
noillm
iS
DU
0
50
2012
2012 2013
2014 2015
2015 2016
resfnraT
ochaBre
r tilPo
ctratnoCfo spnU
ceneloiVlcait Exp
dfieciesp
ctenoitariproExp
INV Claims paid – during each year
0
25
50
75
100
125
2012 2013 2014 2015 2016
US
D m
illio
n
Transfer Political Violence Expropriation etc
Breach of Contract Unspecified
125
75
100
50
75noillm
iS
DU
0
25
2012
2012 2013
2014 2015
2015 2016
resfnraT
fochaBre
itilPo
ctratnoCf spnU
ceneloiVlca Exp
dfieciesp
ctenoitariproExp
INV Recoveries – during each year
INDIA
SPAIN
BRAZIL
INDONESIA
UKRAINE
AUSTRALIA
RUSSIA
TANZANIA
MOROCCO
MEXICO
Other Other INDIA
ANZANIA
OCCO
MEXICO
TTA
MOR
ANZANIA
OCCO
MEXICO
AINSPPA
A
RUSSIA
INDONESIA
UKRAINE
USTRALIA
RUSSIA
A
BRAZIL
INDONESIA
INV Claims Paid 2016: Top 10 countries
PHILIPPINES
SERBIA
CUBA
BRAZIL
CHILE Other
BRAZIL
CHILE Other Other
A CUB
PHILIPPINES
SERBIA SERBIA
PHILIPPINES
INV Recoveries 2016: Top 5 countries
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0
10,000
20,000
30,000
40,000
2012 2013 2014 2015 2016
US
D m
illio
n
40,000
30,000
40,000
20,000
noillm
iS
DU
10,000
02012
2012 2013
2014 2015
2015 2016
PCC New Business - insured during each year
0
10,000
20,000
30,000
2012 2013 2014 2015 2016
US
D m
illio
n
30,000
30,000
20,000
noillm
iS
DU
10,000
02012
2012 2013
2014
2015 2016
PCC Exposures – at year end
PCC Claims Paid - during each year PCC Recoveries - during each year
Berne Union: Prague Club Committee
Key■ MLT – Medium/Long Term Export Credit Insurance■ ST – Short Term Export Credit Insurance
0.0
100.0
200.0
300.0
400.0
500.0
2012 2013 2014 2015 2016
US
D m
illio
n
500.0
400.0
200.0
300.0
noillm
iS
DU
100.0
0.02012
2012 2013
2014 2015
2015 2016
0.0
20.0
40.0
60.0
80.0
2012 2013 2014 2015 2016
US
D m
illio
n
80.0
60.0
20.0
40.0
noillm
iS
DU
0.0
20.0
2012
2012 2013
2014 2015
2015 2016
2016 was a year marked by anumber of major political andeconomic events. Lowcommodity prices (especiallyrecord low oil), political shifts(Brexit, US elections,impeachment in Brazil) andcurrency volatility in bothdeveloped and developingcountries have all left theirmark on world trade. Globaltrade recorded its lowestvolume growth rate in the last decade (just 1.3%) –well below the 4.7% average since 1980, withmerchandise trade reachingjust $15,284 billion.
And yet, even in such a challengingenvironment, following a general decline in2015, Berne Union Members grew theirbusiness again in 2016; supporting trade andinvestment of $1,919 billion – an increase ofmore than 3% compared to their 2015performance.
This improvement was mainly on accountof increasing business underwritten bymembers of the Short-term Export CreditInsurance (ST) and Investment Insurance(INV) Committees, as well as the short and
medium term trade credit insurance coverprovided by Prague Club (PC) CommitteeMembers, for trade between and projects indeveloping countries. Medium/Long-TermBusiness of the ECA members of the MLTcommittee, on the other hand, bucked thenew upward trend, as it continued pattern ofdecline set in previous years.
The aggregated figures of new businesscovered give an indication of the broadtrends in the activity of Berne Unionmembers within each reporting committeeover the course of 2016:
■ The value of cross border tradesupported by short-term trade creditinsurance was $1,634 billion
■ The reported value of new medium andlong-term commitments was $134 billion
■ New investment insured was $113 billion■ Prague Club Members reported $38
billion new cover issued
Berne Union Members collectively paid $6.5billion claims in 2016 – a historically highfigure, and a 4% increase over 2015. At thesame time, this was matched by $6 billionrecoveries collected – a significantimprovement, and more than double theresult for 2015.
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Even in such a challenging environment, following a generaldecline in 2015, Berne Union Members grew their businessagain in 2016; supporting trade and investment of $1,919billion – an increase of more than 3% compared to their 2015 performance.
Review of a year fullof unexpected turnsBy Laszlo Varnai, associate director, Berne Union and Paul Heaney, associate director, Berne Union
Berne Union 2017
Làszlò Varnai
Paul Heaney
Short-term Export credit insurance businessShort-term business represents insurance ofexports with repayment terms of less thanone year – often 30, 60 or 90 days. Thesetransactions typically relate to shipments ofconsumer goods, with the movements ofshort-term export credit insurance are closelylinked with the ups and downs of the broaderglobal economic environment.
Short-term export credit businesscontinues to be the dominant activityreported by Berne Union members, generallyaccounting for more than two thirds ofoverall volumes of new business. As such,changes within the short-term figures havethe largest impact on aggregated totals, andtaken alone, most accurately reflect theresponse to global, regional or domesticevents.
With this in mind, it is encouraging to seethe volume of short-term cross border tradeunder cover returning to growth, and at$1,634 billion, a positive increase of 3% over2015’s drop. Recorded ‘commitmentsoutstanding’ – an indication of the riskappetite of members – followed the samepositive trend as for new commitments, risingback to over $1,007 billion.
The majority of growth seen relates to credit limits approved for American and European buyers, with increases of $4 billion and $12 billion respectively. 73% of credit limits were issued by privateMembers and 27% shared among ECAs and multilaterals.
These positive changes seen in volumes ofbusiness supported and commitments in thepast year give an encouraging indication ofimprovements in existing members’ business.The figures have also benefitted from theaddition of four new and very dynamicMembers of the Committee: CHUBB,LIBERTY, PICC and XL CATLIN.
Berne Union Members indemnifiedexporters for defaults on their tradereceivables up to $2.8 billion in 2016; a 7.7%increase on 2015 levels. At the same time, theoverall default to turnover ratio (0.17%) aswell as claims to exposure ratio (0.28%)remained low. In 2016, the highest volumes ofshort-term claims were paid for buyerslocated in the United States ($311 million),Brazil ($253 million), UAE ($125 million),Spain ($107 million) and Russia ($104.8million).
Recoveries on outstanding claims
remained stable at around $400 million,similar to the pattern of the last five years,and very evenly distributed amongst buyercountries.
Despite these dynamic business trends,pressure on premium levels has remainedintense: Overall premium income reported at2016 year-end decreased by $24 million to$3,434 million. Thus, the average premium toturnover ratio decreased from 0.218% to
0.21%, and the premium to exposure ratiofrom 0.351% to 0.341%.
There are indications that these low ratesof premium income are beginning to putpressure on capital and reserves as well. Theloss ratio1 grew from 74.7% in 2015 to 81% in2016. This is barely balanced by the highrecoveries for an adjusted loss ratio2 of 72.7%(a significant increase from 67.2% in 2015).These figures confirm the cyclical trend inpricing visible over the last 10 years.
Through the course of 2016, membershave continued to invest in digital solutionsand automation (of underwriting and claimshandling) which will help to boostprofitability by lowering operational costs,resource requirements and administrativeburdens, as well as improving standardisationand accessibility for policyholders.
Further improvement is anticipated withinthis business line over 2017, both in terms ofwritten business and operationaldevelopments.30
Berne Union 2017
The majority (ST) ofgrowth seen relates tocredit limits approved for American andEuropean buyers, withincreases of $4 billion and $12 billionrespectively. 73% of creditlimits were issued byprivate Members and 27%shared among ECAs andmultilaterals.
Medium and long-term Export credit insurance businessMedium and long-term trade and exportfinance has faced a number of significantchallenges over the past year, and these aresimultaneously reflected in the insurance andguarantee market.
The continuous phasing-in of new bankingregulations and the clear interpretation ofthese, has affected both the banks’ appetiteand capacity for new business, as well asdemand for ECA cover of transactions.
The unknown impact of changes to ECApremium guidelines, as well as lengthyprocesses of underwriting (or lack of aquorum in the case of US EXIM), combinedwith fierce competition between exporters insome sectors (e.g. aircraft sector) hasresulted in an overall sluggish market.
The medium and long-term businessstatistics capture export support (insurance,guarantees and lending) provided by officialstate-backed ECAs only, with a year or longertenor.
In 2016, support provided for new exportof capital goods and projects decreased by13.3% (to $133 billion) compared to 2015. Thisis a continuation of a consistent downwardtrend since a peak in 2011. Among thedifferent obligor types, almost all havedecreased within the insurance line, with theexception of project finance transactions,which increased again by 52% to $13 billion,mainly due to new contracts in the oil, gasand energy sectors in the United States,Canada and Uruguay. Overall, the volume ofnew policies issued dropped by 28% to $119billion.
In contrast to the insurance prospects,reported lending activity of ECAs indicated apromising turn, reaching a 4-year high (+38%,$14.6 billion), driven primarily by corporateobligors (84%), with most growth seen inCanada, Chile and Colombia.
Unsurprisingly, given the five-year declinein new business, the portfolio commitmentsof ECAs has begun to shrink, with insuranceand lending together losing 2% in 2016, downto a total outstanding exposure of $645billion. This drop of $12.7 billion occurredmainly in the insurance activity and couldhave been higher still, without the boostprovided by new African commitments. Loanexposures meanwhile decreased by arelatively small $480 million.
The overall level of indemnification byECAs remained similar to 2015 at around $3billion. However the division between political
risk and commercial risk shifted from 49:51 to9:91 ratio, doubling the volume of claims paidfor commercial causes.
The top five countries for claims wastopped by Brazil ($612 million – including alarge claim in telecom sector), followed byRussia ($ 338 million), Spain ($297 million –mainly in the energy sector), Ukraine ($228million) and Bermuda ($160 million).
Comparing year-end recovery volumes,2016 was a great year: ECAs recovered $5.5billion; the highest amount in the last nineyears. Most of the recoveries (91%, $5 billion)were gained from political risk claims paidpreviously, primarily in Iran and Iraq.
Information on offers outstandingindicates quite strong pipelines for 2017,especially in Asia and members have alsoconfirmed that the unusually low level of newcover provided was partially due totransactions concluded but waiting forapproval.
Last but not least, a comment on data: inconsultation with the data experts of BerneUnion Members, we have been engaged overthe past year in a project to revise ourprocess for data collection and reporting.This will improve the accuracy andconsistency of information currently reported,as well as adding further layers of information– such as sectors of exposure – which will infuture provide more a detailed and morecolourful picture of members’ business. Thesechanges are still subject to adoption by theMembership, but will most likely take effectfrom 2018 onwards.
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The unknown impact ofchanges to ECA premiumguidelines, as well aslengthy processes ofunderwriting (or lack of aquorum in the case of USEXIM), combined withfierce competitionbetween exporters insome sectors (e.g. aircraftsector) has resulted in anoverall sluggish market.
Investment insurance and other cross border risk insuranceUnder the INV reporting line, Berne Unionmembers report insurance of overseasinvestments against political risks3, as well asnon-honouring of sovereign obligations4 andall other typical credit insurance protectionagainst political and commercial risks forbonding, untied loans and such.5 Thisincludes medium to long-term trade creditinsurance provided by private insurers.
The overall volume of new cover providedunder INV grew by 20%, reaching an all-timerecord of $113 billion, mainly recorded in thecategories other cross border insurance(INVO) and state obligations (INVS). Thissubstantial increase is partly due to theadditional business reported by newmembers joining the committee6, but wouldhave achieved a not insignificant 7% increase,even without the inclusion of thoseinstitutions.
In 2016, both ECAs and private membersreported significant increases in business inthe INV category, with most new businessunderwritten in Kazakhstan, followed by theUS and Indonesia. Improvement in all linesresulted an 8% increase in the INV portfolio.
Overall, claims paid under INV doubledduring 2016, again resulting an all-time highof $300 million. Of this $254 million wasrecorded in the ‘other cross-border insurance’(INVO) category, with the largest claims paidin India, Spain and Brazil.
Recoveries followed suit, primarily relatingto investments recovered after wrongfulexpropriations in the Philippines.7
Looking in more detail at the differentinsurance categories within INV:
Investment insurance (INVI) coverprovided showed a very minor decline in totalvolumes for all regions with the exception ofAfrica which is booming at $14.8 billion newbusiness – launching it past Europe to sit asthe second highest region for new business,behind Asia. This unprecedented demand(+48% in African business), meant that INVI
ended the year the year with $69 billionworth new policies globally (+4%). Othergrowth areas include oil and gas projects inRussia and Egypt.
Portfolio exposure for the INVI categoryfollowed the lead of new business, ending2016 at $145 billion. The largest exposureremains in China ($17 billion), Russia ($15billion) and Kazakhstan ($9.7 billion).
At just $17 million, claims paid in thiscategory in 2016 were actually considerablylower than a year before (-78%). Theseoccurred as a result of expropriation(Venezuela) and political violence (Libya). Asmentioned above, the only noteworthyrecovery came from the Philippines ($37million) after an expropriation case.
Concerning trade credit insurance of stateobligations (INVS), Members underwrote30% more business in 2016 ($17.7 billion). Thisis mostly business underwritten by privateMembers with the majority relating to Asia(China, Vietnam and India).
Much of this business tended to come inlarge chunks: 2016 totals include a largetransaction of over $700 million in SouthAfrica in support of ESKOM and besides that,as an ongoing trend, in Turkey there were aseries of non-honouring transactions totallingclose to $1 billion.
The $28 million in claims paid for INVSduring 2016 related to transactions inTanzania and Puerto Rico. In terms ofrecoveries, private members successfullyrecovered $7.3 million from Cuba.
Other cross-border trade (INVO), showedthe most growth of all of the INV sub-categories – up 87% (or around $ 12 billion) to$26 billion new policies issued in 2016.Notable demand came from: USA ($3 billionincrease), Bahrain, Japan and Guinea
These high levels translate also into growthof the portfolio as a whole: up by almost $4billion, reaching $80 billion at the end of2016.
In a continuation of the trends elsewhere,the INVO was also the largest contributor ofclaims to the INV category: $254 million
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Investment insurance (INVI) cover provided showed a veryminor decline in total volumes for all regions with theexception of Africa which is booming at $14.8 billion newbusiness – launching it past Europe to sit as the secondhighest region for new business, behind Asia.
throughout the year, with the top fivecountries responsible: India ($57 million),Spain ($51 million), Brazil ($38 million)Indonesia ($17.5 million) and Australia ($16million).8 Within INVO claims were recoveredfrom Serbia ($8 million) and Brazil ($6million).
In line with the data revision in the mediumand long-term business reports, the INVreporting line is also subject to a thoroughcleansing, separating and later detaching thepure political risk insurance of foreigninvestments from the export credit insuranceand other cross-border insurance products.
Prague Club Committee MembersIn 2016, the Prague Club was integrated asthe fourth Committee of the Berne Union.Home to the emerging export creditinsurance companies, it is the most dynamicand fastest growing committee. Prague ClubCommittee reporting is much simpler than forthe other three committees, dividing businessinto short-term and medium and long-term,but without a comparable level of detail asseen in the specialist committees. As part ofon-going data reform at the Berne Union,greater derail for PCC data will also beintroduced in the upcoming years.
The overall activity of Prague ClubMembers for 2016 was impressive. Membersunderwrote a record level of new short-termbusiness volumes, reaching a total of $31.6billion (+34%). Even more outstanding is thegrowth of medium and long-term newbusiness; up 87% to a total in excess of $7billion. This takes the total contribution ofPCC business to Berne Union totals from 1%to 2% of the overall support provided – asmall figure, but a noteworthy change.
The level of commitments outstandingbefore reinsurance also increased to $28billion. On account of this, Prague Clubmembers earned $431 million premiumwritten for covering short-term tradereceivables a high multiple of the $78 million2015 income.
In line with the higher business being
underwritten, claims also jumped to $414million, almost twice the total for 2015.However, the short-term export credit lossratio for the Prague Club Committee actuallyfell to 30%, which is below the Berne Unionmembers’ performance during the sameperiod.
In case of complex medium and long-termtransactions, the earned premium followedthe risk level of the new transactions,doubling for the second year in a row, from$258 million in 2015, to $518 million in 2016. Inthe same time, claims levels for medium andlong-term business have barely increased, upjust under $40 million to $281 million in 2016.
What do we expect from 2017?2017 has already brought with it significantchanges in both political and economicarenas. Further political disruption, electionoutcomes and on-going local and regionalconflicts will play a role. As will regulatorydevelopments and new pricing principles forCategory 0 or High Income countries underthe OECD Arrangement, amongst others.
Based on the Members forecast, furtherexpansion is anticipated in short-termbusiness, but with continuing pressure onpremium levels. Approval of delayedtransactions in the medium and long-termpipelines, will likely bring positive changes torecorded business levels in the MLTcommittee, as well as within the investmentinsurance sphere.
But, if Leicester City can win the PremierLeague, anything can happen! ■
Notes1 Calculated as claims / premium.ºº2 Claims / (premium + recoveries).3 ‘INVI’ including: political violence, expropriation,
currency transfer and convertibility risks.4 ‘INVS’ – credit insurance products, providing cover
against the inability or unwillingness to pay bysovereign and sub sovereign obligors.
5 ‘INVO’ or ‘Other’.6 CHUBB and LIBERTY.7 More detail on these claims and recoveries within the
individual categories, outlined below.8 The underlying reason for claims is not identified in
this business line.
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Based on the Members forecast, further expansion isanticipated in short-term business, but with continuingpressure on premium levels. Approval of delayed transactionsin the medium and long-term pipelines, will likely bringpositive changes to recorded business levels in the MLTcommittee, as well as within the investment insurance sphere.
Berne Union 2017
Berne Union 2017
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As globalisation progresses and internationalproduction sharing is deepening the share offoreign inputs in exports increases all over theworld.
At the same time and in spite of itsrelatively small economy, Austria is a veryactive participant in the internationalexchange of goods and services.
It therefore was not too surprising that – inview of OeKB’s foreign content rules applieduntil recently – an ever increasing number ofAustrian firms started to face difficulties withpursuing and participating in potential exportprojects.
As a consequence we changed our policyin mid-2016. Under the new rules a lowerminimum national content may be required:to benefit from OeKB’s unrestricted cover, aproject’s Austrian value added only needs toexceed 25% of the total export contractvalue, instead of 50% previously.
Our customers more than welcome thisdecision: several projects have already beenrealised and covered that would not havebeen possible under the old rules.
This change in policy is in line withinternational trends and developmentsstarting from a ‘made in’-concept, moving to‘made by’ and ending up in ‘made for’.Changes are making clear that politicalguarding authorities and ECAs today put lessemphasis on their trade account balances oron the national value added in single exporttransactions but focus more on long-termwelfare gains and improving locational qualityof their respective economies.
Is there a one-size-fits-all solution?We are well aware of the fact that theAustrian approach is not applicable to all
economies. Startingpositions andframeworks incountries aredifferent, thus it is notpossible to developuniversally applicablestandards and rules.We hope, however, toprovide colleaguesand decision makers
in our industry with interesting ideas or evento inspire them when designing or modifyingtheir own programmes.
Before turning to the rules we apply inAustria today, I want to pick out someaspects worth considering by most ECAs,although their importance may varyconsiderably between individual countries.
HistoryA potential ‘active’ colonial past and trade-tradition can impact a country’s currentposition in world trade considerably. Takingthe ratio of active foreign direct investmentrelative to GDP as a proxy for the extent ofglobalisation, it is apparent that maritime andtrading nations such as the UK, France or theNetherlands show large values, whereascountries such as Austria or Germany arefaring more modest.
Thus, a nation’s economic structure todayis heavily determined by the starting pointand the extent of a country’s industrialisationand internationalisation processes.
Traditional trading nations are favoured byseveral factors: in particular a bigger numberof large companies are located in thesecountries. They are facing less difficultiesgoing abroad than SMEs do. Furthermore
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OeKB: introducingAustria’s more flexiblenational content policyIn this article Ferdinand Schipfer, OeKB’s managing director of exportguarantees, ponders national content considerations from an ECA’spoint of view. Here, he outlines the motives, developments andimpacts of Austria’s policy now in place.
Ferdinand Schipfer
relationships to their former colonies includingtheir influence on language, communication,technical standards and a better access tonatural resources were and still areadvantageous. Therefore, in these countries amore liberal approach towards nationalcontent in exports seems appropriate as theyalso benefit indirectly, e.g. by being present inlocal markets.
The size of a country It goes without saying that small economies –like Austria – are less vertically integratedthan bigger nations. In case of a necessaryoutsourcing of production phases, companiesin these economies cannot easily finddomestic low-cost suppliers. As aconsequence they need to procureinternationally, which results in a generalrecommendation towards a more liberalnational content approach.
GeographyLandlocked countries tend to face highertransportation costs than maritimeeconomies as economic research into thistopic has shown. Furthermore countries thatare surrounded by a number of neighbourswith a similar industrial structure and acomparable specialisation cannot afford toinsist on a high degree of national content intheir exports than geographically somewhatisolated countries such as the US or Australia.
GlobalisationInternational production structures areconstantly changing. A trend towards aglobal distribution of competence centresincluding regional specialisation on differentproduct lines can be observed. Classicalmanufacturing activities are relocated to low-labour-cost economies and the share ofservices in exports of advanced economies isincreasing.
Additionally, governments in a growing
number of emerging countries require anincreasing involvement of local firms as aprecondition when awarding contracts forlarge scale infrastructure projects to foreignsuppliers. These policies (e.g. Iran, Brazil) areregarded as a means to foster the domesticeconomic development and localemployment. Admittedly, involvement of localfirms has also become easier due to theincrease in foreign direct investment activitiesin many areas, including the resulting transferof know-how.
There are of course many more factorsdetermining a specific country’s ‘optimal’policy towards national content in exports,but let us now come to …
… the situation in Austria Austria is a small open economy in the centreof Europe, surrounded by competitors of asimilar degree of industrial specialisation.
OeKB, as the official Austrian ECA, isproviding a non-standard institutional ECA-design with a broad range of products andservices. OeKB is a bank, owned bycommercial banking institutions and has beenmandated by the Austrian FederalGovernment to manage the exportpromotion scheme on the government’saccount. The bank therefore is a kind of‘front-office’ for Austria’s official exportpromotion activities to support nationalexports and FDIs.
Until mid-2016 OeKB applied ratherconservative national content rules comparedto other European ECAs: ● while comparatively liberal regulations
were applied to short-term contracts onexports to low-risk countries, and;
● while sub-supplies from a subsidiary totheir Austrian parent company wereconsidered as 50% Austrian content, and;
● while there was a special rule for ‘small’projects with a volume not larger than EUR10 million, which was quite popular among
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International production structures are constantlychanging. A trend towards a global distribution ofcompetence centres including regional specialisation ondifferent product lines can be observed. Classicalmanufacturing activities are relocated to low-labour-cost economies and the share of services in exports ofadvanced economies is increasing.
firms (after a comprehensive overallassessment of a company‘s activitiesnational content was not evaluated on asingle-project- basis, but on the basis ofthe annual turnover), we most typically expected the Austriancontent in mlt projects to be at least 50 %.
New policy rules In a joint effort with the Austrian FederalMinistry of Finance, we have furtherliberalised our respective rules close to oneyear ago. We can now fully support certainmedium and long-term export credits as longas the national Austrian content is at least25% of the export contract value. Strongeremphasis than on the national content in theindividual transaction is now put oneconomic aspects such as locationalimplications or other features that increasethe future prospects of an export company.
In spite of this change in policy, wecontinue to be interested in a high nationalvalue share in every single export deal.However, we had to accept the trendsmentioned above.
Moreover, many other European exportcredit schemes such as those in Italy, theNetherlands, Belgium, Scandinavian countriesor in Switzerland have embarked some timeago to be more liberal regarding nationalcontent requirements, resulting in a potentialloss of competitiveness for Austrian firms.
For us, when discussing this issue the mostrelevant question is: which companies inAustria will most likely be relevant for theAustrian economy and therefore for thewelfare of Austrian society in 10 years fromnow? If there is some evidence on the firmlevel and – ideally – also on the level of theproject that a company positively contributesto the development of Austria as anattractive location for industry, then evenprojects with a higher share of foreign inputscan be fully supported.
Firm-specific criteria include domesticemployment effects, current and plannedinvestment projects in Austria, R&D intensity,social and ecological conduct, the regionalimportance of a company or corporate taxespaid in Austria.
Project-specific criteria include thepotential of future contracts triggered by thisparticular project or a project’s possiblereference character in a country/region. Agood reason also could be the non-availability of certain components in Austriawhich are crucial for a project’s viability.
When selecting the measures proving acompany’s importance for the Austrianeconomy, it was particularly essential for usto find simple and clear criteria that can becompiled and provided by companieswithout any difficulties and in-depth analyses.
Finally, it should be mentioned that in caseof bigger multisourcing deals with only a fewthird-country partners supplying largeportions, or in case of country-specificportfolio restrictions, we will continue – as inthe past – to outsource high foreign contentparts by asking other ECAs or the privateinsurance market for re-insurance.
Summarising…Export finance is often regarded as a dry anddispassionate topic. In reality, however, we areworking in a complex and demandingindustry jointly with challenging partnersfrom different cultural backgrounds. We haveto be familiar with global political contexts aswell as with the micro-economic projectaspects and we should have a grasp howpeople from other professional backgrounds,how technical engineers and how lawyersthink and communicate.
This mixture of skills enables us to assesscountry risk and risks associated withcustomers in our daily work, to evaluatesocial and environmental aspects, tounderstand the strategy of our competitorsand also to pursue a sensible approachtowards the question of national value addedcontent in exports.
Despite its technical flavour, the topic of‘value added’ is an interesting and immenselyimportant political issue. Being aware ofdifferent aspects is essential to decide on apolicy that best fits the needs of a givencountry’s economy.
Collaborating closely with the AustrianMinistry of Finance, OeKB tries to make upfor the disadvantages in international tradethat arise from the small size of the economy,the high share of SMEs, a low degree ofpolitical power and only a small number ofdomestic firms with investments abroad. Weare striving to serve our business communityby taking decisions fast, by adapting thepolicy framework to mega-trends – such as inthe question of national content –, byflexibility, innovation as well as by a dedicatedcustomer orientation.
Having been awarded recently by TXF theExporter’s Choice award ‘Best PerformingECA 2016’, we are confident that we are onthe right track for the future. ■
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The export industry is in a state of constantchange and public export credit agencies(ECAs) are always having to react to newmarket requirements. Switzerland, as anexport nation, also faces a steady stream ofchallenges. Reacting appropriately to thesechanges is the primary task SERV mustaccomplish to fulfil its mission.
SERV must grapple with changes that aretaking place at different levels, in differentareas of action and are determined, first andforemost, by the activities of SERV’scustomers. Its focus is therefore primarily onthe exporter’s perspective when trying torecognise trends and challenges as early aspossible. This is achieved by continuallyobserving the markets, regularly evaluatingcustomer needs, and systematically followingeconomic and political risks.
Proven supportExport Risk Guarantee (ERG), which wasfounded as a measure against unemploymentin 1934, has proven itself to be a means ofaiding economic growth. The changing needsof customers, however, demanded areorganisation. That is why SERV supersededthe ERG as of 1 January 2007.
The change meant more than just adifferent name. It was a turning point. Theorganisational structure of SERV wasoriented towards efficient companymanagement. Customer orientation remainedSERV’s highest priority – aiding the Swissexport economy in an even more targetedmanner. The possibility to insure privatebuyer risk (PBR) was introduced. The figurestoday demonstrate that this change wasnecessary: SERV achieved positive results the
year it was founded and, today, the PBRbusiness accounts for three quarters of thetotal commitment of SERV.
SERV’s importance was demonstratedafter the financial and economic crisis of2008/2009, when many Swiss exportersexperienced a slump in demand and theirliquidity situation worsened. The abolition ofthe franc’s floor against the euro by the SwissNational Bank on 15 January 2015 placed theSwiss export industry under increasedpressure. SERV, through the temporaryintroduction of products to improveexporters’ liquidity management, helped easethe pressure, especially for Swiss SMEs. JosefTroxler, CEO of the Swiss SME Ampegon AG,states: “SERV is vital to us. Thanks to itssupport, we are able to take commercial risksthat may break our neck.”
The new products – working capitalinsurance, counter guarantee and refinancingguarantee – proved successful. Their periodof validity was extended by four years in 2011and transferred into the permanent productrange in 2016. Their success is evidenced bytheir increasing demand, which accounts for33% of new business.
New trendsNew trends have become apparent in recent times. SERV wants to accommodatethese developments through different lines of action to fulfil its mission for thebenefit of the export economy.
Globalisation is continuing. In addition totraditional exporters that produce on a grandscale in Switzerland, there are more and moreenterprises in SERV’s customer baseconcentrating on their management, research
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Ten years of SERV:achievements andchallengesThis year, Swiss Export Risk Insurance (SERV) is celebrating 10 years inbusiness. The milestone is the perfect opportunity to review its mostimportant innovations and challenges.
and development, financing and marketingfunctions. That is why SERV also made itsrequirements concerning Swiss exporters’content eligibility more flexible, as theprevious demands were no longer productive.
SERV still adheres to the Swiss contentprinciple, but it will cover export transactionseven if the Swiss content of the deal is lessthan 50% of the insured amount. Thecondition is that exporters can show thattheir activities in Switzerland are worthy ofsupport in keeping with SERV’s businesspolicy objectives. Above all, service exportsdemand an adequate interpretation of thecontent, which must be decoupled from ideasof classic machinery- or installation-basedtransactions.
Once-solid states have lost a considerableamount of creditworthiness because of theirhigh level of debt, ongoing economicproblems, or political tensions. Governmentrisks are sometimes greater than privatebuyer risks in these countries. Swiss exportersare also forced to enter new and difficultmarkets because of the stagnant demandfrom these countries.
On the one hand, large regions such asEurasia, MENA, and South America – whichhad been established as target markets of theSwiss export economy or considered to bepromising – were rejected due to politicaltensions, military conflicts and collapsingcommodity prices, and they generate only aminimal volume of demand. On the otherhand, Swiss exporters are facing increasinginternational financing competition and areconfronted with competitors that are stronglysupported by their export credit agencies.SMEs are reaching their limits wherefinancing their export activities is concerned,and banks cannot always overcome this.
SERV has also seen a rise in projects withmore complex sourcing and financing
structures. These require lots of time toprocess and a vast amount of know-how. Inaddition, there is a growing demand fordigitalised business processing.
SERV must be able to guarantee the bestpossible cover and be able to deal with
special regulatory and technological risks, aswell as elaborate financing and coverstructures. These efforts must not be made atthe expense of the high standards that SERVmaintains in the area of sustainability and willfurther develop in accordance with nationaland international regulations. “It is now up toSERV to develop new solutions and to tacklethese new challenges, so that SERV willcontinue to be a customer-oriented, reliableinstrument for Swiss exporters in the future”,Peter Gisler, director of SERV, explains. ■
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“Customer orientation remained SERV’s highest priority– aiding the Swiss export economy in an even moretargeted manner. The possibility to insure private buyerrisk (PBR) was introduced. The figures todaydemonstrate that this change was necessary: SERVachieved positive results the year it was founded and,today, the PBR business accounts for three quarters ofthe total commitment of SERV.”
Globalisation iscontinuing. In addition totraditional exporters thatproduce on a grand scalein Switzerland, there aremore and moreenterprises in SERV’scustomer baseconcentrating on theirmanagement, researchand development,financing and marketingfunctions.
According to the World Bank’s EconomicComplexity Index, Hungary was the 14th mostcomplex economy in 2015, while according toIMF statistics it was the 57th largest economyin the world with $265.037 billion of annualoutput. The country’s gross domestic product(GDP) totalled $121.72 billion in 2015.
Hungary is clearly an export-orientedmarket economy with a heavy emphasis onforeign trade. It is the world’s 35th largestexporter, selling close to $110 billion overseasin 2015. These exports accounted for 90% ofGDP. It also has a substantial trade surplus of$9.003 billion, of which 79% went to EUmarkets, according to Central StatisticalOffice data.
Hungary’s key foreign trade partners areGermany, Austria, Romania, Slovakia, France,Italy, Poland and the Czech Republic.Breakdown of Hungarian exports by mainproduct group is as follows: electronicequipment (approximately 20% of totalexports), machines, engines and pumps(18.9%), vehicles (13.9%), pharmaceuticals(4.7%), medical and technical equipment(4.2%), plastics (3.9%), oil (3.5%), rubber(2.4%), furniture, lighting and signs (1.8%),and iron or steel products (1.6%).
The EXIM Hungary mandateHungarian Export Credit Insurance andHungarian Export-Import Bank (EXIMHungary) is both an insurance company anda bank. The insurance activity of EXIMHungary typically supports short-term dealsthat essentially require export creditinsurance only. EXIM Hungary as a bank alsooccasionally finances medium- to long-term(MLT) transactions based on Organisation forEconomic Co-operation (OECD) rules asbuyer’s credit and tied aid facilities. Althoughtheir value can be higher, the number of the
transactions issignificantly lower.
The fact that thestructure of globalindustry hasdramatically changedover the last fewdecades should notbe neglected.Consequently,companies do not
keep production in one country but ratherinvest in production facilities abroad tobenefit from lower labour costs, taxincentives, etc. This trend has also resulted inforeign trade transactions becoming morecomplex, often now requiring the support ofmultiple ECAs.
Given the relatively small size of Hungary’seconomy and the lack of companies withsufficient scale, many Hungarian companies –and as such EXIM Hungary –cannotparticipate in large-scale transactions alone.A joint approach with international partnershowever provides an opportunity for smallereconomies like Hungary to participate inlarge-scale projects. This may open many
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EXIM Hungary:supporting small and largeSmaller ECAs like Hungary EXIM have a key role to play in bothsupporting SMEs and partnering with other ECAs on large scaleproject financings. By Zoltan Urban, CEO EXIM Hungary.
Zoltan Urban
The recently signed deal betweenGeneral Electric, Indonesian powerutility PLN (Perusahaan Listik Negara), EXIM Hungary and ExportDevelopment Canada (EDC) is the bestexample of international cooperationbetween two ECAs.
opportunities in the future for smaller ECAsand EXIM Hungary plans to take advantageof these as much as possible. We trust that asmaller ECA like EXIM Hungary will also havethe chance to play a significant role in alarge-scale transaction, which is a promisingprospect for the future.
The recently signed deal between GeneralElectric, Indonesian power utility PLN(Perusahaan Listik Negara), EXIM Hungaryand Export Development Canada (EDC) isthe best example of international cooperationbetween two ECAs.
PLN’s EXIM Hungary/ECD-backedloanThe overall project value is in excess of $575million, of which $453 million is co-financedby EXIM Hungary (50%) and EDC (50%) witha 12-year loan. The transaction includes theinstallation of eight General Electric mobilepower plants in regions with lowelectrification rates in Indonesia. As a result,the installed capacity has been increased by500 MW, meaning that electricity will bedelivered to approximately 4 millionIndonesian homes. This project alsocontributes to the Indonesian government’sgoal of installing 35GW of new powercapacity by 2019, which will result in a 99.7 %electrification ratio in the country.
The deal proves that Hungary plays animportant role in the global value chain of theenergy sector, and that EXIM Hungary, withits biggest ever participation as co-lenderwith EDC, is strengthening its presence ininternational export financing markets.
This deal is not only beneficial forHungary’s export relations but for its nationaleconomy as well. The exports generated bythis deal are worth more than $276 million,and it directly and indirectly adds more thanHUF27.21 billion to Hungary’s GDP.
With this deal, EXIM Hungary has proventhat a small economy is able to compete withmore developed economies and provide anadequate level of service. To furtheraccelerate Hungary’s export activity in thefuture, EXIM Hungary plans to participate insimilar projects with domestic companiesand, as a result, enhance the internationalcompetitiveness of Hungarian exporters witha special focus on SMEs. To help thesecompanies succeed in their export activity,financing would be provided by EXIMHungary up to the proportion of theHungarian content of the given projects.
Due to global changes, we believe that therole of smaller ECAs can increase in thefuture and we trust that a key factor in oursuccess will be developing our internationalnetwork and building new relationships. ■
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Creating a competitive edge for Hungarian exporters
A major part of the role of an export creditagency (ECA) is to ensure that its country’sexporters are able to meet the demands ofan overseas buyer in a competitive globalmarket place. As the world’s first ECA, withits centenary coming up in 2019, UK ExportFinance (UKEF) has always seen this as itsguiding mandate.
One of our strategic priorities is thereforeinnovation and flexibility. This is evident in anumber of our recent major transactions.These include the hybrid project finance/reserve-based lending structure for a GE Oil& Gas contract with Ghana’s Offshore CapeThree Points project, and the first ever ECAloan to the Kurdistan Regional Government ofIraq in support of a Biwater contract.
Widened supportThe UK Government’s 2016 AutumnStatement was another major milestone. TheChancellor of the Exchequer not onlydoubled our risk appetite limit to £5 billionand increased our capacity for individualmarkets by up to 100%, he also announcedUKEF’s significantly widened local currencyfinancing offering.
So why is this important? One of the mainways ECAs support exporters is byguaranteeing loans to an overseasbuyer/borrower to finance the purchase ofcapital goods and/or services. Traditionally,these loans tend to be in the main tradingcurrencies, such as US dollars, sterling
and euros.However, many
major projects, forexample water, powerinfrastructure, andlocal transport, do notgenerate foreigncurrency revenues,meaning that theoverseas buyer orborrower may prefer
a loan in its home currency.Local currency financing (LCF) helps to fill
this gap. Under a local currency scheme, theECA guarantees the loan in the overseasbuyer or borrower’s home currency. Thishelps the buyer or borrower reduce foreigncurrency risk and eliminate a source ofuncertainty over the cost of servicing theloan. Furthermore, the OECD permitspremium discounts of up to 20% from its setminimum premium rate (MPR) fortransactions in local currencies, under certainconditions.
That is why UKEF has expanded its localcurrency offering, quadrupling the number ofpre-approved currencies supported from tento 40. Local currency financing is nowavailable as standard for buyer credit loanswhere the value of the contract is at least £5million. And we are constantly looking toupdate our list of eligible currencies; indeed,we can consider any currency on a case-by-case basis if it satisfies our risk standards.
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Local currency finance:local support in aglobal marketplacePaul Radford, chief economist at UK Export Finance, talks about why –and how – the UK’s export credit agency is allowing overseas buyers tobuy British and pay local.
Paul Radford
Many major projects, for example water, powerinfrastructure, and local transport, do not generateforeign currency revenues, meaning that the overseasbuyer or borrower may prefer a loan in its homecurrency. Local currency financing helps to fill this gap.
Local currency financing in practiceThe attractiveness of this offering is evidentwhen you look at some of the transactionswe’ve supported.
Take, for example, UK coach manufacturerAlexander Dennis’s delivery of 90 buses toMexico City’s transport authority Metrobus.These lightweight, fuel-efficient buses willdrive along the Paseo de la Reforma, theiconic ‘Champs-Élysées’ of Mexico City,easing overcrowding in a city of 20 millionpeople.
Earlier this year, UKEF was able toguarantee a loan in Mexican pesos (MXN) tosupport the MXN 1 billion contract. This is thefirst transaction UKEF has supported inMexican pesos, and helped ensure that thebuyer looked to the UK to procure the buses.
In 2015, UKEF became the first non-Chinese ECA to guarantee a loan in offshorerenminbi when it supported an aircraftdelivery to China Southern Airlines. Theoffshore renminbi is one of the most usedcurrencies in trade finance. This capabilitysupports the UK Government’s widerambitions to strengthen trade ties with Chinaand consolidate London’s position as thelargest offshore renminbi centre outside Asia.
So UKEF’s local currency financingoffering is clearly good news for UKexporters.
Managing the riskHowever, from a risk perspective, it posessome interesting questions. Just like astandard ECA-backed guarantee, there is therisk of default – something we analyse, take adecision on and manage as a matter ofcourse.
Risks around the currency play a role, suchas currency convertibility and currencyvolatility. We have to consider whether thereis a suitable bank that can fund and lend inlocal currencies for the required term andwhether there is sufficient stability andliquidity in the banking sector in the overseasbuyer/borrower’s country. There are also theusual considerations around any political riskin the country.
To manage these risks we can take anumber of factors into account. For example,we can use the country’s local currencycreditworthiness to assess the risk of default.Appropriate due diligence, includingconsideration of the credit ratings of thebanks helps us to identify the stability of thebanking and financial sectors as well asidentifying organisations that have the
capacity or capability to lend for the termsand amounts required. The World Bank’s Ruleof Law Index can provide a good indicationaround governance indicators andinformation on currency convertibility isreadily available.
Finally, to mitigate the risk of currencyvolatility, we can include a crystallisationclause as a condition of support. This clauseis used to convert outstanding claims into theECA’s host currency at a pre-determinedfixed exchange rate. However, it can be
difficult to verify beforehand whether or not acorporate or bank in the overseas country willaccept such a clause. Furthermore, it mightnot be possible for the overseas borrower toincur foreign currency denominated debt,meaning that we would not be able toinclude a clause. Regardless of how volatilethe currency is, it may be prudent to add acrystallisation clause if legally possible.
Despite these additional technicalconsiderations, we believe our local currencysupport can help UK exporters make theiroverseas offering even more attractive, andwe look forward to supporting transactions ineverything from the Brazilian Real to theZambian Kwacha.
Conclusion The UK Government has been clear in itsambition for the UK to be a champion for freetrade, addressing barriers and advocating foras frictionless a global trading environment aspossible. By offering financing in any of 40currencies at the buyer’s choice, UKEF isplaying its role in helping the UK’s exportersaccess a truly global marketplace. ■
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Earlier this year, UKEF wasable to guarantee a loan inMexican pesos (MXN) tosupport the MXN 1 billioncontract. This is the firsttransaction UKEF hassupported in Mexicanpesos, and helped ensure that the buyerlooked to the UK toprocure the buses.
The challenges of financinginfrastructure with local currency savingsDeveloping Asia, like other emergingeconomies, faces a daunting challenge tomeet its huge infrastructure investmentneeds. Developing Asia will need to invest$26 trillion from 2016 to 2030, or $1.7 trillionper year, in order to maintain the region’sgrowth momentum, eradicate poverty, andrespond to climate change, according to theAsian Development Bank (ADB)’s latestforecast. To meet this challenge, privatesector participation is now more crucial thanever. The ADB estimates private sectorfinancing in 24 Asian developing countrieswill have to increase from $63 billion a yeartoday to $250 billion a year during 2016-2020to fill this gap.
Furthermore, a bulk of private sectorfinancing will need to come in localcurrencies to avoid the currency mismatch,because many of the infrastructure projectsrely on local currency revenues to pay backtheir debt. Even when foreign currencyindexation mechanisms are available forrevenue streams, the sustainability of suchmechanisms is questionable in the event of acurrency crisis, as some Asian countrieslearned the hard way during the Asianfinancial crisis in the late 90s. The realsolution should be to fund infrastructureinvestment in local currencies.
CGIF is a new multilateral institutionestablished by 13 Asian countries comprisingof all ten member countries of theAssociation of Southeast Asian Nations(ASEAN), and their ‘Plus 3’ partner countries
which are China,Japan and Korea,together with theADB to helpovercome thesechallenges. The CGIFprovides guaranteesto local currencybonds issued bycorporates andprojects mainly in the
ASEAN countries to help facilitate theiraccess to bond markets.
While the CGIF can support corporates orprojects in a wide range of sectors/industries,its guarantee support is particularly useful for
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CGIF’s construction periodguarantee: kick-startinggreenfield project bondsConstruction risk has long been an impediment for the use of projectbonds to finance greenfield infrastructure projects. The CreditGuarantee and Investment Facility (CGIF) recently introduced aninnovative solution to mobilise long-term savings in local currencies indeveloping Asia to finance greenfield infrastructure projects throughproject bonds, discusses CGIF’s CEO, Kiyochi Nishimura.
Kiyochi Nishimura
Figure 1: Infrastructure investment gaps
Source: ADB
infrastructure projects. This is because one ofthe solutions to overcome the challengesabove is to facilitate the channeling ofdomestic long-term savings in emergingeconomies to finance infrastructure projectsdirectly via project bonds, particularly at thegreenfield stage. On the back of steadyeconomic growth, and the rise of incomelevels with growing middle incomepopulation, many ASEAN countries are nowwitnessing rapid accumulation of localcurrency long-term savings in their pensionand insurance funds. These long-term savingsinvariably need long-term investmentopportunities, and the stable cash flows ofinfrastructure projects would be ideal forthem.
The CGIF has been working with theASEAN governments, regulators, ratingagencies and bond investors for several yearsto boost the flows of domestic currencyfunding into infrastructure projects in theASEAN countries, in particular green-fieldprojects. Mobilising long-term savings inpension and insurance funds in thesecountries may be the most efficient model offinancing infrastructure by long-term localcurrency funds, only a few countries in theregion have successfully pursued thiscapability. A critical impediment againstmobilising long-term savings is the low riskappetite of pension and insurance fundmanagers and, in particular, their aversion toconstruction risks.
Construction Period GuaranteeFacility (CPG) The CGIF’s Construction Period Guarantee(CPG) facility is aimed at allaying domesticbond investors’ concerns about construction
risks. It ensures the completion ofconstruction works and the commencementof the operations phase in a project, whichwill be financed by project bonds issued inthe local currency bond market in the region.
Under this facility, the CGIF irrevocablyand unconditionally guarantees non-payment
of scheduled payments for the project’sbonds occurring prior to the commencementof commercial operations. If a project’scompletion is delayed, the CGIF shall ensurethat the project bonds are adequatelyserviced on a timely basis. In the unlikelyevent that it cannot be completed, the CGIFshall accelerate the guaranteed bonds andpay in full the principal and accrued interestamounts to bondholders.
Generally, the CPG facility will cover theconstruction period as well as a reasonablebuffer period to allow for possible delays inthe project’s construction. Therefore, thetenor of the CPG facility is expected to be fora three to five year period or so at the outset,but if the construction is further delayed, theCPG cover will continue until the projectmeets the completion milestone. Dependingon the nature of the project (e.g. the initialramp-up period is necessary before beingfully operational) and investors’ requirements,the CPG facility could also be extended tocover the initial operation period until theproject actually demonstrates its ability togenerate stable cash flows. Such flexibilityembedded in the CPG facility is important toaddress bond investors’ concerns aboutpossible construction delays.
When the ratings agencies assessgreenfield infrastructure bonds, their ratings
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Figure 2: CPG’s Rating Uplift
CONSTRUCTION PERIOD STABILIZED OPERATIONAL PHASE
BON
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INITIAL OPERATIONS
COD
CPG
FA
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CPG
OPERATIONAL PHASE RATING
STAND ALONE RATING OF GREENFIELD BONDS (penalized by construction risks)
BON
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BON
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Developing Asia will needto invest $26 trillion from2016 to 2030, or $1.7trillion per year, in order tomaintain the region’sgrowth momentum,eradicate poverty, andrespond to climatechange, according to theAsian Development Bank.
can be seriously constrained by constructionrisks. This is despite the fact that the projectsmay have stable and robust cash flows duringthe operational period, and even though theconstruction period is far shorter than theoperational period.
There are many elements of risks duringthe construction period which are highlycomplex to assess. The investors, therefore,need pricing of the bonds that ultimatelyreflects these risks. This generally makesbond financing for such deals economicallyunviable when the long-term bonds arepriced considerably higher based on riskswhich are likely to be overcome in a relativelyshort period of time. By removing risksduring the construction period entirely fromthe transactions, the CGP facility eradicatesany rating penalties arising from such risks,allowing bond investors to focus only on theoperational risks of the projects, and enablinglower fixed interest rates to be applied fromthe onset.
Changing project financinglandscape in ASEANThe CPG facility is anticipated to boost theuse of local currency project bonds for newprojects in the region by eliminatingconstruction risks for bondholders investingin greenfield projects.
While local bank lenders in the ASEANcountries are liquid and usually very keen tofinance infrastructure projects, even on aproject financing basis often at attractivepricing, bond finance can bring certainty toproject sponsors with fixed interest rates,which is a common feature of bond finance.Moreover, while local banks can lend for up to12 years or so, bond investors can providelonger tenors of up to 20 years or evenlonger in some countries.
Stretching a finance tenor will improve theproject’s economics and create room toreduce the tariff levels. Finally, projectsponsors will be able to diversify theirfunding sources. This is especially vital toovercome single group exposure limitsimposed on bank lending In the Philippines.For example, there are only a small number ofleading domestic conglomerates engaged ina wide range of infrastructure projects, andsingle group exposure limits hinder thedevelopment of greenfield infrastructureprojects. The CPG facility will unlock a greatvariety of benefits of bond finance to green-field infrastructure projects.
In the developed economies, major
institutional bond investors such as globalinsurance companies and leading pensionfunds, have their own internal expertise andmanpower to supplement the project financebanks in funding greenfield infrastructureprojects. But in the emerging economies ofthe ASEAN, there is little internal capacityamong domestic bond investors, such aspension and insurance fund managers. It willbe very costly and time-consuming todevelop expertise in-house.
The CGIF has developed a comprehensiveassessment framework that allows these risksto be measured and managed. Componentsof this framework will allow for expertjudgement of the various risk factors relatingto the construction works as critical inputs inthe assessment. Risks are also managed bythe CPG’s boilerplate requirements for thevarious contractual agreements and riskmitigants that are consistent withinternational project finance practices.
While domestic bond investors in theASEAN countries may first rely on the CPGfacility, the CGIF plans to share itsassessment tools with these bond investors.Replicating the CGIF’s assessmentframework, they will become familiarised withthe assessment of construction risks and willdevelop their own capacities in the future tounderstand, evaluate and mitigateconstruction risks to acceptable levels. Thiswill allow them to invest in greenfield bondsindependently even without the CPG’ssupport. If this happens, it will fundamentallychange the landscape of project financing inthe ASEAN countries. This may take sometime but CGIF is committed to bring thischange to the region. ■
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. . . a bulk of private sectorfinancing will need tocome in local currencies toavoid the currencymismatch, because manyof the infrastructureprojects rely on localcurrency revenues to payback their debt.
The moment of completion is always the highlight of any technological project. To successfully
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∆Constructed. Financed. Exported.
India’s economy is booming and isforecasted to do so for the foreseeablefuture. The growth of the middle class - andthe massive urban transformation that comeswith it - creates unprecedented opportunitiesfor international business in the infrastructuresector. The country needs about $1.5 trillionof investments in the infrastructure sector inthe next ten years, according to the TheEconomic Times Indian Infra Summit. Theopportunity is undeniable, but how can anexport credit agency help its companies tapinto that business? The only way is by findinginnovative ways of being relevant to themarket and giving those businesses whatthey need.
EDC, the Canadian crown corporationmandated to provide financing, insurance,bonding, trade knowledge and matchmakingconnections to Canadian companies seekingto export and invest abroad — wanted tohelp its customers gain access to thisgrowing market. In November, EDC took theunusual step of providing the rupee (INR) theequivalent of $50 million in financing toMumbai’s Infrastructure Leasing & FinancialServices (IL&FS), one of India’s largestinfrastructure developers. The deal is knownby both parties as the Masala loan, so namedfor an Indian spice mixture.
The loan isconsidered anexternal commercialborrowing (ECB)loan. These are loansmade by non-residentlenders. They arecommon in India as away to facilitate muchneeded access toforeign money by
Indian corporations and public-sectorentities, which are the lifeblood of India’sexplosive economy. ECBs are broad and caninclude commercial bank loans, buyers’credit, suppliers’ credit, securitisedinstruments such as floating rate notes andfixed-rate bonds, credit from official exportcredit agencies and commercial borrowingsfrom financial institutions. Some sources sayECBs have been responsible for between20% and 35% of India’s total investmentflows into the country.
This deal stemmed from a regulatorychange in ECBs by the Reserve Bank of Indiafor transactions in the infrastructuresegment. The bank imposed a minimumtenure of ten years on transactions, a tenureconsidered by EDC and most commercialbanks to be too long as its own average
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Innovative ways toinvest in IndiaFor the first time in its history, Export Development Canada provided a loan to an Indian infrastructure leader, in India’s own currency. Bill Brown, regional vice president, Asia, Export Development Canada(EDC) talks through the achievements and challenges of the loan, andif there is more to come.
Bill Brown
India’s economy is booming and is forecasted to do sofor the foreseeable future. The growth of the middleclass - and the massive urban transformation thatcomes with it - creates unprecedented opportunities forinternational business in the infrastructure sector.
standard transaction length is generally fiveto seven years.
The other challenge was that EDC did nothave an Indian rupee bank account, whichlimited the ability to raise rupees through itsbonds. As a foreign lender, EDC had tocreate a unique structure with an embeddedderivative to allow it to do a currency swap,converting its US dollar accounts for rupeesand thereby reducing currency risk. EDCsucceeded in doing this by partnering withthe Bank of Nova Scotia. It was a solutionthat overcame both obstacles EDC faced inits efforts to help Canadian companiesaccess lucrative infrastructure contracts inIndia.
Entering uncharted territoryOnce it came together, it was a deal of firsts:it was the first time EDC had dealt withIL&FS; it was EDC’s first rupee deal, and thefirst ECB deal under the revised guidelines inIndia.
As smaller Canadian suppliers compete inthis globalised industry, they haveincreasingly asked EDC to help them makenew connections with foreign buyers. Thegoal with the IL&FS deal was to respond tothe needs of Indian companies and make iteasier for Canadian suppliers to win newinfrastructure business. Canadian companiesare well known for their capabilities ininfrastructure projects of all kinds and sizesand IL&FS can give them a foothold in thelucrative Indian market. Now that this deal isdone, the broader goal is to effectivelydevelop the solution so EDC can offer it to awider customer base.
IL&FS, with its large global supply chainand base in growth-rich India, was at the topof the wish list of those companies. This waspartly because it has a strong interest inworking with Canadian companies. IL&FS’sdistinct mandate involves catalyzing thedevelopment of infrastructure in the country.It has focused on the commercialisation anddevelopment of infrastructure projects and
the creation of value-added financialservices.
Since 2013 – long before the new financingfrom EDC – IL&FS has procuredapproximately $2 million in goods andservices from Canadian companies. WithEDC’s financing help, it is hoped that this
number will skyrocket to more than $4million per year.
Nathan Nelson, EDC’s former chiefrepresentative in India, noted at the time ofthe deal that IL&FS had met with more than50 Canadian companies over the previoustwo years and was planning to meet withanother 25 in November when the group wasto travel to Canada for a trade mission. Hesaid IL&FS was part of an important valuechain in the Indian market with a clearinterest in doing more business withCanadian companies, particularly those thathave expertise in surface transport, powerand urban infrastructure and mapping.
Ramesh Bawa, IL&FS’s CEO and managingdirector, said EDC’s loan has showedconfidence for his company. He noted thatEDC’s support through the Masala loan wascrucial as it enabled IL&FS to eliminatecurrency risk entirely and deploy fundingdirectly into the various requirements for itsinfrastructure projects without having toconvert foreign funds to Indian rupees. He
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Once it came together, itwas a deal of firsts: It wasthe first time EDC haddealt with IL&FS; it wasEDC’s first rupee deal, and the first ECB dealunder the revisedguidelines in India.
EDC’s support through the Masala loan was crucial as itenabled IL&FS to eliminate currency risk entirely anddeploy funding directly into the various requirementsfor its infrastructure projects without having to convertforeign funds to Indian rupees.
said having a reputable institution such asEDC, partner with IL&FS, on not only its firstMasala ECB, but also its first funding from aCanadian institution, speaks to theimportance of the work that his companydoes in India.
EDC targets companies such as IL&FS,whose procurement needs match upnaturally with Canadian expertise. Once EDChas a detailed understanding of a company’ssupply chain and business goals, its agentsprovide introductions to qualified Canadiancompanies with well-matched expertise.IL&FS is specifically interested in Canadiancompanies that can help it innovate andreduce costs in upcoming road, port, power,sanitation, waste management and waterprojects.
A winning contractCanada’s IBI Group was one such companyto succeed in getting a contract: “IBI sawIndia as a tremendous growth market,” saidDeepak Darda, director, India and South Asialead, IBI Group, Canada. “It provided us hugeopportunities where we could actually bringour Canadian expertise into the market,whether it was the national highwayprogramme in India, or the tremendousgrowth that the Indian cities wereexperiencing.”
Darda said they learned about the IL&FSopportunity when they approached EDC forconnections with large-scale infrastructureplayers.“ As a result, we have been awarded acontract where we are providing ouradvisory services to evaluate a toll highwayasset for IL&FS,” he said.
Anita Ferreira, head of InternationalBusiness Group at IL&FS Financial ServicesGroup India, said her company is delighted tobe working with Canadians. “The thing thatset the Canadian companies apart is thatlevel of professionalism and their area ofexpertise and that they were willing to tailor
the solution to our requirements,” she said.“You need solutions that work for the projectyou are doing. There was a lot of outside-the-box thinking that they were willing to do.”
Another foreign currency dealBased on the success of its experience inIndia, EDC opened a local peso account thatoffers new opportunities in Mexico. Until thisyear, when an EDC customer was doingbusiness in Mexico needing to complete atransaction in Mexican pesos, it had to go toEngland. EDC responded to that quandaryby opening its first peso account in Mexico.This marked the first foreign currencyaccount to be located within its localterritory, outside the major internationalfinancial centres.
The account was opened in partnershipwith Scotiabank Inverlat Mexico andrepresents an important milestone for EDCMexico to establish new relationships anddiversify its borrowing base.
Having an account based in the exportingmarket facilitates existing business andopens the door to opportunities that maypreviously have been missed. By providingthe same borrowing currency as local bankswith a same-day settlement period, EDC canbetter serve current and future customerswho need that flexibility. To remain relevantin an increasingly competitive market, itneeds to be able to match local bankfinancing and respond to Mexican customerand prospect needs.
If the peso account is successful, EDC maylook at exploring other local currencyaccounts in markets, such as Singapore,Chile, and India. The bottom line is that toremain relevant in today’s global economy,financial institutions and export creditagencies must be creative with theirofferings in order to meet the needs of itscustomers and foreign markets. ■
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Based on the success of its experience in India, EDC opened a local peso account that offers newopportunities in Mexico. . . . If the peso account issuccessful, EDC may look at exploring other localcurrency accounts in markets, such as Singapore, Chile, and India.
Credendo is the new name of Delcredere | Ducroire, Credimundi, KUPEG, INGO-ONDD, Garant and Trade Credit
www.credendo.com
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In a geographical zone where oil and exportsdominate inter-regional trade figures, theglobal fluctuation in oil prices and decreasingdemand have dampened the economicoutlook of many countries in the MENAregion. However, the ripples of change arenot solely tied to oil, or oil rich nations per se.The MENA region has experienced a wave oftransformations in the past few years and therepercussions are still surfacing. Frompolitical turmoil in numerous countries,ongoing wars which have resulted in agrowing regional, and to a lesser extent,international, refugee crisis, along with theboycotting of one country (Qatar), thebusiness climate is being tried and tested. Allindustries have been impacted and riskmanagement strategies are evolving on a dayto day basis, adapting to a new wave ofchanges.
On an international scale, markets can nolonger function in solitude, rather, a globalmarket place has surfaced and occurrences inremote areas now impact businesses acrosscontinents. This interconnected marketplacehas both advantages and disadvantages.Today, risks that companies are exposed toare diverse and are shared by all entities andmust be proactively dealt with to preservebusiness interests.
In terms of trade,trends have botharisen anddisappeared withinthe same week insome cases. The flowof trade has alsodiverged, withdisruption happeningat numerous phasesin the cycle.
Accordingly, credit insurers are paying closeattention to both safeguard their clients’businesses and mitigate risk.
At present, the global outlook on traderemains uncertain. Brexit’s repercussions arecoming into the spotlight, with companiesmoving their headquarters out of Britain. GulfCooperation Council (GCC) nations areshifting from being oil-dependent economiesto diversified ones, and indications made bythe current US administration that thecountry is shifting towards protectionism aremaking headlines. Political transformations innumerous countries along with thequestionable state of security – all thesefactors impact trade in different ways.
For companies operating and trading insuch a dynamic and challenging marketplace,tailoring solutions as well as diversifying the
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How political risks havedisrupted trade acrossthe MENA regionKarim Nasrallah, general manager of LCI assesses the evolution ofpolitical risks and trade disruption in the MENA region.
Karim Nasrallah
On an international scale, markets can no longerfunction in solitude, rather, a global market place hassurfaced and occurrences in remote areas now impactbusinesses across continents. This interconnectedmarketplace has both advantages and disadvantages.
spread of risk to create a well-balancedportfolio are required.
When it comes to the MENA region, themost notable changes over the past fewyears that have disrupted trade, are theboycotting of Qatar and the dampening ofthe economy in Saudi Arabia. Egypt too haswitnessed a currency devaluation that hasdampened trade and the economy. Each ofthese shifts has brought about political risksthat have impacted the way companies aretrading.
In the case of Qatar, in mid-2017, tensionbegan to rise between Saudi Arabia, theUnited Arab Emirates, Bahrain and Egypt –against the small oil rich nation, with aneconomy that relies heavily on globaldemand for petroleum and liquefied naturalgas (LNG). Qatar is the world’s top exporterof LNG, with key markets including Asia andEurope. Qatar also depends heavily on foodimports, due to unfavourable agriculturalconditions locally. Nearly 40% of Qatar’s foodimports were from Saudi Arabia before theboycott, with a total of 80% of Qatar’s foodrequirements coming from other Arabnations.
However, tensions intensified due topolitical pressures. Within 48 hours, the entiredynamic of the GCC region had changed.Qataris were given mere hours and days toleave the United Arab Emirates, and SaudiArabia ceased all shipments to the country.Qatar Airways was banned from flying overcertain airspaces. Qatar responded byexploring other routes to obtain resources.
This incident has impacted Qatar innumerous ways, with local companiesexperiencing slow collection rates to obtaintheir trade receivables from theaforementioned countries that formed acoalition against the nation. Banks in theUAE, Saudi Arabia, Bahrain and Egypt nowenforce tighter due diligence before anytransfer is made, when dealing with Qataricompanies. This measure went as far as
banks checking and verifying if thetransaction was made before the date of theembargo. In one case, companies in the UAEwere transferring funds via other countries, insmaller installments, to avoid the banksblocking the transfer.
Along with the importing of foodstuffs toQatar, other shipments were also prohibitedfrom entering the small nation. Companiesthat have clients in Qatar responded by
shipping via other nations that were notimpacted by the embargo. Businessesoperating in Qatar have been heavilyimpacted by this move, in particular, thoseexporting goods to GCC nations, and cashflow issues have been at the forefront of theirchallenges.
Shifting to the West, Saudi Arabia perhapswitnessed the greatest transformation, froman oil-rich economic player, to one with adampened economy and negative economicoutlook. The country’s credit rating was cutby Standard & Poor, with the agencyindicating that the decline in oil prices willincrease the budget deficit in a country that
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When it comes to the MENA region, the most notablechanges over the past few years that have disruptedtrade, are the boycotting of Qatar and the dampeningof the economy in Saudi Arabia. Egypt too haswitnessed a currency devaluation that has dampenedtrade and the economy.
The repercussions of thepolitical risks that havemade headlines of late, areexpected to surface overthe coming months.Businesses across theregion have adopted a ‘wait and see’ approach and are takingconservative measures,provisioning for any futuredisruptions.
relies heavily on energy exports, which makeup around 80% of its revenues. The Kingdombrought in top consultants from the worldover, to work on a 2030 version, the goals ofwhich are focused on diversifying itseconomy.
Prior to the decline in oil prices, the SaudiArabian government became both directlyand indirectly involved in two wars, thegrowing turmoil in Syria, in addition toigniting a war in neighbouring Yemen. Bothcases heavily impacted the country’seconomy due to mounting costs related tosustaining / fueling these wars.
These changes have impacted the numberof overdue and claim notifications in 2016, aswell as early 2017, spiking figures. In addition,this repercussion reflects the cost cuttingstrategy that the Saudi Arabian governmentimplemented to salvage the economicdownturn.
In the United Arab Emirates, andparticularly in Dubai, an emirate that madeunfavourable headlines in the 2008 economiccrash that brought its economy to a nearstandstill, many changes have been recordedin recent months. Whilst some positivemovement has been reported in specificsectors of the economy, not all the news isgood.
On the one hand, the number of defaultingand runaway cases, which became the normwhen the financial crisis swept through thecountry, decreased in the first half of 2017.However, the Emirate is still exposed to havemore runaway cases that will result insignificant losses in the coming months.
Moving to the most populous country inthe Arab world, with a population of over 90million, Egypt witnessed trade disruptions asa result of growing political risks in recentyears. Having the third highest GDP in theMENA region, just over $336 billion (2016),the country has been facing many ongoingeconomic challenges.
Egypt’s real GDP, as estimated by
Standard & Poor’s is projected to continue togrow at a moderate rate of just under 4% onaverage, until 2020. One of the majorchallenges that Egypt faced was theunavailability of foreign currency, which led tothe Egyptian Central Bank devaluing theEgyptian pound, resulting in the slowdown ofimports of different types of goods andimpacting trade. However, the market stillshows great potential in the industrial andagricultural sectors, both major contributorsto the GDP. Other key industries in Egyptinclude textiles, food processing, chemicalsand pharmaceuticals.
The Levant region witnessed disruptions intrade as well, due to wars, turmoil andpolitical instability in Syria and Lebanon inspecific. Due to the closing of land bordersbetween Lebanon and Syria, Lebanesebusinesses were forced to ship goods via sea.However, the falling oil prices actually keptshipping costs at bay, which did not dampenexports greatly. However, the outlook for theeconomy remains unstable, with little growthforecasted in the coming months. Trade inSyria came to a near standstill due to theongoing war spanning across the country.
The way forwardThe outlook of trade in the MENA region, aswell as globally, will continue to be uncertainfor the foreseeable future. The repercussionsof the political risks that have made headlinesof late, are expected to surface over thecoming months. Businesses across the regionhave adopted a ‘wait and see’ approach andare taking conservative measures,provisioning for any future disruptions.Growth in the trade sector is unlikely to berecorded in the coming months and willremain relatively stable well into the nearfuture.
Companies need to work on safeguardingtheir assets and insuring their tradereceivables to ensure they stay afloat in timesof turmoil. ■
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These changes have impacted the number of overdue and claim notifications in 2016, as well as early2017, spiking figures. In addition, this repercussionreflects the cost cutting strategy that the Saudi Arabian government implemented to salvage theeconomic downturn.
Berne Union members know well thatopportunities to provide insurance mirror theprevailing trends in global trade. Notsurprisingly, demand for credit insurance hasdiminished slightly in markets whereeconomic activity has slowed down. Thereare some cracks, such as the still-unknownimpact of Brexit on the European Union, butthe global economy overall is faring well.Bilateral trade is growing faster thanmultilateral trade, but the fact that tradingactivity remains robust is quite encouragingfor the credit insurance marketplace.
China and Brazil, for example, previouslyled demand for credit insurance, but latelytheir economies have slowed. That reductionis offset, however, by increased demand forprojects in countries such as Colombia, Peruand Argentina, and continuing strongdemand in South-East Asia. Several areas ofAfrica, including Kenya, Uganda and nationsin West Africa, also are seeing rapiddevelopment.
Infrastructure projects, whether theyinvolve replacing aging assets or constructingnew ones, are needed worldwide andrepresent a significant driver of creditinsurance demand. That is a major reason fornear-term growth opportunities on almostevery continent, even in mature markets suchas the United States and Canada.
Opportunities and risks everywhereA cursory glance at the regions of the worldshows that risks, as well as opportunities toprovide insurance, are everywhere. Instabilityand uncertainty are present in:
Africa. Various countries in sub-SaharanAfrica are experiencing a level of growth andinvestments not seen in a long time. ButSouth Africa, at one time a model ofeconomic growth and stability in the sub-
Saharan region, isstruggling.
Asia. Politicaltensions remain high.China is expected tomake leadershipchanges at its 19thCommunist Partycongress later thisyear. Domesticeconomic pressures
and territorial disputes with its neighboursare mounting. Japan’s economic future isunclear as relations between two of its largesttrading partners, the United States andRussia, evolve. North Korea’s militaryambitions also continue to create tension inthe region.
Europe. The European Union’s future isclouded, with Britain’s withdrawal ongoing.French voters this year averted a similarwithdrawal by electing a presidentialcandidate who supports the EU. Majoreconomic reforms are needed in areas ofEurope to stimulate growth.
Latin America. Brazil is still struggling withan economic recession, though other LatinAmerican nations have made impressivestrides with reforms to improve stability andgrowth.
Middle East. Civil conflicts, a migration ofrefugees and depressed oil prices are taking aheavy toll on the region’s economies.
Despite the widespread distribution ofpolitical risk and economic difficulties,opportunities continue to exist for insurersready to look more deeply at situations thatgive others pause. Political risk and trade creditinsurance are valuable tools, especially now.
Product development neededWith opportunities to provide credit
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Growth opportunitieshigh for political risk andcredit insurance providersDaniel Riordan, president of global political risk, credit & bondinsurance at XL Catlin, examines encouraging signs for the trade creditinsurance marketplace, and looks at regional opportunities and risks.
Daniel Riordan
insurance and project finance protection allover the world, the insurance marketplacemust continue to focus on delivering value. Itis more important than ever to listen tobuyers’ needs and provide products thatmeet those demands.
For example, banks – longtime buyers ofcredit insurance – are under increasingregulatory pressure. Their capital charges oncross-border loans, for example, are thehighest they have ever been. Financialinstitutions that are involved in financinglarge and complex projects need and areseeking capital relief. Credit insurance andproject finance protection play importantroles in providing such relief. Larger capacityand longer tenors from counterparties withrobust balance sheets are especially helpfulto banks today, even more than in the past.
Infrastructure development is oftenconducted in stages over a number of years.Such projects generally require moreprotection over prolonged periods. It ishelpful for credit insurers, where possible, toextend protection up to as long as 20 years.This provides capital relief and reduces riskfor sovereigns and financial institutions. Italso helps communities to realise theprojects’ benefits, whether it is a new rail line,a port expansion, a toll road, an oil or gasfacility, or another form of infrastructure.
Claims environmentThe claims environment in credit insurancehas been relatively light in recent years.Short-term export credit insurance, wheretenors generally are 12 months or less, iswhere the highest frequency of claimsoccurs. Berne Union members have over thepast three years seen moderate increases inshort-term claims paid: $2.0 billion in 2014,$2.58 billion in 2015, and $2.78 billion in 2016.Short-term credit insurance premiums overthat period have fallen slightly. If the loss ratiocontinues to rise without a correspondingincrease in premium, that eventually will hurtinsurers’ results and create changes in themarketplace. The credit insurance market ishealthy for the foreseeable future though.
On medium – and long-term export creditinsurance and lending, claims continue to befairly light, on par in dollar terms with short-term claims. What has changed – and is likelyto increase further – is the amount ofcommercial risk claims. In 2015, for example,Berne Union members paid $1.34 billion incommercial risk medium/long-term claims.This nearly doubled in 2016, to $2.65 billion.
At the same time, claims paid in political riskand lending fell sharply.
The nature of medium/long-term creditinsurance means that claims take some timeto develop. Writers of long-term creditinsurance usually expect to see claimsoccurring around the five-year milestone.Although medium/long-term claims are lowerin frequency than short-term claims, they canbe large. Insurers’ ability to select risks,monitor and analyse conditions and toengage with the appropriate parties – such asgovernment ministers – can mitigate much ofthe loss exposure associated withmedium/long-term credit insurance.
How Berne Union can helpThe Berne Union has provided a valuableforum for both analysing and promotingglobal trade since its founding in 1934. It willremain important for Union members tocollaborate and pool our vast resources – notjust economically but also to share ourexpertise and help each other – to betterunderstand the dynamics in political andcredit risks.
Working together, we can create morerelevant products that serve the changingneeds of our customers. We can offer realsolutions that reduce uncertainty arising fromtrade and provide capital relief.
There is enormous opportunity for Unionmembers to engage in public/privatepartnerships that marry government supportwith expert analytical resources. Combiningour strengths in this fashion can helpmembers to identify and mitigate risks beforethey become claims. Disruptions can amountto much more than temporaryinconveniences; they can in some casesjeopardise entire projects.
Political and economic volatility are,ironically, constant forces in the current ofglobal trade. Navigating uncertainty andmitigating risk are vital to sustaining growthin trade. The Berne Union has played a criticalrole in that for 83 years and will continue todo so. ■
Daniel Riordan is president of global politicalrisk, credit & bond insurance at XL Catlin.Before joining XL Catlin, he held varioussenior executive roles in political risk,specialty and global corporate property andcasualty insurance at a leading global insurer.He has had a long association with the BerneUnion, serving as president from 2013 to 2015.60
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Coface published a study called ‘The rise andrise of political risks’1 in March, presenting anew quantitative model of political risk. Butrecent developments, both in emergingeconomies and developed markets, pushedCoface to review its methodology of politicalrisk assessment because of the potentialdisruptions to business activity that theyentail.
In the past 18 months there have beenelections or referendums in the UnitedKingdom, the United States, Italy, Spain, theNetherlands and France, which have grabbedthe attention of investors, exporters andcountry risk analysts. This has fuelled a lot oftalk about political risk. These political eventsare liable to shift radically the economicorientation of the countries involved. But theywere often restricted to emerging economieswith less robust institutions.
Nevertheless, as a return to growth hasfailed to offer equal opportunities to alleconomic participants, the past decadereminded us that social exasperation couldgrow indistinctively both in developedeconomies and in emerging markets.
Detecting social frustration,identifying political vulnerabilitiesSocial frustration can lead to a popularupheaval in emerging markets. It is on thisintuition that one key module of the Cofacepolitical risk model is built, based on the fullscale example given by the Arab Springdemonstrations, both in its violent and non-violent demonstrations.
The model also builds on the assumptionthat cracks in the foundations of the politicalsystem, which may lie in the nature of theregime, in the design of the institutions, in thedegree of political freedom or in thecohesiveness of the population, expose all themore a country to risks.
Venezuela, plagued by corruption,inequalities, cronyism and corruption, was
12th in our 2016ranking of the riskiestcountries (see graph1) in terms of socialand political fragilities– behind the likes ofSyria, Central AfricanRepublic, Afghanistanand Libya.
The constitutionalcrisis and the
constituent assembly elections happened tospark mass protests. The Coface political andsocial fragilities index indicates thatsignificant emerging countries could also bepotential tinderboxes in the near future,including Brazil, Russia and South Africa.Notable events are a general election inBrazil, a presidential race in Russia and JacobZuma’s succession as the head of SouthAfrica still loom over us.
Much of the literature on political risksstresses that it is unpredictable and poorlydesigned policies which represent the mainthreat to business operation. The political andsocial fragilities pillar in the Coface model aimsto detect weak signals leading to this type of
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The new normal ofhigher political riskRouben Nizard, economist for sub-Saharan Africa, from Coface’sEconomic Research Department, discusses the rise in political risk, andhow political risk assessment must be sharper in the coming years.
Rouben Nizard
Graph 1
economic mismanagement. It was, indeed,observed in emerging countries. For exampleofficially motivated by the idea of eliminatingtraces of colonialism, Zimbabwe’s ‘Fast-TrackLand Reform’ in the early 2000s, whichtranslated into the violent expropriation ofwhite landowners without compensation, waspart of a larger scheme meant to maintainRobert Mugabe and ZANU-PF in power. TheZimbabwean case embodies the idea thatnationalisation, burdensome regulations,expropriations, trade protectionism and so onoften respond to the only objective of holdingon to power. Raising the spectre of thesepolicies might as well serve to cease power.
Why measuring a surge in populistrhetoric became necessaryDesigned to appeal to citizens in dire straits,flawed policies serve a populist rhetoric.Populism, equally from the far-right and thefar-left, often promotes nationalistic policies
targeting and, therefore discriminatingagainst, foreign businesses. Donald Trump’sprotectionist stance during his US electioncampaign sent chills through the businessworlds.
Now in power, he will have to translaterhetoric into actions to please his ownelectorate. Despite all the checks andbalances of the American institutions, thePresident has the legal means to pursue hiseconomic agenda. This often seem to bedictated by Trump’s gut feeling rather thanpolicy effectiveness. Far from reassuring, thefew legal achievements registered in the firstmonths of his presidency only fuel uncertaintyof the business operating environment.
Uncertainty has a price, as demonstratedby the post-referendum United Kingdom.Even though more diffuse than most hadanticipated, the impact of the vote in June isnow undeniably being felt on privateinvestment and consumer confidence,pushing the Bank of England to downgradeits short-term GDP growth forecast (seegraph 2).
One of the most dynamic countries inEurope in the aftermath of the Eurozonecrisis, the United Kingdom, is now set to fall inline with its neighbours by 2018. Coface’spopulism index supplements the collection ofrisks already covered by the political andsocial fragilities. Relying on a databasederived from the textual analysis of politicalparties’ manifestos in 50 countries (ManifestoProject2), our populism index intends toapprehend emerging tensions relating to apopulist rhetoric. Such rhetoric can be seenat play in the UK, the US, the Netherlands andFrance.
At the height of a political violencecycleA measure of risk relating to political violenceis also included in Coface’s politicalassessment. A conflict3 index and terrorismindex has been developed, based on theobservation of past events. Strikingly, theyboth highlight a concurrent surge in conflictoccurrences and terrorist attacks.
The number of conflicts multiplied by 1.5between 2007 and 2015 (see graph 3). Notonly does the number of conflicts increasebut their intensity, as measured by the lossesthey incur, is also on the rise. In 2014 and2015, the 100,000-death threshold wasexceeded for the third time in the past 25years. The current period – with conflicts inSyria, Libya or Yemen – compares with 1991 at
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Graph 2
Graph 3
the height of the Gulf War or 1999-2000, withthe Ethiopia-Eritrea conflict responsible forapproximately 40,000 deaths per year. Datafor 2016, not yet fully available, suggest this100,000-death threshold will be exceeded forthe third year in a row. Simultaneously,terrorism linked essentially to Islamistterrorism, is spreading as a form of politicalviolence. The global terrorism index compiledby Coface multiplied by 2.8 between 2008and 2016 (see graph 4), confirming a rise interrorist activities perceived in Syria, Nigeria,Afghanistan, or Iraq, as well as France, Spain,Germany, Belgium, the UK and the US.
Political violence, while not alwaysconsidered the main barrier to businessoperation in the literature on political risks,does raise business concerns. Full-scaleconflicts can potentially annihilate the entireeconomic fabric of a country, meaning theyare relevant in a political assessment. Indeed,a surge in political violence can proveundeniably harmful to business activity.
Some are directly vulnerable to politicalviolence: an unequal allocation of the country’soil resources in Nigeria, aggravated by ethnicfractionalisation4, which is at the core of theconflict in the Niger Delta, targets specificallyoil production facilities. Groups such as NigerDelta Avengers (NDA) even declare that theywant to reduce Nigeria’s oil production to zero.By targeting tourists in Soussa, Tunisia, Paris,or Barcelona, terrorists attacked one of thedriving forces of the local economy.
Political risk behind us, political riskbefore usThe past 18 months were rich in high-profilepolitical risks. This may implicitly send themessage that the bulk of the problems arenow behind us. But Coface political indexindicates that political risks might persist:vulnerabilities remain and upcoming events inthe next 18 months might trigger politicalcrisis of great concern for business operation.High-stakes elections in Italy, Mexico andBrazil will draw close attention. Recep TayyipErdogan in Turkey and Russia’s VladimirPutin, who will once again be candidate to hisown succession next year, embark theircountries on an unpredictable authoritarianslope. Conflicts and terrorism will continue todisrupt business activity, not only in theMiddle East and Africa but also in Asia,Europe and in the Americas. Theseobservations leave us with no doubt thatpolitical risk will linger on and remain aconcern for businesses. ■
Notes1 http://www.coface.com/News-
Publications/Publications/The-rise-and-rise-of-political-risks
2 Volkens, Andrea / Lehmann, Pola / Matthieß, Theres /Merz, Nicolas / Regel, Sven / Weßels, Bernhard(2017): The Manifesto Data Collection. ManifestoProject (MRG/CMP/MARPOR). Version 2017a. Berlin:Wissenschaftszentrum Berlin für Sozialforschung(WZB).https://doi.org/10.25522/manifesto.mpds.2017a
3 Conflict index is calculated using databaseestablished by the Department of Peace and ConflictResearch at Uppsala University (Sweden) under thename of Uppsala Conflict Data Program (UCDP):http://ucdp.uu.se/
4 Ethnic fractionalization is a measure of ethnicdiversity, resulting from the work of Roberto Alesina(2003).
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Graph 4
Diagram: Coface Political Risk Index
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Italian policies to support exports andinternationalisation are evolving andchanging pace. A new phase in SACE historystarted last year, with a stronger missionassigned to the export credit agency by CDP,the National Promotion Entity which ownsthe company.
CDP conferred to SACE 76% of the sharesof SIMEST, a company supporting Italiancompanies investing abroad. This created thenew Italian Hub for Export andInternationalisation, an organisation with apublic mission and private financialmanagement, devoted to sustaining Italiancompetitiveness in the world.
Targeting SMEsSmall and medium-sized enterprises (SMEs)are the primary targets of the new hub, whichgoes beyond the role of an export creditcompany. There are some 136,000 companiesthat qualify as SMEs in Italy. Of these, 112,000are small and 24,000 midsize, employing 3.8million people and generating 12% of nationalGDP. They represent almost all theentrepreneurial fabric of the country but theirpropensity to export is below their potential,especially compared to their equivalent peersin Europe.
Exporters with between 10 and 49employees account for 47% of the corporateworld in Germany, 48% in Spain, and 29% inItaly, where only 14,500 out of 75,000 smalland midcap companies export over 25% oftheir sales. This translates into 60,000 SMEswith around €20million-€50 million in salesthat could better penetrate the foreign
markets, in a morestructured anddiversified way.
Threecharacteristics ofItalian SMEs areamong the mainobstacles to movingforward: lack of scale,limited extension ofreference markets,
and relatively low research and innovation. The Italian Export and Internationalisation
Hub has two major objectives: to accompanymore Italian companies into foreign marketsand, more importantly, to promote a more“informed” risk culture and a better-targeteddrive for competitiveness in companies thatalready operate abroad. This should lead toan increase of quality in dimensional growth,market expansion, and innovation.
SACE estimates that better support tosmall and midcap companies may generateadditional €140 billion in Italian exports by2018 - one-third more than current values.This is an important opportunity for thecountry, considering the strategiccontribution of exports to Italian growthregarding other components of GDP.
Exports withstood the financial crisis inItaly and, unlike domestic demand, havecontinued to positively contribute to nationalGDP (+4.5% in average during 2010-2015).This trend is expected to be confirmed in2017 and exports are likely to outperformGDP, as the former are expected to grow by3%, with the latter by 0.9%.
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A new model fordriving Italian SMEsworldwideTasked with sustaining Italian export competitiveness worldwide,SACE’s new Italian Hub for Export and Internationalization is focusedon backing SMEs in new and innovative ways. By Alessandra Ricci,chief underwriting officer, SACE.
Alessandra Ricci
A new model for SME supportWhat are the major features of this newmodel aimed at involving and supportingmore SMEs?
The "hub model” takes into account theimportance of SMEs to the Italian economyand the strategic role played by exports. Itcombines the capacity of intervention of thepublic sector with the flexibility of a privateenterprise. There are several significantimplications for Italian SMEs: a range ofservices beyond the traditional export creditsupport; a proactive approach vis à vis theclient, and a focus on education, withdedicated advisory services and analysis ofmarkets and exports.
SACE's 2016-2020 business plan includesthe re-engineering of many products, fromexport and credit insurance to protection offoreign investments, from financialguarantees to factoring services, and frombonds to equity investments and low-interestloans.
Flexible integrated solutions have beendeveloped for several core industries of“Made in Italy” worldwide, such as the agri-food and wine sectors. SACE providesinstruments that aim to sustain the entireproduct life cycle, from production to sale. Itoffers protection of inventories and supportsfinancial requirements for the productionprocesses typical of these sectors.
SACE is currently digitialising the productsused by SMEs and upgrading the remotecontact channels, both on and offline, toboost accessibility. It has also increased itsdomestic and overseas network, which todayhas 14 offices in Italy and ten abroad.
Lastly, the theme of education is an
important new frontier for the hub. Italian companies are still under-insured
compared to those in other countries, as theyoften view insurance as a cost rather than animportant indicator of competitiveness. Theratio of GDP to volumes insured by
companies in Italy is about one-third of otherEuropean countries.
The hub emphasises advisory servicesaimed at providing companies withmanagerial support and consulting on growthstrategies abroad. It indicates businessopportunities in high-potential countries andproposes business-matching meetings, aswell as financial and insurance solutionstailored to their needs.
Promoting a more evolved “risk culture”means promoting education, but alsoensuring that those who develop it arerewarded. For this reason, the hub willincreasingly work with banks and financialinstitutions so that companies which insuretheir receivables against the risk of default(thus protecting their revenue) receive ahigher credit standing when seekingfinancing. ■
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The “hub model” takes into account the importance ofSMEs to the Italian economy and the strategic roleplayed by exports. It combines the capacity ofintervention of the public sector with the flexibility of aprivate enterprise. There are several significantimplications for Italian SMEs: a range of services beyondthe traditional export credit support; a proactiveapproach vis à vis the client, and a focus on education,with dedicated advisory services and analysis ofmarkets and exports.
Promoting a more evolved “risk culture”means promotingeducation, but alsoensuring that those whodevelop it are rewarded.
During 2016, EKN contributed to more SMEexport transactions. Seventy-nine SMEsbecame new clients of EKN and guaranteevolume also increased. This is the result of anincreased sales-driven and customer-focusedapproach through regional presence,intensified marketing and sales activities aswell as collaboration with local bank offices.During the year, EKN employees made morethan a thousand visits to companies andbanks around the country.
The number of EKN guaranteed SMEstransactions in 2016 increased from 537 to599. During the year, 271 companies in thissegment were EKN clients, compared with263 the previous year. More and morecompanies offer their customers credit andinsure their risk with EKN or get help withfinance, with the bank insuring its risk on thecompany with EKN.
Variety of industriesSMEs are particularly important fordeveloping Swedish exports. EKN has aspecific mandate to promote thesecompanies’ exports and the guaranteesissued relating to SMEs’ export transactionstotal around €260 million in 2016. This meansa contribution to Sweden’s GDP of €125million and around 1,300 jobs. Theguaranteed SME companies have 5,507employees in total. This demonstrates EKN’ssignificance as a complement and catalyst forthis corporate segment’s exports to moredifficult markets. EKN helps many of thesecompanies to take the first step out into theexport market.
The SMEs that complete transactions withthe assistance of EKN represent manydifferent industries. The largest section,
equating to 62% ofthe guarantee volume,is made up ofcompanies that sellequipment tomanufacturingindustry, such aselectroniccomponents, circuitboards andmachinery. After this
comes wholesaling, especially in paper andcraft paper. Wholesaling represents 19% ofthe guarantee volume. In third place arecompanies involved in technical consultancyand the building sector, and companies thatare active in design and interiors. Companiesthat are sub-suppliers to the exportingindustry are also EKN customers.
Priority target groupSweden is a small, export-dependent country.Nearly 50% of the country’s GDP consists ofexport revenues. Successful Swedishmultinational companies such as Ericsson,Scania, Volvo and SAAB have used EKN’sguarantees for a long time in order to boosttheir competitiveness in internationalmarkets. However, SMEs utilise the sameopportunities to a far too low extent.
The vast majority of Swedish exports go toneighbouring countries in Europe - above allto our closest neighbour Norway, and toGermany and other EU countries. The manyyears of weak growth in a number of OECDmarkets have meant a greater need to takeadvantage of the higher growth in marketsfurther afield, especially in Asia, but also inthe Middle East and the Gulf countries, Africaand Latin America.
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Reaching out toexporting SMEsFor the third consecutive year, EKN, the Swedish export credit agency, reports a record level for the number of small and medium-sized business customers in 2016. Increasing numbers of suchcompanies are taking advantage of business opportunities inemerging markets around the world, with the help of the SwedishGovernment's export credit guarantees. By Carl-Johan Karlsson, headof the SME business area at EKN.
Carl-Johan Karlsson
EKN began a specific drive to reach out tomore SMEs already in 2007. A separatebusiness area with particular focus on thetarget group was created as a first step. TheSwedish SME segment is a very diversetarget group, and there are several challengesin reaching out to them in regard to exportcredit guarantees.
SMEs’ challenges In Sweden, approximately 14,000 companieswith exports to emerging markets have fewerthan 250 employees. Most operate as soleproprietorships and have limited resourcesand interest in expanding their exports. Thesegment's exports to emerging markets islimited, as are the development plans forreaching more markets. Many Swedish SMEsare also suppliers to the major exportingcompanies.
There is a more widespread businessculture among Swedish SMEs, compared tomany other countries in Europe, not to insuretheir customer credit. It is more commonthat Swedish companies demand advancepayment. Only 20% of SMEs exporting toemerging markets responded that they offercustomers credit, according to a survey EKNcarried out in 2015. Of these, 24% reportedhaving used credit insurance, which is a bigincrease compared to the previous year when14% answered yes to this question.
Another challenge is the low awareness ofEKN among the target group - an awarenessof less than 50% in 2016. The perception thatgovernment guarantees are only for largecompanies is also widespread among thosewho are familiar with EKN.
Long-term focusAfter the financial crisis, EKN began a moreintensive drive to reach out to more SMEs. Anew strategy for a greater SME focus wasadopted by management and the Board.Clear results were able to be presentedalready in 2014. The number of guarantees toSMEs rose to record levels and the number ofcustomers grew steadily. Since then, asmentioned earlier, a new record was set inthree consecutive years.
The key focus areas behind the positivedevelopment can be summarised in threepoints; increased regional presence, intensifiedmarketing and product development.
Increased local presenceIn the first year of executing the new SMEstrategy, EKN established local offices in
Göteborg and Malmö (the second and thirdlargest cities in Sweden). During 2016, thelocal presence has been further increasedwith a new office in Umeå (in northernSweden) and with more employees inGöteborg, as well as with external financeconsultants in five cities throughout Sweden.The consultants have a well-developednetwork in their regions and work closelywith local industry and commercial banks.They extend the reach of EKN’s regionalpresence.
Intensified marketingOver the past two years, EKN has investedmore in advertising and various marketingpartnerships to reach out to SMEs. For twoyears in a row, EKN has been a partner to thenationwide growth company competition, DiGasell, run by Dagens Industri, the leadingSwedish business newspaper. Thiscompetition awards the most successful fast-growing SMEs in Sweden. Events aroundSweden enable networking with thesecompanies and the opportunity to promoteEKN and EKN's offer to the target group.EKN awards an annual prize to the growthcompany that has been most successful withexports to emerging markets. EKN has alsoexpanded its presence in social media andhas customised marketing messages to thetarget group.
Product adaptationFor many SMEs it is not primarily to securetheir receivables that they turn to EKN, but tostrengthen their ability to get the bank toprovide financing. Banks that issue contractguarantees and lend working capital andinvestment capital can share the risk in thesub-supplier with EKN. EKN's working capitalloan guarantees and investment guaranteesare important instruments for SMEs. Theguarantees have been developed to betteradapt to the needs of the target group, andare now aimed at sub-suppliers too.
When companies insure their receivableswith EKN, this can act as security for a bankloan. This is the main reason why SMEsbecome EKN customers. Companies alsoneed the banks’ support with working capitalcredit and bank guarantees. When EKNshares the bank’s risk on the company, itbecomes easier for the company to obtainfinance from the bank. Around 97% ofSweden’s local bank offices are aware of EKN,and collaboration with the banks is vital toenable more SMEs to grow internationally
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with EKN’s assistance. Around 80% ofguaranteed transactions for SMEs come viathe banks.
Firmly anchoredThe SME focus is firmly anchored in EKN’sBoard and management and this has beencrucial to the success of the SME initiative.But even the principal - the SwedishGovernment - has explicitly given EKN thetask of raising awareness among SMEs abouthow guarantees can strengthen exportcapacity as part of the Government's exportstrategy.
A couple of years ago, in 2015, the SwedishGovernment adopted a new export strategywith the aim of increasing Swedish exportsand encouraging more companies to sell toemerging markets. It was stated that SMEsneed to increase exports, and a number ofpriority export markets among the emergingcountries were defined. Furthermore, theexport strategy established that the Swedishgovernmental export promotionorganisations should improve theircooperation and facilitate contact channelsfor companies.
Asia is an attractive export marketIn order to increase knowledge about SMEs
need for support from EKN, EKN hasproduced a report for a number of years onSMEs exports to emerging markets. Thereports have provided clear information thatthe number of companies exporting toemerging markets in the SME segment isgrowing year by year. The value of exports toemerging markets from Swedish SMEs is alsoincreasing. The number of SMEs exporting toemerging markets reached record levels forthree years in a row. At the same time,exports to emerging markets account for only13% of the total exports of SMEs, according tothe latest survey conducted in 2015.
Asia is clearly the hottest growth marketfor Swedish SMEs. Asian markets account fornearly half of SMEs’ exports to emergingmarkets. It is also there that exports havegrown most strongly in the past five years -the volume has increased 65% since 2005. In2015, exports grew by 12%, and China is thegrowth market that most companies areattracted by. It is a positive that SMEs arefocusing on Asia, given the potential of thesemarkets.
Focus going forwardBecause of the large proportion of guaranteevolume coming from banks, EKN is now
working to further develop its relationshipwith local bank branches around the country,to increase their knowledge about how EKNcan enhance the bank's ability to financesmall enterprises’ export business.
The challenges ahead include raisingawareness among SMEs, which, despite greatefforts, is moving slowly. This requires acontinued high level of activity in terms ofboth extensive and targeted marketing. TheSMEs also play a leading role for greaterflexibility and efficiency in EKN's internalprocesses and product development. Thedemand for strong commercial expertise in agovernmental structure increases for EKN’semployees.
Sweden is a country with a high level of ITmaturity and is at the forefront in theutilisation of the opportunities of web-basedbusiness models among entrepreneurs who
take advantage of the opportunities thatarise in a digital and connected world. Thesecompanies are ‘born global’. The focus is noton one market at a time, but rather on ten ortwenty. Exports are also becoming moreservice-based, and global value chains arebecoming more complex. This requiresflexibility and agility for the relevance ofexport support.
Swedish SME's exports to emergingmarkets, as previously described, are multi-faceted. For example, EKN’s customersinclude companies selling ice hockeyequipment to Russia, forestry machines tothe Philippines, pilot boats to the United ArabEmirates and blood analysis systems toAfrican countries south of the Sahara.
However, there is potential for morecompanies to achieve success with exportsand growth in new markets, and EKNcontinues to further extend the focus onreaching out to SMEs. ■
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Only 20% of SMEs exporting toemerging markets responded that theyoffer customers credit, according to asurvey EKN carried out in 2015. Ofthese, 24% reported having used creditinsurance, which is a big increasecompared to the previous year when 14% answered yes to this question.
Ensuring that profitable projects do not faildue to lack of financing, is an important partof Finnvera’s mandate as a state-backed riskfinancier. Small and medium-sizedenterprises (SMEs) have become animportant part of our export credit agency(ECA) mandates. We all like to (repeatedly)state this in our strategies and in ourcommunications, both internally andexternally. Certainly, many ECAs havestreamlined their products and processes tobetter serve their SME clients.
Finnvera too has ‘upgraded’ its productstargeting SMEs or small transactions ingeneral. The group recently launched ‘ExportReceivables Guarantee’ aimed at theexporter and ‘Receivables PurchaseGuarantee’ aimed at banks financing exportinvoices. Finnvera has also introduced a ‘Billof Exchange Guarantee’ for markets wherebills of exchange work well as a simple wayof documenting an export credit. In the tradecredit business, these new modified creditinsurances and buyer credit guarantees servethe short-term credit insurance withrelatively small amounts. However, there hasbeen some discussion about longer creditterms and about the possibility to offerdirect cross-border export credits for smalltransactions – a business area where banksseem to have lost interest due to ever-increasing transaction costs resulting fromtightening regulation.
Many ECAs have inrecent yearssuccessfullyintroduced productssuch as WorkingCapital Guarantee.From our perspectivethis seems curious asFinnvera has beencombining domesticSME financing and an
export credit agency from the beginning andhas always had Working Capital Guarantee inits product portfolio. Providing creditenhancement for the working capital needsof SMEs, has been bread and butter in ourbusiness model since the 1960s.
When working with SMEs, one must usesimplified policies and procedures. MostECAs have by now introduced SME-friendlyapproaches to process applications quicklyand efficiently and to offer products with aminimal amount of ‘fine print’.
But what else can be done for SMEs apartfrom improving products and processes? Inits risk policy, Finnvera has introducedincreased flexibility, a more aggressiveapproach to taking risk in SME exporters’small transactions compared to largerexporters’ transactions. This may be shown,for example, in accepting a lower level ofinformation required on the buyer. We haveexperienced a tendency where SMEs often
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Taking SME supportto the next levelKatja Keitaanniemi, executive vice president responsible for SMEs atFinland’s Finnvera, explains what special measures the group takes tolook after smaller businesses.
Katja Keitaanniemi
When working with SMEs, one must use simplified policiesand procedures. Most ECAs have by now introduced SME-friendly approaches to process applications quicklyand efficiently and to offer products with a minimalamount of ‘fine print’.
sell or export to other SMEs – and the buyercredit information tends to be insufficient orvery scarce. In such cases, Finnvera can bemore flexible. The experience so far isencouraging. If loss ratios turned out to behigher, one could argue that the impact ofthese transactions for SMEs is very high andthe SME-related buyer credit portfolio is onlya small fraction of Finnvera’s overall portfolio.
Focusing merely on products is clearly notenough - and may even be a bit old-fashioned. SMEs may not know whichproducts they need or want. And clientmanagers in commercial banks working withgrowth oriented SMEs and mid-caps mayhave gaps in their knowledge of financinginstruments used in foreign trade. To bridgethese gaps Finnvera has been organisingtraining programmes both for growthoriented companies and their bankers. It isnow considering the next step: offering tradefinance-related consulting services for SMEs.
As a domestic SME financier, Finnveraoffers a product palette that covers loansand guarantees from investments andworking capital to financing changes ofcompany ownership, environmentalguarantees, start-up -guarantees,internationalisation guarantees, etc. Untilrecently the products on offer also includedearly stage Venture Capital ‘Seed Financing’for innovative growth-oriented SMEs. Thespecial focus is to offer a palette that coversfinancing needs from the start tointernationalisation. And for the customer, itdoes not really matter which product isbeing used: they just need financing or riskcover.
Finnvera focuses specifically on SMEsaiming at growth and internationalisation.Our target clients are growing andglobalising enterprises - or ‘global’companies. The special unit that covers thismarket segment offers both domesticfinancing needs and export credit products.It is absolutely essential that our clientrelationship and credit managers can offersolutions on a larger scale of financing needsso that domestic SME financing and exportcredit guarantees as operational functions donot work in silos.
This of course requires some expertisefrom the personnel as they need to master awider range of products. These particularclient managers focusing on growth-orientedand export-oriented customers are veryexperienced and have worked on both thedomestic and the export finance side of
business. The same specialisation is neededon the credit manager side as Finnvera hasseparated its credit function from its clientfunction. Finnvera has some 1,000 clients inthis customer segment taken care of byaround 20 highly skilled customerrelationship managers, and the yearlyoffering reaches to several hundreds ofmillions of euros.
Combining domestic financing solutionswith export credit agency offerings is not all:Finnvera is part of ‘Team Finland’, whichgathers various official actors together to
find synergies when serving customers. TeamFinland members include other importantstate-backed agencies or entities promotinginnovation and growth such as TEKES(organisation for financing research,development and innovation), Finpro(Finland’s export promotion agency helpingSMEs to export), and TESI (equity / venturecapital provider). These groups share thesame premises in the same office building. Intotal, 600 experts from four separateorganisations now share a modern openplan, multi-space office focusing on theirjoint customer base of growth and export-oriented companies.
We are quite sure that the next megatrendin public SME financing will be in externalfocusing and cooperation, not any more ininternal concentration: how to combineforces with your colleague organisations toserve SMEs better. This requires a newattitude, but Finnvera is determined toremain in the frontline in finding new andbetter ways to support SMEs. In the end, it isresults that matter: we need more ‘global’companies! ■
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In its risk policy, Finnverahas introduced increasedflexibility, a moreaggressive approach to taking risk in SMEexporters’ smalltransactions compared to larger exporters’transactions.
In 2015, Agência Brasileira Gestora de FundosGarantidores e Garantias (ABGF), acting asan export credit insurance agency, deployeda micro, small and medium enterprises(MSME) export credit insurance officialsupport scheme together with the GuardianAuthority*. The instrument was developedover two years and required extensiveresearch and deep discussions between theBrazilian authorities and exporters fromdifferent sectors and regions to capture theessence of business trends and demand.
The history of MSME export creditinsurance support is short, dating back to2013 when ABGF was requested to providefindings on market gaps in the segment andto assess the real need for such a tool.Brazilian exports have been extremelyconcentrated in the hands of 500 enterprises,which are responsible for 80% of thecountry’s total exports. The remaining 20%comes from 23,000 enterprises with annualoverseas sales worth up to $5 million.Nevertheless, only a small fraction of Brazil’sMSMEs are active exporters because of aguarantees market gap. Whereas indeveloping economies MSME exportsrepresent on average 10% of total exports,Brazilian MSMEs account for no more than2.5% of the country’s exports.
Product researchIn our research, we quickly realised thatMSMEs’ inability to provide the guaranteestraditionally requested by commercial banksmarginalised an enormous number ofenterprises from the financing system. Thisunconducive environment needed to becorrected if MSMEs were to venture intooverseas markets and increase their share oftotal exports. Official support in the form ofexport credit insurance seemed to be the
right tool to fill thegap as banks werereluctant to engage insuch MSME dealsgiven that theysystematically do notpay off. On the otherhand, many MSMEswere seeking exportcover on their own viaself-insurance.
The desired solution to MSMEs’expectations would have to be simple,scalable and far-reaching from the point ofview of the enterprises, the banks and theGuardian Authority. At the same time, it wasimperative that any proposed scheme shouldhave the lowest possible administrative costto take into account the budget constraintsand ABGF’s “more with less” public policyapproach.
Another key design issue was how to builda platform on which all players could interactsecurely, from the initial application to theissuance of the policy. Moreover, the marketdynamics called for a tool that expedited theprocess of application, risk assessment,pricing and policy issuance as fast aspossible. Adjustments were required afterexhaustive testing and the first demo versionoutcomes, but gradually ABGF and theGuardian Authority have found the right path.
As a result, the product involves a fast-track decision process, free of paperwork. Theapplicant goes online and applies for cover bysimply stating country, sector, name and thebuyer’s characteristics, as well as requesting acredit limit for the export. ABGF assesses theexporter risk (pre-shipment cover) and/or thebuyer (post-shipment cover) risk, flagging thecredit limit available and a premiumcorresponding to the risk score. This whole
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Building and operatingan MSME export creditinsurance facility in Brazil ABGF has been working on MSME full-range insurance cover aimed at facilitating prospecting and exports to new buyers abroad. Marcelo Franco, CEO at ABGF, explains the new offering and how it was developed. Co-author Pedro Carriço, ABGF’s creditunderwriting & international relations executive manager.
Marcelo Franco
process takes an average of five working daysif there is enough information on the buyer’sdata and risk profile. ABGF estimates thatend-to-end processing should takeapproximately 10 days.
MSME feedback goodThe feedback from MSMEs that are in contactwith ABGF experts is highly positive andgives us fresh input to keep improving. So far,the MSME team has processed 338transactions from 130 unique exporters in 22different countries, generating exposure ofapproximately $13 million. As of yet, therehave been no claims filed.
Although ABGF was pushed to launch witha post-shipment only cover, the currentproduct is now closely aligned with initialmarket requests for a complete MSME toolencompassing pre- and post-shipment cover.Eligible enterprises must make no more than$3 million of total export sales yearly and havetotal turnover of up to $30 million. Roughlyspeaking, in this example, 10% of the totalturnover can be insured by the current facility.
Behind the scenes, ABGF had a lot ofpaperwork to do in parallel with the product,such as step-by-step online systeminstructions and the export credit insurancegeneral and particular conditions, as well asthe actuarial and technical paper for pricingand risk assessment mapped to the correctrating. We are very proud of the productrolled out, which we believe meets the needsof both exporters and banks.
We realised however that gatheringtogether even the above-mentioned 23,000MSMEs already registered in officiallycompiled data and educating them aboutexport credit insurance and the technicalitiesof this industry would be a big challenge.
In addition, an online presence would notbe enough to reach the rest of theaddressable market of non-exporter MSMEs.A toolkit, workshops and webinars have arole to play in reaching out to these firms, butthere is still an important hurdle to overcomein the management style and mind-set ofMSMEs to help them access a combination ofinsurance and financing via an online tool.
Education and export coverOur current priority is education on export-related insurance and how to apply for coverfor overseas sales. But for those still outsidethe export business, ABGF has been lookingat partnering with official banks and privateexport representatives, campaigning for more
public information on export facilities.Export and credit insurance promotion is
inherent to ABGF’s mandate and should be aconstant focus of our activities, but we havebeen very careful to avoid undercutting orinterfering with the market. Official supportshould come into play where there is amarket gap or failure. Although a period ofpoor performance might open up space forpublic support, we stick to the philosophy ofnot competing with private insurers.
Since pre-shipment should be an incentivefor export production, ABGF launched aproduct that combines a full working capitalinsurance facility with export credit risk cover.Doubtless there is a market gap in MSMEworking capital cover. Commercial banks arenot willing to provide such a credit linewithout appropriate protection, basicallyrelying on their credit scoring systems and/orrecourse against MSME’s balance sheet. Inmost cases, banks are unable to financeMSMEs without regular guarantees. ABGFhas been studying this market and concludedthat the most efficient cover would be a pre-and/or post-shipment product. Of course,MSMEs served under the official support areexpected to produce and sell abroad.
To that end, ABGF has also been preparinga stand-alone pre-shipment cover, whichshould be launched in the current year sincethe Guardian Authority has already revisedand authorised the product.. The main taskfor ABGF is to educate MSMEs and promotethe official cover around the country, much asit did previously with the post-shipmentproduct.
Furthermore, ABGF has also been lookingat prospecting cover for MSMEs that are keenon exploring to overseas markets but do nothave enough resources to look for businessopportunities abroad. This should bechallenging for MSMEs, and ABGFunderstands that a complete service forthese enterprises should include prospectingas well as pre- and post-shipment cover.
In short, the ABGF team has been workingon an MSME full-range insurance cover aimedat facilitating prospecting and exports to newbuyers abroad. We are convinced that MSMEexport success depends on the facilitiesprovided as well as on the enterprises’production ability and willingness to export. ■
*Guardian Authority is the Secretary for InternationalAffairs (SAIN) of the Ministry of Finance as a policymaker which is responsible for the certificate ofguarantee and for hiring ABGF, as fully state-ownedenterprise, to run the export credit guarantee business.
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Brazilian Guarantees Agency
www.abgf.gov.br
Brasília, Federal District - BrazilSAS, Quadra 03, Bloco O, 11º andar, Sala 1000, Órgãos Regionais. Zip code: 70.079-900+55 (61) 3246-6200 / 6201
Rio de Janeiro, Rio de Janeiro - BrazilAv. Rio Branco, 1 - 9º andar - Parte B - Centro.
Zip code: 20.090-003+55 (21) 2510-5000
ABGF - Brazilian Guarantees AgencyThe Brazilian Guarantees Agency is in charge of the export credit insurance and
20 years of experience. 182 exporters served. USD 20.7 billion in 49 countries. The export credit insurance achieved USD 2.4 billion in 2016.
service to our clients facilitating the export cover process and building an export credit loss protection culture.
COSEC’s board of directors lead an importantrhetoric for the relationship between creditinsurers and SMEs, focusing on theopportunities won and lost in Portugal, andthe introduction of a new tool.
The financial crisis of 2008 wasdetrimental to the Portuguese economy andled the Portuguese companies to betterassess the relationship with their customersand the risks that may arise from launchingnew business abroad. The approach ofPortuguese companies to a risk mitigationtool, reflects the advantages of creditinsurance, namely protection against financiallosses (customer debts) and the safemanagement of their financial needs.
In an increasingly competitive market, it is ofparamount importance to create favourableconditions for the development of SMEbusiness, with solutions tailored according totheir needs. Portugal is a country that hasseveral opportunities, support and incentivesthat stand out for the quality and accuracy ofanalysis, so that it is ensured that theinvestment made will bring real returns both tothe exporting companies, or to the ones thatintend to develop their internationalisation, aswell as to the supporting entities (state,banking, insurance companies).
During this period, COSEC has madeintensive efforts to better support SMEs andto spark their interest by launching the newexport credit insurance solutions into themarket. Credit insurance is a fundamentaltool to avoid possible defaults, both in caseswhere trade is carried out domestically, andin transactions involving the export of itsproducts or services to market and non-marketable risk countries.
Not surprisingly, a study on SMEsconducted at European level by ourshareholder Euler Hermes, concluded thatmost companies using credit insurance
export on average to twice as many countriesas those without such insurance. Thesecompanies are increasingly aware of the needto protect commercial credit risk and alsopolitical risk, when exporting to non-marketable risk countries, where thecommercial and political risks are significantlyhigher than those encountered in marketablerisk countries.
Considering the challenges that thePortuguese SMEs are facing in the credit riskmanagement, and taking into account thespecificity of the SMEs market, COSEC offers,together with the banking sector, simplifiedand standard solutions that supportcompanies in the management and control ofcredits in the internal and external markets.
Although nowadays most banks offershort and mid-term financing, tailored to theneeds of each SME, the truth is that access tofinance remains one of the major challengesfor these companies. The role of banks is veryimportant, since through the diversity of theirdistribution network, they not only promote,but also facilitate companies’ access to thesetypes of solutions. In our experience, thecomplementarity of banking with creditinsurance is very relevant for SMEs. COSEC’scredit insurance has allowed many SMEs theaccess to bank financing. Through theendorsement of the export credit policies,banks are more willing to support exporttransactions for SMEs. This type of solution isnot only highly valued by the companies, butalso contributes to the enlargement of themarket: for instance, COSEC has grown, inthe past years, 25% in the number of new clients. ■
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The importance ofcredit insurance fornational SMEs By COSEC
Over the last 20 years, the private sectorinsurance market covering non-payment riskhas gone through a transformation in bothscale and capability that has not been fullyrecognised other than by users and providersof this credit risk mitigation tool.
Not only has the private market grownexponentially in terms of numbers ofparticipants and per risk capacity, it has alsoconfidently withstood the global financialcrisis and weathered the recent commoditydownturn, supporting clients paying billionsof dollars of claims in the process. BerneUnion numbers show the significant amountof credit insurance coverage provided byprivate sector members in 2016, although it isworth noting that most private sectorinsurers are not members of the Berne Union.
More banks using private insurersBanks have been active users of non-payment coverage from the private marketfor over 20 years but this has increasedsubstantially since the global financial crisis.A large majority of participants in theInternational Chamber of Commerce (ICC)Trade Register report for 2016 are clients ofthe private market, although only exportcredit agency (ECA) support of tradetransactions is acknowledged in the report. Inaddition, banks active in the financing oftrade receivables benefit from billions ofdollars of coverage provided by wholeturnover insurance policies. At the long-termend of the financing spectrum, eight out ofthe 10 most active project finance banks arecore clients of the private market.
Traditionally, banks have used non-payment insurance to manage counterpartylimits and credit risk when considering newtransactions. Since its acknowledgement bythe Basel Committee,1 many banks have alsobeen able to deploy this product for capital
relief. More recently,private insurers havebeen partnering withbanks to help manageportfolios ofexposures already onthe books of thebank. For example,Risk.net’s Risk Awards2017 named BNPParibas Credit
Portfolio Manager of the Year for itsinnovative approach, which included thesharing of existing facilities with the privatemarket, with the specific aim of obtainingcapital savings while avoiding some of thedownsides of traditional credit portfoliomanagement tools such as credit defaultswaps.
In this period of growth, underwriters haveconcentrated on developing their productsand building their teams, platforms, pricingmodels and client and broker relationships.Engagement with a wider audience ofstakeholders has taken a back seat.
Raising private insurer profile withregulatorsRecent changes announced or contemplatedby bank regulators – the ‘Basel IV’consultation on changes to the internalratings based models, and the EuropeanCommission’s amendments to the CapitalRequirements Directive (CRD 4) and CapitalRequirement Regulation (CRR) – havehighlighted the need for the private market totake a more proactive role in ensuring that itsvoice is heard as regulators continue to revisethe capital framework for banks.
While there is significantly more to bedone to recognise the role the private marketplays in supporting international trade andinvestment, many private insurers have
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Time to stand up andbe counted The volume of private insurance market credit risk mitigation isgrowing – but does the industry do enough to voice its activities and concerns to regulators? By Peter Sprent, head of global financial risk at Liberty Specialty Markets and Audrey Zuck, director, A2Z Risk Services Ltd.
Peter Sprent
increased their profiles in finance industryassociations and other internationalinstitutions.
Private market membership in the BerneUnion is growing, as is participation in theInternational Association for Credit PortfolioManagers (IACPM) and in the InternationalTrade and Forfaiting Association (ITFA),which formed an insurance committee toaddress its members’ interest in the product.In its submission to Basel IV, ITFA noted that“insurance, although a conditional product,has responded consistently in paying claimsto banks under non-payment policies,justifying banks’ treatment of insurancepolicies as guarantees.”2
Private and ECA – are theyeqivalent?The private market product is equivalent toECA coverage in as much as: ● Performance is uncorrelated to underlying
risk● There is a direct claim against the insurers,
which are located in strong and stablejurisdictions
● Coverage is provided by highly ratedentities (generally minimum A- financialstrength rating from Standard & Poor’s orequivalent rating agency)
● Insurers conduct their own credit analysisbefore a risk is selected to be covered,providing independent validation of thecounterparty risk.The ICC’s 2016 Trade Register noted that
medium- and long-term trade finance is lowrisk largely because transactions are coveredby investment-grade ECAs sponsored byhigh-income OECD governments which havenever defaulted on a valid claim3. The privatemarket also has an excellent track record ofpaying out valid claims, but information ispatchy at best. While brokers have beenproviding their claims data as proof4, there isa growing need for more detailed andcomprehensive data to support the wideradoption of the product by banks and helpconvince regulators and government bodiesthat the product is a strong credit riskmitigation option.
In addition to strong claims performance,the private market has other unique benefits:● Multi-line insurers’ other lines of business
are highly uncorrelated with credit defaultcoverage
● The prudential regulatory regimes in themain jurisdictions impose substantialcapital requirements on private insurers,
designed to ensure that private insurersalways maintain sufficient capital to fulfiltheir payment obligations to policyholders.In the rare event of an insurance companyinsolvency, applicable law and regulation inmost jurisdictions would ensure that, aspolicyholder, the bank stands in aprivileged position ahead of regularcreditors
● As witnessed by the BNPP examplementioned above, private insurance isflexible in application, with the ability tocommit quickly to coverage once riskanalysis has been satisfactorily completed.Looking specifically at the proposed
amendments to the CRD4 and CRR, while therationale for excusing loans insured by ECAsfrom the leverage ratio is consistent with therisk weighting of zero for banks’ exposure totheir own governments in local currency, webelieve that the focus solely on ECAs’provision of credit risk protection is a missedopportunity.
The private market is an important partnerfor banks, and private insurers are anincreasing presence in internationalinstitutions supporting the financing of theglobal economy. However, the private markethas yet to pull together coherent andconsistent data to demonstrate to regulatorsand other interested parties the performanceof the private insurance product thatwarrants more explicit recognition of its meritas a credit risk mitigant. With the help ofbanks, industry groups, and private insurerswilling to provide more comprehensivepremium and claims data, we believe we canprove that the size, scale, professionalism andother benefits of the private insurance marketjustify greater recognition. ■
Notes1 Basel Committee on Banking Supervision: QIS3, FAQ
E: Credit Risk Mitigation, FAQ62 Letter to the Basel Committee on Banking
Supervision dated 24 June, 20163 2016 ICC Trade Register report, pp 51 and 734 For example, BPL Global, a specialist trade credit risk
broker, notes that over the last 30 years and inrespect of claims for exporters, traders and banks,overall 95.5% of their claims for non-payment weresettled in full; 3% were settled amicably but not forthe full amount because of operational issues withrespect to the underlying transaction; and only 1.5%were denied either for breach of policy condition orbecause the client could not produce evidence tosupport the claim.
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The international credit insurance industryhas proven itself to be very resilient andhighly credible, particularly through therecent economic downturn. However, thereare vital geographies and market segmentsthat are simply untapped from a creditinsurance perspective. And to realise thehuge opportunities they present, the industrymust re-evaluate its proposition to customers.
The industry also needs to adjust to a newecosystem and look at how it could improveoperations and take advantage of an overhaulof its services. For an industry that has beensuccessfully operating for over a century, thiswill mean embracing change and pushing atestablished conventions – but the rewardswill be worth it.
Many of the processes and product-typesthat characterised the early days of theindustry are still in use, and while it could beargued that these have held insurancecompanies and their customers in good steadfor a long time, they are now ripe for change.What we want to see is an expansion of thisestablished model. Worldwide premiumshave been increasing since 2003, but mainlyoutside the core European markets, and theindustry has a great opportunity for furthergrowth if it is outward looking and bold.
The long-standing influence of a handful ofEuropean insurers has brought benefits.Critical mass has kept costs down, the markethas diversified within controllable limits andmulti-country services have been developed.Risk control has been supported by a largebase of European buyers.
What about the rest of the world? There areboth challenges and opportunities, and thereare many territories that offer highlyadvantageous opportunities for marketpenetration. Growth of credit insurance in theUS, for example, has been restricted by anopen business culture, acceptable bankruptcy
legislation, a perceivedhigh cost, and verylimited export flowfrom mid-sizedAmerican companies,particularly to marketsother than Canada,Mexico and a fewEuropean countries.Additionally, creditinsurance never
managed to integrate effectively with thefinance industry, notably to provide jointreceivable financing solutions to SMEs.
What businesses in that area are missing isthe massive emergence of global tradeprospects with burgeoning markets in the FarEast, Latin America, India and other parts ofAsia and Africa. Exporters must be eyeingthese markets and looking for ways tomaximise opportunities while still mitigatingtheir risk. Emerging markets too – Asia-Pacificalone saw trade expand by 25% to 33% in the10 years from 2003 to 2013 – have even moreoptions for the credit insurance sector.
Embracing technologyOne barrier for the industry is its oftenentrenched processes, which need to beimproved. Digitisation is having its effect onproduct delivery processes, distribution,supply chain integration, the emergence ofalternative payment and settlement solutionsand data analytics. Meanwhile, while SolvencyCapital Requirements are boosting creditinsurance, they also demand more efficientattention to detail and improved governanceand controls.
Insurance companies are findingthemselves to be part of an extended andmore rigorous ecosystem and it’s not alwaysclear that they understand the position theyoccupy or – even more importantly – the
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The global opportunitiesfor insurers prepared toembrace changeThe credit insurance industry needs to break into new geographicmarkets and adopt new technology to keep pace with changingregulation and stay cost competitive. By Jérôme Pezé, CEO andfounder, Tinubu Square.
Jérôme Pezé
advantageous position they should be aimingfor. This is a challenge that must be faced.While they have met the demands of theirtraditional core markets including brokers,insureds and reinsurers, and even the needsof extended enterprise, including tradeassociations, banks, regulators and investors,what they now have to do is face thechallenges of disruptive technologies andinnovations that will have an impact on theirbusiness. This includes new payment andsettlement solutions, changes in the supplychain and technology developments.
One topic that is causing ripplesthroughout the industry is blockchaintechnology, with one of the main concernsbeing the databases that store details onbuyers. These are no longer the sole domainof the credit insurers, and as new entrantscome into the market, offering moreeconomical access to buyer information,insurers will have to compete on a new stage.This is a challenge that will require freshstrategies and specialised services to keepexisting clients engaged and attractprospects, and is particularly pressing interms of meeting the individual needs ofclients in different geographical territoriesand industries.
If credit insurers don’t want to fall behindthey will need to be more effective, not just inthe way that they choose to communicatebut in the speed with which they deliverinformation. It has to be in real-time so thatthe credit limits of buyers are up-to-the-minute and any area of risk can be assessedaccurately.
Technology is crucial to this. Not only doesit enable the insurer to make informeddecisions based on accurate information, italso speeds up the process, avoiding afrustrating wait for clients. The same appliesto payments, which may continue for sometime to be transferred in the traditional waybut which will inevitably start to useblockchain technology in the years to come.
Blockchain is part of the ecosystem thatthe insurance industry is now operating in.Critical mass is no longer the key competitiveadvantage as work-around solutions haveemerged, but flexibility and the benefits ofinnovation are becoming paramount. Thesooner that the market starts to work withtechnology providers, the sooner digital andoperational transformation can take place.With the right checks and balances in place,insurers should not be afraid to embracetechnology progress.
In fact, many insurance companies arealready overhauling and updating theservices they offer to customers. A few haveembarked on the digital transformation oftheir organisations. Such moves haverequired vision, a methodical approach,commitment and consistency. But it positionssuch players in the forefront to take thebenefit of the opportunity offered to thecredit insurance industry as well as to fulfiltheir mission to the business community.
Best practice – rules and provisionProvision of best practice enhancesprocesses and good governance for mid-sized and smaller companies and is reapingdividends in the form of support fromreinsurers. Instead of maintaining their focuson traditional products, insurers should bekeen to build tailor-made solutions and adopta multi-niche, customer-centric strategy toboost growth.
There are ‘golden rules’ that insurancecompanies really should abide by and whichthey will be aware of. They include: Identifyingthat they are capable of operating effectivelywithin the market; that they can oversee localrelationships and partnerships with a goodcultural understanding; that they canaccordingly empower their partner with know-how transfer; that their products and servicesare competitive; and that they have access tolocal up-to-date intelligence. With these inplace, it is then much easier to diversifygeographically and across different marketsectors with unfamiliar economic cycles.
With emerging markets growing inprominence and accessibility, competitiveinsurers can use their unique expertise andknowledge, supplemented by localpartnership help, to build culturally andeconomically appropriate solutions. In reality,any geography is accessible if you have thestrength and business intelligence to tackle itconfidently. There is a trend for companies tooffer expertise in multiple niche areas, anddiversification helps to spread risk, as long asthe insurer is able to support each of thoseareas within the golden rules.
Now is the time to cast off the cloak ofconvention and look around for partners thatcan help make inroads into new markets. It’sthe time to embrace technology that deliversmore accurate intelligence, and it’s the timeto start honing convincing arguments aboutwhy credit insurance is needed in these vastemerging geographies. The opportunities formarket penetration are too rich to ignore. ■
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Bonds and guarantees are normally requiredunder the terms of a construction orengineering contract, or in accordance withmandatory legal requirements, to secure theobligations of the principal debtor against thebeneficiary. They guarantee the performanceof a variety of obligations, from constructionor service contracts, to licensing and tocommercial undertakings. Almost any sale,service or compliance agreement can besecured by a surety bond. Most OECDcountries have their own legislation underwhich bonds can be required. The bondingindustry was, therefore, traditionally countryspecific and not cross border.
Bonding market – current & outlookThe most recent ICISA survey among suretymembers reported a strong overall decreasein claims over 2016, with an increase inwritten premium and in insured exposure. Butresults vary per company and depend partlyon the state of recovery of leading sectors,such as construction and transport, whichcan differ per country. With a premiumincrease of 13.7%, an insured exposureincrease by 5.4% and a decrease in claims by-15.4% over 2016, the market has in mostcountries improved.
“One major trend in the current suretymarket is for sure the ongoing globalisation,”Nijhout reports. “It means that large andsmaller underwriters are crossing borders andexpanding into other countries. They do thisthrough acquisitions or by establishing newoperators, this leads to more players andconsequently to increasing competition inmost regions.” He notes, however, that “oftenenough this rise in players is notaccompanied by an equal growth in theoverall market premium”.
A second trend -which is aconsequence of thefirst, is a moresensible competitionlevel in the differentmarkets. “Thesecompetition levels arenot only seen in lowerprices, but also inlooser policywordings,” he says.
This is a problem “as more and moreobligations apart from the pure performancerisk are passed on to sureties”.
ICISA surety members commented thatthe industry now faced a challenging taskbecause of these developments, Nijhoutnotes. “This leads to a big challenge for thesurety industry to find growth in thisenvironment.” Nijhout observes that this isdone very successfully in some areas byentering new segments or developing newproducts. “Cooperation with banks isincreasing; however, banks remain the maincompetitor of sureties.”
But there are also regional or countryspecific challenges to overcome beforesurety can become a household financialproduct. “There are still a lot of large regions,for example East Asia, Middle East, Africa andEastern Europe, where the surety product isunderdeveloped. This means a lot of potentialfor this line of business and a great task foran organisation such as ICISA in promotingthe benefits of the product. At the same timegovernments need to be lobbied to createthe right environment and level playing fieldfor sureties to develop”, Nijhout explains. “Alack of surety legislation is, in most of theunderdeveloped surety countries, the key 81
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Surety market developments- from local market players toongoing globalisation Rob Nijhout, executive director - International Credit Insurance &Surety Association (ICISA) – on how surety members are seeingnowadays an increasing number of international companies operatingcross border
Rob Nijhout
reason the product cannot mature. Overall,the surety market continues to offer largecapacities and excellent security and is verywell positioned to take up competition withbanks. The more we are able to share thismessage with lawmakers and beneficiaries,the more surety will penetrate the markets.”
Surety data“Global surety premium is estimated to bearound EUR 9 billion”, Nijhout says. “Membersof ICISA account for around EUR 5 billion inpremium income with a loss ratio of 16.3% in2016. Insured exposure grows year on yearand, in 2016, this was reported at EUR 460billion.”
Among the largest surety markets are theUS, Korea and Italy, while the Chinese marketis growing rapidly. “Surety members of ICISAare active on all continents. Asia and Africaare particular growth markets, althoughsupporting legislation and regulation is stilllacking in many countries. Similarly, a lack ofadequate insolvency legislation in somecountries in the Middle East and North Africaregion holds back the growth of surety incertain countries.” Nijhout predicts a positiveoutlook for surety bonds. “With an improvedeconomic outlook and a focus oninfrastructure in leading economies, thedemand for surety bonds is expected toincrease. Ample capacity and risk appetiteadd to this,” he says.
Surety and banksSurety bonds and bank guarantees are oftenseen as similar products, with competitionbetween the two product lines as a result.Nijhout notes that “this is a generalisation anddoes not apply to every country. Bankguarantees and surety bonds also differ inwording and conditions of cover. Suretybonds are typically conditional while bankguarantees are normally on demand”.
Differences between surety bonds arecountry specific. “In the US, for instance, suretybonds are required by law for governmentfunded projects. In Europe the market is oftendivided between banks and sureties. Adetermining factor in this distinction is theamount covered by a surety bond, where inthe US 100% bonds are common, while inEurope this percentage is much lower,depending on the country involved.”
Legislation and regulation also play a part,as does the bank’s appetite for bankguarantees, Nijhout explains. “In somecountries banks have pulled back from this
market, while in other countries they continueto compete with sureties.”
What kind of surety bonds does asurety insurance company issueThe secured contractual obligation can havemany forms, for example, constructing abuilding or being compliant to legislativeregulations. Nijhout likes to give twoexamples of surety bond contracts: “The firstone is the failure of a contractor (principal) to
complete a contract in accordance with itsterms and specifications. But also the failureof an enterprise to pay taxes or customsduties to a government or department(beneficiary) can be a situation covered by asurety bond.” Nijhout says the most commontypes of surety bonds can be categorised inseven types. “There are customs, tax and/orsimilar bonds, bonds concerning concessionsand licenses, judicial bonds, bondsconcerning purchases of goods and/orservices, bonds concerning leases, bondsconcerning construction and/or supplycontracts and, last but not least, financialbonds. But this list is not complete, there aremany types of other bonds as well.”
Nijhout concludes by reiterating how thebonding industry is now developing is a verypositive way. “In most OECD countries theproduct is now seen as a valuable alternativefor insuring large infrastructural projects and asolid alternative for bank guarantees. Thedevelopment of multi-country players willprobably speed up the developments incountries where the surety industry is not yeta household product and surety bondlegislation needs to be improved. But I dare topredict that the ongoing process in theindustry will continue over the next five to tenyears. The industry will continue growing fromlocal market players to more global players.” ■
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The most recent ICISAsurvey among suretymembers reported a strongoverall decrease in claimsover 2016, with an increasein written premium and ininsured exposure.
For more than sixty years, the Paris Club hasbeen engaged in the coordination ofsovereign creditors’ recovery activitiesgranting considerable debt treatmentstowards more than 90 countries, for anaggregate amount of debt equal to $583billion. Export credit agencies (ECAs) havealways played a significant role in suchrestructurings, since a substantial portion ofclaims held by the 22 Paris Club creditorstates refers to credits owned by theirrespective ECAs.
Along with the standard reschedulingagreements, additional major actions havebeen implemented to allow relief in the long-term period and to restore debt sustainabilityof highly indebted countries. One of the mostrelevant examples is represented by the so-called HIPC Initiative1, jointly launched by theWorld Bank and the International MonetaryFund back in 1996.
Under this initiative, the internationalfinancial community, governments and ECAshave worked together on the same side toensure that the most indebted poorcountries, especially in the African continent,could maintain sustainable debt levels. As aresult, various countries benefitted fromsignificant restructuring agreements andcancellation treatments. To date, debtreduction packages under the Initiative havebeen approved for 36 countries, 30 of whichare in Africa, providing $76 billion in debt-service relief2. During the period 2005-2016,SACE took part in almost 20 of thesemultilateral agreements for theimplementation of the HIPC Initiative withinthe Paris Club framework, providingbilaterally 100% debt cancellation. TheInitiative is currently coming to an end:nowadays, only few additional countriesremain eligible for HIPC assistance.
More generally, strict sustainability
requirementsimposed on localgovernments bymultilateralinstitutions have led inthe past decade to alesser recourse tosovereign guaranteesfor export credittransactions. Thistendency has – in turn
– translated into a revised role of the ParisClub. Debt cancellation, in fact, currentlyrepresents a minor portion of Paris Clubactivities however in parallel new challengesand topics are raised.
Sovereign debt restructuring is facingsignificant evolutions which implyconsiderable challenges and require new solidinstruments to promote development anddebt sustainability.
The outreach success and bestpractices The sovereign debt restructuring landscapethese days is facing a significant evolution interms of participation. New sovereigncreditors have joined the international arena,such as South Korea and Brazil3. Furthermore,subject to the agreement of permanentmembers as well as debtor countries, the Clubmay also invite ‘ad hoc members’ which canfollow the discussion during the monthly ‘TourD’Horizon’ and participate in specificnegotiating sessions. The scenario would notbe complete without mentioning theincreasing role of private creditors, which setsnew challenges for coordination.
Recent discussions, as the ones thatannually take place during the meetings ofthe Institute of International Finance (IIF) andthe Paris Club, which are used to gatherofficial and private creditors, demonstrate
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The new landscape of sovereign debtrestructuringBy Paola Valerio, head of international relations at SACE (Cassadepositi e prestiti Group).
Paola Valerio
that synergy among actors is more crucialthan ever. The boundary between officialsand private creditors is becoming less andless defined. The widespread issuance ofsovereign bonds by emerging countries andtheir subsequent purchase by both privateand sovereign entities are putting thespotlight on the need to reinforcecoordination among these two spheres.
Another emerging issue is the enlargedbasket of solutions proposed within the ParisClub. Creditors are becoming aware of thenecessity to build up and implementsustainable development instruments whichshould be as resilient as possible. To thispurpose, new financing instruments havebeen developed recently to promotesustainability and avoid future sovereign debtcrises, allowing beneficiary countries to reactand rebuild their macroeconomic indicatorsin the medium and long term. Moreover, newsustainable financing schemes have beenpromoted during these years within the Clubwith the purpose of encouraging high–returninvestment projects in debtor countries. Byway of example, in February 2015 the ParisClub agreed on an innovative proposal by theauthority of Seychelles for financing marineconservation through a debt repaymentoperation named ‘blue buyback’.Notwithstanding previous experience on pre-payments within the Paris Club, this initiativehas been internationally recognised as one ofthe most successful and best-sustainedeconomic reform programmes conductedwith the support of the IMF.4 The Seychelloispre-payment was partially financed by anNGO while profits would be used in the nearfuture for the development of environmentalprotective projects.
In a similar spirit in November 2015 a debtrestructuring agreement was offered to theCaribbean island of Grenada. For the firsttime in the history of Paris Club treatmentsthe agreement included the ‘hurricaneclause’, a provision which allows vulnerablestates to obtain a rapid additional debt reliefin case of environmental shocks, which mightseverely affect their economies.
Finally it is worth mentioning that in thepast few years, as a counter-trend, sovereignrisk has re-emerged in ECA-backedtransactions. Taking into account SACE’sexperience, back in the 1990’s sovereign riskrepresented a substantial portion of theportfolio which sharply declined over thefollowing 10 years. However, increased risklevels in certain emerging markets, also due
to the commodity crisis as well as thedevelopment of large infrastructure projects(e.g. dams, railways, power plants), havecontributed to the resurgence of sovereigndebt and sovereign guarantees on public orsemi-public buyers. At this stage the involvedcountries are not requiring recourse to theParis Club, however this might be the case inthe distant future.
Path for new challenges aheadFurther discussions on other contingentinstruments are ongoing within the Paris Clubforum with the aim of preventing theoccurrence of debt distress. The prevailingobjective is to avoid vicious circles ofindebtedness, whereby economic treatmentis postponed to when no other options areavailable or the debt sustainability is alreadyjeopardised. On the other end, the utilisationof the aforementioned contingentinstruments might mitigate the cyclical natureof indebtedness, reinforcing the economicrecovery of external debt levels5.
In this spirit, the Paris Club and itsmembers, with the support of the majorfinancial institutions, are engaged in a strictmonitoring of countries’ conduct andeconomic performance. ECAs play a veryimportant role since they can rely on updatedinformation on payment track record.
Nowadays several emerging countries arefacing a critical situation due to externalcontingences such as, among others, thedrop in commodities prices. This holdsparticularly true for those African countriesthat structurally depend on the export ofcommodities. The debt ratio of thesecountries is now approaching the pre-HIPClevels and this worrying trend of debt re-accumulation might suggest the need for anew debt relief initiative.
All these issues bear considerablechallenges. A robust coordination amongcreditors along with their strong engagementis more important than ever and theimplementation of sustainable mechanisms tosupport emerging countries is, without anydoubt, a win-win strategy for all players. ■
Notes1 Heavily Indebtness Poor Countries.2 Debt Relief Under the Heavily Indebted Poor
Countries (HIPC) Initiative, IMF Factsheet, April 17,2017.
3 Korea join Paris Club in July 2016 while TheFederative Republic of Brazil on November 2016respectively as 21st and 22nd member of the Club.
4 Paris Club annual report 2015.5 IMF paper “Too little, Too Late”, 2013.
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The Government led by President of Mexico Enrique Peña Nieto has driventhe transformation and modernisation of the Mexican Government bydifferent reforms, one of them the Financial Reform with special emphasisgiven to the development banks, particularly Banco Nacional de ComercioExterior (BANCOMEXT), whose core mandate is to foster internationaltrade and activities linked to export and foreign currency generation.
The undertaken strategy and the International Agreements establishedwith other countries, seeks to continue to promote the expansion ofproduction capacity in companies that export goods and services, withthe aim of enhancing Mexico’s economic development, taking care of theenvironment and its capacity to generate employment.
In the last four years, the outstanding credit portfolio balance grew175.2%, from MXN 80 billion in December 2012 to MXN 219 billion as ofJune 2017. The credit portfolio growth has been greater than that of theentire group of commercial banks in Mexico, achieving this in aresponsible way; for reference, our past due loans rate is 1.1%, meanwhilethe credit reserves covers 2.0 times the past due loans and our capitalindex reached 19% as of June 2017.
BANCOMEXT is a long-term partner of the commercial banks. One ofthe strengths that the bank has achieved, of the total credit portfolio,66% is in foreign currency, mainly United States dollars and 34% is in localcurrency. In addition, BANCOMEXT´s total private credit portfolio is 89%long term (more than 2 years and up to 18 years) of which 88% is longerthan 10 years.
BANCOMEXT, as the Export Credit Agency (ECA) of the MexicanGovernment with solid international relations, maintains a stronginteraction with several ECA´s, sharing political and commercial risks onlong-term credits given to Mexican companies.
These credits help the expansion and modernisation of plants, as well asthe productivity and competitiveness of exporting companies that seektheir inclusion in the international markets, a fundamental activity in thedevelopment of any nation.
In 2017, BANCOMEXT has been awarded with the recognition of Bank ofthe Year among Development Banks by the Latin American FinancialInstitutions for Development Association (ALIDE) and the Deal of the Yearby the prestigious financial magazine World Finance for the execution ofFirst Tier 2 transaction executed by a Mexican Development bank.
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Leading Mexico’sbanking transformation
A protracted relaunch into theinternational arena When nuclear sanctions on Iran were lifted inJanuary 2016, it was expected to put thecountry’s economy back into the internationalarena by opening it up to trade, investmentflows and economic growth. About 18months down the line, this has become onlypartly true.
At an annual rate of 4.6% in 2016 , Iran’seconomic growth has definitelyoutperformed its regional peers – and isexpected to do so again in 2017. But thisrebound is mainly driven by a recovery in oilproduction and exports to pre-sanction levelsbecause the oil embargo was lifted as part ofthe nuclear deal.
Moreover, when other oil producers agreedto cut production to support prices in last
November’s OPECdeal, Iran negotiatedexemption and wasallowed to regainmarket share. Thereturn of petrodollarshas also sparked non-oil sector activity,according to data ofthe Iran StatisticalCenter. This is
particularly true in the manufacturing &mining and in the services sectors, such astransportation and storage services.
However, the growth acceleration will soontaper off without further impetus as foreigndirect investment (FDI) inflow, which isessential to Iran's growth strategy, has not yettaken flight (see chart).
The Iranian government aims for an evenhigher annual growth rate of 8% in its five-year economic development plan(2016-2021). This optimistic target is basedon expectations of receiving around $15billion of FDI annually. But only a fraction of ithas materialised since the nuclear deal.
There are some investment inflows in thepipeline though. An estimated $12 billion in deals has been announced in 2016.Most investment deals so far concentrate onthe oil and gas sector. Iran signed a milestonedeal of $4.8 billion in July 2017 with aconsortium led by Total for the developmentof the South Pars gas field. This is reasonableas Iran's proven gas and oil reserves rank firstand fourth in the world.
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Iran: sanction-relateduncertainty is stillhanging in the airJohn Blackwell, senior communication and marketing manager atAtradius, explains why Iran still has a long way to go before itseconomy is fully back in the international arena.
John Blackwell
Iran growth and FDI prospects
Source: EIU
Reintegration in the global financialsystem is the main challengeOne of the major obstacles facing potentialinternational investors in Iran is that globalbanks (including non-US banks) are stillreluctant to facilitate investment and tradedeals in order to avoid any risk of incurring USfines for breaching remaining non-nuclearsanctions. For instance, because of existingUS dollar clearing restrictions, moneytransfers or the opening of a letter of credit(LC) with Iranian banks in US dollars can onlybe arranged outside the US banking system.Iran attempts to tackle this hurdle by tradingmore often in euros. A number of mostly smalland medium-sized non-US banks have re-established correspondent relationships withIran, but major global banks that are betterequipped to finance the bigger projects haveremained on the sidelines.
Banks’ uncertainty over sanctions shouldbe seen in light of the still-high political risk inIran and in the Middle East in general. Iran'stense relationship with the US must also betaken into account. US President DonaldTrump has imposed new, albeit limited,sanctions in response to Iranian ballisticmissile tests. Relations cooled further amidthe US travel ban imposed on several Arabiccountries, including Iran. A modified versionof the ban came into effect in July.
But a fully-fledged re-introduction ofsanctions by the US would not be effectivewithout the cooperation of Europe, China andRussia. Moreover, the risk that a 'hardliner'would come into power in Iran and escalatethe situation has subsided after the re-election of the reform-oriented PresidentHassan Rouhani in May.
But political tensions remain. Iran'sregional rivalry with Saudi Arabia – a US ally –has intensified since the recent diplomatic riftand economic boycott of Qatar, as SaudiArabia and Iran are at opposite sides of theconflict. Rouhani's position has come under
renewed pressure domestically after terroristattacks in Tehran in June, and polarisationbetween reformers and hardliners increased.The hardliners retain a lot of power in Iraniansociety, for example through the IslamicRevolutionary Guards Corps, which areinvolved with many companies in keystrategic sectors in Iran.
The situation is not helped by the fact thatIran's banking sector is generally in badshape, which makes re-integration into theglobal financial system even morechallenging. The sector is dominated bystate-owned banks, whose activities arestrongly guided.
The Iranian government continues to exertsubstantial influence in the background onsome partially-privatised banks. Thesedirected lending practices, combined withpoor risk management, means the ratio ofnon-performing loans is high, at around 11%.This is also reflected in government paymentarrears, while capital buffers are extremelylow (Capital Adequacy ratio of 5.8% in March2015) and on a downward trend. The IMF saysrecapitalisation of a number of state-ownedbanks is therefore urgently needed.
Banks also have trouble obtaining fundingbecause they are dependent on domesticsavings, and have to compete with unlicensedfinancial institutions. This has led to highinterest rates, depressing banks' profitability.Iran is still on a 'black list' for moneylaundering and terrorism financing, whichputs off correspondent banks from dealingwith the country as it requires additional duediligence.
Iran has at least started to address thevarious problems in the banking sector. It isworking with the Financial Action Task Forceto address the deficiencies in its frameworksfor anti-money laundering and combating thefinancing of terrorism. The government alsoattempts to patch banks’ balance sheets byclearing its arrears to the banking sector via
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The Iranian government continues to exert substantialinfluence in the background on some partially-privatized banks. These directed lending practices,combined with poor risk management, means the ratioof non-performing loans is high, at around 11%. This isalso reflected in government payment arrears, whilecapital buffers are extremely low (Capital Adequacyratio of 5.8% in March 2015) and on a downward trend.
domestic bond issuance. A newcomprehensive banking law, which is vital toupgrade Iran's financial supervision andimplement reforms, still needs to be finalised.A large scale recapitalisation seemsinevitable, but there is no progress to bereported here so far.
Macroeconomic indicators remainfavourableIran's macroeconomic fundamentals aregood. Public finances are healthy with amodest fiscal deficit and a very low publicdebt level, estimated respectively by EIU at2.7% and 14.3% of GDP in 2016. The Rouhaniadministration’s prudent fiscal policy meansthe budget has also become less dependenton oil revenues, for instance due to sales taxincreases. Iran plans to replenish its OilStabilisation Fund with revenues that occurwhen the oil price exceeds the budgetedamount of $55 per barrel in order to build abuffer to absorb future budgetary shocks.The current account is expected to remain insurplus, and external debt is almost non-existent (around 2% of GDP). This of course
partly reflects Iran's disconnect from theinternational capital market. Iran alsodemonstrated excellent payment morale,when it repaid arrears to credit agencies thatwere built up during the sanction period.
Iran’s international reserve position isstrong, at around 21 months of import coverin 2016. Central bank access to the reserveimproved when frozen assets were releasedfollowing the removal of nuclear sanctions.Monetary policy is also prudent withrelatively stable inflation (single digit in 2016)and exchange rates. The alignment of theofficial exchange rate with the parallel freemarket rate, which has been postponed, isnow planned for the beginning of 2018. Thiswould remove economic distortions and putthe central bank more in control. It would alsomake Iran more cost competitive and may
encourage FDI inflows because it would likelyrequire a devaluation of the official rate toalign it with the market rate. The officialexchange rate is currently moderatelyovervalued by 5–7%, according to the IMF.
Last but not least, Iran’s population islarge, young and relatively well-educated.This forms a solid base for economicdiversification and boosting the privatesector economy. But structural reforms arerequired in order to fully utilise thesestrengths, for example in the labour market toaddress job mismatches and increase femaleparticipation; and the business environmentto cut red tape and address otherinstitutional and market inefficiencies. Thereis plenty of scope for improvement. Theunemployment rate is high, especially amongthe young (29.1%), while the participation rateis low especially for woman (14.2%). Irancurrently ranks poorly on the World BankDoing Business scale at No. 120.
Iran’s outlook has improved, butdownside risks are there to stayTo conclude, Iran’s economic outlook hasimproved since sanctions were lifted andgrowth potential is promising. However, highpolitical risk and the weak banking sector arepotential pitfalls for doing business with Iran.These are not likely to be solved in the near-term. The success of theRouhani-administration in reforming theeconomy partly depends on how much itneeds to compromise with the hardlineopposition at home in light of the increasinglyassertive stance of the US and its regionalallies. It also depends on whether majorinternational banks begin servicingtransactions with Iran. Export financing andinvestment deals are logically more exposedto those risks.
We acknowledge the potential of thissizeable market once it completely opens upto foreign trade but there remain a number ofrisks in doing business in Iran. Someinconsistencies remain in the desire of thegovernment and other authorities in doingbusiness with Western trade and investmentpartners. The election of Donald Trump as USPresident also dampens interest of UScompanies in working with Iran, also freezingfunds and resources of listed persons/entities.It is also still not clear that money can betransferred out of the country directly andlegally through banking channels.Consequently we remain very restrictive andoff cover on Iran. ■
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The success of the Rouhani-administration in reforming theeconomy partly depends on how muchit needs to compromise with thehardline opposition at home in light ofthe increasingly assertive stance of theUS and its regional allies.
Unprecedented growthWhen reading about the tremendousprogress of Côte d’Ivoire today, it’s hard tobelieve that this thriving country wasembroiled in two civil wars from 2002 to 2011.The country is listed as the fastest growingeconomy in Africa and, according to the IMF’s2016 Economic Outlook, is the world’s secondfastest growing economy with averagegrowth rates of 8% in the last three years.Thanks to a spate of business-friendlypolicies, Côte d’Ivoire has also gained 40positions in the World Economic Forum’sGlobal Competitiveness Index since the 2012-13 report. The rise is based on improvementsin access to electricity, enforcing contracts,and trading across borders.
With such impressive growth and a privatesector-focused government, it’s notsurprising that the country has managed toattract an impressive list of investors,including a recently built $167 millionHeineken brewery, and a raft of UK-basedinvestors including Crown Agents, Diageo,GlaxoSmithKline, Globeleq Holdings, PwC,Standard Chartered Bank, Tullow Oil andUnilever, as well as financial multilaterals suchas African Development Bank, Africa Re,African Export-Import Bank and Zep-Re.
The country’s rags to riches transformationis one of the greatest African success storiesof this decade, which began in 2010 whenAlassane Ouattara – an economist and formerdeputy director of the IMF – won thepresidential election. He was not able toassume office until 2011 after a brief challengeby the previous leader but, since that day,President Ouattara is widely thought to haveshown commitment backed by policies tomove the country toward more transparencyand private sector-led growth.
Key risks remainDespite this impressive progress, there areelements that investors and companies needto know before entering the market. Likemany countries moving from what the IMFterms a ‘frontier market’ to ‘emerging market’
status – which is theultimate goal of thegovernment asoutlined in its 2016-2020 NationalDevelopment Plan(NDP) – Côte d’Ivoireis undergoing whatwe can call growingpains. The country isarguably doing many
things right, which we will also touch upon,but key risks remain and, in our estimation,require some vigilance:● The current focus on succession politics
which underscores the importance of theupcoming 2020 election;
● Bribery and corruption;● Deterioration of banking sector indicators; ● Mutiny;● Terrorism.
Our analysis draws extensively from EXXAfrica, a specialist intelligence companydefined by its unvarnished and accuratereports that, like ATI, are based on a reliablenetwork of on-the-ground sources.
Succession politicsPerhaps nothing highlights the currentpolitical situation more than recent mediaimages depicting masked men with guns.Strikes led by armed mutinous soldiers shutdown several of the country’s cities inJanuary 2017 and then again just five monthslater. The soldiers, many former rebels,demanded back pay for their work thatincluded battles in the 2011 civil war thateffectively ended the impasse between thecurrent president and former presidentGbagbo. The government acquiesced to thefirst demand but, by May 2017, it dispatchedloyal army units to end the mutiny. Thisdecision may have been fuelled by thegrowing bill of $170 million, which thegovernment was ill prepared to honour withfalling cocoa prices, proceeds from whichaccount for a large portion of its budget.
This episode has two aspects worth91
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A Cinderella storyFrom civil war to Africa’s darling in under five years, Côte d’Ivoireposes challenges and opportunities for investors. By George Otieno,CEO, African Trade Insurance Company.
George Otieno
noting. First, there is a political elementdriven by speculation that these mutinies areled by Guillaume Soro, the president of theNational Assembly, who led the rebels duringthe civil war and who has expressed a desireto be the next president. This runs counter toPresident Ouattara’s selection of formerprime minister and long-time ally DanielKablan Duncan as the vice president in early2017. It is a newly created position under therevised constitution meant to signal thepresident’s choice for his successor as he ismandated to step-down in 2020.
The second aspect to the theatre ofsuccession politics is that the government’spreoccupation with politics may give way toits taking the eye off ongoing implementationof critical reforms. These includerecommendations from the World Bank suchas reducing the start-up time for a businessto 24 hours; lowering processing andtransaction times at the Abidjan Port for bothexports and imports; setting up creditinformation bureaus; establishing acommercial court of appeals and creating e-government platforms to simplify a numberof operations such as filing and payment oftaxes and tariffs.
Bribery and corruptionCorruption is, of course, not specific to Côted’Ivoire, where it is characterised asentrenched. For instance, corruption still hasan impact on judicial decisions, contractawards, customs and tax issues, with briberyreported at every level of the civil service. Ata lower level, foreign companies mayencounter petty corruption in businesstransactions – tax officials, for example, maybe overenthusiastic in enforcing laws in thehopes of receiving bribes.
The former militia leaders, who helpedPresident Ouattara end the post-electionconflict in 2011, are reported to be one of themost visible sources of corruption. A 2013 UNpanel of experts cited a military economicnetwork of former leaders, who held powerfulmilitary positions in government,participating in smuggling, illegal trade andparallel tax.
Corruption by its very nature is difficult toroot out. The government has been trying tomake headway in this area with modestmeasures that include a new anti-corruptionforce established by the gendarmerie. It hasled to a considerable reduction in demandsfor bribes at police checkpoints on majorthoroughfares. The Finance Ministry’s
inspector-general’s office and the country’sfinancial intelligence unit have also beenstrengthened – but capacity remains an issue.Clearly more needs to be done on this frontbut the ambitious pace of the government’spolicy agenda coupled with the endemicnature of corruption means that this is likelyto be a slow process.
Banking sector risksThe reported 26 banks in Cote d’Ivoire manageabout 80% of the country’s financial sectorassets, with the rest covered by insurancecompanies. Ten foreign-owned banksdominate the sector, accounting for 51% ofassets, followed by seven subsidiaries ofregional banking groups, five locally-ownedbanks and four public banks, which account forabout 10% of the sector’s assets – though thisis decreasing as the government continues toprivatise and restructure public banks.
With a population of 22 million, Côted’Ivoire is attractive to foreign banks becauseit is one of the largest economies of the WestAfrican economic bloc – ECOWAS. It is WestAfrica’s strongest economy, representingabout 40% of the West African Economicand Monetary Union (WEAMU) GDP. Banksreason that establishing a base in the countryprovides entry to French-speaking WestAfrican countries in the WEAMU block thatincludes Benin, Burkina Faso, Guinea-Bissau,Mali, Niger, Senegal and Togo.
Overall, the sector has seen an increase inbank loans and improved access to bankingservices. But the country still lags behindneighbours Togo and Senegal because one ineight Ivorians are reluctant to deposit savingsin formal financial institutions.
The greatest risk to the banking sector ishigh exposure to indebtedness to thecountry’s five largest borrowers, representingabout one-third of their assets and three-times their capital – which poses an increasein credit risks. These borrowers are reportedto be public and private entities in the agro-business and commerce sectors.
In 2015, the stock of bank non-performingloans (NPLs) increased by more than privatesector credit – an estimated rise of 75% net ofprovisions, indicating an increase in bank creditto small-and-medium sized enterprises (SMEs),which have high default rates and arrears fromfinancially weak public companies.
The IMF has encouraged the restructuringof public banks and faster implementation of financial sector reform to resolve some of the challenges stemming from
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government arrears and falling oil prices.
The ever-present scourge ofterrorismOverall, there is an increased threat of attacksby radical Islamists in West Africa. Côted’Ivoire shares a border to the north with Mali,a known hub of jihadists in the region, whichincreases the likelihood of attacks within thecountry. In March 2016 the countryexperienced its first significant attack at apopular tourist site in Grand Bassam, 40kmeast of Abidjan, by six gunmen affiliated withAl-Qaeda in the Islamic Maghreb. France’sintelligence services indicate that these typesof attacks, targeting tourists in countries suchas Côte d’Ivoire and Senegal, outside thepreviously targeted Sahelian countries, arelikely to continue.
In response to a growing extremistpresence along its border with southern Mali,Cote d’Ivoire has stepped up security innorthern areas and predominantly Muslimneighbourhoods in the commercial capital ofAbidjan. The government is also workingclosely with religious leaders and Muslimorganisations, requesting that they notifypolice of newcomers and suspicious activity.They’ve also sent reinforcements to theirnorthern border.
Côte d’Ivoire leads the charge inthese risk areasIn addition to economic indicators, Côted’Ivoire is also leading Africa in two risk areaswhich emphasise the country’s commitmentto improving the business environment –contract frustration and expropriation.
There is a low risk of contract frustrationlargely because the peaceful transition to theOuattara government decreased fears ofretaliation against French companies by theprevious president, who saw France as themain culprit behind his eventual ouster.Beyond this, Côte d’Ivoire is one of the bestcountries in sub-Saharan Africa for enforcingcontracts – supported by the creation of aspecialised commercial court in 2012. Theaverage time to resolve disputes is estimatedto be even lower than the OECD average,though the cost is about the same as thecontinental norm.
New investment, telecoms and miningcodes, and the establishment of a businessfacilitation centre are all meant to reducedisputes caused by issues includingallegations of collusion between governmentofficials and companies.
Another risk area showing stellar results isexpropriation. While there is a publicexpropriation law in place, there have not beenany cases of government expropriation ofprivate property. In fact, private expropriationas a way to settle contractual or investmentdisputes has historically been a larger problem– but under Ouattara’s presidency these haveseen a noticeable drop off.
A country on the move with aprogressive strategy for futuregrowthPresident Ouattara, much like the currentpresident of the African Development BankAkinwumi Adesina, sees food production as amajor factor in plotting the country’s futuregrowth strategy. The rationale goes that acountry that can feed itself will be able tofeed the world.
To this end, the government is focusing oncreating a market in the 300 million WestAfrican region, where about 100 million are
estimated to be middle-income. Thegovernment is investing in processing in-demand commodities such as cocoa, palmoil, rubber and rice to reduce costly imports.The strategy is already paying off, with thegovernment negotiating with Swisscompanies interested in making juice to sell inthe region. Cemoi, the French chocolatemaker, recently opened a factory to makeproducts for eventual export to other WestAfrican countries.
As our newest member, we at ATI seegreat opportunities in Côte d’Ivoire,particularly in the infrastructure(construction, energy and roads) and services(banking) sectors. While there is tremendousmomentum, the true test will be the country’sability to transition peacefully throughanother election cycle. The ability ofcountries within the ECOWAS region to pulltogether to avoid widespread politicalinstability – as in the recent cases of TheGambia and Burkina Faso – gives reason tobelieve in the power of the community toreign in bad behavior in 2020 and beyond. ■
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As our newest member, we at ATI seegreat opportunities in Côte d’Ivoire,particularly in the infrastructure(construction, energy and roads) andservices (banking) sectors.
SUCCESSFULLY GROWING OUR PORTFOLIO IN FRONTIER MARKETS
ECIC is a registered service provider with the FSB No. 30656
Most heavily indebted countries in Sub-Saharan Africa (SSA) had taken advantage ofthe foreign debt relief initiative under WorldBank and International Monetary Fund (IMF)programmes by about 2010. Sovereignleaders could reallocate finances intodevelopment programmes and the expansionand modernisation of public infrastructure.
This path was also supported by highprices in commodity markets, from whichhigh export earnings and fiscal revenues weregenerated. The prospects for positive marketoutlook allowed governments to return tocapital markets (specifically the Eurobond) toaccelerate their expansionary programmes onthe back of expected higher revenues.
But, with sluggish demand in advancedeconomies and the subsequent fast landingof the Chinese economy, high commodityprices could not be sustained. Most fell bymore than 40% in 2015 alone, meaning SSAcountries faced lower export and fiscalrevenues. The unpredictability of when theupturn would come again led to (i) thereviewing of budgets; (ii) the reassessment ofgovernment programmes and developmentpriorities; (iii) severe pressure on theexchange rates and currency reserves; (iv)restructuring of debt obligations; and (v)delays/cancellation of investment projects.
Mozambique is not an exception to thiscycle. The country benefited immensely fromthe World Bank/IMF debt relief initiative afterreaching the Completion Point in 2001. Fromthere it returned to the capital markets as ameans to raise funds for nationalprogrammes.
Unfortunately, Mozambique was shortlyafterwards plunged once again into a fresherindebtedness cycle. Some of the debts were
not accounted for inpublic debt records. Aforensic audit query,aimed at allowing foraccountability andtransparency onacquiring new debtsgoing forward, hassince begun.
How the currentadministration
handles the matter could either drive away orraise the cost of the awaited foreigninvestments. The revelation of hidden debtsof such magnitude has caused uncertaintiesto the extent that investors and all funddonors have adopted a wait-and-seeapproach as they try to comprehend the levelof risks and ramifications.
Eurobonds – a new gatewaySome African countries’ eligibility to raisemoney by issuing Eurobonds was enhancedby higher commodity prices, sound economicpolicies, and improved governance. It becamea trend to sell Eurobonds in Africa as analternative to getting money at historicallylow interest rates to finance infrastructureunsecured, i.e. without conditions attached tothe funding.
The increase in sovereign bond issues forSSA surged after the global financial crisis of2007/8, with strong levels of issuances from2013 to 2015. The drivers included the slumpin the global economy which ignited a strongappetite among investors for higher yieldingdebt outside the traditional markets in theadvanced economies. Most bond issuanceswere largely oversubscribed, a testimony ofinvestors’ appetite for risk in the frontier
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The Mozambique debtcrisis – how it is unfoldingand potential resolutionsDespite the recent signing of a major ECA-backed project financing –Coral FLNG – the Mozambican government needs to ensure that thepath for large investment in mining and LNG projects is cleared.Cooperating with donors in solving the debt crisis remains paramount.By Benoit Fugah, head of the political, economic analysis and researchunit at ECIC South Africa.
Benoit Fugah
markets.This new round of indebtedness now
poses acute challenges in the face ofeconomic headwinds due to stagnantcommodity prices, poor fiscal revenuecollection, lack of transparency, and shortagein hard currency reserves. What was thoughtto be a new funding option has turned into afinancial burden. Interest payable on issuedbonds continues to increase as investorsdemand higher returns for perceived risks.This has resulted in a number of Africancountries appealing to the IMF for help inrestructuring their public debts.
From old to new debt concernsMozambique was heavily indebted up untilthe early 2000s, as reflected in the chartbelow. Repeated reschedulings and write-offsby various bilateral creditors precededcomplex negotiations. The talks eventuallyresulted in the World Bank and IMF declaringin April 1998 that Mozambique was eligiblefor debt relief under the Heavily IndebtedPoor Countries (HIPC) initiative. The countryreached a Decision Point in April 2000, andthe Completion Point of the HIPC initiative inSeptember 2001 – a feat which allowed it toreceive $3.2 billion debt relief in nominalterms.
As a result, foreign debt fell from about$6.6 billion in 1998 to $3.4 billion in 2001.Total debt stock at this stage was brought toa sustainable level. However, debt has grownbecause of the need for more investment ininfrastructure and economic developmentprogrammes.
Constraints in broadening thegovernment’s income base to finance theambitious programmes left only one option
of raising non-concessional borrowing in anenvironment of lower donor aid flows. Thegovernment expanded in these new sourcesof funding, ignoring the reading of globaleconomic challenges.
The public debt peaked in 2013 and 2014based on an assumption that Mozambiquewould quickly become a global gas exporter.But the slump in commodity prices seems tohave delayed the finalisation of the gasprojects.
Mozambique issued a state guaranteedEurobond of $850 million in 2013. However,the government acknowledged that theprevious administration had incurred further$1.4 billion Eurobond debt around the sametime. This resulted in the total debt to GDP(domestic and external) being about 84.8% in2015.
A parliamentary commission in December2016 found that the government guarantee torepay the undisclosed loans was illegal,particularly because the loans were notapproved by its parliament. The IMF thenissued strong views on remedial steps thatneeded to be taken to improve the issue ofundisclosed debt. The IMF, as part of thateffort, and in agreement with the governmentof Mozambique, initiated an audit on thethree companies that received the bulk of thepreviously undisclosed debt. The contract forthis independent audit was signed inNovember 2016 in consultation with the IMF.It was expected that Kroll’s audit reportwould be completed by 28 April 2017. Theoutcome of the audit is still pending, and willbe the basis for discussions over a potentiallynew IMF-supported programme.
The audit query is to investigate the $2billion debt made in favour of the threecompanies, Proindicus, EMATUM andMozambique Asset Management (MAM).
• $850 million loan to the EMATUMcompany for a tuna fishing fleet
• Proindicus ($622 million) to providemaritime security, particularly for offshoregas operations
• MAM ($535 million) to set upmaritime repair and maintenance in 2013.
Noteworthy, Credit Suisse AG’s Londonunit, arranged the Proindicus loan. PalomarCapital Advisors Ltd, based in Zurich, andRussia’s VTB Capital Plc, arranged the MAMdebt. London-based Clifford Chance LLP andMaputo-based Couto, Graca e Associados,Lda, were the legal advisers to the arrangersfor both loans.
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Mozambique debt to GDP
Source: Based on IMF and World Bank data
foreign debt burden which is currentlyestimated at approximately $10 billion.
Status and management ofMozambican debtMozambique’s government failed to makecoupon payments on a sovereign Eurobondin May 2016, and January and March 2017because of a deteriorating economic andfiscal situation.
Ratings agencies reacted by downgradingthe country’s long-term foreign currencyrating to “restricted default”. Mozambique’sdebt has therefore become unsustainable.The country is now experiencing debtdistress with rescheduling of instalments orrepayments due to lack of funds. The recentdecision by the WB and IMF and G-14 donoraid partners to suspend all balance ofpayments and budget assistance crippled theinterbank market. US dollar supply ran dry,causing persistent depreciation of localcurrency.
The high degree of uncertainty over thefuture of negotiations between thegovernment and bondholders means thecountry will continue to struggle with loweconomic growth. Access to credit marketswill remain closed, while any deal with theIMF will likely have to wait until some kind ofarrangement has been made withbondholders.
This scenario is costly to GDP growth, whichis expected to reach just 3.4% this year – theworst performance in more than a decade. Alack of credit will constrain the government'sfiscal position, forcing cuts that could wellexacerbate already elevated levels of politicalrisk. However, this outlook is unlikely to deterprogress in the development of the country'ssubstantial gas fields by ENI and Anadarko, theeconomy's one bright spot. The government'sminimal role in the project has meant thatprogress has not been affected by thesignificant levels of political risk.
The authorities have revamped efforts toenhance public management, removing fromthe pipeline of priority investment all theprojects that have not been subject to afeasibility study and evaluation. All projectsexceeding $50 million are subject to amandatory technical assessment andapproval by the Investment EvaluationCommittee prior to inclusion on the budget.
In an attempt to control foreign currency,the Central Bank has reverted to a form ofmoral persuasion where it issues instructionson currency trading.
The way forwardThe Mozambican government needs toensure that the path for large investment inmining and LNG projects is cleared.Accordingly, cooperating with the donors insolving the debt crisis remains a paramountparameter. In this process, Kroll’s findings willdictate the direction of the decision-makingby IMF, G-14 and bondholders. Meanwhile, thecountry is currently in default and there areno visible signs of alternatives.
Pursuing former ministers with theintention of prosecuting them is likely tocause discord in the ranks of the Frelimoruling party, which could spill over intopolitical instability in the run-up to the 2018and 2019 elections.
Even if the government had to go downlegal avenues, it might lose the case and seesome of the assets being attached in foreign
jurisdictions. Nonetheless, responsibility ofdebt default would be shared between thebanks, the advisers and the Mozambicangovernment. It is also possible to pursue adifferent route to maintain good relations withcapital market players through negotiations.The government can admit the responsibilityof the debt and negotiate the restructuringvia one financial facility (regrouping all debts),with new terms and longer tenor. This optionis likely to be the most preferable if thegovernment wants to see the continuation ofIMF support and FDIs inflows. ■
Noteswww.imf.org/en/countries/resrep/moz
http://data.worldbank.org/topic/external-debt?locations=MZ
Rhula Intelligence solutions, weekly media review No.167: 10-17 February, www.rhula.net
www.reuters.com/article/us-mozambique-politics-idUSKBN1330KV
http://www.reuters.com/article/us-mozambique-debt-idUSKBN15C0QD 97
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“What was thought to be a new fundingoption has turned into a financialburden. Interest payable on issuedbonds continues to increase asinvestors demand higher returns forperceived risks. This has resulted in anumber of African countries appealingto the IMF for help in restructuring theirpublic debts.”
Argentina is historically one of Brazil’s mostimportant trading partners. Along withUruguay and Paraguay, the two countriesshare the economic and agriculturalheartland that surrounds the extensiveParaná-Paraguay river basin. There is intensetrade in the border areas and a high level ofeconomic integration, especially between thesouthern region of Brazil – where much ofBrazilian manufacturing is located, andArgentine industrial centres. Supply chainsfor some key sectors, such as the automotiveindustry, are spread across either side of theborder of the two neighbours.
The rise of China as a market for Braziliancommodities demoted Argentina from therank of second most important destinationand 10% export share 20 years ago to a moremodest, yet still highly relevant, position today.Despite this diversification of trade partnersand a recent precipitous decline in bilateraltrade between the Mercosur partners broughton by economic slowdown in the region andtit-for-tat trade restrictions, Argentina was stillthe third largest export destination for Brazil in2016, representing 7% of total exports (onefifth of Argentine imports). As for Argentineexports, the large northern adjoining markethas remained in first place (six percent of totalgoods imported by Brazil) but its share oftotal shipments has fallen from 28% to 18% inthe same period.
The Brazilian export credit insurancesystem saw a similar evolution of its portfolioexposure to Argentina risk. After a rapidincrease sustained by the recovery thatheated up demand in post-Currency BoardArgentina after 2002, the Brazilian ECA hadreached between 25% and 30% of its totalcommitments in the country by 2012. Fromthat point on, the share of exposure to
Argentina begandeclining yearly until2016 as thecommitments toother countriescontinued to grow,but new transactionsinvolving Argentinawere few and farbetween.
Both demand fromexporters for cover and ECA appetite forArgentina risk gradually declined. On the onehand, the Brazilian system still had freshmemories of the commercial claims paid alittle over a decade earlier as a result of thecurrency devaluation crisis. Not only was thatevent the first default experienced by a stillyoung ECA scheme, but the recoveryprocess, which had yet to be concluded for anumber of claims, was a daily reminder ofpotential negative results. Furthermore, afeeling of déjà-vu hovered in the minds of thepeople who had lived through the Argentinecrisis. From 2012 on, once again the peso wasartificially maintained over-valued, hardcurrency was rationed by the authorities anda thriving black market for US dollars gave areal time reading of the pressures mountingin the system. The outcome seemed to be aninevitable repeat of what had come before.
Although not formally off cover, economicand financial conditions on the ground inArgentina prompted the ECA to requestsovereign guarantees whenever appropriatealong with explicit government support forprojects, as well as to turn down private riskas long as hard currency availability remainedon a downtrend. Nevertheless, the Argentinegovernment’s ability to extend sovereignguarantees, even for public works projects,
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Argentina: opportunitiesfor business andcooperation next doorSince the rise of China, Argentina has been demoted to Brazil's secondlargest commodities trading partner, but this has not stopped Argentinafinding new opportunities for business. ABGF's executive manager,Pedro Carrico, discusses the new avenues pursued by Argentina, as wellas how political transitions have impacted on the ECA.
Pedro Carriço
weakened as the government encounteredfiscal difficulties and Congress focused on thecoming elections. As a result, fewer and fewerprojects moved forward.
If the system was reluctant to assumemore risk, demand from exporters wassimilarly subdued. Applications for mediumand long term cover in Argentina in theprevious decade had been concentratedmainly in public works led by largeengineering and construction firms thatmobilised suppliers back home to provide asubstantial share of equipment andmachinery used in the projects. As thesecond Christina de Kirchner administrationdrew to a close, decision making came to ahalt due to generalised uncertainty overpolicy direction in the next government. A listof approved projects with promise of covernever broke ground during this period andremained stuck in the pipeline after theMauricio Macri administration wasinaugurated. In addition, the financing forthese transactions was called into questionwhen the recession in Brazil brought aboutspending cuts and dried up credit in thesystem. Financing difficulties werecompounded by the involvement of some ofthe engineering firms in corruptioninvestigations that all but shut them out ofthe credit markets. On top of all this, broadbilateral trade negotiations encompassingsupply chains, non-tariff trade barriers,Mercosur relations, and trade/exportfinancing were frozen during the politicaltransitions in Argentina and Brazil. Had thesetalks advanced, there was hope that aframework agreement on the project pipelinewould have been part of the package.
Gradual political and economicstabilisation allowed for the disagreementsbetween the two countries to begin slowlybeing resolved with the new governments inplace. A concurrence of economicmanagement approaches to include moremarket-friendly policies helped to prodnegotiations forward. In the meantime, thebackdrop was evolving favourably: theresolution of the long-lasting battle withhold-out creditors and renewed marketconfidence in the direction of economicpolicy taken by President Macri’s teamreopened international credit access toArgentina. External liquidity fears subsidedand investors were able to focus once againon the country’s enormous potential invarious sectors, from energy and logistics tomanufacturing and services.
On the domestic front, after the longestrecession in a century, Brazilian creditmarkets have shown signs of normalisingagain, with the Central Bank reducing policyrates and loan quality deterioration ceasing.Financing availability for medium/long termexports has returned, although at a lowerlevel than previously seen and with a plethoraof compliance requirements. As a result ofimproved conditions in both countries, newopportunities for export contracts started toemerge in earnest in 2017. There has been asignificant shift in demand for cover:engineering and construction firms have yetto submit new applications while capitalgoods manufacturers have returned fromtheir long absence. According to marketnews, it seems that although competitionfrom other exporters has increased,Argentina simply has not been concludingpublic works transactions lately. In otherwords, Brazilian engineering firms are notnecessarily missing out on exportopportunities to Argentina because ofinternal and domestic issues. Proof of thismay lie in the fact that the Macri governmentapparently has yet to revise the list of priorityinfrastructure projects in Argentina.
Having said this, there is no doubt thatcompetition has intensified with thenormalisation of Argentina’s financialrelations with the rest of the world.Fortunately, it is often the case that evenwhen transactions are closed by firms fromthird countries, part of the production ofgoods sold to Argentina has a good chanceof occurring in Brazil, given themanufacturing presence maintained in thecountry by a large number of multinationalfirms. Furthermore, increased competitionalso has an effect on the ability of exportersand lenders/insurers to extract additionalguarantees from their buyers. The newgovernment, naturally reticent to offersovereign guarantees due to its laissez-faireapproach, has been able to resist calls forsuch commitments. As a result, more creativesolutions need to be developed, proposedand negotiated within the context oftransactions, bringing together parties thatmay be unfamiliar to each other in morecomplex structures involving a larger numberof players and steps. As necessity is themother of invention, the future seems to bebright for cooperation and risk sharingopportunities between the Brazilian ECA andother export credit insurance industryplayers. ■
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The Local Contractors Programme isdesigned for local citizen-owned contractorsthat are emerging and still in need ofguidance into the next stages of businessgrowth. BECI realised that smaller contractorsface a number of challenges, all of whichneed to be addressed: Weak or non-existentconstruction technical education backgroundamong the smaller contractors; lack ofunderstanding of contracts and theapplication of clauses; and how to boostproject and business management skills.
Smaller contractors can also face thehurdles of weak construction management,waste management, and quality managementskills; as well as a lack of financial acumencompared with larger contractors.
Insufficient capital, a weak balance sheetand a lack of sufficient assets to provide ascollateral can also hold local contractorsback. And understanding of pricingstructures and quality standards was alsofound to be limited, with poor creditarrangements with suppliers anothercommon problem.
The solution to challengesBECI has developed sufficient skills in theunderwriting and technical expertise ofbonds over time and has adapted those skillsto creating a unique underwriting criteria forsmaller contractors, thus developing aproduct that best suits them. It provides acontractor’s guarantee, encompassing boththe support and monitoring of the smallcontractors. BECI underwrites eachcontractor individually and provides theemployer with a guarantee. The financialburden on small contractors is reduced by alower level of collateral being required, andrisk is mitigated by co-signing with thecontractor.
When working with local contractors BECI
negotiates goodcredit terms from itspolicy holders formaterials needed, andcan help theemerging contractorgain skills throughmonitoring andmentoring. We willalso assist thecontractor with a full
detailed construction programme.
The cost structureThe Guarantee costs structure comprises thefollowing:
● Premium ● Monitoring fees● Administration fees.The fees vary between 2.5% and 4.5% of
the guarantee depending on the risk profileand resources required to support thecontractor.
Project management services to BECIBECI worked with a project management firmto help identify any areas where smallercontractors could improve. The firm would inturn provide the following services to bothBECI and the local contractors: Projectmanagement services, risk managementfacilities, cost control, constructionprogramming contract administration, andquality control.
There are a number of other advantages togetting a project management firm involved.It will monitor the project and give BECIupdates, as well as be responsible for dealingwith compliance issues. Furthermore, the firmattends to site meetings and signs off all thepayment certificates. We find the consultingfirm to be a real boost to the smooth runningof the product. ■
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Introducing the BECI LocalContractors ProgrammeBECI has historically provided construction guarantees to the top endof the market. Now, to address the growing needs of local contractors,BECI has introduced the Local Contractors Programme. By BonaniDube, marketing manager, BECI.
Bonani Dube
African economic growth continues to outpacemost other regions in the world. InternationalMonetary Fund (IMF) projections estimate thatseven of the ten fastest growing economies inthe world in 2017 will be in Africa. This growth isexpected to continue into the next decade, withincreased foreign direct investment andimproved regulatory and fiscal management.Future growth, however, is predicated onimprovements in infrastructure. Improvementsto public services such as power, transportationand water can increase trade, provideemployment and promote access to betterservices such as healthcare - all of whichcompound to increase the attractiveness of theregion to investors.
Within infrastructure, the energy deficitremains perhaps the most critical challenge insub-Saharan Africa. Daily per capitaelectricity use in the region is estimated to be124 kilowatt-hours, or the equivalent of usinga 100-watt bulb for three hours. Thisrepresents one-tenth of per capita usage inother developing regions around the world.Limited access, rolling blackouts andincreasing costs also act as a disincentive toinvestment by corporates which face anaverage of nearly 60 days of power outageseach year. Added to this is an estimated $40billion funding gap in terms of availablecapital vs demand. African countries realisethe urgent need to invest in the energysector, but they cannot finance theinvestments required solely through thepublic sector. They are also hampered by aninability to make energy sector projectsappealing to private investors.
Most infrastructure investments in theregion are currently financed by governments(the public sector), the private sector and
other countries - suchas China. Externalofficial developmentassistance (ODA)represents a fractionof the total financing– well under 10%.Multilateral andbilateral organisations,as well asdevelopment finance
institutions (DFIs) such as the World Bank’sMultilateral Investment Guarantee Agency(MIGA), the African Trade Insurance Agency(ATI), the African Development Bank andother similar institutions, are also importantpartners in bridging the financing gap byreducing risk so as to encourage privatesector investors.
DFIs typically bring to power projectssignificant experience, a commitment toencourage sustainable development,improved transparency, risk mitigation andimproved returns on investments (orcertainty of return). They provide optionssuch as direct loans, credit enhancementsand first-loss funds. Export credit agencies(ECAs) also provide similar products such asguarantees and insurance. Figure one lists thefinancing tools offered by DFIs forinfrastructure investments in developingeconomies.
Challenges to using project financingin Africa’s energy sectorTraditional funding sources such as projectfinance from commercial banks areincreasingly a challenge in the region due toBasel III requirements and the sub-investmentgrade ratings of most African countries. In
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A new approach tomitigating offtakerrisk in African powerAfrica’s continued growth hinges on improvements to the energyinfrastructure and innovations in power sector financing are vital toreducing Africa’s $40 billion energy sector funding gap. By JohnLentaigne, chief underwriting officer, ATI.
John Lentaigne
addition, the turn-around time to execute adeal in Africa can take between 30 and 72months compared to the average of 12months in Asia and Latin America.
There are several important factorsrestricting the use of project financing morebroadly for energy projects in Africa. Longtenures, the complexity of coordinatingbetween multiple public and private sectorpartners, credit and sovereign risks, and alack of sound regulatory frameworks in manycountries are all inhibitors.
Power projects themselves are typicallyfinanced through a mix of equity investorsand debt providers according to risk appetite.Projects financed in this manner normallyinclude an equity investment from a privateequity firm or investors, with an insurancewrap from a DFI and a pledged debt from abank. Figure two outlines project financingoptions that are usually available forinfrastructure projects, some of which aresimply not available in African capitalmarkets.
Successful project financing relies on theprediction of future cash flows. The greaterthis is, the easier a project is to finance. Cashflow in the energy sector depends on theamount of power generated by theindependent power producer (IPP), and thensold to a state-owned utility – known as theofftaker. To determine projected cash flows,developers and sponsors create a powerpurchase agreement (PPA). Essentially, thisprovides the terms and conditions thatguides the sale of the energy into the nationalgrid or other power source.
Frequently, the biggest single obstacle tofinancing in this dynamic is the perceived(and often actual) poor financial state of themain sovereign offtakers. They are oftencaught between political realities (such as theneed to keep down the cost of power for thegeneral population) and the actual cost ofthe power being produced. The offtakers’biggest arrears tend to be to other state-owned enterprises (SOEs), while they mayalso be obliged to sell at a tariff that is belowtheir actual cost of production.
This situation leads to a deterioratingdynamic where higher quality, morereputable IPPs are reluctant to bid fortenders, leaving governments with highercost power from less reliable IPPs. Withoutadequate risk mitigation instruments on thenational offtaker, the cost of power willincrease even further given the increaseddebt and equity hurdles that investors will
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Figure 1
Figure 2
Figure 3
Information and stats are drawn from a May 2016 Report by the Milken Institute on“Innovative Financing Models for Energy Infrastructure in Africa”
demand in order to participate. The result isoften reflected in a higher rate of defaults onsuch high cost or marginal PPAs over time,leading to international arbitrations and lawsuits. This is generally a vicious cycle that willfurther deter future investors.
Figure three outlines the historicalmismatch in Africa between the total cost ofenergy production and tariff revenues.
With these well documented challenges,much needed innovations are beingdeveloped and, in some cases, successfullyimplemented as a means of addressing theenergy sector financing gap.
Existing innovations from investors The Milken Institute, an economic think tank,hosted investors in a forum designed to offernew financing options for Africa’s energysector. Broadly, it was felt that Africa couldaddress the funding gap while appealing to awider variety of investors by tacklingcredit/sovereign risk, improving dealimplementation and time to completion, andmitigating financial risk through an increasedvariety of product offerings.
Some of the solutions outlined includedalternatives to current risk mitigation toolssuch as sovereign guarantees, which wereperceived by investors as untrustworthy. Aput/call option to the sovereign was listed asa viable alternative. These effectively functionas a guaranteed sale of the power plant tothe government at a specified price if theofftaker doesn’t pay as scheduled. They arestructured as such to have no effect on thesovereign balance sheet. The “Sponsor”rating model was another option cited. Itbasically substitutes a better-rated “sponsor”for the sovereign to issue debt that wouldthen be repaid through a loan to thegovernment. The World Bank utilises thismodel by issuing bond offerings to fundinfrastructure projects while the governmentrepays the bank to cover the bond.
Other options outside the area ofsovereign risk include developing moreeffective and uniform rating systems. Theycould assess projects across the entireenergy spectrum and across countries andregions in Africa. Investors could then quicklyassess projects and expedite their duediligence and decision making process.Participants also suggested the developmentof structured portfolio options that wouldallow investors to participate in differenttranches of an investment portfolio, such asjunior, mezzanine and senior debt as well as
equity and first-loss junior positions. Thismodel, implemented by the AfricanDevelopment Bank, ensures greater risksharing, which helps attract more investors.
Fixed-income products such asinfrastructure project bonds (with debt that istypically covered by government-issued orcorporate offerings with an insurance wrapprovided by multilaterals) and covered bonds(securities that are backed by a pool of loans,which stay on the credit issuer’s balancesheet) are also being used more frequently inAfrica. They offer a double recourse to theissuer and the pool of loans – thediversification of the pool can help mitigatethe impact of project default.
A new innovation by KfW and ATI There are insurance products available tomitigate offtaker risks, principally arbitrationaward default insurance. This responds afterthe IPP has taken the defaulting sovereign tointernational arbitration and obtained ajudgment that is subsequently not honoured.The downside to this option is that it is timelyand expensive. Smaller IPPs may well also be
insolvent by the time a judgment is reached.But obtaining a cleaner ‘protracted default’insurance (that responds, for instance, aftersix months of default by the offtaker) isfrequently a challenge given the poorfinancial health of many sovereign offtakers.
Because of the perceived high risk ofofftaker default, we (the African TradeInsurance Agency - ATI) in partnership withGermany’s KfW, in June 2017 launched a newinstrument, the Regional Liquidity SupportFacility (RLSF). It is designed to tackle theofftaker liquidity risk for renewable energyIPPs. Usually, such IPPs – especially whenproject financed - rely on the predictable andregular cash flow of the PPA for debt service
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“There are insurance products availableto mitigate offtaker risks, principallyarbitration award default insurance. Thisresponds after the IPP has taken thedefaulting sovereign to internationalarbitration and obtained a judgmentthat is subsequently not honoured. Thedownside to this option is that it istimely and expensive.”
and repayment. Off-taker payment delaystherefore constitute a real threat to the IPPand project lenders.
To mitigate, lenders to project-financedIPPs insist on letters of credit (L/Cs) beingput in place in order to provide a buffer for acertain period of time – usually three to sixmonths of the IPP’s revenues – for whichrespective collateral needs to be put in place.However, utilities struggle to - or are notwilling to - provide such (cash) collateral. Ifthe liquidity cannot be found, for example bythe sovereign or by the IPP itself, this cancreate an un-bankable project. The projecteconomics can also be severely impacted.
For that reason, the main objective of theRLSF is to provide a bridging mechanism inorder to help lenders in markets that have alimited track record with IPPs, and little to notransparency on the payment record of theutility. The business practice as describedabove is currently rather inefficient andprevents many IPPs from reaching financialclose.
The RLSF offers the required collateral forproject lenders, rather than the utilities orhost governments being required to do so(for example by drawing on existing financingstructured instruments in the market as muchas possible). It does not aim to be asubstitute for the role of L/C bank(s), butrather to replace the existing cash collateralrequirements made under such L/Cs.
The proposed liquidity support facility isconsidered a crucial piece of the overallenabling environment attracting privateinvestments. Offering liquidity supportmitigates challenges which cannot beaddressed by the IPPs directly, but areimposed on them by lenders. The RLSF iscomplementarity to other risk mitigationinstruments, therefore it will further assist
IPPs in attracting suitable financing andultimately create bankable projects.
We see this direction - utilising public andprivate partnerships to provide regionalsolutions - as a blueprint for innovation in theenergy sector space within Africa. ATIexpects to unveil another energy sectorsolution within the next year which alsofeatures another partnership with a well-respected international financier.
For Africa to move beyond the currentdeficit it seems clear that it must focus onoptions that boost the appeal to investors. Atthe same time, governments must continue toimplement financial sector reforms. As a start,investors can be encouraged by some of theinnovations already taking place in this sector.I also predict that, over time, as more andmore equity investors and commercial banksestablish solid track records in this sector, thisin turn will pave the way for others to followand costs to continue to fall. ■
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“Because of the perceivedhigh risk of offtakerdefault, we (the AfricanTrade Insurance Agency –ATI) in partnership withGermany’s KfW, in June2017 launched a newinstrument, the RegionalLiquidity Support Facility(RLSF). It is designed totackle the offtakerliquidity risk for renewableenergy IPPs.”
“Frequently, the biggest single obstacle to financing inthis dynamic is the perceived (and often actual) poorfinancial state of the main sovereign offtakers. They areoften caught between political realities (such as theneed to keep down the cost of power for the generalpopulation) and the actual cost of the power beingproduced. The offtakers’ biggest arrears tend to be toother state-owned enterprises (SOEs), while they mayalso be obliged to sell at a tariff that is below theiractual cost of production.”
After dramatically halving oil prices to around$50 per barrel during the last three years,crude oil continues to be the biggestinternationally traded commodity. Crude andoil products produced from it still representthe most important part of global energy,despite the decline seen in its share from the1970s to become one third of the currentworld energy consumption. It is paramountthat we continue to observe and understandthe dynamics of crude oil and the productswithin the market.
The evolution of oil markets and priceregimes were among the most exiting partsof the economic history of last century,reflecting changes in the roles of its mainactors and arrangements. The golden age ofpost-war capitalism was characterised bystable key prices of oil and the dollar (linkedto gold). However, in the 1970s, that stabilityceased to exist. Low oil prices had beendefended for so long by cartels of theinternational oil companies; the ‘SevenSisters’. An increase in pricing has also beenpushed by developing oil-exportingcountries-members of OPEC in 1970s. Theabandonment of supply managementpolicies by OPEC (principally Saudi Arabia),brought about two dramatic declines ofprices starting in 1986 and 2014, followed byprolonged periods of low prices. At the sametime, the price increase during the last
decade were mainlyexplained by growingdemand from China,coining the term‘super cycle’, i.e. theever increasing pricesof commodities.
Since the 1980sprice regimes startedto be increasinglydetermined by future
markets, based on the so-called mainbenchmarks, Brent and West TexasIntermediate (WTI). The price of more than100 sorts of crude oil were based on qualitydifferentials around main benchmarks. Thechange in oil price regimes, which has beendominated by suppliers and pricesdetermined by future markets, were alsodictated by the need to give market responseto price instability and fluctuations. However,the digitally advanced futures marketspermitted to stabilise, through hedgingexpected prices on an individually transactedlevel, but could not manage to tame overallinstability and volatility of market prices. Also,accumulation of strategic and commercialstocks in main importing countries, whilemaking domestic supply of oil products moresecure, were not flexible or large enough toseriously contribute to the stabilisation ofprices.
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Oil price developmentsand prospectsAs the world’s most internationally traded commodity, it is no wonder a dramatic drop in price has sparked concern. Dr RoubenIndjikian, Webster University, Geneva, takes us through what to payattention to, as well as taking a reflective view of what we can learnfrom past decisions.
Rouben Indjikian
When prices increase, producers will also need toconsider new investment decisions, while projects inturn will need a few years for realisation. Whether newstreams of oil will enter the market with high prices orat least in contango is a big question.
Supply and demand instabilityFundamentally, the slow response of supplyand demand in the short term, wascontinuing to be the main reason of priceinstability and volatility. However, majorspikes and falls in prices during the last fivedecades also reflected the policy changes inthe OPEC price and supply managementinitiatives. The build-up of stocks partlysoftened these effects as stock drawdownsand replenishments were moving against theincrease and decline in prices. The excess oftax imposed on oil products such as gasoiland diesel in importing countries, and exporttax on crude oil in exporting countries, alsoinfluenced supply and demand. Taxmechanisms, international trading practices,domestic economic policies are among thefactors altering crude prices.
The elasticity of low prices for crude oilsupply and demand is also an importantfactor. It explains why prices after increase orfall do not adjust quickly to the market level.For example, consumers do not react toincreased petrol prices by the similardecrease in consumption, if at all. Yet crudeoil producers continue to sell supply in spiteof a fall in prices. Massive cuts in investment,especially new projects, took place with atime lag due to price declines after 2014.
When prices increase, producers will alsoneed to consider new investment decisions,while projects in turn will need a few years forrealisation. Whether new streams of oil willenter the market with high prices or at least incontango is a big question. Short-termelasticity of supply is very low and can increaseonly if there are under-used productivecapacities. The developments in crude oilmarkets reflect the geography of productionand the main players, as well as the state ofeconomic cycles and geopolitical events.
The impact of shale oil and gasThe question today is what main forces aredetermining current prices – which have beenrelatively stable since last year. Shale oil andgas, along with the emergence of the US asone of three biggest oil producers, with a
relative decrease of its crude oil imports, willmake OPEC supply management policies lesseffective. It depends on OPEC and non-OPEC oil exporting countries cooperatingand how future markets develop. Forinstance, the expected demand for oilproducts and the supply of crude oil, giventhe energy policies, climate changerestrictions, technological innovations andcuts in investments in current andperspective oil fields.
Hosts of organisations and experts arefollowing price developments on a daily basis.Prices are still gravitating around $50 in themain commodity exchanges which determinethe current spot and future prices. Marketparticipants are actually hesitating between aquite flat contango (expectation of increasingprices in future) and backwardation (thecontrary expectation). In spite of the conflictsand political risk in the Middle East andVenezuela, market participants considersupplies and stock enough that they do notneed to react to events, which historicallywere considered as important game changers.Specialised press follows and tries to explainthe small fluctuations in price and changes indifferentials between Brent and WTI spot andfutures pricing. Thus, there was around a 3%increase in the price of Brent crude on August19, 2017, subsequently characterised as a‘jump’ in price by the media.
Let us look at the long and short-termdeterminants of the current relative stabilityof oil prices at around $50 per barrel. Thespread between future prices of September2017 and say April 2018, will become muchlower compared to the August 2016 priceexpectations for September 2016 to April2017. The dramatically lowered spreadsuggest that markets do not expect muchchange in the supply and demand balance.
The supply and demand balance in themid-term has the potential to differ and couldcreate conditions for price increases due tothe growth of the world economy, especiallyemerging economies such as India, Indonesiaand others. It is also relevant to note thatChina continues to import crude oil, with a
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The short-term prospects and market expectationssuggest very small changes in pricing, albeit volatilityaround existing price levels may persist. The mid-termprospects could suggest a potential for considerableprice increases.
view to increase its stocks in an environmentof relatively low prices. In spite of the country’sefforts to develop electric cars, an increasingmiddle class in those countries will use morehybrid models with lower petrol/dieselconsumption rates, still increasing demand forthose products in absolute terms.
The progression of infrastructure toproduce electric cars needs investment, whilehybrid cars will continue using existing petrolstations. In this sense, expectations ofinvestors for electric cars could be provedexcessive, at least in a mid-term. Also in spiteof climate change commitments of mostcountries, the inertia in structural changetowards gas and renewables, as well as thepace of energy consumption will probablynot permit governments to meet the Parisclimate accord commitments – as a result ofpolicy measures. So an increase in demandwithout enough increase in supply, due to theexplained time lags, may bring aboutconsiderable increase in crude oil pricing. Thisis the most probable scenario, consideringthat technological breakthrough and drasticpolicy measures will affect the sector in thenext two to three years.
For the long term, the big unknown is the
pace of technological innovation and, moreimportantly, its diffusion. Apart from electriccars, innovations such as the Internet of things(IoT) may permit to better management ofenergy consumption and waste avoidance.Better construction materials used inresidential areas and industrial complexes canalso contribute to energy conservation. Goodnews may in addition come from technologiescapturing Co2 and other emissions, whileproducing crude oil and oil products andconsuming the latter. Technology solutionscould seriously limit the level of Co2 emissions,protecting the environment.
To conclude, the short term prospects andmarket expectations suggest very smallchanges in pricing, albeit volatility aroundexisting price levels may persist. The mid-term prospects could suggest a potential forconsiderable price increases. At the sametime, it is difficult to predict prices in thelong-term due to the pace of technologicalchanges and dynamics of the world economy.Looking at the last decade, the global crashof 2008 reflects how the governance ofglobal monetary policy and financialarrangements still cannot predict and tamefuture boom and bust cycles. ■
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The global economy would not exist but for acomplex series of institutions and rules, whichgovernments, international organisations, andprivate bodies have created over the previousdecades of globalisation. Since the 1950s,many multilateral organisations have adopteda rule-based approach that have given statesincreasing confidence to liberalise theireconomies and reduce tariffs, quotas, andother barriers to trade. As a result, theexpansion of international business activitiesthrough a multilateral trading systemprovided a major pillar for growth enjoyed bymany countries in the last century.
However, firms are exposed to severaldimensions of risk when they export theirproducts and services or set up foreignmanufacturing operations: Political risk,commercial risk, currency exposure as well ascross-cultural risk. In addition, internationaltrade is embedded in a well-developed andfunctioning financial environment. Financingis crucial for trading partners in order tobridge the time lag between export orderand payment for goods and servicesproduced. Scholars strongly support theargument that companies need adequateprovision for their export transactions.Factors such as export transaction volumeand credit period can considerably increasecosts of financing.
As a consequence, firms require coverfrom private credit insurers and governmentexport credit agencies (ECAs) for politicaland commercial risks linked to exporttransactions. ECAs are also important to
mitigate negativetrade effects offinancial constraintsdue to market failures.
Main objectivesand research gapThe Global CEOSurvey was launchedin 2015 by researchersfrom OffenburgUniversity, theUniversity ofWestminster and theLondon School ofEconomics andPolitical Science (LSE)to better understandwhat factors influenceexporters’ demand forcredit insurance.Although somescholars discussed
aspects of corporate insurance demand withregard to exporters, there is limited researchconcerning the demand for export creditinsurance associated with firm-specificfactors.
The study follows an explorative qualitativeapproach and an explanative quantitativeapproach, both informing each other. Datawas collected via surveys with qualitative andquantitative questions, open-endedinterviews, as well as publicly availabledocuments including annual reports. Multiplerounds of qualitative data collection via
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Risk aversion,financing and realservices Risk will always be there, and it is how that risk is covered which willkeep the conversation moving. Professor Andreas Klasen, OffenburgUniversity, and Dr Simone Krummaker, University of Westminster,discuss the how risk and financing will move forward with one another,as well as challenges along the way, looking at results from the GlobalCEO Survey and other sources.
Andreas Klasen
Simone Krummaker
interviews ran simultaneously with thecollection of data via questionnaires. Thisresearch was conducted with CEOs, COOsand managing directors from 35 export creditand political risk insurers in both public andprivate forms. In addition, more than 100interviewees from governments, exporters,project sponsors, buyers, as well ascommercial banks and development banksparticipated. The selection was driven by theaim to include a variety of participants fromdifferent regions in order to coverorganisations from different cultural andnational backgrounds. Full research resultswill be published by the end of this year.
Risk aversion The risk management function of creditinsurance is a significant factor for exporters’insurance demand. This applies for bothprivate credit insurers and governmentagencies. As discussed by Mayers and Smith(1982) the structure of ownership affects thefirm’s risk aversion and consequently theirdemand of insurance. Focusing on publiclylisted corporations, theory assumes that theirshareholders and investors are holding a well-diversified portfolio, thus are neutral withregard to firm-specific risks. In contrast theinsurance purchasing behaviour of singleowners of sole proprietorships can beexplained with their individual risk aversion.Because rather small companies have only alimited number of shareholders, firm size hasbeen connected to risk aversion. Size leads toa relatively smaller diversification regardingthe equity structure and can also lead to arisk-averse attitude of an exporter.
In our research, nearly all intervieweesmentioned that small and medium-sizedcompanies have a higher need than largecorporations to cover risks associated withinternational trade via insurance agreements.According to the empirical data, the size ofthe exporter drives demand for coverthrough three main motives: The transactioncost of risk management, knowledge aboutforeign buyers and markets, and businessdiversification. Interviewees also mentioned
that larger firms have more weight innegotiating the terms of credit insurancefacilities.
Transaction cost of risk management ismost relevant because the effort of buildingup a fully-fledged risk management functionas well as the related knowledge is notincreasing proportional to firm size. Larger
exporters not only have more professionalrisk management functions but also moreknowledge about markets for risk andinsurance products available. Once a growingfirm has installed such a risk function,benefits are that more resources are availableto manage risks efficiently. In addition, mostinterviewees mentioned that risk aversion is akey driver due to a rise of geopolitical risk,and SMEs’ lack of knowledge about buyersand markets. The evidence indicates thatthere is a strong relationship between smallfirms’ demand for coverage against thoserisks and the perceived or actual risks. Privatecredit insurance as well as ECA cover canalleviate some of these issues.
Financing functionFinancing of the specific trade transaction isa key determinant for companies to purchasegovernment export credit insurance. Liquidityfor transactions is a relevant factor of risk andfinancial management including, for instance,hedging. Purchasing insurance can benecessary to safeguard liquidity fortransactions, and insurance enablescompanies to realise financial advantagessuch as more consistent cash flows. This
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In our research, nearly all interviewees mentioned thatsmall and medium-sized companies have a higher needthan large corporations to cover risks associated withinternational trade via insurance agreements.
Larger exporters not onlyhave more professionalrisk managementfunctions but also moreknowledge about marketsfor risk and insuranceproducts available.
especially applies in the export creditinsurance context. It is of vital importance forthe company to structure financially soundexport transactions in order to safeguardcash flows. In addition, firm-level evidenceindicates that exporters cut back exportsmore than other companies if financialinstitutions are not able to provide adequatecredit facilities.
Insurance increases the opportunities forexporters to receive financing fromcommercial banks and mobilises additionalfunds otherwise not being available. Thus, thebank which finances the transaction plays adecisive role in the demand for coverageagainst these risks. The role of the financialintermediaries is also emphasised in the topicof financing for SMEs. Several statements inthe interviews describe that externalfinancing for SMEs is more difficult than forlarger companies, which often have long andactive relationships with several banks. Inaddition, there is often no sufficient offeringfrom commercial banks for ‘small ticket’transactions below €5 million due to limitedrisk appetite and competition. Tight financingconditions also become apparent both forvery large transactions, as well as projectswith longer maturities and in risky markets.
Although interviewees mention thatfinancing is one of the most importantfunctions of credit insurance, there are alsoother findings leading to potentially opposingtrends: less traditional international playersare now active in export finance in general.Many commercial banks’ activities are volatile,and trade and export finance bank strategieschange quite often. Global financialinstitutions have shown less appetite, and alarge number of correspondent bankingrelationships have disappeared. This isrelated, in particular, to the changingregulatory environment including Basel III(some say Basel IV) implications andAML/KYC requirements. As a consequence,direct lending (i.e., funding directly providedby government export credit agencies)becomes much more important now. SeveralECAs enhanced their financing programmes,introduced specific direct loan programmesfor transactions up to €5 million for medium-term projects, or work on a more competitivedirect lending offering for SMEs.
Insurance services Several studies mention insurance services asan additional argument for corporateinsurance demand. Private credit insurers are
able to provide efficient services for theadministration and processing of claims aswell as the prevention of losses due to, forinstance, economies of scale. Governmentexport credit agencies also have a specificknowledge and are well versed in riskanalysis. This includes the assessment ofcountry risks and foreign buyers’ financialratios. Providing real services for theircustomers, insurers have a comparativeadvantage concerning the development aswell as the application of risk management,and have mechanisms to control adverseoutcomes.
Some European ECAs have been pioneersin offering advisory services to exporters.They provide managerial and advisorysupport for the definition and implementationof market-specific international growthstrategies. Insurers also support exporters inidentifying business opportunities incountries with sales potential, proposingfinancial and insurance solutions. Incollaboration with universities and industryassociations, some ECAs developed traininginitiatives and seminars dedicated toexporters. These workshops and trainingsessions allow participants to acquirestrategic and operational skills needed forsuccessful internationalisation.
Other factorsIn addition to risk aversion, financing and realservices, demand for credit insurance isassociated with agency conflicts. Theseagency conflicts between shareholders andoutside creditors are caused by a non-linearity of rights or claims for payment. This
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Some European ECAshave been pioneers inoffering advisory servicesto exporters. They providemanagerial and advisorysupport for the definitionand implementation ofmarket-specificinternational growthstrategies.
is because risk positions with regard toexpenses and income are shifted betweenshareholders and outside creditors. Exportcredit insurance is able to solve theunderinvestment and the asset substitutionproblems.
Agency conflicts can also arise from
different interests of shareholders andmanagers. Shareholders of large exportersintend to have a risk neutral behaviour due tothe diversification of their portfolio whereasmanagers are risk-averse and tend to operateself-interested at the cost of shareholders.Furthermore, there is a different time horizonbetween the managers’ working life and theindefinite life of a corporation. Theorysuggests that managers will therefore try tomaximise expected revenues in a specificfinancial period and will neglect thecompanies’ long-term perspective to increasethe firm value. Buying export credit insuranceis a result of the managers’ risk aversion andtheir behaviour to reduce or transfer risk.
Interviews reveal that many exporters areconcerned about the impact of the risks ofinternational trade on the firm’s balancesheet. The key reason here is to avoidearnings volatility, as this is in generalconsidered to be a feature of risky firms. Thismotive is closely connected with the factorsof signalling to stakeholders. Insurance isassumed to be a means of signalling risk ofthe company to markets and stakeholders, ascompanies with insurance contracts will havea lower earnings volatility due to insurableunsystematic risk.
Government credit insurance in the‘Strategic Econsystem’A driver for demand of government exportcredit insurance is the integration of ECAofferings into a concise national strategic
framework to leverage impact. Governmentsprovide opportunities for technologicaltransformation and sustainable economicdevelopment through the establishment ofcoherent policy goals and innovationsystems. An innovation policy mix includes,for example, the provision of an appropriateinfrastructure, networks of publicly-financedresearch institutes and universities, as well asgovernment financing instruments such asconditionally repayable loans. Effectivelymanaging the interaction of governmententities involved in innovation, tradepromotion and export credit support is key tocrafting sustainable and responsiveeconomies.
This supportive economic environment,the coherent interplay in a ‘StrategicEconsystem’, is capable of adapting to thedemand of exporters. Interviewees mentionthat it is crucial that innovation funds, tradepromotion agencies, export credit agenciesand investment promotion organisationswork closely together. Innovative andintegrated government financing instrumentsmeet exporters’ demand and have thepotential to substantially support thecompetitiveness of companies in the globaleconomy.
ConclusionResults show concepts emerging from thedata which enrich the current theoreticallandscape on firms’ demand for export creditinsurance. There is empirical evidence thatrisk management, financing and real servicesare key drivers for export credit insurancedemand. In addition, motives includesignalling effects. It is important to mentionthat the context of risk management andfinancing for SMEs differs significantly fromthose in larger or even multinationalcompanies, in particular with regard torestriction on access to finance andlimitations on the sophistication of riskmanagement and knowledge. The role offinancing institutions is crucial, and regulatoryissues have to be addressed in an appropriatemanner. However, regulatory effects have anegative impact on export credit insurancedemand as well leading to deflexion ofdemand towards direct lending fromgovernment agencies. A further importantfinding of this research is that governmentsfollowing the approach of a coherent‘strategic econystem’ seem to have acompetitive advantage meeting exporters’demand for credit insurance. ■
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A driver for demand of government exportcredit insurance is theintegration of ECAofferings into a concisenational strategicframework to leverageimpact.
WORLD TOUR 2017/2018TRAINING COURSES
Berne Union 2017
Berne Union 2017
4Directory
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Berne Union MembersThe Berne Union has 82 member companies from around the world, including 3 observers. The membership is
diverse – member organisations may be private or state linked, small or large. They represent all aspects of the
export credit and investment insurance industry worldwide.
As of October 2017, the Berne Union’s 82 members include:
69 ECAs, 9 private insurers and 4 multilateral institutions.
The Berne Union member directory has moved online – this allows us to ensure that member information and
contact details are always current and accessible. For contacts and more detailed information about each member
please visit:
https://www.berneunion.org/Members
ABGF BrazilAgência Brasileira Gestora de FundosGarantidores e Garantias S.A.
AIG United States of AmericaAmerican International Group, Inc.
ALTUM LatviaDevelopment Finance Institution Altum
AOFI SerbiaSerbian Export Credit and Insurance Agency
ASEI IndonesiaAsuransi Asei Indonesia (Asuransi Asei)
ASHRA IsraelIsrael Export Insurance Corp Ltd
ATI MultilateralAfrican Trade Insurance Agency
ATRADIUS The Netherlands Atradius NV / DSB
BAEZ BulgariaBulgarian Export Insurance Agency
BANCOMEXT Mexico Banco Nacional de Comercio Exterior S.N.C.
BECI BotswanaExport Credit and Guarantee Company
BPRFRANCE FranceBpifrance Assurance Export
CESCE Spain Compania Espanola de Seguros de Credito a laExportacion
CHUBB Switzerland Chubb Insurance Company
COFACE France Compagnie Française d’Assurance pour leCommerce Exterieur
COSEC Portugal Companhia de Seguro de Créditos, S.A.
CREDENDO GROUP Belgium
DHAMAN MultilateralThe Arab Investment & Export Credit GuaranteeCorporation
CREDIT OMAN OmanExport Credit Guarantee Agency of Oman
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ECGC IndiaExport Credit Guarantee Corporation of India Ltd
ECGE EgyptExport Credit Guarantee Company of Egypt
ECIC SA South Africa Export Credit Insurance Corporation of SouthAfrica Ltd
ECICS Singapore ECICS Limited
ECIE United Arab EmiratesExport Credit Insurance Co. of the Emirates
ECIO GreeceExport Credit Insurance Organization
EDC Canada Export Development Canada
EFIC AustraliaThe Export Finance and Insurance Corporation
EGAP Czech Republic Export Guarantee & Insurance Corporation
EGFI IranExport Guarantee Fund of Iran
EH GERMANY GermanyEuler Hermes Aktiengesellschaft
EIAA ArmeniaExport Insurance Agency of Armenia
EKF DenmarkEksport Kredit Fonde
EKN SwedenExportkreditnämnden
EXIAR RussiaExport Insurance Agency of Russia
EXIM HUNGARY HungaryHungarian Export-Import Bank Plc.
EXIM J JamaicaNational Export-Import Bank of Jamaica Limited
EXIM R RomaniaEximbank of Romania
EXIMBANKA SR Slovak Republic Export-Import Bank of the Slovak Republic
EXIMGARANT BelarusEximgarant of Belarus
FCIA United States of America FCIA Management Company, Inc
FINNVERA FinlandFinnvera Plc
GIEK NorwayGaranti-Instituttet for Eksportkreditt
HBOR CroatiaCroatian Bank for Reconstruction & Development
HKEC Hong Kong Hong Kong Export Credit Insurance Corporation
ICIEC MultilateralIslamic Corp for the Insurance of Investment &Export Credit
JLGC JordanJordan Loan Guarantee Corporation
KAZAKHEXPORT KazakhstanKazakh Export Credit Insurance Corporation
KREDEX EstoniaKredEx Credit Insurance Ltd.
KSURE KoreaKorea Trade Insurance Corporation
KUKE PolandExport Credit Insurance Corporation Joint StockCompany
LCI LebanonLebanese Credit Insurer
LIBERTY United Kingdom Liberty Mutual Insurance Europe Limited
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LPEI IndonesiaIndonesia Eximbank
MBDP MacedoniaMacedonian Bank for Development Promotion
MEXIM MalaysiaExport-Import Bank of Malaysia Berhad
MIGA MultilateralMultilateral Investment Guarantee Agency
NAIFE SudanNational Agency for Insurance & Finance ofExports of Sudan
NEXI JapanNippon Export and Investment Insurance
NZECO New ZealandThe New Zealand Export Credit Office
ODL LuxembourgLuxembourg Export Credit Agency
OeKB AustriaOesterreichische Kontrollbank Aktiengesellschaft
OPIC United States of America Overseas Private Investment Corporation
PICC ChinaPeople’s Insurance Company of China
PwC GermanyPricewaterhouseCoopers AG
QDB QatarQatar Development Bank
SACE ItalyServizi Assicurativi e Finanziari
SEP Saudi ArabiaSaudi Export Program
SERV SwitzerlandSwiss Export Risk Insurance
SID SloveniaSID Inc, Ljubljana
SINOSURE ChinaChina Export & Credit Insurance Corporation
SLECIC Sri Lanka Sri Lanka Export Credit Insurance Corporation
SONAC SenegalSociété Nationale d’Assurances du Crédit et duCautionnement
SOVEREIGN BermudaSovereign Risk Insurance Ltd
TEBC Chinese Taipei Taipei Export-Import Bank of China
THAI EXIMBANK ThailandExport-Import Bank of Thailand
TURK EXIMBANK TurkeyExport Credit Bank of Turkey
UK EXPORT FINANCE United Kingdom Export Credits Gurantee Department
UKREXIMBANK UkraineJoint Stock Company the State Export-ImportBank of Ukraine
US EXIMBANK United States of America Export-Import Bank of the United States
UZBEKINVEST UzbekistanUzbekinvest National Export-Import InsuranceCompany
XL CATLIN United Kingdom XL Insurance Company SE
ZURICH United States of America Zurich Surety, Credit & Political Risk
