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SBerne Union 2016
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
TXFEditor-in-chiefJonathan Bell
News and features editor Oliver Gordon
Specialist publications editor Oliver O’Connell
Production editorJohn Smith
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Data analystAna Jovanovic
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Contents
MEDIUM- AND LONG-TERM EXPORT CREDITINSURANCE
The OECD Regulatory Framework and the benefits of international cooperationbetween ECAs 35Paola Valerio, head of international relations,SACE
Compliance: A priority for ECAs 39Lucy Wylde, general counsel and head ofcompliance, UK Export Finance
The cost of emerging from the perfect storm 41Daniel Schmand, chairman, ICC BankingCommission Advisory Board
Reinsurance: An ECA point of view 43Adi Gross, chief underwriting office, ASHRA
Competition, the ECAs and the private market 45Charles Berry, chairman, BPL Global
CIRR: Analysing its contemporary importance 49Henri d’Ambrieres, HDA Conseil
The era of regulation – part two 53Ralph Lerch, chairman, export credit workinggroup, European Banking Federation
Funding products and guarantees: The Credendo experience 59Paul Becue, technical communicationsspecialist, Delcredere Ducroire
The ICC and export finance: An update on key developments 61Eric de Jonge, manage director, global headof structured export finance, ING Bank, andDavid Bischoff, policy manager, BankingCommission, ICC
INVESTMENT INSURANCE
The economist’s view: A world caught intradelock 65Mahamoud Islam, senior economist for Asia;Daniela Ordoñez, senior economist for LatinAmerica; and Ludovic Subran, chiefeconomist, Euler Hermes
The oil price hardly matters for Russian country risk 71John Lorié, chief economist; Theo Schmid,economist; and Peter Sayer, quantitativeeconomic intern, Atradius Credit Insurance
Political risk and trade credit policy wordings,and harmonisation in the context of the Insurance Act 2015 77Joe Blenkinsopp, senior vice president, globalhead of market distribution and development,XL Catlin Political Risk & Trade CreditInsurance
UK Insurance Act 2015: Disclosure requirements and implications 80Carol Searle, general counsel, Texel FinanceLimited
OPIC: Political risk insurance claims andcoverage for political violence 83Tracey Webb, vice president, structure financeand insurance, OPIC
1 Introduction
3 Expert Analysis
2 Data and Statistics
Berne Union elected officials, committees and secretariat 6
Foreword 11Topi Vesteri, president, Berne Union
A new Berne Union 15Kai Preugschat, secretary general, BerneUnion & Paul Heaney, communications, Berne Union
A strengthened Prague Club 18Chris Chapman, manager, NZECO
Berne Union totals 22
Short-term export credit insurance
Medium- and long-term export credit insurance
Investment insurance
State of the industry 28Committee chairs and vice-chairs offer theirinsights
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A GLOBAL GUIDE TO POLITICAL RISK ANDPOLITICAL VIOLENCE
Political risk and political violence in Southeast Asia 87Mark Wong, managing director, credit, political and security risks – Asia, JLT Specialty
Central Asia: Transition-in-process 91Norm Kimber, Zurich Credit and Political Risk
Latin America: The (incomplete) turn to the right 95Keith Martin, senior consultant to AOK Brazil and Veracity Worldwide
Key political risks in the Middle East and North Africa 99IHS Economics and Country Risk
The changing dynamics of risk in sub-Saharan Africa 101Michael Creighton, head: export credit finance, Nedbank Corporate and Investment Banking
Demand for export credit and political risk insurance 105Professor Andreas Klasen, OffernburgUniversity, and Dr Simone Krummaker,University of Westminster
SHORT-TERM BUSINESS
2016: The tipping point 108William Clark, head of UK trade credit, AIG
Digitalisation: One aspect of the future of short-term credit insurance 111Olaf Lipinski regional director riskmanagement, Euler Hermes World Agency
SMALL AND MEDIUM-SIZED ENTERPRISES
The challenge of the trade finance funding gap 113Marc Auboin, counsellor for trade and finance, WTO
Small business is big business for US Exim Bank 115Jim Burrows, senior vice president of smallbusiness, US Exim Bank
Small business support: AOFI’s support for the development of SMEs, entrepreneurship and competitiveness in the Republic of Serbia 117Dejan Vukotić, CEO, AOFI
BUSINESS OPPORTUNITIES, CHALLENGES ANDCHANGES
The opportunities and challenges of Iran’s post-sanctions era 121Michael Sobl, trade and export finance, DZ-Bank
The outlook for the Iranian market 123Arash ShahrAeini, deputy CEO, EGFI
Trade and export finance in Brazil: Outlook and challenges 125Marcelo Franco, CEO, ABGF, and PedroCarriço, executive manager international credit assessment, ABGF
BECI: Business opportunities, challenges and change 127Cowell Habana, general manager, BECI
PICC: Our three measures to survive and compete against a dominant player 128Zhongzhu Chen, general manager of creditinsurance and surety, PICC
MENA: Changing region, changing business 130Karim Nasrallah, general manager, LCI
Transfer of the state guarantees from Coface to BPIfrance 132Maëlia Dufour, sous-directeur, direction desgaranties publiques, Coface
NEXI’s transformation to a stock company, and its future 133Kazuhiko Bando, chairman and CEO, NEXI
Exploring new opportunities in the energy sector: Key considerations tounderwriting successful projects 135Benjamin Mugisha, senior underwriter, ATI
Walking a tightrope 137Geetha Muralidhar, chairman and managingdirector, ECGC
Financing gaps, mobilisation and the importance of enhanced cooperation between development financiers and Berne Union members 141Paul Mudde, Sustainable Finance andInsurance
Digital trade: Wish, vision or reality? The blockchain euphoria! 151Urs Kern, senior manager, corporate business, EMEA, SWIFT
3 Expert Analysis continued
4 Member Directory
Berne Union members 157
Berne Union 2016
Berne Union 2016
1Introduction
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 responsible forcredit and analysis functions of both exportcredit agency (ECA) as well as domestic SME financing business of Finnvera, inOctober 2015.
Topi is chairman of the board of FinnishExport Credit Ltd, the subsidiary of Finnveraresponsible for providing funded exportcredit solutions and chairs also the boards ofFinnvera’s venture capital subsidiariesVeraventure Ltd, Seed Fund Vera Ltd andERDF Start Fund Ltd. Topi also served asboard member of Finnish Fund for IndustrialCooperation Ltd (Finnfund), 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 of thebank’s overseas and domestic subsidiariesand business units.
Within the Berne Union, Topi wasappointed president in 2015, was chairman ofthe Medium and Long Term (MLT) Committeein 2009 – 2011 as well as Vice President of theUnion in 2003 – 2004.
Topi holds a Master’s Degree in Law(LL.M.) from the University of Helsinki.
Vice President, Michal RonSACE Italy | Managing Director, Head ofInternational Relations and Network
With extensive experience inthe world of structuredfinance and export credit,Michal Ron is currentlymanaging director, head ofinternational business inSACE, overseeing the group’s
international relations, overseas network andpolitical credit recovery.
Her responsibilities include all activitiesrelated to the Paris Club and other politicalrecoveries, with a track history of €10 billion insovereign recoveries over the past years andthe achievement of successful results in post-sanctions contexts such as Argentina, Cubaand Iran, paving the way for these countriesto regain access to international markets.
Over the past seven years, Michal hassteered the expansion of SACE’s overseasnetwork, supervising internationalunderwriting generated by the 10 officesabroad (Bucharest, Dubai, Istanbul, HongKong, Johannesburg, Mexico City, Moscow,Mumbai, Nairobi, Sao Paulo). She alsomanages SACE’s role within the OECD andEU, Reinsurance Agreements and the overallrelationship with other export creditagencies.
In 2014 she has been elected to the role ofvice president of the Berne Union, andreconfirmed in the same position in October2015. In her capacity as Berne Union VicePresident she has led numerous initiatives,including the Outreach Working Groupbetween the Berne Union and the World Bank.
Prior to working at SACE, she spent 10 years at MCC SpA (head of oil, gas andpetrochemicals, structured finance) and sevemyears with HSBC (London, Madrid, Milan).
With a Business Studies, Risk Managementand Finance BSc Honours degree from CityUniversity Business School (London), Michal
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The Berne Union:Who’s Who 2016Berne Union Elected Officials
has worked in investment banking in severalEuropean countries and has been invited tospeak in numerous business conferencesworldwide.
She is based in Rome, Italy (SACE’sheadquarters).
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 at the 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) ofthe 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, Adi GrossASHR’A Israel | Chief Underwriting Officer
Adi Gross is ASHRA's (theIsraeli Export CreditAgency) chief underwritingofficer. He first joined thecompany as an underwriterin 1999 and following hisreturn in 2009 now leads
the underwriting teams, with overallresponsible for the company’s creditinsurance process, reinsurance, IT system andcustomer service.
Within the Berne Union, he was appointedfor vice chair of the Medium and Long TermCommittee in 2015, and was the chairmanand the host of the first Berne UnionReinsurance Specialist Meeting held in TelAviv, Israel in the same year.
Previously, Adi worked from 2007-2009for ZURICH Surety Credit and Political Risksas a consultant for business developmentand marketing in CIS and CEE countries.
He holds an MBA from Tel Aviv University,Israel, majoring in Finance and Accountingand a BA in Economics from Ben-GurionUniversity, Israel.
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Investment InsuranceCommittee
INV Committee Chair, Vinco DavidATRADIUS DUTCH STATE BUSINESSNetherlands | Senior Manager
Vinco David has 30 years’international experience incredit and investmentinsurance.
He is currently a memberof the management team ofAtradius Dutch State
Business NV, the Export Credit Agency of theNetherlands. His responsibilities includeinternational relations, reinsurance, productdevelopment, market development,communication and corporate responsibility.
Previously Vinco David held positions atthe Berne Union Secretariat and theNetherlands Ministry of Finance. He holds anMA in political science and internationalrelations and a BA in economics and Italianlanguage and literature from the FreeReformed University of Amsterdam.
INV Committee Vice Chair, ChristinaWestholm-SchroderSOVEREIGN RISK INSURANCE Bermuda |Chief Underwriter
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- and co-insurance 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 in
Stockholm, Sweden. Christina has an MBA ininternational business from StockholmSchool of Economics and BusinessAdministration and an MBA in finance fromNew York University.
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
Kai PreugschatBerne Union | Secretary General
Kai joined the Berne Union –the International Union ofCredit & Investment Insurers– as the organisation’sSecretary General in August2014, based in London.
Until then, Kai wasUniCredit group’s deputy global head ofexport finance. He also chaired the ICC’ssteering committee for its medium / longterm Trade Register and serves asindependent member on the board of SMEexport financier Northstar Trade Finance Inc.,Canada.
Previously Kai co-headed the underwritingand risk management division of Germany’sOfficial Export Credit Agency, Euler Hermes.Before joining Euler Hermes, he managed theExport Finance Bank-project “EFB” inSingapore, sponsored by ANZ BankingGroup. EFB advised on and arranged ECA-guaranteed loan facilities.
From 2004 to 2008 Kai was responsiblefor the establishing and management of KfWIPEX-Bank’s Financial Products Advisory
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department, providing the bank’s industrydivisions with specialist advisory services forcredit risk insurance, financial modelling aswell as trade- and LBO-finance. On behalf ofKfW IPEX-Bank, Kai also served as deputyadvisor to the German highest decisionmaking body for export credit guarantees,the Inter-Ministerial Committee.
During 1986 and 2004 Kai held variousmanagerial roles for ANZ, BayerischeLandesbank and Hypo-Bank withassignments in Germany, Asia and Australia,focusing on export, trade and project finance. In Sydney Kai also worked forAustralia’s ECA EFIC.
Laszlo VarnaiBerne Union | Associate Director (STCommittee Support)
Laszlo joined the Secretariatin June 2016, mainly toadvise it on legal mattersand to support theCommittees (primarily theST Committee) andSpecialist Meetings. He
gained focused experience in policy analysisas he worked for EXIM Hungary for morethan 5 years, leading the ECA’s internationalrelations (OECD, EU and Berne Union) andensuring compliance with WTO, OECD andEU regulations, as well as the internationalsanctions.
Laszlo graduated in law from PeterPazmany University, holds a DipHE in Law ofEngland and Wales and the European Unionfrom the University of Cambridge, anddiploma of economic diplomacy from theKároli Gáspár University in Hungary.
Johannes SchmidtBerne Union | Associate Director (INVCommittee 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.
Laura LindBerne Union | Committee Support Manager(MLT Committee)
Laura Lind joined theSecretariat in December2015. Her main responsibilityis supporting the MediumLong-Term Committee andall related activities,including cooperation with
the ICC Banking Commission.Prior to joining the Secretariat, Laura
completed her Master´s Degree inInternational Relations and European-AsianStudies, complementing her Bachelor´sdegree in Business Administration.
Laura previously supported Finnvera´sexport finance and international relationsdepartments after working for five years asprogramme assistant with the Finnish Fundfor Industrial Cooperation Ltd. (FINNFUND).
Ella Szukielowicz-LindonBerne Union | Committee Support Manager(PC Committee)
Ella joined the Secretariat inNovember 2014 as businesssupport manager, heavilyinvolved in operationalduties but currently lookingafter Prague ClubCommittee and its
members. Ella has broad knowledge andexperience in financial sector and previouslyworked as human resources manager in aprivate equity firm. Ella holds a B.Sc. inBusiness Administration and Economics.
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Massimo SartiBerne Union | Data Manager
Massimo joined theSecretariat in January 2015as data manager, withresponsibility for the datatransformation project andfor handling data collectionfrom the Members as well as
reporting.Previously Massimo worked at Italy’s SACE
for eleven years as senior IT manager in theIT department. He has a long professionalhistory and extensive experience in projectmanagement and IT services, gained also inhealth care, consultancy and technologicalsectors.
Paul HeaneyBerne Union | Media & CommunicationsManager
Paul joined the Secretariat inJuly 2016 as the first evermedia and communicationsspecialist, with responsibilityfor handling internal andexternal communications.Paul’s objective is to
increase engagement amongst memberswithin the BU, as well as expanding on ouroutreach and collaboration with externalinstitutions trade press and media.
Prior to joining the BU Paul worked as aconference producer at Informa, running theExCred (Insuring Export Credit & PoliticalRisk) series of events.
Paul holds a BA in Philosophy from TrinityCollege Dublin and an MA from King’sCollege London.
Nicole CherryBerne Union | Team Assistant
Nicole joined the Secretariatin July 2016. Nicole providesassistance to the SecretariatTeam and manages theoffice. She has recentlymoved back to the UK afterliving in Tanzania for six
years working with NGO’s and running avolunteer organisation. Most recently sheworked as the personal assistant for the CEOof the largest company in East Africa, MeTL.
Dong Hyuk KimBerne Union | Data Secondee
Dong-hyuk is joining theSecretariat until the end of2016 on secondment fromKSURE. His primary areas ofwork will be themanagement of Berne Unionbusiness data, including
managing the collection and reporting ofsuch data from Berne Union members.
Dong-Hyuk has more than 10 years exportcredit experience working for KSURE, mostrecently he served as a manager of auditdepartment in KSURE. Dong-hyuk holds aBA in Law from Sungkyunkwan University.
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Management Committee Members
ATRADIUS COFACE ECGC ECIC SA
EULER HERMES EXIMBANKA SR SERV SINOSURE
SOVEREIGN UKEF US EXIMBANK ZURICH
2016 has been an eventful, and in somerespects surprising year so far. A number ofhigh-profile political developments – not leastthe UK’s referendum to exit the EuropeanUnion – sit against a backdrop of difficulteconomic conditions, rising geopolitical risksand uncertain financial markets. Collectively,these trends have sustained the challengingenvironment for trade we saw in 2015.
Figures from the World Trade Organisation(WTO) indicate that world trade experienceda considerable decline in 2015, down over 13%on 2014 to just under $16.5 trillion. Lowenergy and commodity prices and verycautious low investment activity certainlyaccount for a significant portion of this, butalso changing patterns of demand andcurrency fluctuations.
In line with these developments in thewider global economy, Berne Union membershave also recorded a decline in volumes ofexport credit insurance – collectivelyunderwriting around $1.84 trillion of newbusiness in 2015. However, it is noteworthythat this drop – down approximately 7% from2014 volumes – is considerably lower than thecomparable fall in overall world trade, and inactual fact, the percentage of global tradesupported by Berne Union memberscontinued to rise, amounting to over 11% for
2015 business. This statistic
underlines theimportant role whichBerne Union membersplay in facilitatingtrade in difficulteconomicenvironments, as wellas the counter-cyclicaland stabilising
function of the credit insurance products theyprovide. Of course this stabilising role canonly be effective where the industry isconfident that Berne Union members’ creditinsurance and investment insurance productsperform both in good times and in bad. Inrespect of claims, Berne Union members paidout $5.9 billion in 2015 – a 38% increase whencompared to the $4.3 billion recorded in 2014.
Indeed, since the beginning of the globalfinancial crisis in 2008, Berne Union membershave paid approximately $35 billion toexporters and banks to compensate them forlosses suffered due to defaults by buyers orother obligors, thus Berne Union membershave provided ample and flexible riskcapacity to support international tradetransactions and to foster sustainableeconomic growth.
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INTRODUCTIO
NBerne Union 2016: President’s foreword
2016: a leap-year, year ofchange and year of growthfor the Berne UnionTopi Vesteri, Berne Union president, and deputy CEO, and group chief creditofficer of Finnvera, reveals how the Berne Union continues to support a grow-ing amount of global trade, and reports on the importance of the formalmerger with the Prague Club.
Topi Vesteri
2016 has been an eventful, and in some respectssurprising year so far. A number of high-profile politicaldevelopments – not least the UK’s referendum to exitthe European Union – sit against a backdrop of difficulteconomic conditions, rising geopolitical risks anduncertain financial markets.
Significant changes for the BerneUnion in 2016 An affirmative vote at the May 2016 Springmeeting in Warsaw confirmed the formalintegration of the Berne Union and PragueClub, bringing combined membership to arecord 82 companies from 73 countries,representing over 90% of world population.
The Berne Union has always been aninternational organisation, with globalinterests, but this development is significantin bringing together a wider cross-section ofindustry representatives than ever before.Our members include the largest privatecredit insurers and most ambitiousgovernment-backed ECAs, with globalfootprints, writing business in excess of $400billion, as well as small regional outfits, withannual turnover of only several million US dollars, and everything in-between.
It goes without saying that a largernumber of members, writing more businesscan only be a good thing for therepresentation of the collective organisation;but even more so, for an industry whichresists a cookie-cutter approach, thisdiversity of representation is itself bothimportant and appropriate, and the resultingexchange of information is invaluable to allmembers and the wider trade financecommunity.
These themes of engagement, diversity ofrepresentation and communication exchangeare central to the Berne Union’s vision, andhave informed the continuing evolution of theorganisation as we adapt in line with both ourmembers and the changing landscape we allfind ourselves in.
We are currently poised to initiate the nextsteps in reform of the Berne UnionManagement Committee, incorporatingrepresentation for our colleagues at theerstwhile Prague Club – which now sits as aspecialist committee, alongside those forShort-Term, Medium/Long-Term andInvestment Insurance – as well as makingchanges to the terms served by electedofficials, and the rotating members. The
intention is that this will facilitate moreeffective leadership, better overallrepresentation and smoother transitions fromterm to term.
Execution of long-term strategy will be theremit of newly established Task Forces,initially focused on Data, HR & Finance andOutreach. These will provide a concretemeans of delivering the Berne Union’sstrategic goals, and will allow theManagement Committee to more efficientlydirect its resources and expertise to this end.
The world of export finance has changedconsiderably, even just in the eight yearssince the start of the global financial crisis.The role of ECAs in particular, and providersof export credit in general, has been centralto this. Determining how our industry relatesto the banks and other financial institutions inthe trade space is essential to remainingrelevant in such a rapidly changingenvironment, with complex external drivers.
Alternative sources of finance anddiversification of riskRegulation remains a primary concern forlenders. The Basel Committee’s stringentcapital and liquidity requirements in particularhas put pressure on banks’ capacity tosupport trade and to a large degree hasencouraged trends towards banks asarrangers, seeking to originate to distribute,leaving noticeable market gaps in funding.Small businesses, the potential growthengines of future exports in many countries,have been hit especially hard. In thisenvironment of increasingly onerouscompliance, where the cost of providingtrade finance facilities is often not worth themargin for banks, alternative sources offinance are essential.
For the part of ECAs, most temporaryexport credit funding schemes set up since2009 have become permanent. Directlending schemes, transfer schemes,securitisation or funding guarantee schemes,all have their place within the toolboxes ofmany ECAs, but differing rules on eligibility,
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Berne Union 2016: President’s foreword
An affirmative vote at the May 2016 Spring meeting inWarsaw confirmed the formal integration of the BerneUnion and Prague Club, bringing combined membershipto a record 82 companies from 73 countriesrepresenting over 90% of world population.
application, differing credit quality and costof funds raise questions as to how far we riskdisrupting the putative ‘level playing field’.
Partnerships between public and privateinsurers are increasingly common and theseprovide a unanimously welcome source ofexcess capacity and greater diversification ofrisk. However, there remains a question markaround the rightful territory of state-backedinsurers, in a soft, competitive and hungryprivate market. The Berne Union provides aunique forum for bringing together public andprivate insurers to collectively tackle exactlythese sorts of issues.
We operate in a complex andinterconnected environment where ECAs areessential for their capacity building, and alsoexpected to be innovative in adapting tochanging client needs, but at the same timeremaining conscious of the need to avoidcrowding out the private market, whether it is banks or insurers. There is clearly a needfor all participants to look carefully at howtheir respective roles can remaincomplimentary in this environment. With theright kind of dialogue, we create an incredibleopportunity to drive innovative change inexport finance and in so doing, enhance flowsof trade globally.
It is with such objectives in mind that theBerne Union has formed a specialist WorkingGroup, along with colleagues from the ICCBanking Commission’s Export FinanceCommittee, striving to provide a discussionplatform to address key issues of commonconcern between the ECAs and the exportfinance arranging and lending banks.
The initial meeting of the Working Groupin Rome in June 2016 focused on thecoordination of a cross-industry response toregulatory challenges. In particular, the grouphoned in on the Basel III leverage ratioconsultation, and the vital role for the BerneUnion, and our members in highlighting anddemonstrating the importance and reliabilityof trade credit insurance to banking clients,regulators and policy makers. Similarly,making steps towards the clarification andstandardisation of export credit insurancepolicy wording to avoid regulatory gaps ishelpful in developing complimentary ECAand bank product suites.
Some progress has already been made inlobbying around these issues and theEuropean Banking Authority hasrecommended the consideration of ECA-finance as a special case, in the context ofBasel III implementation. There is, of course,
much more work to be carried out, but withthe Working Group set to continue meetingregularly, several times a year, the mostimportant outcome is the establishment andmaintenance of formal industry dialogue.
The market is moving, our members arechanging and adapting and so too is theBerne Union as an organisation.
We find ourselves in a world which israpidly changing. But while the shape and size
of our business may vary over time, and frommember to member, its essential functionremains constant. Even as new markets nowopen up – for example now with Argentina,Cuba, Iran and Myanmar – geopolitical rifts,sanctions and conflicts narrow the arteries ofbusiness elsewhere. In addition, Fintech,disruptive technology and disruptive businessmodels are leveraging advances indigitisation, automation and big data to findnew and innovative ways of structuring andintegrating physical and financial supplychains – connecting people who can andwant to do business together more easily.
The Berne Union remains an outwardlyfocused organisation, dedicated topromoting and representing the industry,with the mission to enhance trade andinvestment flows globally. Our growingmembership helps foster a genuinely valuableprofessional exchange and reinforces andamplifies our collective voice. Through thecourse of 2017 we expect to find new ways toengage with the community and look forwardto further expanding our external links andcollaborations. ■
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INTRODUCTIO
NBerne Union 2016: President’s foreword
The Berne Union remainsan outwardly focusedorganisation, dedicated to promoting andrepresenting the industry,with the mission to enhancetrade and investment flowsglobally. Our growingmembership helps foster a genuinely valuableprofessional exchange andreinforces and amplifies our collective voice.
Provided solely for informational purposes, this is intended as a general description of certain types of insurance and services available to qualified customers through subsidiaries within the Zurich Insurance Group: in the United States, individual member companies of Zurich in North America, including Zurich American Insurance Company, 1400 American Lane, Schaumburg, Illinois 60196; and, in Canada, Zurich Insurance Company Ltd, 100 King Street, West Toronto, Ontario M5X 1C9; and outside the US and Canada, Zurich Insurance Plc, Ballsbridge Park, Dublin 4, Ireland, Zurich Insurance Company Ltd, Mythenquai 2, 8002 Zurich, Switzerland, Zurich Australian Insurance Limited, 5 Blue Street, North Sydney, NSW 2060, Australia; and further legal entities, as may be required by local jurisdiction. Nothing herein should be construed as a solicitation, offer, advice, recommendation, or any other service with regard to any type of insurance product. Some coverages in North America may be written on a non-admitted basis through licensed surplus lines brokers. Your policy issued by your local Zurich office is the contract that specifically and fully describes your coverage, terms and conditions. The description of the policy provisions gives a broad overview of coverages and does not revise or amend your policy. Coverages and rates are subject to individual insured meeting local underwriting qualifications and product availability in the applicable countries and locales. Certain coverages are not available in all countries or locales. For more product information, please visit www.zurichna.com/tradecredit.
ZURICH INSURANCE.FOR THOSE WHO TRULY LOVE THEIR BUSINESS.
NAVIGATE TRADE CREDIT RISK.
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The Berne Union has entered a new epoch!Two years ago, in celebration of our 80thanniversary, we took occasion to reflect uponthe history of an organisation which haswitnessed, endured, and indeed propagateddramatic change in the landscape of worldtrade. Tracing the timeline from ourfoundation by just four members in the earlytwentieth century, up to the present day, wecharted key milestones in the Berne Union’sevolution.
One such important milestone, thefoundation of the Prague Club in 1993, pavedthe way for the expansion of membership toinclude a host of smaller, recently establishedand maturing providers of export credits.Initially focused on the newly openedmarkets of Central and Eastern Europe, thePrague Club quickly evolved to represent theinterests of emerging ECAs and creditinsurers from across the world; in coursebecoming the de facto ‘incubator’ formembership of the Berne Union, with the firstPC member (Poland’s KUKE), joining the BUin 1999.
Over the past 20 years, the Berne Unionand Prague Club have operated in paralleland although several companies havefollowed KUKE to hold membership of bothorganisations, they have remained distinct,
and hence, until now,unable to fullycapitalise uponshared and mutuallybeneficial synergies ofknowledge andresources.
Followingintegration, the BerneUnion represents 82 members from 73 countries,including bothgovernment-backedofficial export creditagencies (ECAs) and private creditinsurers.
There has longbeen a great diversityamongst themembership of theBerne Union and
never more so than now, following integrationwith the Prague Club. Under the new BerneUnion, 69 operators of state-backed exportcredit accounts are joined with 12 privateinsurance companies and 4 multilateralagencies from across the world and withannual turnover ranging from as high as
15
INTRODUCTIO
NBerne Union 2016
Following integration, the Berne Union represents 82 members from 73 countries, including bothgovernment-backed official export credit agencies(ECAs) and private credit insurers
A new Berne UnionBy Kai Preugschat, secretary general, Berne UnionPaul Heaney, communications, Berne Union
As of May 2016, members of the Berne Union and Prague Club voted to fullyand formally integrate, creating a new global association for export creditand investment insurance, under the single Berne Union banner
Kai Preugschat
Paul Heaney
$420 billion down to less than $5 million.In 2015, Berne Union members collectively
provided cover of $1.84 trillion, whichcompares to just $30.85 billion coverprovided by PC members (less than 2%).
Of course the differences are not justlimited to business turnover, but also in manycases to the underlying character of thetransactions. For example, in comparison tothat of the larger Berne Union members,Prague Club business is generally associatedwith smaller, short-term transactions, oftenproviding working capital facilities andpredominantly focused on regional (in manycases South-South), rather than inter-continental trade. Prague Club membersthemselves are smaller organisations, manyof whom have considerably less resourcesavailable than their Berne Union counterparts.
The significance of full integration of thesetwo groups is that the Berne Union nowbrings together a broader mix of creditinsurers, in support of both larger and smallerexport communities, contributing to greatermarket representation and a closerframework for valuable exchange ofknowledge and expertise.
Integration supports the informationsharing and development objectives ofPrague Club members, allowing them toengage more closely with their BUcounterparts and learn from the greaterexperience that the larger, longer establishedand better resourced agencies havedeveloped over time.
At the same time, Prague Club membersare well positioned to provide knowledge andinsight into the finer points of their local andregional markets which is valuable to BerneUnion members and their counterpartiesengaging in relevant business. It is often thecase, particularly in frontier markets, thatfirst-hand knowledge of the local customsand business practices is the most expedientway to avoid the most common pitfalls.
Already, engagement is working well and
as we head towards the first Annual GeneralMeeting of the new Berne Union, larger andsmaller members are working together totackle key challenges, collaborating indiscussions around country risk, KYC andcompliance, and the impact/opportunity ofdisruptive technology in trade finance.
As well as the mutual benefits thatmembers of the Berne Union and PragueClub can realise through greater dialogue andcooperation, this combined globalrepresentation also facilitates more effectiveinterpretation and application of internationalframeworks by all parties, and provides theopportunity work together to influenceregulators and standard setters who guidethe industry.
The eight years since the global financialcrisis have been marked in the world of tradefinance by capacity and appetite of thebanking sector to bring liquidity to themarket in the face of increasing regulationand risk aversion. This environment hasundoubtedly given new relevance to theECAs and credit insurers who support themarket, but the efficacy of export creditsupport can only be fully realised if it isallowed to provide a tangible benefit to endclients, in particular banks looking for capitalrelief under Basel regulations.
In its most recent report on leverage ratiorequirements under article 511 of the CRR, the
16
Berne Union 2016
Developing a closercommunity for knowledgeexchange and a strongervoice for the industry andproducts globally
The significance of full integration of these two groupsis that the Berne Union now brings together a broadermix of credit insurers, in support of both larger andsmaller export communities, contributing to greatermarket representation and a closer framework forvaluable exchange of knowledge and expertise
European Banking Authority (EBA) explicitlyrecognised the lower risk of ECA-coveredtransactions, hopefully paving the way for amore favourable treatment for ECA finance,and ultimately, perhaps, export credit insuredtransactions more generally.
This follows strong advocacy andengagement efforts from across the industry,including not just the Berne Union, but alsocolleagues at the ICC Banking Commission,EBF and others, and demonstrates the valueof a powerful and coherent industry voice inadvancing the collective interests of allparticipants. Integration of the Prague Clubfurthers this objective and allows the BerneUnion to benefit from more effective internaland external communication of issues centralto the industry.
A new Prague Club Committee willcomplement the existing Berne Unionspecialist committees, while retaining theunique identity of the Prague ClubOf course, the Prague Club has always had itsown unique interests and a valuable cultureof knowledge exchange amongst itsmembers and its original mission, to supportmembers in developing their export credit
and investment insurance schemes andfacilities remains valuable.
For this reason, a new ‘PC Committee’ willcontinue this nurturing objective, sittingalongside the other specialist committees inshort-term, medium/long-term andinvestment, within the auspices of the newlyintegrated Berne Union. This will allow thePrague Club to retain its unique identity, whileproviding greater scope for partnerships andknowledge-sharing amongst all members.
Industry trends at present suggest thatgreater integration, greater transparency,greater dialogue and greater outreach willbe the priorities of the coming yearsThe industry continues to change swiftly andlooking forward, members of the Berne Unionare individually and collectively adapting theirstrategy and product development to meetthe coming challenges.
SMEs have long been on the mind and inthe mouths of policy makers and businessleaders alike; an essential, valuable andunderserved segment, the challenge lies inovercoming the reversed economy of scaleinherent in low-value, low-resourcetransactions which remain equallyburdensome to administer. Technology isbeginning to change this, and ECAs andinsurers are poised to adapt their productsuite to capitalise upon this.
Increasing partnership between public andprivate insurers has also been a hallmark ofrecent years. The Berne Union continues toevolve in line with this and as the tenor,capacity and risk appetite of private marketinsurers grows ever closer to their ECAcounterparts the industry as a whole benefitsfrom the increased engagement, new ideasand innovation which is brought to themarket by all participants.
The Berne Union benefits greatly from theintegration of the Prague Club and in thespirit of these wider developments, theopportunity to bring newly amplified voicesto the table can only be of benefit to theindustry as a whole. ■
17
INTRODUCTIO
NBerne Union 2016
The focus remains onenabling collaborationamongst members and theindustry at large. As thisfunction solidifies, so willthe reliance upon thebusiness data collectedand analysed by the Berne Union.
The industry continues to change swiftly and lookingforward, members of the Berne Union are individuallyand collectively adapting their strategy and productdevelopment to meet the coming challenges.
Did you hear the story about the Bulgarian,Botswanan and Belarussian who entered arestaurant in Muscat, Oman? No this isn’t thebeginning of a joke, or a James Bond movieplot. Instead it is a scenario typical of aPrague Club meeting.
The Prague Club was first established byfive newly-created export credit agenciesfrom Central Europe. Its purpose was to helpdevelop these export credit agencies throughsharing the lessons and successes amongstenterprises which face similar challenges andopportunities by virtue of their smaller sizeand/or relative experience.
Now twenty-three years ‘young’, the fivefounding members remain along with afurther 33 new and maturing export creditagencies, multilateral and private insurersfrom across Central and Eastern Europe, theMiddle East and Africa, Central and SoutheastAsia. The diversity of these institutions isrepresented amongst the four newestmembers: Russia’s EXIAR (joined 2012);Indonesia’s LPEI (joined 2015); Armenia’sEIAA (joined 2015) and Senegal’s SONAC(joined 2015).
Each of these four institutions havediffering business models and productvariations but they all share in the collectivegoal of exchanging information, experiencesand best practices in the pursuit of facilitatinginternational trade, often in support of SMEexporting firms.
EIAA is also a successful example of thePrague Club’s openness and focus onsupporting organisations as they proceedthrough their formal establishment anddevelopment stage. EIAA joined the PragueClub in 2013 as an “Observer” and severalmembers cooperated with informationsharing in support of EIAA’s product andpolicy development, and its formalestablishment as the Armenian government’smandated export credit agency.
The provision of short-term trade creditinsurance is common across all Prague Club
members, and themajority also providemedium to long termexport credits as wellas political riskinvestment insurance.
During 2015, thePrague Club memberscollectively insured$31 billion of exports,which is a steady
increase over the last three years. This hasoccurred against the global backdrop offalling commodity prices (including oil) andgeopolitical tensions, which have contributedto negative economic growth and weakeningof local currencies. These events havesignificantly impacted on many of the PragueClub’s member economies, which provide amix of new risks and business demand.
Many members’ countries areinternationally assessed as being relativelyhigher risk markets, resulting in reduced riskappetite or capacity from external insurers.However the local export credit agencies andregional private and multilateral insurers oftenhave a different perspective and approach toassessing and managing the risks, becausethey have a closer understanding of the localcompanies, political environment, and theculture and norms of doing business. It is thisrich vein of local knowledge, networks andexperience which is a core competency andstrength of the Prague Club members.
A buyer’s access to credit as well as anexporter’s access to pre and post shipmentfinancing are key drivers for facilitating tradethroughout these regions, and the PragueClub members’ range of solutions are criticalenablers for this trade, especially betweenSMEs. Although the reality for many PragueClub members is low awareness andutilisation of trade credit insurance withintheir domestic markets, which often do nothave a well-developed private sector marketfor this insurance.
18
A strengthenedPrague ClubBy Chris Chapman, manager, New Zealand Export Credit Office
Chris Chapman
Berne Union 2016
This provides opportunities for members,who are all focused on ways to increase theprofile of their agency and educatecompanies about the benefits of trade creditinsurance. For some members this includesfactoring services, while others havedeveloped innovations to their trade creditpolicies to improve their support of lowvolume and/or start-up SME exporters.
As an example, Croatia’s HBOR providesan export receivables insurance productspecifically for micro entrepreneurs, family businesses and start-ups who haveannual turnover less than $2 million. Thisprogramme has a streamlined administrativeprocess and has resulted in increasedutilization by small Croatian exportbusinesses.
Prague Club members’ reporting showthat over half of members are forecastingsimilar levels of premium for their short-termtrade credit insurance for 2016 compared to2015. Over a third of the remaining membersproject higher total premiums for this year,primarily due to higher demand. This trendreflects both success in building marketawareness, combined with the increased risksand uncertainties as described above.
In regards to medium to long term exportcredits, half of those members that providethis product have experienced lower demandfor it over the last 12 months. Although thereare some notable exceptions, includingRussia’s EXIAR which continues to steadilygrow its export customer base and supportincreasing volumes of trade.
An important service is the payment ofclaims as they arise. Total claims paid during2015 by Prague Club members was $284million, which represented 25% and 8%increases for the short term and medium tolong term export credits respectively.
The majority of members are forecastingtheir potential loss notifications to remainsteady over the next six months, although thelevel of these notifications is higher, relativeto 2014 and 2015.
The Government trade policies of manymembers, from New Zealand to Belarus, arefocused on ways to diversify their country’sexporters, exports and their internationalmarkets. In turn, the members are looking atways to develop their own new productsbeyond their core trade credit solutions.
The provision of pre-shipment workingcapital and bond insurance or guarantees arenew and evolving solutions for severalmembers, as they look to diversify their
product range. Many members facechallenges in negotiating satisfactory policyterms with their domestic banks, as well asobtaining risk sharing when supporting theirexporting clients with these products. Theseare scenarios which the Prague Clubmembers actively share experiences andsolutions about, and which more establishedexport credit agencies, operating in marketswith banks who are already familiar abouttheir partnering role and benefits, may notface.
For many of the reasons noted above, thePrague Club members can provide anexample to other Berne Union members inregards to effective risk assessment andsustainable support of trade within theEastern and Central Europe, Middle East,Central Asia and African regions. Manymembers can correlate an increase in theutilisation of trade credit insurance withintheir own domestic market from the date of
their institution’s establishment. Their successin supporting their exporters can also, overtime, validate their regional market and risksto a wider pool of insurers.
However opportunities for this informationexchange is two-way, with several PragueClub members closely partnered with BerneUnion members for technical support, newproduct development, reinsurance and formalcooperation arrangements.
With the formalisation of Prague Club’sintegration as a fourth Committee of theBerne Union, the professional and personalrelationships will only strengthen and thescenario described at the beginning may nowextend to ”did you hear the story about theLatvian, Iranian, Korean and Canadian whoentered a restaurant in Lisbon, Portugal?” ■
19
INTRODUCTIO
N
Local export creditagencies and regionalprivate and multilateralinsurers often have adifferent perspective…because they have a closerunderstanding of the localcompanies, politicalenvironment, and theculture and norms ofdoing business
Berne Union 2016
Berne Union 2016
Berne Union 2016
2Data and Statistics
22
Berne Union 2016
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2011 2012 2013 2014 2015
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
1201 2012
2013 2014
2014 2015
New Business – during each year
0
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
1,750,000
2,000,000
2,250,000
2011 2012 2013 2014 2015U
SD
mill
ion
1,750,000
2,000,000
2,250,000
1,000,000
1,250,000
1,500,000
1,750,000
noillm
iS
DU
250,000
500,000
750,000
0
1201 2012
2013 2014
2014 2015
Exposure – at year end
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2011 2012 2013 2014 2015
US
D m
illio
n
6,000
7,000
3,000
4,000
5,000
noillm
iS
DU
1,000
2,000
0
1201 2012
2013 2014
2014 2015
Claims Paid – during each year
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2011 2012 2013 2014 2015
US
D m
illio
n
3,000
3,500
1,500
2,000
2,500
noillm
iS
DU
500
1,000
0
1201 2012
2013 2014
2014 2015
Recoveries – during each year
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2011 2012 2013 2014 2015
US
D m
illio
n
1,800,000
1,400,000
1,600,000
1,800,000
800,000
1,000,000
1,200,000
noillm
iS
DU
400,000
600,000
0
200,000
1201 2012
2013
2014 2015
ST New Business – insured during each year
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2011 2012 2013 2014 2015
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
1201 2012
2012 2013
2014 2015
2015
ST Credit limits – at year end
Berne Union: Short-Term Export Credit Insurance
Berne Union: Totals
Key■ 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 2016
0
500
1,000
1,500
2,000
2,500
2011 2012 2013 2014 2015
US
D m
illio
n
2,500
2,000
2,500
1,000
1,500
noillm
iS
DU
500
1,000
0201
1201 2012
2013
2014 2015
ST Claims Paid – during each year
0
100
200
300
400
500
600
2011 2012 2013 2014 2015
US
D m
illio
n
600
500
300
400
noillm
iS
DU
100
200
0201
1201 2012
2013
2014 2015
ST Recoveries – during each year
UNITED STATES
GERMANY
UNITED KINGDOM
FRANCE
ITALY
CHINA
SPAIN
NETHERLANDS
SWITZERLAND
BRAZIL
OTHER
TES
GERMANY
AATUNITED STTA
GERMANY
UNITED KINGDOM
THER OO
KINGDOM
FRANCE
Y
CHINA
ALLYITTA
BRAZIL
NETHERLANDS
CHINA
AIN SPPA
SWITZERLAND
BRAZIL BRAZIL BRAZIL
ST Credit limits 2015: Top 10 countries
RUSSIA
BRAZIL
VENEZUELA
UNITED STATES
SAUDI ARABIA
ITALY
HONG KONG INDIA
UNITED KINGDOM MEXICO
OTHER
RUSSIA
BRAZIL BRAZIL
THER OVENEZUELA
TES AATUNITED STTA
UDI
A
INDIA
SA
ITTA
ARABIA
Y
UDI
ALLY
MEXICO
HONG K
UNITED KINGDOM MEXICO
ONGKO
ST Claims Paid 2015: Top 10 countries
UNITED STATES
IRAN
VENEZUELA
RUSSIA
ITALY
GERMANY
ARGENTINA
ALGERIA
MEXICO UNITED
KINGDOM
OTHER
TESAATUNITED STTA
IRAN
THER OOT
VENEZUELA
RUSSIA
GERMANY
Y ALLYITTA
ARGENTINA
ALGERIA
MEXICO UNITED
KINGDOM
ALGERIA
ST Recoveries 2015: Top 10 countries
24
Berne Union 2016
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
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
2014 2015
cilbPur ehtO
dfieciespnU
MLT New Business – insured during each year
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
2011 2012 2013 2014 2015
p y
Commitments -Before Reinsurance
Refinanced/Rescheduled Amounts
Claims Outstanding: Political Claims Outstanding: Commercial
Aid-Related Commitments Overdues on Refin/Resched Amounts
Arrears Lending (Total Exposure)
900,000
pp y
600,000
700,000
800,000
200,000
300,000
400,000
500,000
0
100,000
200,000
2011
Commitments
2011 2012 2013 2014
nanced/ReReffi
2014 2015
Amounts inanced/Rescheduled Commitments ore Reinsur-Befo
Claims Outstanding:
Aid-Related Commitments
s rearAr
ance ore Reinsur
olitical PClaims Outstanding:
Aid-Related Commitments
nanced/ReReffi
Claims Outstanding:
erdues on RefOv
otaLending (TTo
Amounts inanced/Rescheduled
Commercial Claims Outstanding:
Amounts in/Resched Reffi
otal Exposure)
MLT Exposure – at year end
UNITED STATES
EGYPT
BRAZIL
RUSSIA
TURKEY
QATAR
CHINA
UNITED KINGDOM
KOREA REP.
PAKISTAN
Other
TESAATUNITED STTA
EGYPT
Other
BRAZIL
RUSSIA
QA
CHINA
TURKEY
AR TTAAAT
AKPPA
UNITED KINGDOM
OREA REPOREA REP.K
ANKISTTA
UNITED KINGDOM
MLT New Business 2015: Top 10 countries
UNITED STATES
RUSSIA
TURKEY
BRAZIL
SAUDI ARABIA
INDIA
VIET NAM
UNITED KINGDOM
ARGENTINA
CHINA
OTHERS
TES
RUSSIA
AATUNITED STTA
RUSSIA
TURKEY
BRAZIL BRAZIL
ARABIA
INDIA
VIET NAM
UDI SA
THEOTTHERS UNITED KINGDOM
ARGENTINA
CHINA
MLT Exposure 2015: Top 10 countries
Berne Union: Medium/Long-Term Export CreditInsurance and Lending
25
DA
TA A
ND
STA
TIS
TIC
SBerne Union 2016
0
1,000
2,000
3,000
4,000
2011 2012 2013 2014 2015
US
D m
illio
n
Political Risk Commercial Risk Lending
4,000
3,000
2,000
noillm
iS
DU
1,000
0201
Po
1201 2012
skiRlcaitil C
2013
skiRlarcimmeoC
2014 2015
Lending
MLT Claims Paid – during each year
0
500
1,000
1,500
2,000
2,500
3,000
2011 2012 2013 2014 2015
US
D m
illio
n
Political Risk Commercial Risk Lending
3,000
2,000
2,500
1,000
1,500noill
mi
SD
U
0
500
1,000
0201
Po
1201 2012
skiRlcaitil C
2013
skiRlarcimmeoC
2014 2015
Lending
MLT Recoveries – during each year
RUSSIA
IRAN
UNITED STATES
UKRAINE
BRAZIL
UNITED KINGDOM
INDIA
KAZAKHSTAN
TURKEY
POLAND
Other
ANKAZAKHSTTA
TURKEY
POLAND
Other
INDIA
UKRAINE
BRAZIL
UNITED KINGDOM
UKRAINE
UNITED KINGDOM RUSSIA
UKRAINE
IRAN
TES
UKRAINE
AATUNITED STTA
IRAN IRAN IRAN
MLT Claims Paid 2015: Top 10 countries
EGYPT
INDONESIA
ARGENTINA IRAQ
IRAN
PAKISTAN
KAZAKHSTAN
SERBIA
CUBA
LIBYA
Other Other
EGYPT
KAZAKHST
SERBIA
A
A
CUB
LIBYYA
AN HSTTA
AKPPA
Q
IRAN
AN
IRA
KISTTA
ARGENTINA
INDONESIA
Q IRA
MLT Recoveries 2015: Top 10 countries
26
Berne Union 2016
0
20,000
40,000
60,000
80,000
100,000
120,000
2011 2012 2013 2014 2015
US
D m
illio
n
120,000
100,000
120,000
60,000
80,000
noillm
iS
DU
20,000
40,000
0201
1201 2012
2013 2014
2014 2015
INV New Business - insured during each year
0
50,000
100,000
150,000
200,000
250,000
300,000
2011 2012 2013 2014 2015
US
D m
illio
n
300,000
250,000
300,000
150,000
200,000
noillm
iS
DU
50,000
100,000
0201
1201 2012
2013
2014 2015
INV Exposure - at year end
KAZAKHSTAN
CHINA
BRAZIL
INDONESIA
SAUDI ARABIA
RUSSIA
UNITED STATES
UZBEKISTAN TURKEY
INDIA
Other
ANKAZAKHSTTA
CHINA
Other
BRAZIL
INDONESIA
ARABIA UDI SA
INDIA
TES
RUSSIA
AATUNITED STTA
UZBEKISTINDIA
TURKEY ANKISTTA
INV New Business 2015: Top 10 countries
CHINA
RUSSIA
BRAZIL
KAZAKHSTAN
UNITED STATES
INDIA
INDONESIA VIET NAM
SAUDI ARABIA TURKEY
Other
CHINA
RUSSIA RUSSIA
Other
BRAZIL
AN
TES
KAZAKHSTTA
AATUNITED STTA
VIET NAM
INDONESIA
INDIA
VIET NAM
ARABIA UDI SATURKEY
ARABIA
INV Exposure 2015: Top 10 countries
Berne Union: Investment Insurance
27
DA
TA A
ND
STA
TIS
TIC
SBerne Union 2016
0
50
100
150
200
250
300
2011 2012 2013 2014 2015
US
D m
illio
n
Transfer Political Violence Expropriation etc
Breach of Contract Unspecified
300
200
250
100
150
noillm
iS
DU
0
50
1201
1 2012
2013 2014
2014 2015
resfnraT
ochaBre
r tilPo
ctratnoCfo spnU
ceneloiVlcait Exp
dfieciesp
ctenoitariproExp
INV Claims paid – during each year
0
20
40
60
80
100
120
2011 2012 2013 2014 2015
US
D m
illio
n
Transfer Political Violence Expropriation etc
Breach of Contract Unspecified
120
80
100
40
60noill
mi
SD
U
0
20
1201
1 2012
2013 2014
2014 2015
resfnraT
fochaBre
itilPo
ctratnoCf spnU
ceneloiVlca Exp
dfieciesp
ctenoitariproExp
INV Recoveries – during each year
LIBYA
NIGERIA
TURKEY RUSSIA
VIET NAM
MALAWI
UKRAINE
CHINA
SERBIA
BRAZIL Other
CHINA
BRAZIL
CHINA
SERBIA
Other
LIBYABYYA
WI
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Reported business trendsVolumes of export credit andinvestment insurancereported for 2015 byMembers of the Berne Uniondecreased by 7% to reach atotal amount of $1.865 trillion.But Berne Union membersstill supported about 11% of
international trade in 2015.Within the aggregated new business
figures, the value of new export creditinsurance cover reported in the Short Term(ST) Committee was $1.586 trillion, thereported value of new cover provided byofficial export credit agencies (“ECAs”) inMedium and Long-Term (MLT) Committeeamounted to just over $154 billion, the newbusiness reported within Investment CreditInsurance (“INV”) Committee was $97 billion,while the Prague Club Members reported $2billion new cover issued.
Total claims paid by Berne Union membersduring 2015 amounted to $6,271 million, anincrease of 35% compared to 2014, whilerecoveries decreased to $2,776 million (-10%).
The Berne Union continues to pursue itsinitiative to revise the existing data reportingmechanism and to develop it further in orderto provide better information to its Membersand the stakeholders of the industry, such asinternational organisations, regulatory bodiesand financial institutions.
Short-term export credit insurancebusinessShort-term business represents insurance ofexports with repayment terms of less thanone year – often 30, 60 or 90 days. Thesetransactions are typically shipments ofconsumer goods and natural resources, withthe movements of ST export credit insuranceclosely linked with the ups and downs of thebroader global economic environment andmarket price levels.
The volume of ST export turnover insuredby Berne Union members shrank by 7% in
2015 to $1.586 trillion, breaking the trendsince the recovery from the global financialcrisis and mainly due to the figures reportedby the private Members. The insurancecapacity provided by Berne Union members,measured by the value of credit limitsapproved, just dropped below $1 trillion afterthree consecutive years, as the aggregatedvalue ($985,045 million) was 6% lower thanat 2014 year-end.
ST claims paid by Berne Union membersto indemnify exporters for defaults on theirtrade receivables rose from $2,019 million in2014 to $2,584 million, which is a drastic 39%increase, but the overall default to turnoverratio of 0.163% continued to reflect soundunderwriting practices. Based on the datareported, ST loss ratio (i.e. claims paid as ashare of the premiums earned) for BerneUnion members continued to increase, nowstanding at about 70%, after 53% in 2014.
The highest volumes of ST claims paid percountry in 2015 resulted from defaults inRussia ($236 million), Brazil ($205 million),Venezuela ($202 million), USA ($161 million),followed by Saudi Arabia ($150 million).
SHORT TERM COMMITTEEVerena Utzinger, Short Term Committee ChairChunyi Xiao, Short Term Committee Vice Chair
The growth rate of global trade has beenlower than that of the global economy forfive consecutive years ever since 2011, andthere seems to be no obvious signal ofresurgence in the next half or one year, as therecovery of the global economy is still facingheadwinds and uncertainty. Although
Chunyi XiaoVerena Utzinger
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State of the industry:Committee chairs and vice-chairsoffer their insightsBy Làszlò Varnai, associate director, Berne Union
Berne Union 2016
Làszlò Varnai
turbulences in certain markets/regions couldcreate opportunities for credit insurers to a
certain extent, a more or less stable trend isexpected in short-term business.
In terms of the commodity sector, thepresently low trade margins have aninfluence on the pricing of short-term exportcredit insurance. The volatile market isexpected to remain and the pressure onpricing likewise.
A key element of success in the future willbe innovative product development to meetchanging demand arising from various newtrade and finance models, e.g. e-commercecompanies making their whole tradingprocess (purchasing, logistics, selling, etc.)internet-enabled or fintech solutions thatchallenge the traditional trade finance world,impacting both financial institutions andinsurers.
A close cooperation among Berne Unionmembers will proof to be very valuable toexpand and adapt to the needs of the rapidlychanging market. ■
Medium and long-term export creditinsurance businessThe MLT statistics of the Berne Union captureexport insurance coverage provided byofficial state-backed ECAs only. Alongsidethe core insurance business, some ECAs alsofinance medium and long-term transactions,which amounted to 6.9% of the new businessand 9.4% of total exposure reported in 2015.
New business covered in 2015 decreasedby 7% (to $154 billion) compared to 2014,although the portion of sovereign and publicbuyers has significantly increased. The totalexposure of ECAs reached $708 billion at theend of 2015, showing a 1.1% increase versus2014.
Claims paid to customers by ECAs underMLT transactions amounted to $3.251 billionin 2015; an increase by 51% compared to thelevel of defaults in the previous year, whileclaims paid for political risks haveconsiderably increased by 78%.
There was no change noted for the topfive countries responsible for claimspayments, with the highest amounts ofclaims due to defaults in Russia (1,448 million,Iran ($374 million, halved compared to 2014),USA ($301 million), Brazil ($192 million) andUkraine ($168 million).
Comparing year-end recovery volumes,2015 levels decreased by 3% ($2,323 million)on 2014, but comparing half-year figures,2016 shows a promising trend, with ECAsrecovering 74% more claims in the first half of2016 than in the same period of the previousyear ($2,249 million), almost reaching theannual results of 2015 already.
MEDIUM & LONG TERM INSURANCEBeatriz Reguero, Medium & Long TermCommittee ChairAdi Gross, Medium & Long Term CommitteeVice Chair
2016 will be a momentous year in the BerneUnion history: the merging of the PragueClub into the Berne Union at the springmeeting in Warsaw saw the birth of anorganization of over 80 members from 73countries.
While this is certainly a historic event,from the point of view of MLT business, andjudging from data and comments as of May,2016 may well be a transition year when itcomes to new business. Total figures for theyear 2015 were already below previous years’levels, and we saw in May, an almost evensplit between ECAs who were reporting adrop in new business and pipeline and thosewho were seeing an increase. Amongst thereasons explaining the decrease, we canmention the drop in oil prices, the situation inBrazil, Russia and other regions wheregrowth prospects have been reviseddownwards, a reduction of large-scale exportcontracts, etc. All of the reason which explain
Beatriz Reguero Adi Gross
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In terms of the commoditysector, the presently lowtrade margins have aninfluence on the pricing ofshort-term export creditinsurance. The volatilemarket is expected toremain and the pressure onpricing likewise.
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the downturn in business for 2015. We needto keep in mind, however, that ECAs werecoming from exceptionally high levels ofactivity during the years since the globalfinancial crisis, and that one of thetraditionally largest player, US Exim, had itsown 'domestic' challenges during a part of 2015.
The impact of the downturn can also beseen in what looks like a reversal of a longseries of years with very limited andmanageable levels of claims. While overallfigures are still relatively low compared toexposure levels, 2015 saw a sharp increase inclaims, both commercial and political innature; an increase which we may seeprolonged into 2016.
Despite this somewhat gloomy picture, asthe new MLT Committee Chair and ViceChair, our focus at the meetings so far hasbeen to increase the level of members'engagement and to add some new initiativesalongside the regular agenda. Our firstopportunity was in Warsaw, May 2016, wherewe introduced an Oxford Debate session anda new MLT Deal of the Year contest. ECAshave embraced these initiativesenthusiastically, with SACE our first winnerwhile both Sinosure and EDC contributed alot to the session. Overall, the exchanges atthe Warsaw meeting were interesting andinformative and the overall impression wasthat despite difficult market conditions, ECAswill continue to adapt their products andprogrammes to rise to the occasion. ■
Investment insurance and other crossborder risk insuranceUnder INV, Berne Union members reportcredit insurance for overseas investmentagainst political violence, expropriation,transfer and convertibility risks; non-honoringof sovereign obligations credit insuranceproducts, providing cover against the inabilityor unwillingness to pay by sovereign and subsovereign obligors; and all other typical creditinsurance protection against political andcommercial risks for bonding, untied loansand export credit not insured by officialECAs..
The overall investment insurance portfoliogrew by 7% compared to 2014, with the finalresult of $258 billion. With the minordecrease in the volume of new coverprovided (-2%) and still almost $100 billion ofnew transactions ($98 billion in 2015), itseems the average tenor of recenttransactions has not shortened any further. It
is worth noting that new cover provided forinvestment and state obligations grew morethan 10% in 2015, and the largest growingportfolio is of the credit insurance of stateobligations, growing 35% from $29 billion in2014 to $39 billion at year-end 2015 anddeveloping further to 43 billion at half-year2016.
The INV Committee Members accounted alow level of claims payments in 2105 ($151million), 64% less than in 2014 ($238 million).
In terms of classic investment insurancethe largest indemnifications occurred in Libya($34 million), Turkey ($16 million), Russia ($13million), Vietnam ($5 million) and Ukraine ($4million). In 2016 so far, only claims paid onKenyan investments exceeded $1 million.
Within the insurance against non-honouring of sovereigns the largest claimswere paid for transactions in Nigeria ($21million), Malawi ($8 million) and Vietnam ($5.5million). In 2016 first half, significant volume ofclaims were paid for transactions in Tanzania($4.2 million) and Congo ($1.3 million).
Within the remaining line of investmentinsurance the largest indemnified claims wererelated to obligors based in China, Russia andSerbia.
In 2015, the recoveries volume was verylow (only 14% of the 2014 amount – $11.7million) and even though the 2016 first halfreport shows a higher rate (140% increase), itis still below the performance of the previousyears.
INVESTMENT INSURANCEVinco David, Investment InsuranceCommittee ChairChristina Westholm-Schröder, InvestmentInsurance Committee Vice-Chair
The Berne Union Investment InsuranceCommittee, which includes both public andprivate insurers, currently has 38 members.This mix of membership, with institutionsoffering not only investment insurance butalso credit and other types of cover, providesa diverse and comprehensive understandingof the global risk environment. Also,interestingly, there is an almost perfect
Christina Westholm-SchröderVinco David
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correlation between the amount ofinvestments covered and worldwide volumesof foreign direct investment, with about 10%insured by Berne Union members.
Limiting the comments in this article tothe core business of investment insurance,the current risk landscape is very much influx, with two major trends; increased risk inmany markets and, at the same time, anincrease in capacity among providers. Therisk environment is characterized by:
An overall relative low claims ratio (claimsas a percentage of premium income); anaverage ratio between 10 and 20% overthe last few years, but with markedexceptions, both regionally and sector-wise.The aftermath of the Arab Spring hascaused and is still causing considerableclaim payments mainly due to politicalviolence leading to loss of foreigninvestments. Libya, but also othercountries, has been severely affected.The conflict in Eastern Ukraine and thecurrent situation in Venezuela are leadingto political violence and expropriationclaims.The drop of commodity prices alsoimpacts investments and likelihood ofclaims. Although not yet manifested inclaims activity among the Committeemembers, risk in commodity relatedsectors, such as oil or mining, is rising asgovernments may be pressured toexpropriate or change terms forinvestments that are not delivering theexpected benefits; conversely, investorsmay interpret low returns as political risks.Apart from the perception of increased
risk, and perhaps counter-intuitively, theprivate insurance market is currently seeing asubstantial increase in insurance capacitycaused by new insurers entering the market,putting pressure both on pricing and policywordings. This increase can be attributed tothe challenging investment returnenvironment (and indeed even negativebond yields); with insurers seeking businesswith better returns, and investment insurancehas traditionally offered returns that are both
uncorrelated to and offering higher returnsthan more traditional insurance lines.
Prague Club membersThe Prague Club is the home of emergingexport credit insurance companies who areoften domiciled in frontier markets. Currentstatistics on the Prague Club members allowus to assess the performance of both ST andMLT insurance activity. Prague Club businessremained strong in 2015. The aggregateportfolio saw growth of 1% in overall businessvolumes with an increase of 54% for premiumlevels collected. Claims meanwhile increasedby 17% and recoveries by 65%. in detail:
Volumes of new ST business for PCmembers reached $24 billion in 2015.Premiums earned on ST trade receivableswhere up slightly on 2014 at $78 million,again reflecting continued steady business inthis area. Claims payments relating to STtransactions increased by 35% to $40 million.
Following two years of high growth, MLTnew business volumes remained flat for 2015,registering a total of $3.8 million. Premiumsearned meanwhile almost doubled in 2015($258 million), a reflection of the complexityof MLT transactions and the tendency ofpricing to follow the risk level of newtransactions. Claims figures for MLT businessincreased to $244 million in 2015 from $214million in 2014. ■
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The impact of the downturncan also be seen in whatlooks like a reverse of a longseries of years with verylimited and manageablelevels of claims. While overallfigures are still relatively lowcompared to exposure levels,2015 saw a sharp increase inclaims, both commercial andpolitical in nature; anincrease which we may seeprolonged into 2016.
Apart from the perception of increased risk, and perhapscounter-intuitively, the private insurance market is currentlyseeing a substantial increase in insurance capacity causedby new insurers entering the market, putting pressure bothon pricing and policy wordings.
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3Expert analysis
The OECD Consensus: Genesis andmajor achievementsThe OECD arrangement on OfficiallySupported Export Credits, also known as‘Consensus’, has recently celebrated 38 yearssince its establishment in April 1978.Originally undersigned between twentyparticipating countries, it now involves the 28Members of the European Union plusAustralia, Canada, Japan, Korea, NewZealand, Norway, Switzerland and the UnitedStates. More recently Brazil became aparticipant to the Aircraft SectorUnderstanding.
Back in the 1970’s, the arrangement wasconceived – and subsequently implemented –with the ambitious goal of providing for anoverarching framework for officiallysupported export credits and ensuring a levelplaying field to exporters. To this aim, theConsensus not only envisages specific termsand conditions by which official support isprovided by ECAs, but also encompasses adhoc consultation and information-sharingmechanisms among its participants. Itsoverall building process, including ongoingnegotiations initiated by members’ proposals,is actually based on transparency and peerpressure and its disciplines have since thebeginning found recognition under the WTOframework.
Despite its nature as a non-binding
agreement or agentlemen’sagreement, theConsensus has beentranslated into EULaw1 and hasexperiencedthroughout its historya remarkable successin terms of adherenceof its participants, as
well as a certain adaptability to reflectchanges in the financial and industrialmarkets, the globalisation of internationaltrade and the different challenges set by afast-changing business environment. Overthe years, as the ECA activities graduallyshifted towards commercial counterpartiesbesides the traditional sovereign riskinsurance, the general arrangement hasevolved as to include a common frameworkfor the pricing of private buyer risk based onthe obligor’s creditworthiness (the Malzkuhn-Drysdale Package) as well as a specificpricing methodology for transactions in highincome OECD countries, aimed at avoidingcrowding out of the private market.Contextually, in sectors with specific technicaland financial characteristics, the applicabledisciplines have been set out in separatesections – the so-called sectorunderstandings – which are annexed to the 35
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The OECD RegulatoryFramework and the benefitsof international cooperationbetween the ECAsBy Paola Valerio, head of International relations at SACE (Cassa depositi e prestiti Group)
The OECD Regulatory Framework on Export Credits has ensured faircompetition for several decades and it is often quoted as an exampleof successful international cooperation. The current challenge is theattempt to replicate the model on a much larger and more globalscale, as well as the prospect to render it more suitable for anenhanced operational environment.
Paola Valerio
Arrangement and currently apply to ships,nuclear power plants, civil aircraft, renewableenergy/climate change mitigation andadaptation/water projects, rail infrastructureand coal-fired electricity generation projects.Such sector understandings reflect the needof certain industries for specific financialdisciplines to meet their construction andfinancing requirements, market and relevantfinancing practices. Furthermore, as in thecase of the sector understanding onrenewable energy, climate change mitigation,adaptation and water projects and the mostrecent sector understanding on coal-firedelectricity generation projects2, thearrangement has also become a policyinstrument to reach ambitious and importantgoals such as the climate change objectives,in line with the unprecedented effortsundertaken by major governments worldwidewith respect to environmental issues.
OECD regulation on policy issuesBesides the terms and conditions set by theArrangement, defining the most favourablefinancial package offered by ECAs, the OECD– through the Working Party on ExportCredits (ECG) – also provides a forum fordiscussing and coordinating export creditspolicies relating to good governance, such asenvironmental and social due diligence, anti-bribery measures, and sustainable lending.
The potential impact of ECA backedprojects on the environment has been on theOECD agenda since 1998, which eventuallyled to the Council Recommendation onCommon Approaches. The recommendationidentifies the environmental and social risksthat ECAs have to address whenunderwriting new business, as well as definessensitive areas where a due diligence has tobe carried out even for small-sizedtransactions – usually outside the scope ofthe recommendation. The current text(approved in April 2016) encompasses severalenhancements, including the screening of anysevere project-related human rights impactsand the requirement of complementarystandards for social issues (an area whereWorld Bank standards, currently underreview, are deemed as insufficient), further toa commitment to report CO2 emissions fromall supported projects in the power sector;such improvements are also indicative of theconsideration paid by the ECAs and theirguardian Authorities to any potential effecttriggered by supported projects in therespective country of destination.
Always on the policy end, the keystone toOECD efforts in fighting international briberyis the OECD Anti-Bribery Convention and theRecommendation on Bribery and OfficiallySupported Export Credits. The
recommendation encompasses specificprovisions to prevent, detect and investigatebribery of foreign public officials in exportcredit transactions, including reporting to lawenforcement authorities. A peer reviewprocess ensures a coordinated approach onthe implementation of the recommendationsas well as the construction of a body ofexperience.
In addition to the above, the ECGmembers have also adhered to a set ofprinciples and guidelines to promotesustainable lending practices, aimed atensuring a consistent approach vis a vis newindebtedness of low income countries.
The outreach strategy Following the globalisation of internationaltrade and the increased competition fromnew players, in recent years the OECD hasengaged worldwide with countries that arecommitted to embracing a more marketbased economy. The outreach program,addressed to key partners as well as regionsof strategic importance (e.g. Latin America),promotes inter alia the participation in jointcommittees and the adherence to OECDinstruments, with a mix of elementsdetermined by mutual interest. In this respect,the success story of Brazil’s adhesion to theAircraft Sector Understanding (ASU) in 2007was a first precedent: even though not anOECD member and hence not bound toapply the arrangement, Brazil became aparticipating member to the ASU. This was acrucial milestone in the outreach efforts,particularly as Brazil is one of the mainplayers in the aircraft sector.
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Despite its nature as anon-binding agreement ora gentlemen’s agreement,the Consensus has been…a remarkable success in terms of adherence ofits participants.
also launched in order to identify moreflexible routes to incentivise non-participantsto join the arrangement. Whereas the currentprocedure foresees that countries primarilyneed to be OECD members in order to beable to join the consensus, considerationcould be given to different approaches thatmight detach such a prerequisite, to someextent in analogy with the Brazilian case.
Besides the OECD efforts, bilateraloutreach talks between United States andChina led to the establishment in 2012 of anInternational Working Group on ExportCredits (IWG) outside the OECD context,aimed at negotiating a set of common ruleswith non-OECD countries – such as China,Brazil, India and Russia. Discussions havefocused on specific sectors, while horizontaltopics (including interest rates and riskpricing) have been considered only recently.Although the IWG works have not reachedthe negotiating stage yet, some progress wasmade in terms of mutual understanding ofpractices as well as detailed explanation oftechnical issues. Further and more substantialadvancement could possibly be made withthe establishment of a Secretary General orany other permanent entity relevant to theIWG that would ensure continuity to thediscussion, currently managed with a rotatingchair mechanism.
Enhancing the OECD Framework:Pending issues and challenges aheadIn the most recent years the OECD regulatoryframework has appeared less and less able tocapture the actual international trade, as non-export related operations conducted by ECAscontinue to grow. Products aimed atsupporting the internationalisation of nationalcompanies, the issuance of surety bonds aswell as any form of untied financing notdirectly linked to national procurement remainoutside the scope of the OECD. In order toavoid subsidisation of certain activities, someECAs apply specific legal frameworks to suchprogrammes (e.g. EU State Aid regulation3),however the approach is not consistentamongst different players. Furthermore, evenwithin the current scope of the OECDframework some major pending issues remaindue to the existence of significant gaps in thecurrent regulation. The lack of a minimumpricing level in the Ship Sector Understanding,a highly competitive sector, has led to a raceto the bottom, which contradicts the actualspirit of the arrangement and the WTO
prohibition on subsidies. Similarly, the absenceof provisions on a minimum floating rate hasdetermined uneven financial supportespecially during the financial crisis, triggeredby the downgrade of sovereign ratings.Likewise, the lack of a common rating system(with the only exception of the ASU) weakensthe pricing provisions, as even within theframework of a common minimum pricingmethodology, ECAs may differ on theassignment of risk ratings, driven by theirinternal risk appetite framework and mandateto support their national exporters.
Also at policy level, the recommendationsrequire a constant monitoring activity as wellas periodical updates – as appropriate – inorder to address specific needs emergedduring the implementation and to enhanceand harmonise members’ due diligence andKYC practices. The latest update of theCouncil Recommendation on CommonApproaches has just been released, while thereview of the recommendation on Bribery iscurrently ongoing. Potential improvementsmay feature an extension of the due diligencecurrently envisaged for exporters/applicantsto all relevant counterparties involved in atransaction (i.e. including buyers/borrowers/guarantors) as well as a widerdefinition of bribery in order to includebusiness-to-business corruption in addition tobribery of foreign public officials.
A robust and consolidated export creditdiscipline is still important to ensure faircompetition among international players.Fundamental changes in the currentregulation have become necessary and willneed to be carried out in the very near future.Like in the 1970’s, international regulators inall countries are now requested of anextraordinary commitment and spirit ofcompromise to fill in the current regulatorygaps or, alternatively, to re-draft a moreambitious, comprehensive and adequatelyflexible set of rules suitable to changingmarket conditions, that may be triggered bycompetition from powerful emergingeconomies, growing civil society interests,climate change, globalisation and financialcrises. ■
Notes1 EU Council Decision 93/112/EEC applicable to EU
Member States.2 Entering into force in January 2017.3 Commission Notice on the application of Articles 87
and 88 of the EC Treaty to State Aid in the Form ofGuarantees.
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For any export credit agency (ECA),following the highest standards ofgovernance, accountability, transparency andrisk management should be an imperative.For UKEF, as a UK government department,not only is it a public policy objective to avoidfinancial loss from transactions tainted bycorruption, but to avoid unjustifiablereputational risk through failure to complywith all applicable laws and regulations.
As an ECA and a government department,we have many compliance obligations. Theseare drawn from a large number of laws, UKgovernment policies, regulations andinternational agreements. They are as wide-ranging as the Bribery Act 2010; internationalsanctions legislation; the Equality Act 2010protecting our employees from discriminationin the workplace; the Equator Principlesgoverning our environmental, social andhuman rights due diligence; the OECDArrangement; and, of course, theresponsibilities we have as a member of theBerne Union.
An independent compliance functionUKEF has always had policies and proceduresin place to manage risks, but we wish tofurther strengthen the level of assurance byproviding a more holistic oversight of all our
complianceprocesses. To this endUKEF has committedresource to anindependentcompliance function,which coordinates theoversight of thecontrols in place tohelp ensurecompliance with the
regulatory framework within which UKEFoperates.
In line with our holistic approach, we havechosen to adopt a compliance policy with awide remit that encompasses all ourcompliance responsibilities whilst at the sametime ensuring that we meet our coreresponsibilities as an ECA and governmentdepartment. Specifically, our goal is to adoptstandards that reflect best practice in thefinancial services sector.
The compliance function acts as a contactpoint for other UKEF staff responsible forelements of compliance, and providesguidance and advice to staff across thebusiness to support them in meeting theircompliance responsibilities. The objective isto ensure the department is fully engagedand equipped, has the right controls in place,
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Compliance:A priority for ECAsBy Lucy Wylde, general counsel and head of compliance at UK ExportFinance (UKEF)
Compliance risk management should be a priority for any exportcredit agency. Lucy Wylde outlines how the UK’s export credit agencyis taking steps to further strengthen the assurance provided aroundcompliance risk.
Lucy Wylde
For any export credit agency, following the highest standards of governance, accountability,transparency and risk management should be an imperative.
and thus is an exemplar of best practice incompliance.
The compliance function also worksclosely with other assurance providers withinUKEF. These include UKEF’s operational riskfunction, which oversees the managementand mitigation of risks relating to our abilityto fulfil our statutory purpose, achieve thefinancial objectives set by HM Treasury,adhere to international agreements ormanage other legal risks. Taken in tandem,compliance and operational risk managementprovide a second line of defence, withinternal audit providing the final link inUKEF’s assurance framework as the third lineof defence.
Best practice is not static and so we meetwith external organisations, seeking inputfrom their compliance functions on controlenhancements and exploring how we canadapt and implement these strategies atUKEF. By seeking out improvements made byothers we can help ensure that we are at theforefront of industry developments.
Compliance cultureTo be successful, compliance needs to start atthe top of any organisation. Overallresponsibility for UKEF’s compliancetherefore sits at the highest levels within thedepartment, including our board andexecutive committee, which is made up of themost senior staff including the chief executiveofficer. Our executive committee is chargedwith demonstrating leadership in compliancethrough their own individual roles as well asoverseeing and assessing the effectiveness ofhow compliance risk is managed in UKEF. Itapproves our compliance policy and isresponsible for communicating, implementingand ensuring it is followed. In my role asgeneral counsel, I also act as the head ofcompliance, with responsibility for instilling acompliance culture across the entiredepartment.
While it provides a greater and more
robust level of assurance, simply having acompliance function is clearly not enough.The Basel Committee on Banking Supervisionhas made it clear that compliance can neverbe the responsibility of a single individual orselect group of individuals. Whilst our culture
of compliance starts at the top with ourboard and executive committee, it thereforeinvolves each member of staff playing his orher part in fostering a climate of honesty andintegrity and ‘doing the right thing’.
As a result, compliance is one of our fivedepartmental objectives, from which all staffthen draw their own individual objectives,sitting alongside other high-level prioritiessuch as performance, efficiency, teamworkand brand. The compliance team isimplementing a communication andeducation plan to help ensure that this is thecase and a culture of compliance isembedded across the department.
Robust risk management, rigorousgovernance and strict adherence to laws andinternational agreements are an integral partof UKEF’s ethos as well as our businessactivities. As the head of compliance I amconfident that our compliance function willplay a key part in providing us with assurancethat we meet our responsibilities as an ECAand contribute to developing best practiceacross the ECA field. ■
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By seeking outimprovements made by others we can helpensure that we are at theforefront of industrydevelopments.
Whilst our culture of compliance starts at the top with our board and executive committee, it thereforeinvolves each member of staff playing his or her part infostering a climate of honesty and integrity and ‘doingthe right thing’.
If you were writing a drama about thefinancial system, then you could not haveasked for more material over the past fewyears. A major and potentially catastrophicfinancial crisis, the after-shocks of which arestill with us, the rise of cyber-crime, geo-politics getting out of control, wave afterwave of regulation, and on top of that, therise of new market challengers in the form ofthe financial technology sector. It’s something of a cliché, but you could notmake it up!
Let’s be very frank, however. Tighterregulation was long overdue and has largelybeen a reaction to a collapse in riskmanagement controls and some marketethics. The financial crisis revealed some hugeproblems and behaviours that just could notbe tolerated any longer. Since 2008,regulators have had to ensure there is nosystemic risk in the market, that banks arestable and robust to withstand shocks andthat investors and savers have an appropriatelevel of protection.
The crisis, and its fall-out, have placedcompliance very much in the front-line asbanks and other financial institutions dealwith the new, developing business paradigm.While the compliance officers and their teamsrepresent the public face of the commitmentto regulatory best practice, there is a growing
feeling thatcompliance is theresponsibility ofeveryone.
The regulators setthe rules, but it is thejob of thepractitioners toensure that individualorganizationsimplement and
monitor the business and ensure they arecomplying with laws, regulations, standards,codes of conduct and accepted marketbehaviour.
The result of this is that banks arespending increasing amounts of money onensuring their compliance regimes are robust,appropriately skilled and right-sized.Consequently, the cost of compliance is risingat a time when the financial burden ofpursuing traditional business models, such ascorrespondent banking, are also climbingsubstantially, to such an extent that banks arescaling-back correspondent bankingnetworks. The implications of this growingtrend are significant – some banks will find itimpossible to maintain US dollar and euroclearing accounts or confirm letters of credit.This not only impacts the banks themselvesbut also the economies of the countries in
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The cost of emergingfrom the perfect stormBy Daniel Schmand, chairman, ICC Banking Commission Advisory Board
Daniel Schmand
The crisis, and its fall-out, have placed compliance verymuch in the front-line as banks and other financialinstitutions deal with the new, developing businessparadigm. While the compliance officers and theirteams represent the public face of the commitment toregulatory best practice, there is a growing feeling thatcompliance is the responsibility of everyone.
which they are located. The oldcorrespondent banking model, so long partof the lifeblood of banks, is also under threatfrom new ideas and new competitors fromoutside of the industry.
It’s not just compliance that is seeing a risein costs and headcount. Supportingfunctions, such as business control offices,audit and risk, are also in the ascendancy.Statistics from the European Central Bank(ECB) provide evidence of the shift inexpenditure to ensure bank infrastructure issafe and sound – in 2015, the ECB said thatthe appropriate size of an audit department,for example, was approximately 0.9% of thetotal global workforce. Indeed, from abusiness perspective there is no longer asingle compliance officer, but specialists inanti-bribery and corruption, anti-financialcrime, sanctions and embargoes and anti-money laundering.
The involvement of an ever-increasingnumber of compliance gatekeepers, while anecessity, can add weeks to the lifecycle of adeal. Furthermore, the prolonged processaround client onboarding is costing time andresources. The industry is currently workingon utility type systems that can introducestandardization, notably through instrumentslike legal entity identifiers, and consistency tothe act of client adoption, but these are still intheir nascent stages. The effect of delayedindicative offers and credit approval, forexample, can be frustrating for clients. As wemove out of a huge transitionary phase, theindustry has to balance the need for a moreresponsible regulatory environment withcommercial requirements.
A lot of banks and financial institutionshave become more selective in the deals,clients and counterparties they engage with,often deterred by the regulatory ask or thepractical hurdles in meeting all requirements.The huge growth in control functions acrossthe industry has simply made it that muchharder to do business. Some banks havetrimmed back their client lists or retracted incertain areas because of a reduced riskappetite or simply through cost restrictions.
There are broader considerations otherthan those affecting banks, however. Whilebanks’ reluctance to get involved in certaindeals, for a variety of reasons, undoubtedlyimpacts the clients, alternative investors havestarted to fill the void left by the banks.Financial technology companies areproviding payment services or FX services by
matching buyers and sellers online withoutthe need for extensive KYC procedures. Thisbrings a new dimension to a system that hasbeen in place for decades.
Where does this leave us as we look backeight years since the onset of the financialcrisis? Cost is not just measured in money,but also in terms of time and opportunity.Much of banks’ capacity is now beingabsorbed in developing more stringent anti-money laundering and anti-financial crimetechniques and processes. We all agree thatthere are legitimate reasons for a morerigorous approach, but there is also a need toensure that these additional layers of scrutinyare correctly calibrated to do their job: ensurethe safety and stability of the financialsystem. In the coming years, I believe it is theshared responsibility of industry leaders andglobal regulators to work together to create amore safe and sound financial system. Butthis resiliency and this trust will have to berebuilt over time, and can only come fromdialogue which is candid and open. And Iinvite each of you to join us as we begin thisjourney towards greater resiliency andopenness. ■
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Tighter regulation was long overdue and has largelybeen a reaction to a collapse in risk managementcontrols and some market ethics. The financial crisisrevealed some huge problems and behaviours that justcould not be tolerated any longer.
It’s not just compliancethat is seeing a rise incosts and headcount.Supporting functions, suchas business control offices,audit and risk, are also inthe ascendancy.
For many years the linkage between exportcredit agencies (ECAs) to the reinsurancemarket was related only to their reinsurancetreaties or special arrangements under theirshort-term credit insurance business (STC).
ECAs in general have continued tomanage their Medium and Long Term CreditInsurance lines (MLTC) within the frameworkof their own governments. Not only was thatthe decision for supporting a MLTC projectwas made by the government or by its ECA,but taking the risk itself as well was fullygoverned by the ECA's government, takingthe obvious advantage of its "deep pocket".In the traditional world where the majority ofcredit insurance lines were provided to STC,MLTC was rarely used or mostly used forspecial projects that were linked easily togovernment support.
ECA to ECAThe first change was less connected to riskmanagement, as you may have guessed, andmore related to national content issues andto the increase in volumes and thecomplexity of projects. It is quite easy tounderstand why a government should nothave to cover their counterpart country'sportion especially if the case does not fit
exactly to theirnational contentregime. The obviousfirst alternative was tosplit a specific projectinto portions;however, it maynegatively affect thefinancial structure andcosts. The secondalternative is to
cooperate and nowadays every ECA knowsthat whenever a major portion of their projectis related to another specific country, they arewelcome to approach their counterpart ECAfor risk sharing by way of reinsuranceagreement with classic follow the fortuneapproach.
ECA to privateThe second change was the relatively newactivity of the private credit insurancecompanies in the medium and long-termcredit and political risks insurance areas. Andespecially, their active entrance to the BerneUnion as members in the 1990s. Such creditinsurers have acted as a bridge betweenECAs’ hesitation to use the market's service,and the new needs. When a project has
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Reinsurance:An ECA point of viewBy Adi Gross, chief underwriting officer, ASHRA
Adi Gross
The advantage of private market insurers was alwaysabout their availability, speed and flexibility. Amongtheir biggest advantages over ECAs are their ability tocover risks of export finance and trade finance, withoutany linkage to national content and without anyobligatory requirement for down payment.
required, for instance, a downpayment loan(15%) in parallel to the ECA Loan (85%), theprivate members were there to provide
coverage. No doubts then that after a whilesome ECAs have started to cooperate closelywith private members, in their own portfolios.
The advantage of private market insurerswas always about their availability, speed andflexibility. Among their biggest advantagesover ECAs are their ability to cover risks ofexport finance and trade finance, without anylinkage to national content and without anyobligatory requirement for downpayment.
However, cooperation through ECA toprivate reinsurers is still limited. In my opinionit is mainly due to the gap between thecultures. Is the private market reinsurancepolicy clean enough for ECAs to rely on? Or,what are the exclusions of the private insurerreinsurance? What are the approaches of theprivate insurer and the ECA with respect toclaims process and especially to the ParisClub? Can private reinsurer meet the OECD'spremium rates? Furthermore, difficultdilemmas with different answers, those whowere able to be flexible, are rewarded withexcellent partnerships on both sides.
Types of reinsuranceStructuring reinsurance can be approached indifferent ways, which should be chosenaccording to the insurer's needs.
Unlike short-term credit reinsurance, thealmost automatic structure for MLTC is tohave a quota-share facultative reinsuranceagreement toward each insured project, orfor several. In such cases the reinsurer followsthe insurer's policy, and in case of a claimpays its quota share.
Excess of Loss (EOL) is another goodoption to use the service of the privatemarket. This is where certain risks are dividedinto layers. For instance: the first layer of riskis covered by the ECA, the second layer by
the reinsurer, and third by the ECA again. Insuch cases the reinsurer will only be obligedto pay a claim after the entire first loss is paidby the ECA. Taking a decent portion of thefirst risk by the ECA can be helpful for pricingmatters, for handling the policy and the claimprocess as well. The main advantage for thisoption is mainly for portfolio risks, or countryexposure risk, and less for single risk.
An increasingly popular option is using atreaty for MLT. It may be more useful forrelatively large ECAs with a decent amount ofMLT projects on a yearly basis. On one hand,the advantage is that the reinsurance processfor each insured project is faster as thedocumentation is finalised in advance andunderwriting is done by the ECA solely. Onthe other hand, a treaty renewal is requiredon a yearly basis and ECAs are requested tocover whole turnover or a large portion oftheir portfolio.
ASHRA’s experience with MLTreinsuranceASHRA is considered to be a small-mediumECA. Using private market capabilities, itleverages its ability to service Israeli exportersand is at the forefront in major projects.
The first time ever that ASHRA reinsured aproject with private market involvement wasin the early 2000s. At that time ASHRA's(formerly IFTRIC) exposure to Romania andVenezuela was quite high and the politicalrisks of both countries had increaseddramatically at the same time. ASHRA and itsguardian authority have decided to look forways to reduce exposure and using a privatemarket player wasn't an obvious choice, atthat time.
Since then ASHRA has had some majorachievements in the reinsurance field:1. More than 100 projects were reinsured2. More than 30% of the current exposure is
reinsured3. Reinsured and insured major ECAs4. Multi-reinsurers' projects5. Excess of Loss reinsurance solution6. Direct reinsurance or through brokers
Bottom line: As the requirements forECAs' risk management are always growing,using private market solutions to reduce orshare risks is not a secret anymore. ECAs arestill the best partners for banks in their ownterritory. However, differences in risk appetiteand credit tenors are not seen as often, andprivate market players are highly motivatedto cooperate with ECAs and not to replacethem. ■
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ASHRA is considered to be a small-medium ECA.Using private marketcapabilities, it leveragesits ability to service Israeliexporters and is at theforefront in major projects.
A degree of competition between ECAs andthe specialist credit and political riskinsurance (CPRI) market has becomeinevitable and appropriate because, ofnecessity, both now often cover the sametype of risk. We welcome this choice forclients (whether exporters or financiers) butissues remain:
First, many in our industry continue todeny the existence of this competition.This denial threatens the properdevelopment of our market.Second, for the competition betweenECAs and the CPRI market to be fair, ECAsneed to comply with the OECDArrangement with its minimum premiumrates, and there needs to be a level playingfield on premium taxes.Third, some ECAs have begun to competewith their clients. When an ECAapproaches the CPRI market for facultativereinsurance, simultaneously as its clientapproaches the same insurers for cover onthe same transaction, ECA and client findthemselves in competition for the sameprivate market capacity. We needsafeguards to ensure that when pursuingreinsurance, ECAs do not restrict clientchoice.
Capacity constrained marketable risksOur views challenge the traditional narrative,enshrined by the European Commission, thatprivate insurers and ECAs operate in differentrisk categories, with private insurers covering‘marketable’ risks and ECAs covering ‘non-marketable’ risks.
The EU’s definition of ‘marketable’ risk,though narrow, is reasonable: short termbusiness in the EU and a handful of
developed countriesis indeed the onlyarea of the business“where there issufficient privatecapacity to cover alleconomicallyjustifiable risks”.Therefore the EUECAs do not normallycover ‘marketable’
risks so defined.The problem is that everything else is
considered ‘non-marketable’, a view that isconfounded by the activities of the CPRImarket. BPL Global’s portfolio of close to $40 billion of live policies represents about15% of the CPRI market and is typical of themarket as a whole. Less than 5% of ourportfolio is ‘marketable’ under the EUclassification, and this shows that there is amarket for most so-called ‘non-marketable’risks. Traditional thinking is furtherconfounded by our portfolio beingpredominantly medium and long term (MLT)risk, and by it revealing that CPRI marketinsurers have proportionally more exposure inhigh risk emerging markets than the ECAs do.
Of course some risks remain truly non-marketable, either because of size or tenor,particularly for private sector obligors.However, the clear majority of risks deemed‘non-marketable’ are individually within therisk appetite of the CPRI market. Butcollectively they are not fully ‘marketable’ inthe EU sense, because there is not sufficientprivate capacity to cover all such risks. Thereis therefore a third category of risk, “capacityconstrained marketable risk”, where the CPRI
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Competition, the ECAsand the private marketBy Charles Berry, Chairman, BPL Global
Most ECAs in the developed world do not compete with the privatesector for ‘marketable’ risks; but when it comes to ‘non-marketable’risks, life is a lot more complicated.
Charles Berry
market is very active, but ECA participation isstill essential.
The CPRI market’s capacity constraintsarise from the concentrations by obligor andby country that inevitably arise in exportcredit insurance, particularly in emergingmarkets. CPRI market capacity is a scarceresource, and its providers underwriteselectively because they need balanced riskportfolios. So a risk may be overpriced oreven unacceptable this week, simply becausethe market wrote a large identical risk lastweek. Country aggregate is a particularconcern. From Berne Union figures weestimate that total global demand for MLTcover in high exposure countries like Brazil,China, Russia and Turkey may approach $50billion. The CPRI market can meet at bestperhaps 25% of that total demand. Thesevery real capacity constraints are not goingto change soon.
The need for government support toaddress aggregate exposure and riskconcentrations is well known in other classesof insurance, such as terrorism and flood risk.The export credit insurance market is unusualbecause, for historical and structural reasons,government support comes as directinsurance, rather than as reinsurance sittingbehind the private sector. It is this necessarypresence of ECAs in the direct market whichmakes our class of insurance complicated.Given the rise of the CPRI market, we need toface up to the inevitable competition that hasarisen.
Competition is now inevitableCompetition is indeed inevitable for capacityconstrained marketable risks. Consider 50clients who each require MLT policies on thesame obligor in a medium to high riskcountry, whose risk is well within the appetiteof the CPRI market, but where the market hasenough aggregate capacity to write only 10to 15 of these policies. How should theseessentially identical risks be allocatedbetween the ECAs and the private insurers?
If ECAs were serious about not competingwith the private market, they would have towithdraw their support until the privatemarket capacity was exhausted, holding backeven when the price of the private insurancerose well above the OECD minimum premiumrates as it became more scarce. This wouldbe a disaster for clients. If ECAs only offeredcover on an obligor when the CPRI markethad run out of capacity, they would simplyexacerbate the imbalance between demandand private market supply, with the obviousconsequences.
So while some ECAs maintain that they donot compete with the private insurers, inpractice they issue cover where privatemarket cover would be available, albeit onless favourable terms. The ECAs cannot fulfiltheir role without competing with the privatemarket. If a European exporter with a CPRImarket quote at 125% of the OECD minimumprice, finds itself in competition with an Asianexporter with ECA support at the minimumprice, the European ECA has little alternativebut to put its client first, and undercut theprivate insurance market.
Competition is appropriateHowever, the policy of not competing withthe private market is not only impractical, it ismisguided. Consider the effect of the policyon the clients’ behaviour. The clients naturallyprefer the established ECAs, to the less wellestablished private insurers. So the ECApolicy of not competing with the privatemarket becomes in effect a threat towithdraw ECA support if the client obtainsterms from the CPRI market. We cannot thinkof a better way of discouraging clients fromapproaching the CPRI market, or ofperpetuating the ECAs’ de facto monopoly. Inany other context, the ECAs would beaccused of anti-competitive behaviour andabuse of their dominant market position. TheCPRI market accepts that it is the newentrant and has to prove its worth. But ECAsshould encourage clients to explore the
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If ECAs were serious about not competing with theprivate market, they would have to withdraw theirsupport until the private market capacity wasexhausted, holding back even when the price of theprivate insurance rose well above the OECD minimumpremium rates as it became more scarce. This would bea disaster for clients.
private market, not position the privatemarket as a threat to the still necessary ECAsupply. Is it surprising that many clients treatthe CPRI market as a market of last resort,only to be approached when ECA cover isnot available?
The policy should be reversed. All ECAsneed to make it clear that regardless of anyterms obtained from the CPRI market, ECAsupport will still be available subject tonormal eligibility and underwriting criteria,and subject to the OECD Arrangement. ECAsneed to encourage choice. This choice willbenefit clients, and provide a moretransparent and efficient allocation of risksbetween public and private sector insurers.
In accepting the existence of competitionour industry should take comfort thatcompetition between an ECA and the CPRImarket is very different to the head-to-head,destructive competition that occurredamongst ECAs before the OECDArrangement. If an ECA loses out to the CPRImarket, its client has not lost to a foreigncompetitor but simply found a betterinsurance alternative. Furthermore, when theCPRI market loses a transaction to an ECA,its scarce capacity remains available for whatmay well be a better opportunity down theroad. Like many participants in complexindustrial markets, the private insurers willplay to their competitive advantages offlexibility, speed of response and freedomfrom the constraints of eligibility criteria andthe OECD Arrangement. This is why clientssee the ECAs and the CPRI market ascomplementary. But this coexistence is theresult of competitive strategy, and the tworemain competitors whenever clients canchoose between them for all or part of a risk.
Competition needs to be fairThe real question facing our industry is notwhether competition between the ECAs andthe CPRI market does or should exist, butwhether it is fair. Here the OECDArrangement takes on a new importance. Aswell as its original purpose of limitinggovernment subsidy for export credits, sopreventing the market distortions thatsubsidy can create, the arrangement, with itsminimum premium rates, now serves asecond purpose of ensuring that the ECAscompete fairly with private insurers. Privateinsurers have an interest in ECAs abiding bythe arrangement and in the Arrangement’sminimum premium rates fully reflecting bothrisk and the cost of capital.
The CPRI market also needs a level playingfield on premium tax. We are not aware ofany EU ECA that is subject to premium tax. Itfollows that no private insurer operating at
the same level of the market as these ECAs,should be subject to premium tax whencovering ‘non-marketable’ risks. The BerneUnion should take up the cause.
‘Horizontal’ risk sharingWith both ECAs and the CPRI marketcompeting for capacity constrainedmarketable risks, new opportunities haveemerged for risk sharing between the two.This risk sharing is ‘horizontal’ when it takesplace across the market, between insurersoperating at the same level of the marketwho can quote against each other for all orpart of a risk. With our base in the Londonsubscription market, we of course welcomesuch risk sharing when it serves the client’sbest interest.
In particular we agree that clients canbenefit on certain transactions by the CPRImarket reinsuring an ECA. However, wherethis risk sharing remains ‘horizontal’, an ECApursuing such reinsurance may find itselfcompeting with its client for the CPRImarket’s capacity.
Therefore, where the client might itself bein negotiation with the CPRI market, the ECAshould first obtain the client’s permissionbefore approaching private insurers forreinsurance. If an ECA fails to do this, itsintervention in the market may limit theclient’s choice and thereby affect the pricethe client can obtain. Simple examplesillustrate the point:
Even when a client knows that Insurer A, Band C would all be acceptable to an ECAneeding reinsurance on a transaction, theclient should be able to restrict the ECA toapproaching only Insurer C, where, forexample, it needs Insurer A’s capacity tosupport a financed down payment, and
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Is it surprising that manyclients treat the CPRImarket as a market of lastresort, only to beapproached when ECAcover is not available?
Insurer B’s capacity to cover an onshoreportion of the project.In a situation where Insurer A has offeredterms that undercut the ECA’s price, butwhere the client needs Insurer B’s supportto complete the private market placement,the client should be able to prevent itsECA approaching Insurer B with an offer ofreinsurance at the higher ECA price. Byunilaterally entering the market andsecuring Insurer B’s capacity for itself, theECA, maybe unwittingly, would scupperthe CPRI market better offer.The above rule – that an ECA needs its
client’s permission – will provide the clientwith the oversight and control it needs toensure that risk sharing, whether by co-insurance or reinsurance, between public andprivate insurers operating at the same level ofthe market, leads to the best result for theclient.
If ECAs do not immediately see the needfor this rule, it indicates that there is anopportunity for the Berne Union to perform avaluable service for its ECA members byreminding them that they are undertakingssubject to competition law; by helping themto identify when they are operating at thesame level of the market as the CPRI marketinsurers, and when therefore risk sharingwould be horizontal (as not all reinsurance ofECAs by private insurers is horizontal); byreminding them why competition authoritiesremain deeply suspicious of all risk sharingand ‘co-operation’ between insurersoperating at the same level of the market,particularly when they involve insurers with adominant market share; by understandinghow following the best principles of thesubscription market can keep thecompetition authorities happy; and byunderstanding why the process of horizontalrisk sharing should be controlled by theclient, not by the insurers or any one of them.
ECAs have entered unfamiliar territory.Used to the OECD Arrangement and itslaudable aim of limiting state subsidy, ECAsnow find themselves in an environment wherea similar arrangement or understanding
between an ECA and a private insurer wouldbreach competition law. No private insurer isbound or could be bound by theArrangement. Indeed, freedom from theOECD Arrangement’s constraints is a souceof competitive advantage to the CPRI market.
ConclusionCompetition between ECAs and the CPRImarket is inevitable and appropriate given thefact that most risks once deemed ‘non-marketable’, are today in this new category of‘capacity constrained marketable’ risks. Inconclusion, though, there are some realbenefits that flow to ECAs from recognisingthis new category of risk.
For despite the fact that the ECAscollectively remain a vital part of the world’scommercial infrastructure, supporting tradeand development globally, many individuallystill struggle to make their case to theirgovernment owners. The reason is that thenarrative of ECAs only covering ‘non-marketable’ risk must be inherentlyunattractive: it inevitably paints a picture ofthe ECAs as a dumping ground for sub-standard risks rejected by commercialinsurers. This conjures up images of tax payersubsidy and corporate welfare, images thatpersist, despite the Berne Union ECAs’ veryhealthy financial performance over the last 20or so years.
The narrative around capacity constrainedmarketable risks presents a more complex,but more accurate and pleasing picture of theECAs’ role. The market gap is different butclear: not a lack of risk appetite at thetransaction level, but a problem of capacityaggregation at the portfolio level. Thisnarrative still sees the ECAs fulfilling a vitalrole: this they can do on commercial terms,without providing a subsidy, and earning areturn for their government backers. Abidingby the OECD Arrangement and followingsensible policies, the ECAs can provide ahaven of consistency, stability and capacityaround which the CPRI market can ebb andflow, guided by a normal market process ofclient choice. ■
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For despite the fact that the ECAs collectively remain avital part of the world’s commercial infrastructure,supporting trade and development globally, manyindividually still struggle to make their case to theirgovernment owners.
Minimum fixed interest rates are as old as theOECD Arrangement on officially supportedexport credits. Then the system was fine-tuned in 1983 and these fixed rates werecalled CIRR (commercial interest rate ofreference). Some ECAs offer these kind offixed rates, directly or through other publicagencies, while other ECAs do not offer theserates to their exporters. A few ECAs thatoffered it 10 or 20 years ago stopped,generally for budgetary reasons. Interestingly,the British scheme which was scaled-down in2005 and closed in 2011 for budgetaryreasons, was relaunched in 2014 by UKEF inorder to better support exporters. As currentfixed rates are very low and most expertsexpect, and sometimes also hope, for anincrease, guardian authorities of the ECAsface an interesting challenge: does thesupport to exporters justify a scheme whichmight be costly for the taxpayer?
1. Brief descriptionCIRR are fixed rates used for export creditsand supported by public authorities. TheOECD Arrangement defines some rulesregarding CIRR. It is now constructed as thesum of Treasury Bonds (with a duration closeto the average repayment period of theexport credit) plus a margin of 100bp, and ifthe export credit benefits from an officialfunding with a fixed rate, the CIRR is theminimum applicable fixed rate.
While commercial loans with fixed ratesmade available to corporates are usually usedwith a unique drawing and a rate determinedon the date of the drawing, CIRRs are fixedrates which are not offered by the market asthey include three options:
The first option is that the interest rate isdetermined before the signing of the
export credit; it canbe fixed on the dateof signing of thecommercial contract(so the parties aregranted a delay of afew months to sign anexport credit, withoutbeing subject tovariations of fixedrates over this
period). This option is free.The second option is that the rate can befixed on the date of the commercial offerof the exporter (so a few months ahead ofthe signing of a possible contract). Theprice of this option is a surcharge of 20bpon the interest rate if the credit is signed.There is no fee charged if the commercialoffer fails or if the export credit is notsigned.The third option is that the loan is not usedat once on the day upon which the rate isdetermined; it can be used through one ormultiple drawings for years after thesigning of the export credit, without anyprevious commitments on the dates ofdrawings which are only made accordingto the execution of the underlyingcommercial contract (and not predefined).This option is free.Some rules regarding the delays of validity
of these options (and renewals) arementioned in the Arrangement butinterpretations differ from one country to theother.
CIRR can be extended through threedifferent channels :
Some ECAS can act as direct lenders andoffer CIRR, using funds usually brought bytheir Treasury with fixed rates.
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CIRR: Analysing itscontemporaryimportanceBy Henri d'Ambrières, HDA Conseil
Henri d'Ambrières
For loans granted under a pure coverscheme, commercial banks can, accordingto the ECA,– Ask for an ad-hoc refinancing to public
institutions (such as KfW Ipex inGermany or ExportKreditt in Norway)
– Use their own funding and enter in anInterest Make-Up (IMU) agreement witha public institution (which will exchangeinterests calculated with the CIRRagainst interests calculated on a floatingbasis). This exists in Belgium, France,Italy, and Spain, for example.
2. Why does it make sense to use CIRR?There are several reasons why CIRR are usedin export finance:
The need for a fixed rate, linked to:– A request of the borrower, especially if it
is a Sovereign entity used to borrow onlywith fixed interest rates
– A corporate borrower which prefersfixed rates for its business plans and/ordoes not have the capacity to managefloating rates over a long period
– The need for a fixed rate to discount asupplier’s credit
The flexibility of CIRR vs traditional fixedrates during the drawing period, asdrawings are only made according theexecution of the commercial contract withno financial constraints linked to a financialtimetable. The borrower is not exposed toreplacements costs which would appearwith a loan fully drawn at the beginning, orit does not take the risk of future fixedrates (at the end of the constructionperiod). In addition, it is often the only way to get
an export credit with a fixed rate. Most banksdo not offer loans with fixed rates and do notpropose either Interest Rate Swaps (IRS)attached to an export credit signed with afloating rate as breakage costs are often notcovered by ECAs. In addition, regulatorycosts are expensive if the borrower is poorlyrated and the IRS has a large duration.
Some borrowers have also realised itsfinancial advantages :
Two options (delay for the signing of theexport credit and drawings during theconstruction period) are free options andin some cases the choice between thefloating rate and the fixed rate has only tobe made upon the date of the firstdrawing. With a unique drawing, the choicemight then be delayed for years. If ratesare declining, the borrower can renounce
to the option at no cost without infringingthe Arrangement.As CIRR are constructed according to theduration of the repayment period, for loanswith very long construction periods, someborrowers are asking for very shortrepayment periods and able to get cheaprates, based on two-year T bonds, for six-year credits. Finally, for some ECAs, the recourse to
CIRR, with prevailing rates, might also be away to limit credit risks, if floating rates (andthen interests calculated on these basis) wereto increase substantially in the next five to tenyears.
3. Are there other ways to get fixedrates? The rules prevailing on capital markets (withbond issuances) also prevent the recourse toflexible solutions, included in the CIRR, unlessthere is one unique drawing.
Long-term fund providers such as pensionfunds are looking for long-term investmentswith fixed rates but today their capacities tomanage export credit policies and a calendarwith uncertain dates of drawings are limited.
4. Can ECAs afford CIRR ?Some borrowers are reluctant to use fixedrates as they might be lower a few years later.This was probably more accurate in 1995when US dollar CIRR rates at 8.5 years wereat 8.8% but with prevailing rates (2.33% on 1-9-2016) this risk is probably remote.
More importantly, the CIRR exposesguardian authorities to financial risks andattached costs.
The first risk is linked to the funding of theloan.
a) if the CIRR loan is funded by the ECA ora public authority through a refinancing, thisentity will have to use its financial resourcesat fixed rates, taking a risk of replacement ora risk of a future increase in fixed rates.
b) if the CIRR loan is funded by a banksusing an IMU, the public entity is taking therisks of increased floating rates in the future.
In both cases, these risks could be coveredby appropriate financial instruments whichcan be paid using the 100bp margin added toT-bonds. This would probably be better doneif the durations used as reference for theCIRR rates were aligned on the averagedurations of the export credits including theirdrawing period. In addition, CIRR wouldincrease with the inclusion of the drawingperiod in the average duration.
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With an IMU, the public entity is alsotaking the risk of a widening gap betweenthe CIRR (based on T Bonds) and the indexused for floating rates (based on interbanks’lending). This difference measured by mid-
swap rates measures somehow thedifferences between the creditworthiness ofSovereign entities and banks. We are nowcoming again to the situation which prevailed10 years ago and the high spreads registeredin 2011 were for the benefit of the CIRRmanagers.
A second risk is linked to an earlyrepayment of the loan. If it is a voluntaryprepayment, the Arrangement mentions theneed to ask for breakage costs so thefinancial risk for the public entity is a remoteone. If the early repayment of the loanoriginates in an event of default, the financialrisk created by the CIRR will only appear ifthe ECA decides to indemnify the bank atonce and not according to the originalrepayment-schedule. In the second case, therisk remains the original credit risk acceptedat the inception of the operation, as it wouldhave appeared with a loan with a floatingrate. And the choice of an earlyindemnification remains the choice of theECA, except if there is a repossession of thefinanced asset (which might only happen foraircraft and ships). The rules applying toaircraft limits the usage of CIRR. Hence themajor risks from a CIRR angle might appearin shipping and do not really exist for othergoods. If market solutions are considered, the
need for a cover of breakage costs also exits.A third risk is linked to the options
embedded in the CIRR. These options mightbe very costly and are often offered at nocost.
Some countries do not use all theflexibilities provided by the Arrangementwhile others do. And some delays, especiallyin the case of renewals, are not clearlydefined, if they are.
Some delays (expressed in months) areoften required for the formalisation of exportcredits and the risk of delays in the drawingswill always remain. They can be probablycovered by the 100bp margin embedded inthe CIRR.
While it is probably difficult to ask anexporter or a bank involved in a biddingprocess to pay for offering a CIRR, it shouldbe possible to ask borrowers to pay for someoptions, once a project is awarded, or tocommit upon the signing of the export crediton the recourse to the CIRR without waitingfor the end of the drawing period.
This might create a need for someclarifications in the Arrangement to preventcompetitions among ECAs (or providers) onthe extension of the CIRR.
While some countries stopped to offerCIRR for losses incurred through this system,other countries claim for positive resultsthanks to appropriate financial covers.
ConclusionThe possibility of offering export credits withCIRR rates is a good tool to supportexportation contracts as it allows to combinethe need for fixed rates and the need forsome flexibility which does not exist onfinancial markets. Alternatives throughmarkets do not really exist for the time being.
The financial costs linked to theirmanagement can be probably covered inmost cases when loans are drawn; theyrequire adapted cover policies of interestrates.
The recourse to the appropriate durations(including drawing periods) used asreferences for the establishment of CIRRrates and the billing of some options (such asthe possibility to wait for the end of thedrawing period to make a decision on therecourse to the CIRR) used by cleverborrowers are tools which might limit somefinancial risks assumed by public entities. Andsome clarifications in the OECD Arrangementmight be required to prevent unnecessarycompetition. ■
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The possibility of offeringexport credits with CIRRrates is a good tool tosupport exportationcontracts as it allows to combine the need for fixed rates and theneed for some flexibilitywhich does not exist onfinancial markets.
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In the United Kingdom, Marsh Ltd is authorised and regulated by the Financial Conduct Authority. Copyright © 2016 Marsh Ltd All rights reserved GRAPHICS NO. 16-1069
Why do concerns on the future ofexport finance become apparent inthe leverage ratio (LR)?There is little doubt about the stabilisingfunction of Export Credit Agency-backedexport finance for exports during crisis timesas the post-2008 renaissance illustrates.Since then we have been living in uncertaintimes with political instability and volatility incurrency exchange rates, interest rates andraw material prices. Good reasons for anongoing momentum and a bright future forECA-backed financing. In addition, Europeanindustries are facing huge competitionworldwide with Asian economies andemerging markets also seeking to participatein global markets. Consequently, trade andexports should be promoted further.
But why then do we observe a decline inECA volumes under the OECD arrangementwhen Asian ECAs are still on the rise? In 2015it was estimated that more than 50% ofworldwide ECA business was covered byAsian ECAs. In parallel, the ECA dealsreported to tagmydeals declined in 2016 byalmost 50% in comparison to 2014.
ECA growth is mainly in countrieswith less regulationWhat are the potential reasons for thischange? It would be too simple to refer toregulation only. In some economies andindustrial sectors, the investment climate is sodepressed that even ECA support isineffective in convincing investors to go forcapital expenditure (CapEx). There are alsostrong indicators that the adoption of Basel IIIregulation within banks can be seen as anegative catalyst especially for ECA backed-export credits. The ECA business in Asia isdominated by public banks and not bound toregulation. Other major growing ECAslocated in non-OECD countries, e.g. India,
Brazil, Russia withsupporting publicbanks, are alsoexempt from harshbanking regulations.
Commercial banks,subject to the Baselrules on the otherhand, have to team upmore often to sourcebigger deals and seek
off-balance sheet solutions to pass equitytests for stressed scenarios. A number ofbanks have already reduced their exportfinance capacity or have shut down thissection completely.
Whilst the greater reluctance for SMEtransactions today is mainly based on theresults of much stricter governance (riskanalysis + know your customer, anti-moneylaundering etc.), and the need to reducecosts allocated to the management of smalleroperations, the drop in capacity for biggerdeals is further due to the most criticalelement in regulation for export finance:
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The era of regulation– part twoBy Ralph Lerch, chairman of the Export Credit Working Group at The European Banking Federation
Ralph Lerch
Graph 1: Evolution of ECA volumes 2014-2016 (TXF data based on tagmydeals)
the leverage ratio. Consequently, banks are inthe midst of a transitional process from abook-and-hold approach to the originate-to-distribute model and ECAs start (or continue)to focus on direct lending options.
Why is the leverage ratio so fundamentalto the future of long-term export financesolutions for the industry?
Leverage ratio, a valid approach toregulate banks?After a period of ultra-liberal bankingsupervision and regulation during the 1980sand 1990s, the financial crisis of 2008 hasshown the disadvantages of excessiveleverage in the banking system. Basel Icategorised five buckets of bank assets withdifferent capital requirements. From thisperiod of time 8% is still known as some sortof general equity, underlying and 0%government risk, as well as for ECAs.
Basel II was an attempt to limit economicleverage and required advanced banks toestimate the risk of their positions andallocate capital respectively. Nonetheless, theresults as evidenced by the financial crisiswere a disaster for the reputation of banks’ability to calibrate their own risk models inorder to avoid major losses.
As a result, the Basel committee forbanking supervision (BCBS) proposed theimplementation of a leverage ratio as asimple, transparent, non-risk sensitivemeasure and backstop to the risk-basedmethods/requirements (BIS: Basel III: Aglobal regulatory framework for moreresilient banks and banking systems,December 2010). In 2013, the European Uniontransferred the project of the leverage ratiointo European law, i.e. CRR/CRD IV.
The leverage ratio is defined as the ratio of
Tier 1 capital (numerator) and an exposuremeasure (denominator):
Capital measureLeverage ratio = –––––––––––––––––––––––––
Exposure measure
After a period of observation and testing, theleverage ratio is expected to come into forceon 1 January 2018. In January 2016 theoversight body of the BCBS announced anin-principle agreement to apply for aminimum level of 3% based on Tier 1 capital.
Fundamental to assessing the impact ofsuch a leverage ratio on ECA-backed exportfinance, is understanding the changes inrelation to what was practised previously. Incontrast to short-term trade, the gapbetween the current approach in exportfinance indicates a substantial increase inunderlying capital, especially for ECAs,backed by favourable sovereign ratings,independently of whether banks use thestandard approach (KSA) or the internalrating-based approach (IRBA), see Graph 2.
The European Banking Authority (EBA)admitted that: “by design, the non-risk-basedleverage ratio may incentivise financialinstitutions with low-risk business to diversifyasset portfolios into high-risk business, inparticular when applied on a stand-alonebasis”. This is true, especially if themanagement of a bank has to decidebetween a 15-year transaction (ECA) and(riskier) business with much shorter timeperiods. In times when predictability ofsufficient underlying capital is jeopardised bysteady stress tests, it is unlikely that a 15-yearECA-backed transaction will prevail incomparison to a much riskier transaction witha three-year tenor.
It is also wishful thinking to expect margins
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Graph 2: Comparison of Basel II and Basel III impact on ECA-backed business (ICC)
for ECA-backed business to be easily raisedin order to convince the bank’s managementof higher profitability. ECA business is alreadyprofitable due to a low-risk profile (asconfirmed by the International Chamber ofCommerce (ICC) Medium-to Long-term trade(MLT) register report). Pricing for ECA-backed export credits is mainly based oncosts of funds, costs of capital, overheadcosts and risk-related costs derived from PDsof the borrower and the risk mitigant(sovereign backing the respective ECA). Andit has still to be attractive enough to supportexporters in global competition. Taking intoconsideration that export finance businessworldwide is mainly executed by GlobalSystemically Important Institutions (GSIIs) theleverage ratio might be even higher than 3%in the future.
One of the major suspicions of the EBAduring the discussions and hearings was apotential excessive growth in business whichwould be exempted from the leverage ratioor otherwise preferably treated. We arguedthe ECA-backed export finance is limited bynature as a counter-cyclical instrument toovercome market gaps in crisis times, sogrowth is restricted. In addition, the OECDarrangement prevents ECAs and banks fromtoo aggressive an offering.
What is more, based on a closer look atthe various stages of a specific ECAtransaction, the challenges of a simpleleverage ratio are evident (see Graph 3).
Phase 1: commitment to final ECA approvalDepending on the procedure of therespective ECAs there is sometimes a periodof several weeks/months from an initial
commitment to a final ECA approval. Duringthis period the bank’s commitment is alwayssubject to final ECA cover, i.e. conditional. Forsuch a period a lower Credit ConversionFactor (CCFL) than 50% should apply.
Phase 2: ECA approval to disbursementSimilar to phase 1, a CCFL of 50 % ignoresthat an ECA-backed export credit is noteasily disbursed in a stress scenario.Disbursements are always linked to thepresentation of shipping documents/servicecertificates. Therefore, a natural hurdle israised to prevent parties from receivinginstant disbursement. Such period may lasttwo to three years, even on some occasions,up to five years.
Phase 3: disbursement to final repaymentDuring the lifetime of the loan (up to 18 yearsaccording to OECD sector understandings)the LR will be applicable. At present, theadditional equity consumption resulting fromsuch a leverage ratio seems to be the majorthreat to more accurate businesspredictability. Any a hurdle will be seen as apotential showstopper for a deal.
The EBA has opened a door for ECA-backed export credits in EuropeIn early August, the EBA published its longawaited report on the impact of the leverageratio on the finance industry (“EBA report onthe leverage ratio requirements under article511 of the CRR”). Even if it is not that easy forpractitioners to obtain the substance of thecomprehensive report, it can be seen as animportant milestone on the way to
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Graph 3: how an ECA deal is affected by regulation
After a period ofobservation and testing,the leverage ratio isexpected to come intoforce on 1 January 2018. In January 2016 theoversight body of theBCBS announced an in-principle agreement toapply for a minimum level of 3% based on Tier 1 capital.
implementing a leverage ratio in Europe andfor improved understanding of how resilientthe various business segments of financialinstitutions are in light of the new regulation.The EBA's assessment is based on variousdiscussions with industry experts, businessassociations and on statistics andquantitative analysis. In order to share thisassessment with the industry the above wereinvited to a public hearing in April 2016 whereover a 100 participants from all areas of thefinancial sector, including representatives ofthe ICC, Berne Union, ECAs and EBF,attended.
During the hearing many issues werebrought to the attention of the EBA. It wasargued that the consequences of theimplementation of the leverage ratio shouldbe carefully assessed in the context ofproduct specifics, validation of
collaterals/guarantees, support for SMEs andalso for trade and export finance.
The report will now form the basis offurther work by the European Commission ona potential legislative recommendation for aleverage ratio minimum requirement in theEuropean Union. It is not consideredsurprising that the EBA deems the potentialimpact of introducing a leverage ratiorequirement of 3% on the provision offinancing by credit institutions, as a whole, tobe relatively moderate. From an EBAperspective such a leverage ratio should leadto more stable credit institutions and helpmitigate the risk of excessive leverage.
The EBA comments that “the results of thequantitative analysis performed, suggest thata 3% level of calibration for the LR is,generally consistent with the objective of abackstop measure which supplements risk-based capital requirements.”
At the same time, “the results of asimulation-based analysis, estimating theimpact of potential adjustment actions […]suggest a high sensitivity to changes in thecalibration of the LR and estimate that thepotential reduction of exposures wouldincrease significantly beyond a LR level of3.5%.”*
Based on the EBA report it can beexpected that a 3% leverage ratio will beintroduced into Europe. And yet the acuteconcern of the industry that a more restrictiveratio might be determined at a higher level of4% or 5% is still there and will still be a furtherpotential threat for the Global SystemicallyImportant Institutions (GSIIs).
In order to understand the EBA’s view onthe mechanism of such a leverage ratio it isinteresting to refer to the report again:“Hence, the LR and the risk-based capitalrequirements should function in acomplementary manner, with the LR defininga minimum capital to total exposurerequirement and the risk-based capital ratios
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Graph 4: front page of the EBA report
There are also strong indicators that the adoption ofBasel III regulation within banks can be seen as anegative catalyst especially for ECA-backed exportcredits. The ECA business in Asia is dominated bypublic banks and not bound to regulation. Other majorgrowing ECAs located in non-OECD countries are alsoexempt from harsh banking regulations.
limiting risk-taking. In order to achieve this,and considering the role of the LR as asupplementary measure to risk-based capitalrequirements, calibration needs to bedetermined in a manner which ensures thatboth approaches to capital regulation remainrelevant.”**
From an EBA perspective the leverageratio serves as the minimum level for a bank’ssource to cover losses. For riskier businessadditional equity is needed but the majorconcern of the EBA is related to low-riskprofile business with a higher leverage.
As a result, it is of major importance thatthe EBA report came to the conclusion that“an exception may be ECA-backedexposures, which may, in some cases, have arisk weight as low as 0%. Given the lack of
data on these exposures, it cannot beexcluded that if some institutions arespecifically constrained or bound by the LR,an incentive may be created not toexpand/reduce their exposure to thiscategory.”***
Not only have ECA-backed export creditsarrived on the radar of EBA, they have alsobeen acknowledged as a potentiallyconstrained business (see Graph 5).
The EBA comes to the overall conclusionthat “one exemption may be ECA-backedexposures, which typically attract a very low-risk profile”****. From my perspective thisconclusion opens the door to furtherdiscussions, supported, I would hope, by theexport-oriented industry in Europe as well. Iam confident that other regulators (BCBS,WTO, EU COM, ECB) will rapidly realise thesituation and understand the need to protecttrade and export finance (and high-profilejobs) during turbulent times.
The way aheadThe EBA expressed the critical need toexempt a certain business segment from theleverage ratio on several occasions. What ismore, market participants admitted that theratio should be kept as simple as possible andthe envisaged regime of a 3% minimumleverage ratio appears reasonable. Given theoverall impression of regulators (and citizensat large) that leverage in banks should berestricted, the foreseen ratio of 3% will highlylikely become the standard. This said,discussions with the regulators shouldcontinue, based on a wider understanding ofthe transaction specifics of ECA-backedexport credits to define which mitigants couldbe brought to banks willing to offer exportcredits. One of the lessons learned fromprevious hearings, meetings and discussionswas this: a joint effort by the Berne Union,ICC, EBF and business associations may helpto address the major concerns of the exportindustry. And exporters should be more vocaland active in these discussions, to expresstheir needs for export finance supported bycommercial banks. ■
Notes* page 15, EBA report on the leverage ratio
requirements under article 511 of the CRR** page 12, EBA report on the leverage ratio
requirements under article 511 of the CRR*** page 25/26, EBA report on the leverage ratio
requirements under article 511 of the CRR**** page 200, EBA report on the leverage ratio
requirements under article 511 of the CRR 57
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Graph 5: excerpt from EBA report,p.198
6.4 Specific characteristics of ECAfinancingOne category of trade finance exposures isthose guaranteed by state-backed ECAs.ECA financing (as also discussed in section6.9 of the NSFR report) serves the purposeof providing credit protection or, in somecases, direct financing (along with otherprimary lenders) for projects or exporttransactions. In 2015, the total commitmentsof European ECAs at year end amounted to$330 billion, of which 0.04% consists ofdirect financing. ECA instruments includeguarantees, credit insurance and loansprovided to foster the manufacturing andexport of goods.
It is also noteworthy that an ECA-coveredtransaction (before being fully on balancesheet) is usually committed from the first daythe transaction is made, although the payouthappens over time. It is understood that thisinitial phase can easily take two to threeyears, during which time a CCF of 50%applies to the commitment for the purposesof the LR calculation (given the long-termnature of these transactions the originalmaturity is greater than one year).
The type of risk protection can vary. ECAsusually cover the political risk in a highproportion and also cover commercial risks.
The percentage taken into account for acomprehensive cover is the minimumpercentage covered under political risk andcommercial risk. It should be noted that thereare additional technical differences betweeninsurance and guarantees which may impactthe level of coverage and the mechanisms totrigger and collect a claim. The protectionprovided by an ECA not only extends toprincipal payments but also to interestpayments due under the transaction.
TURNINGUNCERTAINTIESINTO OPPORTUNITIES.
At fi rst glance, there was a lot of risk in the pipeline.
Looking at it more closely, we found it was clearly open to doing business.
It only takes one of our clients to ask Hywel Griffiths, our Risk Underwriter, for help and this
man of figures and reports turns into a man of action. When he learned that one of our
clients wanted to close a deal with a start-up in Botswana which didn’t have any financial
figures, he took it upon himself to go there for a marathon five-day visit. The facilities he
saw, the meetings he held and the investments already agreed proved to him that, despite
its lack of track record, this business was definitely ready for the future. Completely reassured,
he agreed to cover the risks. Better still, he raised the credit limit by 48%. Hywel Griffiths
could have taken the easy way out. He preferred to take a plane.
www.credendogroup.com
Delcredere | Ducroire, Credimundi, KUPEG, INGO-ONDD, Garant and Trade Credit are part of the Credendo credit insurance group.
In the last few years, Delcredere | Ducroire,the parent company of Credendo Group, haslaunched various initiatives to support thefinancing of Belgian export operations. Firstof all, there’s the direct financing of SMEs byway of forfaiting and the buyer credit, as asuppletive product to fill in the gap in themarket. Besides these two direct financingtools, there are several indirect financinginstruments. Credendo thus stimulates bank financing of exporters through itsfinancial guarantees. Furthermore, there’s the Credendo financial guarantee for private bond issues, besides the possibility ofusing Credendo policies in covered bonds ofbanks. Finally, there is the export fundingguarantee.
ForfaitingIn 2004 Credendo started offering ‘forfaiting’as a financing product for (relatively) smallcredits from two to five years which Belgianexporters offered to their foreign buyers(‘supplier credit’). It was launched as a’suppletive product’, meant to fill in the gapleft by the commercial banks. A suppliercredit means that the exporter itselfprefinances the contract and production, andgrants its buyer the credit. This credit ismaterialised in bills of exchange orpromissory notes. Forfaiting means thatCredendo is discounting these bills ofexchange or promissory notes, i.e. buys themfrom the exporter. It is thus an indirectfinancing of the buyer. This financing productwas created to be used in parallel with thecredit insurance product that covers the non-payment and termination risk for theexporter. SMEs are clearly the main target forthe forfaiting product. Since the launch of the
forfaiting product,Credendo has severaltimes enlarged itsscope, increased thecapacity provided andmade its terms andconditions moreflexible in order tomeet as much aspossible theexporters’ needs.
Buyer creditCredendo further increased its efforts tofacilitate export financing for SMEs. This isaligned with the strategy of the Belgiangovernment which stressed the importance tosupport SMEs going abroad. Early 2016,Credendo launched a new financing product,the buyer credit. Under this new product,Credendo will be granting the financingdirectly to a foreign buyer of Belgian goodsand services. After delivery and presentationof the necessary documents to Credendo, theexporter will be paid by Credendo, in the sameway as he would be under a buyer creditgranted by a bank. The foreign buyer willreimburse the credit over two to five years.The credit amounts considered are between€2 million and €5 million. The exporter has toenter into a credit insurance policy withCredendo to cover its termination risk underthe commercial contract.
For both financing products, the OECDArrangement applies. In addition to the newfinancing instruments, Credendo has alsolaunched a specific SME desk to offer a morecomprehensive service to SMEs. On thebusiness development side as well, effortshave been made to attract more SMEs.
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Funding products andguarantees: TheCredendo experienceBy Paul Becue, technical communication specialist, Delcredere | Ducroire
Paul Becue
Financial guarantees for bank creditsCredendo can participate in credits that aBelgian company needs for its tradetransactions. Banks consider Credendo as an attractive partner thanks to its creditrating (AA with S&P). There are three kinds of credit facilities which each have a differentpurpose:
the issuing of bank bonds (bid bonds,advance payment bonds, performancebonds, etc.);the financing of a company’s workingcapital;the financing of investments abroad(buildings, machinery, equipment).A link with the company’s international
business is always compulsory. The target isclearly to promote Belgian export trade.
Support for bond issuesCredendo can assist a Belgian company andbank in finding additional funds for bondissues on capital markets. This support canappear in two ways.
The first is a financial guarantee byCredendo in favour of investors who arewilling to subscribe to a privately contractedbond issue (not via public markets). Thebond is issued by a Belgian business withinternational operations, and it covers itspayment obligations in favour of thebondholders or their trustees (acting as aproxy for the bondholders). In principle, 50%of the bond amount is guaranteed.
Another recent development concerns thecovered bonds. After the subprime creditcrisis of 2008, securitisation was no longerevident due to a crisis of confidence. But theBelgian law of 3 August 2012 made the issueof Belgian covered bonds possible. Onlybanks accredited by the Belgian central bankcan issue them on the public markets. Thelaw foresees that these bonds are covered byseveral debt categories, for examplemortgage loans. Another coverage possibilityis offered by debt claims on orguaranteed/insured by public institutions.And this is where can Credendo intervene:Credendo’s insurance policies in favour of thebank were recognised by the Belgian centralbank as an asset which can be pledged forthe covered bond issue. But of course, this
depends on the bank. Up until now it hasn’tbeen used yet as there is enough liquidity.
Export funding guaranteeCredendo has another product that can helpbanks to finance large amounts in exporttransactions, i.e. the export fundingguarantee. The purpose is to facilitate thefinancing of Belgian export transactions byproviding banks with access to funding atmore competitive conditions, herebycontributing to solving the liquidity cost issuethat commercial banks (and in particularEuropean banks) faced in the aftermath ofthe financial crisis. Banks that finance anexport credit with Credendo’s insurance canrefinance themselves with external investors
based upon a 100% guarantee by Credendo.It’s an unconditional guarantee on firstdemand that can be called by the investor ifthe bank, for whatever reason, does notreimburse at maturity. The aim is also toindirectly provide cheaper funding to Belgianexporters. However, the product has not beenused up until now since the liquidity situationof most banks has improved.
ConclusionThe examples above show that Credendo hastaken a lot of initiatives to stimulate theBelgian export financing in the last ten years,targeting in the first place the SMEs. All theseinitiatives should have a positive stimulatingeffect on the Belgian economy. ■
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Credendo has taken a lotof initiatives to stimulatethe Belgian exportfinancing in the last tenyears, targeting in the firstplace the SMEs. All theseinitiatives should have apositive stimulating effecton the Belgian economy.
In addition to the new financing instruments, Credendohas also launched a specific SME desk to offer a morecomprehensive service to SMEs.
A year after the first meeting of the ICCExport Finance Committee in Barcelona it is agood time to look back at what we had inmind starting this initiative and where westand now.
Over the last months we received quite afew inquiries related to this committee,varying from questions related to what thecommittee is about, to whether it would bepossible to join. We were also pleased toreceive invitations to present ourselves atvarious conferences.
Looking back at the start when receivingthe approval of the ICC banking Commission,the purpose of launching this committee wasthreefold:
1. To create a credible standing globaldiscussion forum of banking experts inmedium and long-term (MLT exportfinancing;
2. To create a representative body todiscuss industry matters with variousstakeholders;
3. To advocate for and help developimprovements and efficiencies through thestandardisation and harmonisation ofprocesses and regulations.
Following the earlier successful initiative ofthe ICC to include medium and long-termexport covered financing in the ICC TradeRegister Report, we were pleased with theICC Banking Commission welcoming thisinitiative to further help this global industry toprovide for a platform under its globalumbrella. The warm welcome was bestillustrated by the words of Daniel Schmand,the chair of the ICC Banking Commission:
“The export industry is by nature a global
industry and thecommittee istherefore also trulyglobal – connectingwith, and gleaninginformation from, keyinstitutions aroundthe world that servethe export financebusiness. The hope isthat the forum willbecome a globalrepresentative bodyin discussions with allkind of stakeholders –representing anindustry that may besmall, but is certainlycrucial."
Since the exportfinance industry isindeed global, the first
goal was to form a committee with industryexperts from all continents with not only thebiggest banks being represented. Based onthe initial inquiry, feedback was positive frommany people to join and volunteer to try andbring this industry to a next, higher level.Jointly with the ICC, 14 members wereselected to get this going. This also meant wehad to disappoint a number of people lateron given the already large size of thecommittee. The terms of reference howeverprovide for the possibility for other experts ofother banks to join when existing membersstep down after a three year period. It iscertainly not envisaged that when a memberleaves, another person of that bank will take
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The ICC & exportfinance: An update onkey developmentsBy Eric de Jonge, managing director, global head structured export finance,ING Bank, and David Bischoff, policy manager, Banking Commission, ICC
Eric de Jonge
David Bischoff
over. The ICC will also ensure that thecommittee remains truly global and that itsmembers are also truly active.
The second goal was to quickly liaise withour most important partners in the industry,the export credit agencies (ECAs). Thispurpose was best served by connecting withthe Berne Union, the representative body ofExport Credit Agencies and Private Insurers.Its Secretary General Kai Preugschatwholeheartedly supported the idea from thestart and the Berne Union formed a workinggroup from its medium and long-termBusiness membership to get the ball rolling.
The third goal was to start with an agendaof items that the industry is facing and wheresome immediate action would be required.
Our kick-off meeting in Barcelona last yearserved that purpose and a few main topicswere listed.
So, were do we stand one year after theinception?
Like the export finance business, nothingreally moves very quickly. Sometimesunfortunately. There are however a number ofencouraging achievements anddevelopments, which we would like to reflecton.
First, we did have our first physicalmeeting with the sub-committees of theExport Finance Committee and the BerneUnion. A number of industry topics havebeen discussed and an action list was formed.This is a historical step, which was receivedwith enthusiasm from both sides. Somefurther follow up already helped in solvingcertain issues between parties form bothsides.
The second meeting will be held in Lisbonend of October, illustrating this initiative is
useful and here to stay.Secondly, we focused on a number of
topics related to the consequences ofchanges in regulations following Basel 3 and 4.
Two main topics were formulated in orderto ensure further follow up:
1. The impact of the leverage ratio,potentially threatening the export financeindustry due to higher capital charges,requiring much higher pricing;
2. Art 194 of the CRR (CapitalRequirements Regulation), embedding inEuropean law the need for legal opinions onrisk mitigating instruments to ensurereduction of RWA (Risk Weighted Assets).
The first topic requires ongoingdiscussions with all stakeholders in theindustry. A higher capital charge, unrelated tothe well mitigated underlying risks in thisindustry is unwanted and odd when thinkingof governments stimulating the very sameindustry that will be impacted by theirconsent to such regulation.
The various efforts by amongst others theEBF have at the minimum resulted in someattention for the impact of the leverage ratioon the Export Finance Industry. In its reporton calibration on the leverage ratio (LR), theEBA stated: “An exception may be exportcredit agency (ECA)-backed exposures,which may, in some cases, have a risk weightas low as 0%. Given the lack of data on theseexposures, it cannot be excluded that, forsome institutions, if they would be specificallyconstrained or bound by the LR, an incentivemay be created not to expand/reduce itsexposure to this category.”
It is furthermore understood that theEuropean Commission will want to avoid anynegative impact on trade. At the time ofwriting this, the EBF, the ICC Export FinanceCommittee as well a few industry experts areexchanging thoughts in order to provide forfurther feedback to try and get some form ofrelief for this industry in the coming LRregulation.
The second topic has been put on theagenda to come to some form of standardapproach for the industry, as per thesuggestion of the members of thiscommittee. It is unwanted that all financialinstitutions would need to make high costs tomeet this requirement, where a jointapproach and a guideline would be moreefficient and cheaper.
At this point in time a number of financialinstitutions have catered for external general
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The export industry is bynature a global industryand the Committee istherefore also truly global- connecting with, andgleaning information from,key institutions around theworld that serve theexport finance business
legal opinions on various products of theECAs, some of which are for the benefit of allinstitutions using these products.Unfortunately, some of these opinions areonly written for the benefit of those that havepaid for the opinion.
Then there are the ECAs for which thereare no such opinions yet, while for someECAs there is a standard market approach tocater for a specific legal opinion pertransaction.
There is also the ongoing issue of futuremonitoring to see to it that the opinions stillcover the fact that the underlying ECA coversare still legally valid and binding.
The Export Finance Committee intends tocome with a further elaboration on this topicin the coming period, to serve the industrywith a standard approach to createawareness and (cost) efficiencies.
And thirdly we formed an agenda andaction list going forward, to be discussed inconference calls and at physical meetings ofthe committee, mostly planned around large
industry events/conferences.The objective for our committee is
certainly not to cover what otherstakeholders like the EBF and BAFT etc. aredoing already. It is the intention to coordinateand act on behalf of the global industry.
The overall guiding principle remains andthat is to foster for a better and moreefficient industry over time. This can only bedone by being fully transparent in what wedo and by involving the whole industry inwhat we should be doing.
Therefore, we most welcome furtherinitiatives and suggestions to bring thisindustry to the next level. ■
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The overall guidingprinciple remains and thatis to foster for a better andmore efficient industryover time.
Global trade was high on the agenda of theG20 meeting in Hangzhou, China – and for agood reason, too.
Volume growth trudged along at a limitedpace over the past four years, twice slowerand twice closer to GDP growth rate whencompared to the pre-crisis period. In 2016, itmight even dip below the key overallindicator. Trade volume growth is expected toreach +2.1% against GDP growth of +2.4%.
Unsurprisingly, such trends raise worriesamong the leaders of major economies.Global GDP has been inching up below 3%since 2012 and trade seems to be one of theculprits. In the pre-crisis period, strongexpansion in global movement of goods andservices was associated with healthyeconomic growth and a fast catch-up byemerging markets.
Against this backdrop, G20 members withChina as a frontrunner called for furthercoordination and action. Their aim, if you will,was to rid the global economy of what I calltradelock. In this situation sluggish tradehinders growth and vice versa.
Solemn pledges to act might suffice forsome pundits. Those who want to believe arewelcome to. Reality as seen through theeconomist’s lens is, sadly, a trifle morecomplex.
There are few reasons to believe in a fastrecovery. Real global trade would likely growbelow 4% in the medium term, far below thepre-crisis average of 7%.
Stuck in the slow lane Global trade growth in volume will slow in2016 to 2.1%, down from 3.0% in 2015. In valueterms, it should contract at a slower pace: -2.9% this year, after -10.4% in 2015. Why is thishappening? Look no further than low
commodity prices,which push downoverall prices.
Currencydepreciation andvolatility will alsoremain a drag. Thesereflect the continueddivergence inmonetary policybetween the US andlarge economies suchas China and theEurozone. While theformer is tightening,the latter is easing.Add to those ongoingconcerns over largeemerging marketssuch as Russia, Brazil.When these enginessputter, if not overallchoke, the wholemachine is stuck intradelock.
We see a slightimprovement nextyear, with volumetrade expanding by amodest 3.1% in 2017. Invalue terms, USDdenominated tradegrowth wouldrebound (+5.7%) due
to progressive improvement in commodityprices and less currency depreciations.
What’s crucial is that global demandgrowth would finally improve. Demand fromadvanced economies could strengthen.Expect firm growth in the Eurozone andgradual improvement in Japan as
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The economist’s view:A world caught intradelockBy Mahamoud Islam, senior economist for Asia, Daniela Ordoñez, senior economist for Latin America, and Ludovic Subran, chief economist,Euler Hermes
Mahamoud Islam
Daniela Ordoñez
Ludovic Subran
policymakers intensify their support. Demand from emerging markets should
also expand somewhat as Russia and Brazilwill exit recession. China’s imports would seea significant rebound next year as policystimulus continues. Add to the mix a growingmiddle class, which translates into servicesimports such as tourism, and educationrelated expenditures. Higher demand growthwould help stabilise global prices. As thesame time, better prospects outside the U.S.will translate in lower pressures on currencies.
Small pie, small gains In this context, countries will find it hard togrow through exports.
Core Eurozone countries and marketsrelated to their value chain such as Romaniaand Poland would top the league. Theseeconomies combine real exports growthwhich is well above global average with a risein market share over 2016-17. They will benefitfrom a heady mixture of cheap currency,eased financing conditions and improveddemand growth by main partners (namelyEuropean Union members). Next in line willbe countries with strong competitiveadvantages. Vietnam, Philippines, Morocco,and Kenya are all good examples ofeconomies benefiting from cheap labourcosts and strategic positioning in regionalvalue chains.
Second, a weaker RMB in China willprovide some boost to volume growth. Yetone can expect reduced US dollar exportsgains (+$33 billion only from 2015 to 2017)and a loss of market share (-0.15pp). Causesinclude a deteriorated price competivenessover the ten past years (due to rising wagesand strong appreciation of the RMB) andlimited demand overseas. For net primaryindustrial producers, countries with strongmarket share (e.g. Saudi Arabia, Australia, andSouth Africa) or more diversified export base(Canada, Mexico) may enjoy strong growth involume terms. Yet market shares willprobably decline with a lack of a price boost.For manufacturing hubs such as Turkey andThailand, weaker currencies will lead to lower
USD denominated exports. Then upside ofdepreciations is a boost to volume growth.
The main losers would include: (i)countries highly dependent on Chinesedemand (primary industrial commodities andAsian trade suppliers), (ii) exporters sufferingfrom monetary tightening or strong currency(United States), (iii) markets that are affectedby political deadlocks (Russia).
Low for longer? In the medium term, there are few reasons toexpect a significant upturn. Global trade ishampered by frequent demand shocks,structural adjustments in the global valuechains, lack of US dollar financing,competitive depreciations and politicalhurdles.
Brake #1: demand shocks become morefrequentGlobal demand is struggling to find a solidfooting as cyclical shocks become morefrequent. 2015 marked the fourth consecutiveyear in which GDP growth has been belowthe +3% threshold. This situation might lastuntil 2017 at least.
The Eurozone crisis and austerity policieswere the main culprits in 2012-2013. Sincethen, headwinds in the emerging marketshave been the main drag. Heightenedfinancial volatility, weaknesses in some largeemerging markets, increasing signs of abumpy transition in China, and lowcommodity prices hit oil producing countriesare all to blame.
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Currency depreciation and volatility will also remain adrag. These reflect the continued divergence inmonetary policy between the U.S. and large economiessuch as China and the Eurozone. While the former istightening, the latter is easing.
With global trade ofgoods growing belowtrend, companies need tofind alternative strategiesto internationalise. Recent trends offer a few ways forward.
Brake #2: Structural adjustments are stillunderwayStructural adjustments in global demandcomponents and value chains are stillunderway. In particular, lower investmenttranslates into lower import growth whilevertical integration of large economies affectsglobal supply chains.
The main protagonist of these changes isChina.
Growth pivots from a reliance oninvestment, exports, and manufacturing, toconsumption and services. This also means ashift from the production of low value-addedgoods to high-tech products. On top of that,there is also a will for a more sustainablegrowth which is less resource and creditintensive.
Lower investment growth and economicservitization will translate into weaker
demand for basic materials and capitalgoods.
The upgrade of the economy is associatedwith substitution effects where domesticcompanies rely more on local suppliers thanforeign ones. Asian economies will bear someof the brunt. Old trade hubs partners (e.g.Hong Kong, Taiwan, Singapore) and industrialcommodities suppliers (Malaysia, Indonesia,Australia) are the most affected.
Brake #3: US dollar shortage rendersexternal payments difficultLimited access to US dollars makes it moredifficult to pay for imported goods. For somecountries, the problem could persist. Furthermonetary policy tightening by the Fed meansthat worldwide liquidity would continue todecrease. And when the world’s currency runslow so do external payments and trade flows.
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After an exuberantsupercycle, have weentered into a period ofsecular stagnation ofcommodity prices? If so,what are the consequencesof this ‘new normal’ for allactors on the commoditysupply chains?
Indeed, the supercycleis now well over. 2015witnessed a major commodity rout, affectingall sectors. 2016 raised hope after the sharprebound of commodity prices in the first half.Its sustainability is not warranted though, asthe world economy seems to have entered inthe prolonged low growth era.
Yet, all is not gloom and doom, and Chinais still displaying a robust appetite forcommodities.
Translated into flat prices, the worst of therout should be over. However, a sustainablerebound of prices is unlikely: volatility willtherefore remain high.
What does this mean for commoditysupply chains?
Producers have faced a difficultenvironment and, while markets haveimproved, the remainder of 2016 isunlikely to provide great comfort to them.Traders are much better off. Volatility istheir garden and they are less affected by
flat price movements than producers.Besides, their liquidity requirements arelower in the current market and are boundto remain stable. Good news for an industrywhich relies so much on bank finance. What is good for traders is not necessarilyso for bankers: – The consequence for low commodity
prices is a low utilisation of theirfacilities, hence lower profits. Not greatfor an industry already challenged byever more demanding capitalrequirements and negative or lowinterest rates.
– Risk, on the other hand, should remainunder check – at least as far as tradersare concerned, while producers’ (andprocessors’) risks remain to bemonitored closely.
– Banks will compete for more utilizationand this could weigh on spreads,although it should not push them toofar down as return on capital remainsthe prime concern for this industry.
Overall, a mixed bag. Commodity supplychains and their financiers would certainlybenefit from a less uncertain environment.Arguably, nothing last forever. But at leastfor the years to come, it seems that this veryuncertainty could have become a ‘newnormal’ to which all parties should getaccustomed.
Jean-FrançoisLambert
The impact of low commodity prices on commodity supply chainsJean-François Lambert, founding partner, Lambert Commodities
Second round effects may take place andcapital outflows are a particular worry. LowerFX reserves translate into a more prudentmonetary policy stance from Central Banksas governors become reluctant to share withthe private sector. This is a typical problem insmall emerging markets such as Papua NewGuinea and Mongolia but also for largermarkets such as Venezuela and Nigeria.
Brake #4: Unproductive currencydepreciationsIn theory, a decrease in the value of currencycan be supportive for exports. Once more,reality bites – and crawls. Simultaneouscompetitive depreciation is a hurdle for trade,and even more so when global demandgrowth is low.
The past two years showed thatdepreciation works best when implementedin markets with improved financingconditions and little reliance on industrialcommodities. For such economies, cheapercurrencies may translate into better price
competitiveness. This should lead to anincrease in export volumes.
In contrast, countries suffering from forceddepreciation due to capital outflows andweaker domestic financing condition(tightened monetary policy) may suffer. Thisis especially true for those which rely onprimary commodities. In this case, the maineffect of currency depreciation is acontraction of imports. This is the case forLatin American, African, primary industrialcommodities exporters in Asia.
Brake #5: Political hotspots andprotectionismPolitical hotspots continue to weigh ontraders’ confidence, driving countries andmultinationals to take a wait and see position. Soured relations between the Westand Russia, risks of conflict in the Middle Eastwith the collapse of Yemen's government,and political instability in Syria are all clearexamples. In Brazil and South Africadiscontent is on the rise as a result of
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Low commodity priceshave impacted exportfinance, but what isinteresting is not so muchthe reduction in volumes,but the resulting shifts inthe marketplace that wehave seen over the past 12to 24 months.
TXF’s statistics show that global ECAvolumes dropped by nearly a third from 2014 to 2015 and the data for 2016 YTDsuggests that, whilst ECA financing hastypically been cyclical, we are unlikely to see a recovery this year.
In some sectors such as oil & gas andmetals & mining, with many of these arestructured on a non- or limited recoursebasis, we have seen some projects delayedlargely due to a reduction in cashflowforecasts. The issue has been compoundedin commodity-rich markets where theimpact on economic growth has also led topublic sector projects being postponed.However, for areas where infrastructureprojects are proceeding, we are now seeingsophisticated entrants to the ECA financing
market that were traditionally cash players,seeking alternative forms of financing.
Moreover, in sectors where commoditiesare a cost rather than a revenue item,continued low prices are having a direct butbeneficial impact to the bottom line forborrowers. Power projects are continuingapace, particularly those fired by fossil fuels,and now comprise the largest sector inexport finance. Aviation is also currentlybenefitting from the low oil priceenvironment with the boost to airlinefinancials attracting new liquidity to the sector.
The increase in commercial liquidity hasnot been restricted to aviation. Asian DFIs, inparticular the Chinese policy banks, havebecome major players in energy andinfrastructure projects, for example.
While low commodity prices haveresulted in a reduction in ECA volumes, if thelow price environment continues, we expectto see a wider spectrum of ECA borrowersactive in the market going forward. Ascashflow expectations adjust, buyers willlook for new financing opportunities to fundtheir strategic imports.
Clarine Stenfert
The impact of low commodity prices on ECA financingClarine Stenfert, global head of infrastructure export finance, JP Morgan
deteriorating economic prospects andrampant unemployment.
The rise of protectionism is also a majorobstacle. This is true for explicit trade barrierssuch as high tariffs (e.g. India or Brazil) aswell as less direct measures such as subsidies(e.g. France with its public bank). A top 10 list of protectionist countries since 2014, isdominated by emerging markets with theBRICS leading the wat. However, the US,Japan and the UK have also been quiteaggressive in restoring protectionistmeasures.
External growth alternatives: meet EDIWith global trade of goods growing belowtrend, companies need to find alternativestrategies to internationalise. Recent trendsoffer a few ways forward.
First, businesses can leverage ForeignDirect Investment (FDI) to get closer toconsumers and then repatriate investmentrevenues. The nature of current economicgrowth calls for further proximity asconsumer demand and services arebecoming the main growth drivers globally.Households’ consumption accounted for 61%of GDP in 2015, up from 58.3% GDP in 2014.
Moreover, a currency valuation effect is stillin play. Countries where there was littledepreciation since 2014 lost pricecompetitiveness but gained purchasing power(e.g. USD, JPY). Cash rich companies canventure abroad and buy assets on the cheap.
Finally, countries with large currentaccount surplus and mild economicprospects (e.g. Taiwan, South Korea) can useforeign investment as a way to recyclesavings.
A second way forward is, well, to reallymove forward. Companies must adapt to newdrivers such as digital flows and services.Trade in the latter has been less disruptedcompared to goods trade. In 2015, servicesexports accounted for 6.7% of global GDP(stable from 2014), while exports of goodsdecreased to 22% (from 24%).
Looking ahead, there are signs of further
improvement. A gradual recovery in oil priceswould be associated with an improvement inmarine transports services and a modestpickup in global demand. Structurally, this willbe underpinned by the servitisation of largeemerging markets like China.
Another type of cross-border movement isgrowing rapidly: data flows. Digitalisation ofbusiness activities contributes up to 9.4% ofthe annual global economic output,according to estimates by Euler Hermes. Thisfigure is set to reach 16.6% in 2020.
However, only affluent countries andadvanced markets benefit from the transitionto knowledge-intensive economy. Thesetypically have the necessary infrastructure toenable fast access to the internet and othertechnological networks.
To asses readiness for change EulerHermes developed a proprietary EnablingDigitalization Index (EDI). It grades 135countries on a scale based on the quality ofconnectivity, logistic performance and easeof doing business.
EDI’s scores show a clear discrepancybetween advanced economies and emergingmarkets. Germany, the Netherlands andSweden lead the ranking. None of the BRICSrank in the top 40 and China ranks 44th.While it performs relatively well on logisticssub-indicator (24th out of 135 countries), theAsian giant still lags in connectivity qualityand ease of doing business.
Third, companies can take advantage ofmega trade agreements. Despite politicalresistance and protracted hagglinginternational deals are potential gamechangers. So where do things stand? Theadoption of the Transatlantic Trade andInvestment Partnership is blocked sinceFrance and Germany have threatened towithdraw from negotiations. The US electionscould also be pivotal for the Trans PacificPartnership. The One Belt One Road designedby China seems to be on more solid ground.However, implementation would take time. Sofar, no formal treaty has been negotiatedbetween the 65 participant countries. ■
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Looking ahead, there are signs of further improvement.A gradual recovery in oil prices would be associatedwith an improvement in marine transports services anda modest pickup in global demand. Structurally, this willbe underpinned by the servitization of large emergingmarkets like China.
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+49 711 127-73230 or visit www.LBBW-international.com
The orchid. Beautiful and
at home anywhere in the
world. Botanists have named
30,000 species so far.
Landesbank Baden-Württemberg
1. Introduction The Russian economy is in a recession.Russia’s GDP contracted by 3.7% in 2015 andis forecast to contract again this year. With oiland gas accounting for 70% of Russianexports, the recent oil price decline is onereason behind the economic turmoil. Thesanctions imposed against Russia since Q1 of2014 by, amongst others, the US, Canada,Australia and EU countries, is another one.For 2017, GDP recovery of 0.8% is expectedas domestic demand slowly picks up.
This article focusses not so much on ananalysis of the economic perils of Russia. Thatis already widely covered by others. Rather,we put ourselves in the shoes of businessestrading with or investing in the country. Wewant to establish empirically the impact ofthe oil price decline on the risk of doingbusiness in Russia. Indeed, we focus on theimpact on Russian country risk, using theempirical tool of correlation analysis.
Literature on the relationship between oiland country risk tends to focus on thepolitical side – factors such as corruption andrent seeking. A number of studies find apositive relationship between oil andcorruption.2 There is also evidence of anegative relationship between oil revenuesand political rights and a positive correlationwith civil liberties. The idea is that oil statesrepress political rights in order to prevent themasses from getting a share of the pie, buthave to give civil liberties in return keeppeople satisfied. However, there are alsostudies that do not find any effect of naturalresource abundance and the degree ofcorruption.3
One of the difficulties with this type ofresearch is that it is hard to prove causality
between natural resources and the politicalclimate based on regression techniques thatprimarily exploit variance between countries.Moreover, there is a perceived probability thatthe results suffer from omission of relevantvariables that are time-invariant and countryspecific, causing omitted variable bias in theestimates. We will see that our approachprovides comfort for the causality issue whilstomitted variable bias is ignored by nature ofthe empirical tool. The latter indeed providesthe caveat to our results.
2. Data and methodologyWe use the Euromoney Country Risk (ECR)score to measure country risk.4 ECR providesan online rating community of economic andpolitical experts. The overall ECR scoreprovides a snapshot of country risk in acountry on a 100 point scale, with 100 beingnearly devoid of any risk, and 0 beingcompletely exposed to every risk. Theheadline ECR score is built up of sixcategories (which in total consist of 18subcomponents). Three of the categories arequalitative expert opinions on political risk(weighting 30%), economic performance(30%) and structural assessment (10%). Theother three quantitative scores are debtindicators (10%), credit ratings (10%) andaccess to finance/capital markets (10%).5 Anoverview can be found in Appendix Table A1.
We plot the development of the oil priceand the ECR score in figure 1. Casualinspection suggests a correlation betweenthe two. But one should be careful: a closerlook reveals that the relation is far fromperfect. For example, when internationalsanctions were imposed against Russia inmid-2014 the CR score fell significantly as the
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The oil price hardlymatters for Russiancountry riskBy John Lorié, Theo Smid and Pieter Sayer1, Arradins Credit Insurance
oil price hardly budged. We use a dataset provided by Euromoney
for the overall ECR score as well as scores forthe different categories and subcomponentsover the period 2011 Q1 – 2016 Q1 for Russia.Quarterly data are used. Oil prices arecollected for the same period from IHS andare converted into real prices, with 2014 as abase year.6 Our dataset gives us 22observations for the overall ECR score and itscategory scores.
We use correlation analysis to link the oilprice to ECR scores. This is purely a functionof data limitations. A regression of ECR onthe oil price and controlling for relevantvariables would have been better. But it turnsout the regression coefficients are hard tointerpret given the low number ofobservations.7
Correlation coefficients as such describe atwo-way relationship between variables,meaning that causality does not becomeevident from the coefficients themselves.However, Russia can hardly exert any
influence on the oil price, which is determinedin the global market. Russia is simply a pricetaker in that market. Therefore, if a significantcorrelation is found, there is a strong case tobe made that the causality runs from the oilprice to the ECR score. We are simply lessconcerned with the causality issue. Moreover,we address the underlying trend in the ECRscores and oil price that is observed in Figure1 by taking first differences. It reduces thenumber of observations to 21, though.
An assumption we make is that ECRscores are collected uniformly throughouteach quarter. Based on the informationprovided by Euromoney, which stresses thatthe ECR scores provide a snapshot of acountry’s current position, this seems aplausible assumption. We therefore also takethe average oil price during each period. In anattempt to control for the sanctions againstRussia that are in place since 2014 Q1, wehave also calculated the correlations pre andpost sanctions.8 The downside is that thisfurther reduces the number of observationsto 12 for the pre sanction period (2011 Q2 –2014 Q1) and nine for the post sanctionperiod (2014 Q2 – 2016 Q2).
3. ResultsEstimation results can be found in Table 1 forthe three main categories underlying the ECRscore: economic, political and structural risk.Correlation coefficients between the oil priceand the overall ECR score and the scores onthe categories economic, political andstructural are all found to be positive whenlooking at the full sample. The correlationcoefficient of the economic score is found tobe significant, whereas the political andstructural scores are not. This makes sensegiven that the negative effects from the lowoil price on the Russian economy is obvious,whereas the empirical evidence on the effect
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Figure 1 Oil price (in US$) and Euromoney country risk score
Sources: Euromoney, IHS, Atradius
Table 1 Estimation results
of oil revenues on political and structuralaspects of a country is less firm. Thecoefficient depicting the overall ECR score isdriven into insignificance by the political andstructural variables. This is our main result.
To grasp how sanctions against Russiahave impacted the relationship between theoil price and ECR scores, we have alsocalculated the correlations before and afterthe sanctions. The results show the following.Firstly, all coefficients increase in size goingfrom the pre to post sanction period.Secondly, as the economic correlation is onlyweakly significant in the pre sanction period,it has a stronger significance in the postsanction period. One is then inclined to
conclude that this is indeed due to thesanctions being imposed. They stifledomestic and foreign investment andincrease the reliance of the economy on oil.Additionally, the sanctions coincide with adrastic drop in the oil price. In a system basedon expert judged it is not implausible thatchanges in the ECR ratings become moreelastic to oil price changes as they becomelarger. Experts may simply act after the oilprice change has surpassed a certainthreshold. In such case, the increasedsignificance is due to these two effects.Thirdly, the political and structuralcoefficients remain insignificant in both thepre and post sanction period.
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Table 2: Euromoney country risk score categories and components
We have also looked at the correlationsbetween the oil price and thesubcomponents of each of the threecategories as well as the quantitativemeasures (credit ratings, debt indicators,access to finance/capital markets). Theresults are shown in Table 2. The correlationsof economic variables all have a positive signover the full sample period and are all –except for government finances – found to besignificant at the 5% level or higher. Nosignificant relation is found between the oilprice and political and structural variables –except for a weak negative relation withInformation Access & Transparency. Otherthan some empirical studies (see literature
overview), we find no relationship betweenthe oil price and corruption. We also find notrace of an impact on government stability. Itmeans that the Russian government retains afirm hold on power. And that such power isnot markedly eroded by the oil price. Besidesthe subcomponents of the qualitativecategories, we have also looked at the threequantitative variables. As expected the creditratings show a (very) high correlation whichis significant, but only weakly. The otherquantitative variables display either nosignificant correlation with the oil price.
Moving to the difference between pre andpost sanction periods, the signs of thecoefficients related to the economic variables
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Table A1: Correlation results for risk categories and components
are all positive, in line with our previous result.What really stands out is that four out of fiveeconomic variables are significant at 95% orhigher in the post sanction period, whereasno or only weak significance can be found inthe pre sanction period. As stressed before,this has to do with the simultaneous oil pricedrop and strong deterioration of theeconomic situation in Russia post Q1 2014.Looking at the political part of the ECR,information access & transparency andinstitutional risk carry negative coefficientsthat are significant at the 95% level in the presanction period. In the post sanction period,the significance of both these variablesdisappears. This result is arguable in line withthe empirical results of Aslaksen (2010),finding a negative relationship between oilrevenues and political rights. The variablesbelonging to the structural part of the ECRare found to be insignificant for both the preand post sanction period.
One of our assumptions was that surveydata on which the ECR scores are based werecollected uniformly in each period. Wetherefore conducted our correlation analysisbased on the country risk score as well as theaverage of the oil price from the same period.However, we cannot rule out the possibilitythat ECR survey data were mainly collectedfor instance in the month prior to quarter endinstead of uniformly throughout the quarter.Therefore, we want to test whether theresults hold if we take the average oil pricefrom the third month of each quarter. Theresults from this sensitivity analysis indicatethat this does not change the overall picture.9
Another assumption was that the oil priceof the current period is the right unit ofanalysis for country risk. In other words, theunderlying assumption is that experts whosubmit the ECR scores are not beinginfluenced by oil price changes in previousquarters. To formally test whether thisassumption is correct, we have alsocalculated correlations using a 1 quarterlagged oil price. According to the results, thisleads to a disappearance of the significanceof the economic coefficients, which meansthe 1 quarter lag in the oil price is notmeaningful as an input.10
4. ConclusionIn this study we looked at the relationshipbetween the oil price development andRussian country risk using correlationanalysis. While our dataset is limited, we dofind evidence that at least a strong
correlation exists between economic parts ofRussia’s country risk score and the oil price.No such significant relationship is found forpolitical and structural variables that are alsopart of the overall country risk measure. Thelack of significance on these parts makes thecorrelation between the overall country riskscore and oil price insignificant. This does notmean that the oil price decline is notimportant, it simply does not carry enoughweight on itself to significantly influencecountry risk, giving that the economic part ofthe overall risk score carries a weight of only30%. Therefore, the oil price is only of limitedrelevance for Russian country risk. It hardlymatters. That is our main result. What wehave also found is that the correlationsincrease in size if we focus on the period afterthe sanctions against Russia were imposed.As this period coincides with a large drop inthe oil price we argue that such may havetriggered experts to adjust ECR ratingchanges that are otherwise not made. ■
Notes1 Respectively chief economist, economist and
quantitative economic intern at Atradius CreditInsurance. Lorié is also affiliated to the University ofAmsterdam as a researcher.
2 Source: Arezni, A. and Brückner, M. (2011). Oil rents,corruption, and state stability: Evidence from paneldata regressions. European Economic Review 55 (7):955-63. Aslaksen, S. (2010). Oil and Democracy: Morethan a Crosscountry Correlation? Journal of PeaceResearch 47 (4): 421–31.
3 For example, Hurb, M. (2005). No Representationwithout Taxation? Rents, Development, andDemocracy. Comparative Politics 37: 297–317.
4 Country risk is a collection of risks related to doingbusiness with a country. ‘Doing business’ regardsinvestment or exporting to a country. If country riskchanges in essence the ability to service investmentsor pay for imports is affected.
5 Based on a survey of debt syndicate managers ofinternational banks.
6 This conversion is needed because ECR scores arereal numbers as well, in the sense that ECR scoresalways fall in the fixed bandwidth of 0-100.
7 We have indeed run regressions using simple OLSconfirming this.
8 We use the Fisher transformation because thePearson correlation coefficients are found to be non-normally distributed (which is not surprising withsuch small n). The transformation solves this byconverting the correlation coefficients into z-scoreswhich we can then compare using a formula frome.g. Cohen, J., and Cohen, P. (1983). Applied multipleregression/correlation analysis for the behavioralsciences, Hillsdale, NJ: Erlbaum, p. 54. This is just ahypothesis test that there is no difference betweenthe correlations.
9 Results are available upon request.10 Idem.
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INSURANCE FOR A BOLD NEW WORLD.If you�re looking for local insights on a global scale, let�s chat. ............................... MAKE YOUR WORLD GO xlcatlin.com
XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltdcompanies. XL Catlin is the global brand used by XL Group Ltd�s (re)insurance subsidiaries.
Political risk and trade credit insurancepolicies have become one of the keyelements that can facilitate the occurrence offoreign direct investment and/or internationaland/or domestic trade. Without these policiessuch important global economic activity isoften dampened down, or may in certaincircumstances not happen at all, especially asnot many commercial entities are willing totake these risks fully unprotected in today’shighly unpredictable global political andeconomic environment. Given the vastvariations in the way in which globaleconomic activity can occur; not surprisinglymany different methods of protection,including methods other than pure insurance,have evolved to address the myriad ofopportunities facing those companieswanting to trade and invest internationally.For the sake of simplicity, it makes sense toconfine the contents of this article toinsurance policies governed by English lawand those predominantly in the privatecommercial insurance sector.
Policy wording quintessence It may seem rather an overly obviousstatement to make but at the heart of everypolitical risk and trade credit insurancecontract is the policy wording. The policywording embodies the contractual agreementmade, usually exclusively, between two willingand consenting parties who have negotiateda legally binding commercial agreement.Perhaps not surprisingly, policy wordings forthis type of insurance can also take manydifferent forms, cover many different risksituations and can be constructed in a varietyof different ways to address the specific
needs of eachindividual insurancebuyer. To have ageneric harmonisedone size fits all policy wording ispossible asdemonstrated bymarket standard andvarious publishedwordings. However;
very often a bespoke policy wording isnegotiated between the contracting partieswhich reflect the specific nature of the risksto be insured.
UK commercial insurance changes It would be possible to write a lengthy bookon the many different types of policies thatare available to protect foreign directinvestment and global trade. However; itwould be firstly remiss not to mention herethe most significant change to UKcommercial insurance contract law since theMarine Insurance Act 1906; being the UKInsurance Act 2015 (the Act) whichintroduces substantial changes to the lawsgoverning disclosure in non-consumerinsurance contracts (and to the remedies forbreach), warranties and other contractualterms, insurers’ remedies for fraudulentclaims and contracting out. It applies to allcontracts of insurance and reinsurance aswell as variations to existing contractsentered into after 12th August 2016 andwhich are governed by the laws of England,Scotland, Wales and Northern Ireland. All ofthese changes were extensively consultedupon and XL Catlin had representatives at
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Political risk and trade creditpolicy wordings, andharmonisation in the contextof the Insurance Act 2015By Joe Blenkinsopp, senior vice president, global head of market distributionand development, XL Catlin Political Risk & Trade Credit Insurance
Joe Blenkinsopp
these consultations, so the vast majority ofthe Act’s content was anticipated before itwas passed into law.
Harmonization Overall, we, at XL Catlin, have been broadlysupportive of the changes; nonetheless, theeffect of the Act on particular policies iscomplex and in some respects unclear.Seeking to harmonise policy wordings in thesphere of political risk and trade credit at thistime, across such a wide range of optionsmay not seem realistic in the context of suchsignificant fundamental change to Englishlaw. However; one of the simplest and mostimportant ways to harmonise policywordings, especially where significantly largerisk exposures need coverage, is to make fulluse of a multiple insurer syndication of therisk using a common policy wording. In fact,many current users of these products havecome to expect insurers to be willing toparticipate upon a common set of policyterms, not limited just to the quantum of thepremium. In some circumstances, actually thepremium itself can vary between insurers onotherwise fully harmonised policy wordingsas each insurer must set its own premiumterms for taking the risk.
The services of a professional insurancebroker with specific dedicated product teamsand knowledge dedicated to this syndicationprocess is considered to be best practice bythis part of the insurance market in particularin the UK. As a customer it is very importantto appreciate that unless a syndicatedinsurance policy is indeed on a harmonisedpolicy wording that there could be verysignificant differences in the coverage andpotentially important inadvertentconsequences as to how any risk mitigationactions or claims and recovery work may beable to function. Differences need notnecessarily be confined to simply the policypremium and particular care needs to betaken when this is the case.
The Insurance ActWith the arrival of the Act into law, the workof reviewing and potentially redrafting allpolicy wordings, which by their nature areusually bespoke, has been, or will be,significant. However, we believe that the Actreflects our philosophy of doing business in aclear, fair and client-focused way. Ourapproach to claims has always been to makefair decisions alongside our clients and notrely on points that might be regarded as
unfair or highly technical. For instance, weannounced before the Act was passed thatwe would not be relying upon Basis Clausesin our dealings with customers.
The parts of the Act that are of particularrelevance to this article are: A) the duty ofdisclosure at the time of placing andremedies for breach of the duty; B)warranties and other clauses that go to lossprevention or reduction; and C) fraudulentinsurance claims. As far as A) is concerned,the Act has introduced a new duty of fairpresentation as well as a range of potentialnew remedies in the event of any breach.Policies containing clauses which touch onnon-disclosure issues will need to be carefullyreviewed and possibly updated in light of theAct. Where appropriate, London MarketAssociation (LMA) clauses could be used.
Clearly, the fewer different versions of suchclauses that are adopted in the market, thebetter it should be for customers.
Regarding B), the Act has created twonew regimes, one for warranties (section 10under the Act) and one for terms (includingwarranties) which would have tended toreduce loss of a particular kind or at aparticular time or location (section 11 underthe Act). We are concerned that theintroduction of these regimes has createdfertile ground for disputes and litigationowing, in particular, to the potentialuncertainty as to whether or not a term is asection 11 term. In an effort to reduce thescope for litigation, which is in the interests ofall concerned, we would intend to usespecific statements in the policy wordings toindicate how key terms should fall to betreated under the Act, for example by stating
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With all the technicalchanges brought aboutunder the Act, it issignificant to bear in mindthat for political risk andtrade credit policies, weare dealing very often withcomplex underlyingactivity and contractualdocumentation.
which terms are to be considered section 11terms under the Act. We hope and expectthis will provide greater clarity as to theremedies that will apply in the event of anybreach of these terms.
Regarding C), the remedies for fraudulentclaims will operate by virtue of the Act and,as such, there is no need for a clause in thepolicy. However, if fraud clauses are to beused, then as with disclosure clauses, werecommend the use of standardized LMAclauses relating to fraud for the same reasonsas already articulated above.
Clear and presentWith all the technical changes brought aboutunder the Act, it is significant to bear in mindthat for political risk and trade credit policies,we are dealing very often with complexunderlying activity and contractualdocumentation. Despite this, best practicehas often advocated the use of clear andplain English in policy wordings to describethe proposed circumstances to be insured.The range of perils to be insured can bedescribed either on an “all risks” basis or on anamed perils basis – the latter being the usualmarket standard for political risk and tradecredit policies. In the case of tradetransactions, this can be as simple asnonpayment by the debtor under the insuredcontract. This binary insuring clause can besimply proven – the payment has either beenreceived or not; with any attendant reductionor proof of loss usually being relativelystraightforward.
For policies covering foreign directinvestment, usually the main peril covered isconfiscation, expropriation or nationalization.In this sphere of activity, we have witnessedgreater use of additional policy languagedesigned to expand coverage to includemany additional perils that are often found inmore general property and casualty/liabilityinsurance policies such as businessinterruption. Being clear at the outset of thecontract on what it is supposed to cover orindeed not cover, how the quantum of loss isto be assessed and how loss and recoveriesare to be handled, is one of the keyingredients for successful claims handling forall concerned in a loss scenario.
Cooperation and innovationFor those who are by constitution andmandate set up to act as nationally ownedexport/import credit agencies and/or foreigndirect investment insurers and/or as actors
for and on behalf of their countries’ nationalinterest or multinational or even supranationalentities operating in the field of political riskand trade credit insurance; it has been self-evident from years of global governmentcooperation agreements that workingtogether can, and often does by necessity,produce a syndication of risk on a commonpolicy wording. It can be very timeconsuming for all the various parties who areworking together, on say a large powerproject costing many billions of dollars toconstruct, to reach agreement on all theterms of the insurance contract to supportthis important economic growth activity.
In recent years the cooperation betweenthe private commercial insurance sector andthe ECAs, multi and supranational agencieshas grown significantly. Rather than seeingthis as a potentially negative occurrence, wewould argue that by bringing together willingand sophisticated public and private insurers,both sides can fulfill their mandates; whilst atthe same time bringing certainty throughpolicy wording harmonisation andsyndication for our customers. A furtherbenefit undoubtedly has been the ability toshorten the length of time it can take to bringsome of these larger and more complextransactions to fruition through theinvolvement of privately owned commercialinsurers.
As we all ponder the ramifications of Brexit and other fundamental shifts in globalsociopolitical economics; will the global worldof international investment and trade simplycease to function as a result of politicaldecisions taken by various differentpoliticians and electorates? This would seemhighly unlikely – successful international tradeand investment is at the heart of what allnations aspire to in terms of improving theirpopulations’ standard of living. In thesecircumstances will insurance policy wordingharmonisation and a one size fits all approach for all political risk and trade creditinsurance be relevant and a reasonabledesirable objective? In one sense, yesabsolutely, in appropriate circumstances suchas syndication of risk. Given the huge varietyof business opportunities available topotential users of these policies, innovation ofthe policy wordings within the revised newlegal environment under the Act, will remainat the cornerstone of what the privatecommercial insurance market will do to helpfacilitate customers’ activities in this crucialglobal activity. ■
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12 August 2016 has come and gone and sothe long anticipated changes to Englishinsurance law are now in force and suddenlyvery relevant to our industry. The InsuranceAct 2015 (the act), unless contracted out ofby the parties, applies to all English lawinsurance contracts entered into from 12 August 2016.
The radical changes introduced by the actconcern the new remedies for breach ofwarranties and particular terms and theintroduction of proportionate remedies forthe breach of the duty to give a fairpresentation of the risk (the duty). From apractical perspective, however, the changesthat have an impact on how business isplaced in a post 12 August world are thosethat concern the duty. The act provides adefault set of rules that apply to how aninsured is expected to satisfy the duty andwho needs to do it. This article considers thenew guidance concerning the duty and itsimplications for the industry.
The duty applies before an insurancecontract is entered into and contains threeelements. First, the duty to disclose materialcircumstances to a risk. The test for what ismaterial is unchanged – anything whichwould influence the judgment of a prudentinsurer in determining whether to take therisk and, if so, on what terms. This duty is thecorner stone of insurance allowing insuranceto be appropriately and effectively priced andhas been retained as a key feature of a fairpresentation. We come back to this. Second,as before, there is a duty not to make amaterial misrepresentation. Third there is anew duty concerning the form in which apresentation must be given. Information mustbe presented in a reasonably clear and
accessible way. This isintended to target‘data dumps’ wherean insurer ispresented with anoverwhelmingamount of undigestedinformation.Information providedshould be structured,indexed and
signposted so that an underwriter is able tonavigate to what is important.
DisclosureThe law commissions recognised that insurersshould be engaged in the disclosure processand not ‘underwrite at the claims stage’waiting to ask questions only when a claimwas presented. The Act recognises thisconcept in that there are now two ways tosatisfy this duty. The first and primary dutyreplicates the previous test – an insured mustdisclose all material circumstances that theinsured “knows or ought to know”. Thesecond way is new. It applies if the insuredhas failed to satisfy the primary duty but hasdisclosed enough information to put theinsurer on notice that it needs to ask furtherquestions for the purpose of revealing allmaterial circumstances about the risk; thenthe disclosure duty will have been satisfied.This takes into account that there may becircumstances where an insured will needguidance from an insurer to satisfy thedisclosure duty and greater participationfrom insurers seeking clarification ofinformation is anticipated.
The act clarifies what an insured knows orought to know, but this clarification has given
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UK Insurance Act 2015:disclosure requirementsand implications
By Carol Searle, general counsel, Texel Finance Limited
Carol Searle
insureds many factors to consider includingwhether any amendments to policy wordingsare required to amend and/or clarify thedefault position.
In broad terms an insured is taken to knowwhat is known to its senior management orto the individuals who participate in buyinginsurance. In a corporate context, this is likelyto include members of the board of directorsbut may extend beyond this, depending onthe structure and management arrangementsof the insured. Insureds need to identifywhose knowledge within the insured’s
organisation will be relevant for the purposeof compliance with the duty of disclosure.Are there people whose knowledge isimportant to the risk who do not fall withinthose categories? Policy wordings may beamended by identifying those persons whoseknowledge is relevant.
In addition an insured should carry out areasonable search both within its ownorganisation and of third parties. Insuredsneed to consider what the parameters of areasonable search will be and how this searchwill be conducted both within its organisationand of third parties. The knowledge of thoseindividuals who do not fall within thecategory of senior management, yet whoperform management roles or otherwisepossess relevant information or knowledgeabout the risk to be insured, may be capturedby the “reasonable search” criteria. Insuredsneed to consider how to document and keeprecords of a reasonable search. Insuredsshould also consider how best to disclose thesearch parameters and processes andprocedures to insurers as part of theplacement process.
The act also deals with the question ofinsurer knowledge in the context of theexceptions to this disclosure duty. TheInsured has no duty to disclosecircumstances known/ought to beknown/presumed to be known by the insurer.
This captures those involved in making theparticular underwriting decision andinformation held elsewhere in the insurer’sorganisation if it should have reasonably beencommunicated to the underwriter or wasreadily available to the underwriter. Insurersare also expected to know matters ofcommon knowledge, that is what an insurerwriting the risk would reasonably beexpected to know. An insurer ought to havesome insight into the industry for which it isproviding insurance, but this insight mayreasonably be limited to matters relevant tothe type of insurance provided.
The changes to an insured’s disclosureduty are evolutionary and not radical andmany elements of the previous regimeremain. Long-standing buyers of insurance inthe credit political risk market have wellestablished processes and proceduressurrounding their purchase of insurance andpolicy wordings that have served them well.Many of these insureds have/are consideringthe act and how it reflects the way theirinsurance business has been conductedhistorically and the extent to whichestablished practice and procedures cancontinue alongside the new regime. They arealso considering whether their policywordings require amendment to contract outof the default provisions of the act.
In particular bank insureds are ahead ofthe game as they have already grappled withtheir disclosure obligations for Baselcompliant non payment policies to ensurethat they fully understood their duties andwho would discharge these. For many yearsnow banks have had deal team/transactionteam or an equivalent definition in theirwordings to designate and define thosepersons whose knowledge is relevant for thepurpose of their disclosure duties. Somecorporates have also incorporated similarfunctioning definitions. We expect to seemore definitions of this nature in policywordings for insureds who haven’t yetnegotiated this.
Both existing and new buyers of theproducts available in the credit political riskmarket are in the same situation whenconsidering their duties on placement of arisk and negotiating a wording in this newlandscape. Overall, due to the bespoke natureof the products and the sophistication of theinsureds purchasing credit and political riskinsurance, the impact of the changes is likelyto be less arduous than may be encounteredin other areas of insurance. ■
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Insureds need to identifywhose knowledge within the insured’sorganisation will berelevant for the purpose of compliance with theduty of disclosure.
The Overseas Private Investment Corporation,(OPIC) is a long-time Berne Union memberthat mobilizes private capital to help addresscritical development challenges, and in doingso, advances US foreign policy objectives. Asthe US Government’s development financeinstitution, OPIC provides political riskinsurance and project financing for USinvestors, lenders, NGOs, and impactinvestors seeking to invest in more than 160developing economies and countriestransitioning from nonmarket to marketeconomies.
OPIC political risk insurance – and OPIC’sstrong record of protecting investors andpaying claims – has helped investors make apositive impact in countries and sectorswhere attractive opportunities merge withuncertain political and economic conditions.A fundamental benefit of OPIC’s involvementas a political risk provider (including directinsurance and reinsurance) is its willingnessto advocate on behalf of the insured partybefore conditions deteriorate to the point ofcausing losses and result in claims.
When OPIC is an insurer, it will work to
avert claims beforethey materialise byworking with theinsured investor, otherUS governmentagencies and the localUS embassy, and hostgovernmentauthorities. OPIC’sclaim process isdesigned to ensure
protection of the insured party and theproject, if possible, while prudently managingthe US government funds that back OPIC’spolitical risk insurance.
When OPIC has paid or settled claims, itsrecovery rate has been outstanding. Since1971, OPIC has made 298 insurance claimpayments and settlements that total $977.2million, and its recoveries on those claims are$1.006 billion, or 103% of total claimsettlements through FY2015. Thisinformation, and the memoranda ofdeterminations that underlie OPIC’s claimsdecisions are found on the OPIC website atwww.opic.gov.
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OPIC: Political risk insuranceclaims and coverage for political violence – A necessaryinstrument for investors andNGOs to mitigate investment risk
By Tracey Webb, Vice President, Structured Finance and Insurance, OPIC
Tracey Webb
Since 1971, OPIC has made 298 insurance claimpayments and settlements that total $977.2 million, andits recoveries on those claims are $1.006 billion, or 103%of total claim settlements through FY2015
Types of coverage and benefits forinsured parties:OPIC political violence coverageOPIC’s political violence (PV) insurancecoverage continues to be an important partof OPIC’s risk mitigation products. Thiscompensates investors for equity assets(including property) and income lossescaused by such actions as: declared orundeclared war; hostile actions by national orinternational forces; revolution, insurrection,civil strife; terrorism and sabotage. In theevent of such loss, OPIC pays compensationfor two types of losses:
Assets: Damage to covered tangibleassets; and Business income: Income losses resultingfrom damage to assets of the foreignenterprise caused by politicalviolence/terrorism. Investors may purchase one or both
coverages. In addition, OPIC can providecoverage for:
Evacuation expensesTemporary abandonment or income lossesdue to political violence that causesevacuation or forced abandonment of aprojectSpecial riders: OPIC can also providespecialised coverage to compensate forincome losses resulting from damage tospecific sites outside the insured facility,such as a critical railway spur, powerstation, or supplierOPIC PV coverage can be a decisive factor
in enabling investors, contractors, NGOs, andeducational institutions to commit capital,resources and sorely-needed expertise intocountries and regions that desperately seeksuch support for security, stability, economicgrowth, and job creation.
PV coverage and private investors For private investors, PV coverage can be animportant factor when determining whether
to invest or whether to rebuild and restartoperations. For example, a US company,Seaboard Overseas Limited (Seaboard), hasbeen insured by OPIC against politicalviolence in several risky emerging markets.
Zambia: OPIC provided political riskinsurance to Seabord Corp. in a project insupport of food security. In 2012, OPIC paid a$38,027.37 claim to Seaboard ascompensation for the adjusted cost of lostCovered Property (grain silo equipment andvarious food products) destroyed or takenduring post-election riots in that Africannation
Haiti: Seaboard is also part of an investorgroup that purchased OPIC PV coverage inHaiti that enabled the investors to mitigatethe risk of doing business in one of thepoorest and most unstable countries in theWestern Hemisphere. The investorspurchased a mill that produced as much as95 percent of the flour consumed in Haiti thathad been unfortunately destroyed during themassive 2010 earthquakes in Haiti. It was thenreconstructed.
In the Haitian project, there has not been aclaim but it was critical for the investors tocommit their capital. OPIC PV insurancecovers damage to assets or business incomeloss resulting from political violence. Thiscoverage allowed the insured investors toreconstruct the facility – including a flour mill,offices, warehouse, storage silos, machineshops, and an electricity generating plant –which was completed in December 2011.Along with increased production capacityand more modern equipment, the facilitycreated 150 local jobs and increased thesupply and distribution of flour throughoutHaiti.
PV coverage and NGOs – covered propertyWhile OPIC frequently works with privatesector businesses that use OPIC financing orpolitical risk insurance to support their
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OPIC PV coverage can be a decisive factor in enablinginvestors, contractors, NGOs, and educationalinstitutions to commit capital, resources and sorely-needed expertise into countries and regions thatdesperately seek such support
operations in emerging economies, theagency also supports the work of non-profitorganisations and NGOs. One long-timeOPIC partner is the International RescueCommittee (IRC), one of the world’s largesthumanitarian organisations, which respondsto humanitarian crises around the world tohelp address vital nutrition, health care,housing and subsistence farming needs. IRChas used OPIC political risk insurance in morethan 20 countries to enable it to continue itswork in countries embroiled in politicalviolence. “The support IRC receives fromOPIC is really indispensable,” IRC’s vicepresident for policy and advocacy has said.“When our operations are threatened, OPICis right there with us providing the insuranceand backup that we need to keep ouroperations moving forward.”
Specifically, OPIC has paid separatepolitical violence claims to IRC in threecountries since 2014, totaling more than$874,000. Recently in Yemen, OPIC agreed topay IRC up to $73,711.80 for covered property(medical supplies and office equipment) thatwas looted or destroyed. Similarly, in 2015,OPIC paid up to $205,000 to IRC forreplacing covered property (office equipmentand vehicles) lost and destroyed duringarmed conflict between opposing forces inSouth Sudan, where IRC has been working tostem gender-based violence and providehealth care and child survival programs. Andin 2014, OPIC paid IRC a $595,413.40 claim toreplace destroyed covered property (officeequipment and vehicles) in the CentralAfrican Republic, where IRC has beenproviding emergency aid and long-termassistance to refugees and displaced personssince 2006.
PV coverage and educational institutions –evacuation coverage and loss of incomeIn 2011, OPIC provided political risk insurancein connection with the AmericanInternational School of Bamako in Mali. The
insurance protected against loss of businessincome, including evacuation expenses thatresulted from political violence. At that time,the West African nation was a stabledemocracy. But in the year after OPICprovided the insurance, the political situation in Mali deteriorated rapidly, a group of Malian soldiers seized power, which caused school officials to evacuateand close the school. After reopening theschool in August, a claim was filed for loss of income resulting from the politicalviolence, and in February 2013, OPIC paid a claim of almost $1.4 million. Today theschool is open as it continues to monitorsecurity in the region. Its ongoing operationis helping support the community ofinternational aid workers and diplomats whoare helping advance development andstability in Mali.
Potential opportunities forcooperationRecently, OPIC has focused its efforts onworking more closely and effectively withother investment insurance providers. Thishas resulted in new and innovative facilitieswhere OPIC has entered into reinsurance,pooling, and other risk sharing agreementswith private insurers and with public insurers,both multilateral and bilateral.
It is reasonable to hope that these effortswill result in political risk insurance facilitiesthat can mitigate the daunting risks ofpolitical violence faced by investors anddevelopers seeking to develop criticallyneeded projects, e.g., humanitarianassistance, transportation infrastructure,water, and waste treatment and agricultural.OPIC’s history and familiarity with PVcoverage and claims provide a soundfoundation to find ways to cooperate amongBerne Union members to meet the needs ofthe insured, while being fully compliant withthe relevant criteria and objectives of theinsurers. ■
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OPIC’s history and familiarity with PV coverage andclaims provide a sound foundation to find ways tocooperate among Berne Union members to meet theneeds of the insured, while being fully compliant withthe relevant criteria and objectives of the insurers.
Political volatility and political violence haveincreasingly provided cause for concern inSouth-East Asia over the course of 2016.Concerns include an uptick in domesticprotests in response to the prolongedscandal involving the Malaysian sovereigninvestment fund, 1Malaysia DevelopmentBerhad (1MDB). The continued junta rule inThailand will also likely contribute to renewedpolitical tensions. In addition, the newlyelected Philippines President RodrigoDuterte’s war on drugs and othercontroversial decisions are also likely tocontribute to nationwide unrest. Theterritorial disputes in the South China Sea arepersisting as China rejects a judgementawarded by an international tribunal andpolitical violence and terrorism continues tothreaten South-East Asia as the rise of theIslamic State leads to terror attacks inIndonesia and Malaysia.
Political volatility and the frequency ofterrorism events could be a hurdle toinvestment and growth in the region,especially when the Asian Development Bankforecasts GDP growth for 2017 at 4.8%.Though investors and lenders are keen toparticipate in the region’s growth story, theywill need to fully understand the political and
credit risks in theregion in order tomitigate and managetheir exposure tothem and tomaximise theiropportunities.
MalaysiaControversy firstsurrounded 1MDB in
2015 when the Malaysian sovereign fundstarted to miss coupon payments tobondholders. Following which, a scandalunfolded, spurring involvement from variousforeign governments in the allegedmisappropriation of billions of dollars fromthe fund. Government officials who criticisedthe scandal were removed from theirpositions, a crackdown on the media’scoverage on 1MDB ensued and Prime MinisterNajib was given sweeping security powersamid protests. With the clamping down oncivil liberties in Malaysia and mountingdiscontent, rallies and protests are likely tocontinue, facilitated by opposition parties.This has resulted in increased concern frominvestors and reduced lending. In addition,low oil prices and a weak ringgit have put a
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Political risk andpolitical violence inSouth-East AsiaBy Mark Wong, managing director, credit, political and security risks – Asia,JLT Specialty
Mark Wong
Political volatility and the frequency of terrorism eventscould be a hurdle to investment and growth in theregion, especially when the Asian Development Bankforecasts GDP growth for 2017 at 4.8%.
drag on the Malaysian economy. 30% of thestate’s revenues come from oil-related taxesand economic stagnancy is likely given thelack of alternative income. Heightenedconcerns in these areas have promotedactivity in the private credit and political riskinsurance (CPRI) market with investors andlenders seen actively managing and coveringtheir investment exposures with the market.The CPRI market has previously beenunderweight on Malaysia and premium ratesare still well within deal margins.
ThailandSince the military seized control of thecountry during a coup in 2014, Thailand hasbeen ruled under a strict military regime.
Order might have been restored following aprolonged period of political unrest that ledto Yingluck Shinawatra’s government beingousted but this came at the expense of civilliberties. Coup leaders have also granted thearmy sweeping powers to arrest and detaincriminal suspects, entrenching militarycontrol over the country. Results of a vote onthe junta’s proposed draft constitution inAugust 2016 suggest an election next year. Itis likely that Thailand will transition towardsdemocracy, however, it should be noted thatthe constitution only offers semi-democracywhereby future elected governments will besupervised by the military. There is asignificant risk of large-scale protests in RedShirt strongholds in the north and northeast
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World Risk Review Ratings: September 2016
Source: World Risk Review, JLT’s Proprietary Country Risk Rating Toolhttp://jlt-talos.com/services/worldriskreview/
Thailand Indonesia Philippines Singapore MalaysiaStrikes, Riots & Civil Commotion 5 3 4 2 3
Terrorism 5 5 5 2 3
War and Civil War 3 3 4 1 2
Country Economic Risk 5 5 4 1 5
Currency Inconvertibility & Transfer Risk 5 5 4 1 4
Sovereign Credit Risk 5 5 5 1 4
Expropriation 5 5 5 1 3
Contractual Agreement Repudiation 6 6 6 1 5
Legal & Regulatory Risk 6 6 6 2 5
Countries are rated between 1 and 10. 1=Low Risk, 10=High Risk.
of Thailand as well as in Bangkok as thegovernment implements measures to ban orweaken opposition parties, in particular thosesupporting Thaksin Shinawatra, the formerprime minister.
Historically, Thailand has experiencedseveral transitions between military rule anddemocracy. Since the coup in 2006, in whichThaksin was overthrown, continued politicalvolatility has become a norm in Thailand andwith another transition back to military rule in2014, there has been prolonged impact onthe economy. As such, investors and lendersare likely to take a wait-and-see approach for2017. The CPRI market continues to offercoverage for Thailand and insurers have takeninto consideration the country’s recurringgovernment transitions and political riskinsurance premium for Thailand has beencreeping up over the past few years.
PhilippinesFollowing his successful election in May 2016,President Duterte pledged to crack down ondrug dealers and criminal gangs, resulting in1,800 individuals having been killed by theend of August 2016. President Duterte’s waragainst drugs and crime, and the trade off inallocating public monies could result indissatisfaction amongst the Filipinos andpotential unrest as budgets of the police,military and presidential office were raised atthe expense of spending on health,agriculture, labour, employment and foreignaffairs. President Duterte has also criticisedthe mining industry, declaring that thePhilippines could do without this industry andwarning mining companies to adhere strictlyto environmental rules or risk being shutdown. Though there is much potential in thePhilippine mining sector, investors could faceincreased licence cancellation risks eventhough the president eventually adapted hisstand and confirmed that mining permits willstill be issued.
South China SeaChina’s historic claim to sovereignty underthe ‘nine-dash line’ area of the South China
Sea (SCS) was rejected on 12 July 2016 by thePermanent Court of Arbitration (PCA),alongside its proclaimed entitlement to thefull exclusive economic zone (EEZ). Thearbitration, initiated by the Philippines,
commenced in January 2013. It is likely thatthe Philippines and China will seek anegotiated solution to their contestedterritorial claims, in spite of the ruling.
The Philippines and China are calling forrestraint in the aftermath of the PCA ruling inorder to avoid military escalation. It is likelythat China will seek to further embed itself inthe area by enhancing its land reclamationefforts on disputed areas as well as furtherexploiting traditional fishing grounds byencouraging expanded fishing by itsfishermen militias. It is also possible thatChina will declare an Air DefenceIdentification Zone. The Chinese air forcesent H-6K bombers alongside other aircrafton 15 July 2016 and advised that regularpatrols of the SCS will continue indefinitely.
The Philippines is buoyed by the outcomeof the ruling. Nonetheless, President RodrigoDuterte has indicated that this ruling willserve as an opportunity for defining bilateralrelations rather than legitimising any form ofdrastic action. Although the ruling provideslegal support for the Philippines to operate in
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Low oil prices and a weak ringgit have put a drag on theMalaysian economy. 30% of the state’s revenues comefrom oil-related taxes and economic stagnancy is likelygiven the lack of alternative income.
Since the coup in 2006, inwhich Thaksin wasoverthrown, continuedpolitical volatility hasbecome a norm inThailand and with anothertransition back to militaryrule in 2014, there hasbeen prolonged impact onthe economy.
the SCS unimpeded by China, theinternational court does not possess thepower to enforce this ruling. Duterte willhave to respond to nationalist demands forcontrol to be reasserted, particularly of theScarborough Shoal, however this could leadto heightened hostility with China.
The SCS facilitates approximately $5 trillion of trade annually and significantfishery, oil and gas resources are also presentthere. The ruling will likely result in thePhilippines regaining access to the oil and gasand fisheries of the SCS, which was denied bythe Chinese naval blockades of 2012.However, timelines for these discussions withChina are unconfirmed. President Dutertewas elected amidst a commitment topromote the growth of the economy andrequires Chinese investment in order toachieve this. As such, President Duterte willlikely show restraint from enforcing the rulingby sending coast guard or naval vessels topatrol the Spratly Islands.
The favourable result of the tribunal forthe Philippines may precipitate further claimsfrom Brunei, Malaysia and Vietnam inparticular. Existing trade ties with China haveso far dissuaded these sovereigns frompursuing claims in the SCS.
Political violence/terrorismThe terrorism threat in Southeast Asia isevolving and there has been an uptick inattacks carried out by the Islamic State, withsuccessful attacks in Indonesia and Malaysiamost recently. Security measures throughoutthe region have been strengthened andauthorities have detained suspected militantswith ties to terrorist organizations, therebyavoiding serious incidents. With porousborders within Southeast Asia, securityagencies of the various countries are workingtogether to prevent further terror attacks. InAugust 2016 the Indonesian police arrestedsix militants with links to Islamic State,reportedly planning a rocket attack onSingapore. Throughout 2016, there havebeen lone wolf attacks in Jakarta, a grenadeattack at a nightclub near Kuala Lumpur, the
attempted suicide bombing in an IndonesianCatholic church and the recent bombingsacross various provinces in Thailand,including tourist spots like Hua Hin andPhuket. It is likely that there will be furtherIED attacks targeting tourist destinations inThailand, such as Bangkok, Koh Samui andPhuket, as well as government offices and
police stations outside the threesouthernmost provinces. The peace processbetween the government and Muslim-Malayrebels has been granted increased priority.However, it is likely that there will be furtherattacks against foreigners in the comingmonths as the Muslim-Malay rebel groupshave exchanged statements of support withthe Islamic State, indicating that it is evolvingfrom prioritising an ethno-religious aim tohaving a wider Islamist objective.
Islamic State has an increasingly globalreach and the risk across Southeast Asia hasbeen raised. Law enforcement agenciesthroughout the region have stepped upefforts to counter this threat and we haveseen increased interest from clients as theyexplore political violence and terrorisminsurance solutions covering loss of revenuewith the private political violence insurancemarket. ■
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President Duterte has also criticised the miningindustry, declaring that the Philippines could do withoutthis industry and warning mining companies to adherestrictly to environmental rules or risk being shut down.
The favourable result ofthe tribunal for thePhilippines may precipitatefurther claims from Brunei,Malaysia and Vietnam inparticular. Existing tradeties with China have so far dissuaded thesesovereigns from pursuingclaims in the South China Seas.
Twenty-five years ago the five nations ofCentral Asia (CA) – Kazakhstan, Kyrgyzstan,Tajikistan, Turkmenistan and Uzbekistan –emerged from the shadows of Soviet centralcontrol to embark on a transitional processexpected to result in the development ofmarket-based economies. That transition isstill a work in progress, which this articledescribes, highlighting facts and observationsthat may be of interest to those consideringbusiness opportunities in these emergingmarkets.
The Berne Union in Central AsiaThe Berne Union footprint in CA has grownsteadily since 2005, with year-end exposuresincreasing by about 500% over the period2005-2015, reaching just over $29 billion in2015. In comparison, regional GDP (nominal)grew by 250% over the same period1. SoBerne Union activity in the region has growntwice a fast as the region has grown over thelast decade. While Kazakhstan accounted forabout 62% of total year-end exposure in 2015,BU members have significant exposure in allfive CA countries.
Observing Central Asian economictransition: Hindsight is 20/20It is much easier today, with the benefit of 25years of experience, along with knowledge ofrecent external economic shocks (the “new”oil crisis, recession in Russia and theslowdown in China), to understand thechallenges of transition for CA countries andidentify key success factors for the next 25years of transition. Under USSR leadership,economies of the Soviet republics werespecialised and interconnected within abroader, albeit isolated, economic communitythat while considered inefficient in someWestern eyes, was highly integrated and didnot require independent sovereign decisionmaking. Following a few years of initialvolatility, low hanging fruit such as previouslyunderutilised natural resources and human
capital, as well as aprolonged period ofincreasing commoditydemand and prices,fueled relatively rapidGDP growth in CA,averaging 7.5%2 overthe first 20 years orso of full-onindependence.Readily achievable
growth in this initial period of transition madeit easier to avoid proactively tackling longer-run challenges related to fundamental,structural economic transition throughdiversification.
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Central Asia:Transition-in-processBy Norm Kimber, Zurich Credit and Political Risk
Norm Kimber
Dependence on commoditiesCA oil and gas exporters, Kazakhstan,Turkmenistan and Uzbekistan, have beenheavily dependent on strong hydrocarbonprices to support their economies. InKazakhstan, oil and gas directly accounts for20% of GDP, 50% of fiscal revenues and 60%of exports. In past years the country has runcapital account surpluses largely due tofavourable oil and gas prices. But breakingeven from a capital account and fiscalbalance perspective, in 2017 for example,would require an oil price of about $85 perbarrel3. Turkmenistan and Uzbekistan are lessdiversified than Kazakhstan so they are moredependent on oil prices. Assuming pricesremain lower than in past years, all three ofthese countries will need to diversifyeconomic activity to continue transitionalgrowth.
Dependence on RussiaCA oil and gas importers, Kyrgyzstan andTajikistan, depend indirectly on hydrocarbonprices through remittances from domestichuman capital employed in Russia and
neighbouring countries that are directlyaffected by the decline in oil prices and, in thecase of Russia, commodity price and sanctionsdriven recession. Remittances account for 45%of GDP in Tajikistan and 30% in Kyrgyzstan7.External shocks affecting Russia andneighbouring CA countries are immediatelytransmitted to Kyrgyzstan and Tajikistanthrough declining remittances, which has anoffsetting effect on the benefit of cheaperenergy supply. Kazakhstan, Turkmenistan andUzbekistan also rely on remittances, as well ashydrocarbon export earnings from Russia. Sowhen Russia sneezes, CA very quickly catchesa cold, and since Russia’s economy ishydrocarbon dependent and affected bysanctions, so are the economies of CA oil andgas importers and exporters.
Renewed CA transition efforts will requirediversification away from dependence onRussia as well as oil and gas. Like manycountries that have enjoyed years of robusteconomic growth based upon reliance onhigh commodity prices, especially in oil andgas markets, without looking ahead topotentially leaner times and the need for
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Kazakhstan: Shifting focus inresponse to the oil price shocks
Kazakhstan’s growth in GDP terms has beenimpressive averaging 8.1% over the period2000-2012, but dropping to just over 1% in2015, a trend that reflects the country’sdependence on oil and gas production4. Oneresponse to external economic shockresulting from declining oil prices appears tobe tightening state control of the othersubsoil resources and, in particular, uranium,an industry in which it has a strong marketposition, accounting for about 40% of worldproduction in 20155. Introduction of a longawaited, new mining code was expected in2016, but has been postponed to 2017.Details are not yet readily available, butobservers expect the new code will favourincreased state control of sub-soil resources.It remains to be seen what impact this willhave on existing and new foreign investmentand, in turn, future prospects for foreigninvestors.
In March of this year, the governmentannounced that, in its view, some foreigninvestors in the uranium sector have notlived up to their mine developmentcommitments under joint venture
agreements with Kazatomprom, and that itmay need to respond by returning someassets to the state. This pronouncement waslikely intended to prompt foreign investors inthe uranium sector to respond withproposals that will lead to increasedproduction value and redistribution of jointventure ownership benefits to the state.Cameco Corporation, one such investor,subsequently signed a publicly announcedagreement with Kazatomprom6, which isexpected to increase Kazakh ownership inJV Inkai from 40% to 60%, extend theduration and quantity of existing miningrights, and lead to enhanced uraniumprocessing opportunities within Kazakhstan.This is a good example of partnership, with aforeign investor demonstrating flexibility inview of economic transition challenges facedby host government investment partners, aswell as transparency by both parties incommunicating intentions to the public in anopen and detailed manner.
These developments probably reflectgovernment concern over the future value ofoil and gas reserves, and realisation thateconomic transition by the country sinceindependence has not sufficientlyemphasised diversification.
developing a broader economic base, CAcountries now face the challenge ofsimultaneously dealing with the immediateeffects of external economic shocks,diversifying to reduce disproportionatedependence on commodities and othercountries, as well as continued transition withthe benefit of hindsight.
Moving forward – what will the futurelook like?Kazakhstan is in a relatively stronger positionin adjusting to the new oil crisis than some ofits CA neighbours, having built up foreignexchange reserves (currently more than 7months of imports) and avoided heavyindebtedness (debt/GDP currently sits atabout 22% compared to closer to 70% inKyrgyzstan)8. It also has the advantage ofhaving established sovereign wealth fundSamruk-Kazyna, which provides the countrywith some added financial flexibility. But likehydrocarbon dependent countries in theMiddle East, it will need to diversify relativelyquickly to avoid sliding backwards in futureyears of transition. Other hydrocarbonexporters, Turkmenistan and Uzbekistan, alsoenjoy temporary buffers, but are lessdiversified than Kazakhstan and are feelingthe new oil crisis crunch sooner and moreacutely. Other CA countries, Kyrgyzstan andTajikistan, that are indirectly, but more quickly,affected by the new oil crisis, transmittedthrough disproportionate dependence onRussia and its economic woes, will feel theneed to diversify more immediately and,arguably having weaker institutional andstructural foundations to build upon, mayneed to rely more on donor assistance andlending. Unemployment related to returningexpat workers may also result in increased,additional social burdens.
Going forward, foreign exporters, lendersand investors will hopefully find themselvespursuing infrastructure, value added naturalresource production and manufacturingsector development opportunities in the CAregion, as diversification proceeds.
Central Asia and ChinaEconomic linkages between CA and Chinahave been steadily growing9, which is notsurprising given China’s need for naturalresources and the region’s need for growth intrade and investment. Trade between Chinaand the region, including Caucasusneighbours Armenia, Azerbaijan and Georgia,grew from only $5 billion in 2005 to close to
$50 billion in 2014, with China accounting forsignificant shares of total trade forKyrgyzstan (50%), Tajikistan (42%),Turkmenistan (27%), Kazakhstan (22%) andUzbekistan (21%). Over the same period,Chinese official lending to the region grewfrom $260 million to almost $4.5 billion. FDIfrom China reached $5.5 billion in 2012 and isexpected to increase to $30-35 billion by2020. So diversification away from Russia isfortunately already underway, althougheconomic slowdown in China is anothersource of economic stress that the CA regionwould have preferred to avoid.
Geopolitical affiliations – location iseverythingThe New Silk Road? To support resource access, it is said that theChina sponsored One Belt One Road initiativeis to construct a Silk Road Economic Belt thatwill stretch through Central Asia connectingChina to Europe and providing opportunitiesfor development through infrastructure gapfilling and economic diversification10. All fiveCA countries are members of the $100 billionAsian Infrastructure Investment Bank, whichwill support this initiative alongside aseparately allocated $40 billion Silk RoadDevelopment Fund. Details of the new SilkRoad concept remain somewhat vague, butthe concept does seem to mesh well withgrowth in China–Central Asia economic tradeand investment to date. Chinese strategicintentions vis à vis investment in Central Asiamay resemble resource access motivatedinvestment approaches in Africa, exceptcloser to home and on the way to EU markets.
European Economic Union (EEU): Soviet 2.0or pivot to Asia? Although originally proposed by Kazakhstanas an idea in the 1990s, more recentinstitutional development and the 2014 treatyof the Eurasian Economic Union (EEU) arethought to be the brainchild of leadership inMoscow. The EEU is an economic union ofstates that is said to be Eurasia’s answer tothe EU common market. A treaty establishingthe EEU was signed on 29 May 2014, withcurrently membership limited to Russia,Kazakhstan, Kyrgyzstan, Belarus and Armenia,prompting some Western observers toconclude that the objective is to resurrect anew version of Soviet-style regionalintegration. That could be the case, as otherCA and former-Soviet republics considermembership. Another view is that it could
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also be part of Russia’s so called pivot to Asia,which was underscored by the $400 billionthirty-year gas delivery agreement signedbetween Gazprom and CNPC in 2014. Therehas been some speculation that the EEU willattract interest in formal cooperation, if notmembership, by China, which would certainlyboost the organisation’s economic diversityand significance. There is some precedent forthis in a similar alliance, the ShanghaiCooperation Organisation (SCO). All five CAstates, along with Russia and China, aremembers of the SCO.
Turkey has thus far not been involved withthe EEU, perhaps preferring the prospect ofEU membership, but with EU accessionappearing further in the future, and withtensions rising between Turkey and someWestern powers, and recent reconciliation indiplomatic relations between Russia andTurkey, it is possible that Turkey couldconsider a formal relationship with the EEU.Turkey and four of the CA states share Turkicheritage and cooperation on some levels hasbeen evident since CA independence, asillustrated by mutual membership in theCooperation Council of Turkic SpeakingStates (www.turkon.org). At the very least,Turkey likely views the region as beinggeopolitically important and can be expectedto welcome opportunities to foster soft powerthrough economic cooperation in the region.
In short, Central Asia is geographicallylocated to be integral to the interests of anumber of potential economic partners andgeopolitical affiliations, which may provide apartial means to increased diversification andcontinued economic transition. Foreigninvestors ought to follow these developmentsclosely in assessing what the future will looklike in the region and what opportunities thatfuture will bring.
Key take-aways for foreign businessinterests
1. Although it has been 25 years since CAstates gained independence from the former-USSR, economic transition remains a‘work-in-progress’.
2. Regional and individual GDP growthrates have been significant over the last 20years, largely because of direct and indirectgains from unsustainably high hydrocarbonand other commodity prices.
3. Dealing with economic shocks resultingfrom the new oil crisis, recession in Russia,and slowdown in China, are hard felt in all CAstates and will preoccupy decision makers
over the coming several years.4. In particular, the coming years of
transition should be characterized byeconomic diversification away fromcommodity reliance and dependence onRussia, leading to business opportunities forforeign exporters, investors and lenders in theinfrastructure, value added natural resourceproduction and manufacturing sectors.
5. The geographic location of the CAregion means that it will be increasinglyimportant to neighbouring economic powersincluding China, Russia, Turkey and the EU.Geopolitical affiliations will be important tothe region’s continued economic transitionprovided such partnerships are managedwith a long-term strategic focus and in amutually beneficially manner. Foreigninvestors will need to be prepared to take asimilar approach to establishing andmanaging partnerships with hostgovernments. ■
Notes1 “Regional Economic Outlook Update: Middle East
and Central Asia”, International Monetary Fund, April2016.
2 The Caucasus and Central-Asia: Transitioning toEmerging Markets, International Monetary Fund, 2014.
3 “Regional Economic Outlook Update: Middle East andCentral Asia”, International Monetary Fund, April 2016.
4 Ibid5 World Nuclear Association, May 2016.6 “Cameco and Kazatomprom Sign Agreement to
Restructure JV Inkai”, Press Release May 27, 2016,available at www.cameco.com.º
7 “The Spillover Effects of Russia’s EconomicSlowdown on Neighboring Countries”, InternationalMonetary Fund, 2015.
8 Data reported by Standard & Poors RatingsServices, from various sources, March 2016.
9 All data from “CCA: Reforms Needed to WeatherShocks from Commodity Prices and Russia”,International Monetary Fund, 2015.
10 Ibid11 All data from “CCA: Reforms Needed to Weather
Shocks from Commodity Prices and Russia”,International Monetary Fund, 2015.
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Economic linkagesbetween CA and Chinahave been steadilygrowing11, which is notsurprising given China’sneed for natural resourcesand the region’s need forgrowth in trade andinvestment.
The past year has seen a remarkable reversalof fortunes for the leftist regimes throughoutSouth America. With the exception of RafaelCorrea in Ecuador, all the others haveexperienced defeats. In Argentina and Brazil,Cristina Kirchner and Dilma Rousseff havebeen replaced by decidedly pro-marketpresidents. And in Bolivia and Venezuela, thepresidents hang on, but have sufferedstinging defeats – in the case of Venezuela,the Parliament is now solidly controlled bythe opposition to Pres. Maduro, with effortsunder way to recall him, and in Bolivia, Pres.Evo Morales was defeated in his attempt tochange the Constitution in order to run for afourth term. Finally, the peace agreement inColombia, ending 50 years of civil conflict, isa tacit acknowledgement by the FARC rebelsthat they were under siege.
What does this mean for the region, inparticular in terms of trade and investment,and the need for risk mitigation? It is worthexamining the individual cases of the region’sthree largest economies – Brazil, Mexico andArgentina – as well as the two main tradingblocks of the region (the Pacific Alliance andMercosul).
Pacific Alliance vs. MercosulOver the past five years, according to theWEF, the pro-market bloc of Latin America
(Mexico, Chile, Peruand Colombia) hasenjoyed greater GDP,export and importgrowth than Mercosul.Additionally,especially sinceVenezuela joinedMercosul, that grouphad become littlemore than a (left-
leaning) political talk-shop. Currencyproblems in Argentina and Venezuela meantthat, even within the bloc, restrictions wereimposed and intra-bloc trade slid.
With the election of President Macri inArgentina and the confirmation of Pres.Temer in office, most leaders in the region arealready clearly in favor of revitalizing theeconomic aspects of Mercosul, including innegotiations with the EU, US and others.However, protectionist sentiment continuesto run high, even in some wings of therespective ruling coalitions. And, in thecontext of a nearly worldwide backlashagainst globalisation in general, and tradeagreements specifically, it is difficult toimagine that the new impetus that Macri andTemer bring to Mercosul will quickly result innew agreements with Europe or the US. Talkswith the EU may have restarted, but given the
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Latin America: The(incomplete) turn tothe rightBy Keith Martin, senior consultant to Aon Brazil and Veracity Worldwide1
Keith Martin
If the US were to turn more protectionist after theelections there, deeper Latin American integration maybe one of the answers that would united countries fromMexico to Argentina.
scrutiny in Europe of potential agreementswith Canada and the US, it is unlikely that thenew talks with Mercosul will have rapidresults. On the other hand, the region maystill see progress in three areas: within thePacific Alliance and within Mercosul,respectively, and between the two blocs, nowthat the main players in Mercosul have movedideologically closer to the Pacific Alliance. Inparticular, if the US were to turn moreprotectionist after the elections there, deeperLatin American integration may be one of theanswers that would united countries fromMexico to Argentina.
It is worth noting, however, that there areboth structural and political impediments tosuch a process. On the structural side, thepredominance of commodity exports meansthat most countries are more inclined to becompetitors than to be able to harnesscomplementary competitive advantages.Similarly, both the volatility in commoditiesand the economic mismanagement in several(mostly Mercosul) countries has resulted ingreat currency volatility – making trade andinvestment flows more difficult, andconcerning foreign investors and traders. Onthe political side, despite the now more pro-market rhetoric, it is clear that politicians inthe countries of both alliances are seeking toharness deeper regional integration for short-term political gain, too – and hence will beresistant to relax their own protectionistmeasures.
BrazilExpectations are that Brazil will next yearfinally emerge from its worst recession in acentury. Early signs are that the confirmationof Temer as president will help accelerate andincrease that upward potential – but muchdepends on the new government’s ability toget much-needed reforms passed in the nexttwo years. Early indications are that Temer –who was previously president of the lowerhouse of Congress – will be able to push
through significant labor and pensionreforms, as well as launch a wave ofprivatisations and concessions. (The labourreforms, in particular, are likely to result instreet protests and potentially even violence– particularly if they coincide with thepotential arrest of former president and left-wing hero, Luiz Ignácio “Lula” da Silva. Onecan expect, however, that the violence will belimited in scope and concentrated on a fewlarge cities.)
These reforms are important, if minimal,steps toward putting Brazil back on track.Deeper reforms – of the dysfunctionalpolitical system itself and of the byzantine taxcode, for example – will most likely wait untilafter the 2018 presidential election (andperhaps much longer…). So, the most likelyscenario is that Brazil will return to its“general form”: institutionally solid butfragmented; growing, but below its potential;and resolving problems only, as Brazilians say“at the 48th minute of the second half”.
For foreign investors, the scenario isfavourable – at least until the veryunpredictable 2018 elections. Brazil’s currentfiscal crisis means that the government isopenly counting on foreign investment forthe much-needed modernisation of thecountry’s creaking road, rail, port and airportinfrastructure – and is willing to provide morefavorable terms to those investors than theprevious one. Investors may also look forwardto a “bargain basement” moment for Braziliancorporates, on two fronts. First, while itcannot politically put through privatizinglarge state-owned companies like Petrobrasand Eletrobras, the government has made itclear that significant parts of their empireswill be privatized (and that means: probablysold to foreign investors). At the same time,local content and co-investment rules (forPetrobas, but also for airport concessions)are being relaxed. Second, private corporatesare also attractive targets now, given thedepreciation of the real and the precarious
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Expectations are that Brazil will next year finally emergefrom its worst recession in a century. Early signs are thatthe confirmation of Temer as president will helpaccelerate and increase that upward potential – butmuch depends on the new government’s ability to getmuch-needed reforms passed in the next two years.
situation many find themselves in after threeyears of recession. (The telecoms giant Oi isonly the most spectacular example of this.)
However, significant challenges remain –not least of which is the fact that thecorruption scandals just keep widening andengulfing more companies and politicians.The federal prosecutors and police havedemonstrated a striking independence fromall the parties in Brasília, determined to lookunder more and more rocks. Given theendemic nature of the propinoduto (funnelingof bribes), they are finding evidence underevery rock. The Temer government will have amajor challenge to try to maintain stability –and get its reforms passed by Congress –while the investigations continue to causeindictments among leading politicians of allstripes, most likely including more membersof the government, too. This is also achallenge for foreign investors: carefulanalysis is necessary to ensure that the assetsthat may be on sale in the “bargain basement”are not toxic in some non-financial manner.
In sum, we expect that the region’spowerhouse will regain some of its luster butsignificant challenges remain – not least afterthe 2018 elections. This should result in anincreased demand for PRI, as investors seeopportunities but also risks. (It is worthremembering that in the early 2000s, Brazilwas the country with the single largest PRIexposure in the world – and very scarcecapacity from private insurers for it.) Tradecredit is also likely to increase, particularly onthe medium- and long-term side, as foreigncompanies come in to export more goodsand services under the privatizations andconcessions.
Mexico“Pobre México – tan lejos de Dios, tan cercade Donald Trump!”This new adaptation of an old Mexican sayingsums up well one of the major cloudshanging over Mexico’s future. Much moreclosely linked to the US than the other LatinAmerican countries, the US elections will
have a direct impact on Mexico, whoever iselected. And of course, in the case of a Trumpadministration, those impacts are expected tobe much more drastic.
On the domestic front, Mexico underPresident Peña Nieto has demonstrated awillingness to try to reform and open up,even at a political cost. In the first two yearsafter assuming the Presidency in late 2012, heproved to be a powerful reformer, especiallyby Mexico’s sclerotic standards. With the helpof opposition parties in the Congress, hemanaged radical changes that often requiredconstitutional changes: reforming the energysector, including opening up drilling toforeign companies beyond Pemex; loweringtaxes; taking on the teachers’ unions toimprove education; and promoting pro-market policies in trade and tax.
However, that honeymoon has not lasted.Peña Nieto, who cannot be reelected at thenext presidential election in July 2018, nowhas an approval rating of only 23% – anddefinitely not helped by his much-maligneddecision to invite Donald Trump for a visit.Personal scandals involving him and his wifehave undermined his credibility – especiallyas he was seeking to get Congressionalapproval of sweeping anti-corruption laws(finally passed in July 2016). The sluggisheconomy – hurt by low oil prices and thetepid pace of the US recovery – has beenanother weak spot. But perhaps the greatestconcern of many Mexicans remains thesecurity situation: not only the wars againstand among the drug traffickers, but also theapparent emergence of hit squads targetingother groups, such as teachers’ unions.
From the investment and tradeperspective, it remains clear that Mexico is anattractive partner – including because of theNAFTA access to the US and Canadianmarkets. If the next US president were todecide to scrap or revamp that treaty (whichis obviously only likely under a Trumppresidency), this could spell serious troublefor investors, exporters and importers.Another threat may lie in the very “success”
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Mexico under President Peña Nieto has demonstrated awillingness to try to reform and open up, even at apolitical cost. In the first two years after assuming thePresidency in late 2012, he proved to be a powerfulreformer, especially by Mexico’s sclerotic standards.
of the reforms: the 2018 elections may be areferendum on Peña Nieto’s economicpolicies, which created more efficiency – andmore unemployment and inequality. Abacklash, particularly from the left is possible:Andres Manuel Lopez Obrador, who nearlywon the 2006 elections and was again
runner-up in 2012, may try again, and hasespoused his opposition to Peña Nieto’spolicies. As in Brazil, things look positive forforeign investors and exporters – but only forthe next two years, until presidential electionsagain cloud the crystal ball.
ArgentinaFew countries in Latin America haveexperienced as radical a policy shift in a shorttime as has Argentina in the transition fromPresident Cristina Kirchner to President Macri.From exchange rates to publishing verifiableinflation statistics, Macri has wasted no timein moving toward an agenda aimed atreassuring foreign and domestic investors.The fact that Argentina’s $16.5 billion returnto the international bond markets in 2016 wasoversubscribed and resulted in surprisinglytight pricing for a country that has defaultedtwice in the past twenty years is evidencethat investors want to believe that “this timewill be different.”
Yet, the situation is complex. Removingenergy subsidies has caused both a massive(if mostly one-off) spike in inflation. As manypeople have found the price hikesunaffordable, it has also resulted inwidespread demonstrations against thegovernment. Many other necessary reforms –particularly to take on the bloated andinefficient public sector – are beingpostponed, not least because Macri must rely
on support from the opposition-controlledCongress to push through his reforms. (Hemay hope that next year’s Congressionalelections will strengthen his hand, but that isfar from certain.) The recovery is now onlyexpected to begin in 2017 and Macri ispleading for patience – in a country with ahistorically rather limited reservoir of thatcommodity. The Supreme Court, for example,has already ordered a partial rollback of theenergy price increases.
Beyond the bond issue, which boughtMacri some breathing room, Macri – like hisBrazilian counterpart – is betting on foreigninvestors to fund many of the neededinvestments in infrastructure. And despiteArgentina having been the “world champion”of investment insurance claims andinternational arbitral decisions against it,many are indeed looking at the opportunitieswith interest. Notwithstanding the currentlydrop in oil prices, there is global interest inVaca Muerta, one of the world’s largestuntapped shale gas and oil reservoirs, locatedin the remote Patagonia region. Exploiting itwould require billions of dollars in investment,not only in the fields, but also in the ancillaryinfrastructure (pipelines, ports, etc.).
Finally, Macri is clearly keen on rekindlingthe country’s glorious exporting past,particularly in agricultural commodities. Goneare the punishing taxes and hard currencyretentions that the Kirchners placed on thoseexports. While exports are rebounding, it isunclear how much they will help plug thehard currency hole Argentina faces. (Whilethe bond issue provided on short-term fix, heis counting on investments and exports, aswell as an amnesty programme designed toencourage Argentinians to “on-shore” theiroffshore assets, as longer-term solutions tothe reserve crisis.)
As anyone who has been working withArgentina over the past twenty years knows,radical shifts are a common occurrence – andoften foreign investors are left holding thebag. Additionally, matters are complicated bythe fact that much political (but little tax)authority resides with the provinces. Thismeans that foreigners looking at concessionswill often face a double risk: federal andprovincial. The question will be: will foreigninsurance providers be as bold as someforeign investors and bondholders, and returnto covering Argentina risk? ■
Note1 The views expressed in this article are strictly the
personal ones of the author.
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Few countries in Latin America haveexperienced as radical a policy shift in ashort time as has Argentina in thetransition from President CristinaKirchner to President Macri. Fromexchange rates to publishing verifiableinflation statistics, Macri has wasted notime in moving toward an agendaaimed at reassuring foreign anddomestic investors.
EgyptPresident Abdel-Fattah al-Sisi faces a rangeof challenges including reducing Egypt'sdependency on Gulf aid, cutting governmentspending through subsidy reform, restoringinvestor confidence despite a growinginsurgency, quelling recurrent strikes, andavoiding mass economically-motivatedunrest. The severe difficulty of meeting theseconflicting demands means that the Army islikely to lose popularity during a Sisipresidency, undermining governmentstability. While Egypt's public finances areexpected to remain under pressure, theauthorities' reform measures and stimulusplans are aimed at gradually reducing thefiscal gap and jump-starting the beleagueredeconomy. Egypt's foreign reserves havebroadly stabilised, with Gulf aid providing theunderlying support. But, contractors facesevere non-payment risks until Egypt's aiddependency is resolved. The country's energybill should be less of a burden with low globaloil prices expected in the two-year outlookand, therefore, a reduced drain on the foreignreserve position, while providing some reliefto public finances. Meanwhile, Islamist-backed IED and shooting attacks are likelyand a two-front Sinai and western Egyptinsurgency is a risk.
TurkeyThe consecutive re-elections of the Justiceand Development Party (Adalet ve KalkınmaPartisi: AKP) in 2007 and 2011 broughtstability and continuity to Turkish politics. Anauthoritarian trend in recent years and aconcomitant rise in societal polarisation haveeclipsed the party's positive track record.President Erdoğan, the party's founder, isnow likely to exploit the popular momentumhe gained following the failed coup on 15 July2016 and push for constitutional changes
providing the presidency with executivepower, further straining societal tensions.
The AKP government is likely to continueexploiting the 15 July coup attempt to purgethe military, judiciary, and state bureaucracyfrom political opponents. Although Erdoğanremains unlikely to de-escalate Turkey's fightagainst the Partiya Karkerên Kurdistan (PKK),the military's loss of morale and the post-coup purges are likely to undermine its fightagainst the militant group, while renderingthe top command more pliable to Erdoğan'swishes. There is a risk of high-casualtyattacks by the Islamic State and PKK affiliatesin Istanbul and Ankara.
Turkey's short-term sovereign risk issupported by a declining current-accountdeficit and high official reserve levels. Lowpublic debt and reasonable fiscal deficits alsosupport a fairly benign short-term risk.However, the outlook for the rating isNegative, reflecting liquidity pressures, whichcould dramatically intensify should net capitalinflows turn sharply outward. The biggestshort-term risk to liquidity is a potentialreversal of these capital flows.
IsraelPrime Minister Benjamin Netanyahu's right-wing government coalition is likely toprioritise anti-terrorism efforts and themaintenance of the status-quo, to thedetriment of relations with the Arab-Israeliand Palestinian populations. Israel's missiledefence systems are likely to intercept mostrockets from Gaza. Hizbullah, however, islikely to be able to fire rockets at rates thatwould at least partially overwhelm theircapacity, indicating a severe risk in the eventof another Israel-Hizbullah war in Lebanon.This is unlikely in the one-year outlook due tomutual deterrence, although there remainsthe potential for escalation through 99
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Key political risks inthe Middle East andNorth AfricaBy IHS Economics and Country Risk
miscalculation. Coalition partners are likely topressure Prime Minister Netanyahu to extractsupport for their special interests, includingcontroversial policies such as expansion ofsettlement construction and curbs on NGOactivity. Government efforts to politicise theinstitutions of state, including the judiciaryand armed forces, are likely to promptincreased social unrest between Israel's left-wing secular tradition and right-wing andreligious activists.
Israel’s short-term sovereign credit risk isvery low. Substantial foreign-exchangereserves and a healthy current-accountsurplus help to minimise the risk to Israel'sexternal liquidity position and solidify Israel’sfinancial footing. Short-term external debt forthe private sector is somewhat high, but canusually be rolled over fairly easily.
JordanThe US and Gulf states are invested inJordan's stability, given its location,moderation, and counter-terrorismcapabilities. The 20 September elections willlikely again produce a parliament pliant to theroyal court and there is no oppositioncapable of threatening the power of KingAbdullah II. Jordan's economic weakness andthe strain from Syrian refugees are key long-term threats.
Jordan's weak financial position has beenexacerbated by the refugee crisis, makingpayment delays and localised economicallymotivated protests likely. Economic growth islikely to remain weak in 2016-17, as a result offiscal retrenchment and regional anddomestic political uncertainty. Nevertheless,the US and allies will probably providesufficient financial aid to the Hashemitemonarchy to prevent persistent orcoordinated protests from becomingdestabilising. Inter-state war with Israel orSyria is unlikely, although skirmishes alongthe Syrian border are probable. The conflictsin Iraq and Syria are increasing the IEDcapabilities of Jordanian jihadists. Recurringstrikes are likely to affect ports, phosphates,transport, and manufacturing.
Saudi ArabiaThe division of power between the crownprince, in charge of political and securityaffairs, and deputy crown prince, overseeingeverything else, is unlikely to change in thesix-month outlook. The latter has positionedhimself as a change agent, willing tomarginalise the ruling family and the clericalestablishment's influence over government.The monarchy's priorities are to contain anIslamic State insurgency, ensure the clericalestablishment remains supportive, and delivereconomic growth. Should the economicslowdown adversely affect youthemployment and the monarchy’s ability toredistribute patronage, the risk of a seriousthreat to state stability emerging over thecoming year would grow sharply. The IslamicState campaign has progressed to moreambitious attacks on security force targets.Successful attacks on secure assets remainunlikely.
Saudi Arabia's short-term sovereign creditcurrently faces limited risk, with its ratingunderpinned by its vast petroleum reservesand strong external finances. The governmenthas accumulated large reserves of hard-currency and the country has huge additionalliquid assets overseas. The weak oil priceoutlook will continue to pressure SaudiArabia's external balances over the next 12months, but the kingdom is expected to leanon its significant financial buffers to managethrough the low price environment. Moreover,the sovereign's high-quality credit ratingallows it easily to meet any short-termfinancing needs by readily tappinginternational capital markets. ■
About IHS Economics and Country Risk IHS ECR leverages the company’s detailedqualitative and quantitative analysis of 204countries, covering political, economic, legal,tax and security risks.
Intelligence cut-off date: 4 October 2016.
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The weak oil price outlook will continue to pressureSaudi Arabia's external balances over the next 12 months, but the kingdom is expected to lean on its significant financial buffers to manage through thelow price environment.
Optimism towards sub-Saharan AfricaRecent years have seen an enormous amountof optimism towards Africa, bothinternationally and within Africa. Ex-Presidentof the African Development Bank, DonaldKaberuka, has made reference to Africa’sLions joining Asia’s Tigers. Kingsley ChieduMoghalu made the following comments in his2013 book, Emerging Africa, “… globalinvestors are increasingly paying attention toa continent once dismissed as ‘hopeless’ buttoday regarded as the global economies ‘finalfrontier’”. The reference to hopeless continentcomes from the cover of the Economist,which in May 2000 described Africa as ‘TheHopeless Continent’, but a decade later (late2011) the Economist title had radically shiftedand the new title was ‘Africa Rising’.
Much of this optimism stemmed from theimpressive growth rates experienced bymany African countries over the recent yearstogether with improvements in democracy,less internal civil strife and better governance.Africa’s largely young population andgrowing middle class were viewed as a hugeopportunity for continued growth anddevelopment.
Challenges facing sub-Saharan AfricaThe last two years have however seen atempering of this optimism.
Regular incidences remind us of thefragility of democratic institutions. Evencountries well respected for their democraticstability, have shown vulnerability at times.Then there are of course important marketsand significant economies where truedemocracy is questionable. On the otherhand the large economies of Nigeria andSouth Africa have shown a degree ofdemocratic maturing as evidenced by recentelection results.
Corruptioncontinues to be aconcern, evidencedby talk of ‘statecapture’ in SouthAfrica and the ‘tunabond’ scandal inMozambique. Certainleaders such as Buhariin Nigeria andMagufuli in Tanzania
are however making strong efforts to addressthis. Terrorism remains a threat, particularly incountries such as Kenya and Nigeria.Unemployment is high, as is the scale ofpoverty.
The obvious challenges relate to thecurrent economic conditions. Low oil pricesand the downturn in the commodity cycle ingeneral, have highlighted theoverdependence on natural resources.Growth rates have declined rapidly with theWorld Bank now predicting only 1.6% growthin sub-Saharan Africa in 2016. Most countriesare experiencing a concerning rise in debtand currency depreciation, and declining hardcurrency reserves have created currencyinconvertibility concerns; Ghana, Angola andNigeria are prime examples. Power shortagesand lack of infrastructure continue to createproblems for the continent.
Current state of export credit financein sub-Saharan AfricaDespite the increasing concerns, exportcredit finance continues to play an important role, with on average $1 billion to$2 billion of deals being done per quarter.However, a look at quarterly statistics since2014 provided by TXF’s tagmydeals, doreflect a slowdown in export credit financesince Q4 2015 (see chart below).
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The changingdynamics of risk insub-Saharan AfricaBy Michael Creighton, head: export credit finance, Nedbank Corporate andInvestment Banking
Michael Creighton
The majority of transactions beingcompleted in the region are in theinfrastructure, power and transportationsectors. Not surprisingly, the power sectorhas been the most active sector in 2015 andthe first half of 2016. This is reflective of thehuge power shortages across the continentand the fact that power is critical to ensuringsustainable growth. In January 2016, duringthe World Economic Forum in Davos,Hailemariam Desalegn, Prime Minister ofEthiopia, said the following: “Africa has hugeopportunity and it is becoming a global polefor growth. Energy is the main challenge inAfrica. The challenge is to have a quality,reliable energy source that makesindustrialisation possible.”
In 2014, the three most active export credit agencies (ECAs)/multilaterals in Sub-Saharan Africa were US Exim, ECIC (SouthAfrica) and CESCE (Spain); in 2015, SACE(Italy), Decredere Ducroire (Belgium) andJBIC (Japan) and for six months in 2016,MIGA (multilateral), US Exim and CESCE(Spain). The top three markets that werebeneficiaries of export credit finance in 2014were Ethiopia, Ghana and Angola; in 2015 itwas Zambia, Angola and Ghana and for thefirst half 2016, South Africa, Angola andGabon (All information provided by TXF,tagmydeals).
Challenges to export credit financein sub-Saharan AfricaThe political, social and economic challengeshighlighted earlier have started to impact ontransactions. Credit committees are
increasingly raising concerns regarding theviability of projects and the ability ofgovernments to maintain payments, resultingin an increasing degree of selectivity inapproved transactions. This seems to beevident across the board both with insuranceproviders and lenders.
These concerns are not withoutjustification. An increasing number ofcompleted transactions have started toexperience difficulties. Entities associated tothe oil and gas and broader resource sectorsare experiencing cash flow difficulties. Wehave seen service providers to the oil and gassector losing contracts or having theirmargins cut as the oil and gas companiesdemand lower costs in an attempt to adjusttheir businesses to a low oil priceenvironment.
Currency is an increasing area of concern.Dollar funded public-private partnerships(PPPs) where offtake agreements have beensigned with utilities that earn revenues inlocal currency, are starting to wobble as theutilities find themselves having to fund dollardebt with less revenue thanks to localcurrency devaluation. Lack of supportinginfrastructure associated with new projectshas created problems. Projects have beencompleted in certain regions, but are not ableto operate at their maximum due tolimitations in the supporting infrastructurethat, although it was anticipated, have notbeen completed by project completion date.While offtake agreements may have beensigned on a take or pay basis, therequirement of the utility to repay debt when
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Export finance deals 2014 - 2016 (Q2)
Source: TXF, Tag my deals
revenues are not maximised, adds furtherstrain to the financial performance of theutility.
General hard currency shortages in manymarkets are causing delays in payments,highlighting currency inconvertibility risks.Rising debt and concerns raised by the IMFare resulting in a reducing ability of Ministriesof Finance to issue guarantees or directlyborrow for the development of projects.However, in many countries, the state-ownedcompanies fail to provide financialinformation, or if they do, the financialinformation is outdated and potentially ofpoor quality, making it very difficult forlenders and ECAs to approve transactionswithout the involvement of the Ministry ofFinance. This increasingly causes delays inprojects reaching financial close.
The regulatory environment in manycountries is still inadequate. This is especiallyevident in the power sector where theregulation around Independent PowerProducers (IPPs) and the Power PurchaseAgreements (PPAs) are inconsistent. Somecountries have frameworks of world-classstandards in place, while in others thestandards are lacking.
While a more cautious approach to thefunding of projects is being adopted byinternational players, the general view is thatthere remains plenty of funding available, thekey problem is inadequately structuredprojects.
Outlook for 2017Export credit finance will continue to be animportant source of funds in Africa, despitethe challenges facing the continent, which arelikely to continue for much of 2017. In fact,with the current challenges, the involvementof commercial and political risk insurance willbecome increasingly important. Thechallenges will force governments to be moreselective in their choice of projects. Inaddition, lenders and insurance / guaranteeproviders will be more cautious in thetransactions that they support. Only the well-structured projects are likely to progress andthose that involve well-respected players. Forexample, transactions that includeinternationally respected developmentfinancial institutions (DFIs), financially soundand experienced project sponsors and EPCcontractors and involve high governmentcommitment, are more likely to be able toattract the necessary funding.
The interest in power will continue but
with an increasing focus on renewableenergy. South Africa has been at the forefrontof implementing successful renewable energyprojects, but the interest is expanding acrossthe continent. New markets are likely toattract increasing interest as financiers lookto diversify their portfolios away from the
historical big markets that are experiencing ahigher degree of problems to marketsperforming better and where exposure islower, such as Ivory Coast and Senegal.Countries along the east coast of Africa willmost probably receive more interestinfluenced by their lower resourcedependence. Mozambique, despite itsproblems, will be a market that will attractmuch attention in 2017 as variousinfrastructure and gas projects progress.
Governments, together with internationalinstitutions, will try and improve thegovernance and performance of utilities sothat they can start borrowing without theneed for government guarantees. Efforts todiversify economies away from resourcedependency will gain momentum, with astrong focus on agriculture. Due to the weakprivate sector in many jurisdictions, it is likelythat governments will be active in thesediversification initiatives.
ECAs will continue to play an importantrole, however the involvement of multilateralssuch as MIGA, African Trade InsuranceAgency (ATI) and The Islamic Corporation forthe Insurance of Investment and ExportCredit (ICIEC) as well as private insurers willbe more prevalent.
While the current situation in Africa ischallenging, the long-term prospects for thecontinent remain positive and in time theoptimism of a few years back should return.Certainly Nedbank remains committed toproviding ongoing export credit finance in Africa. ■
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Regular incidences remind us of the fragilityof democratic institutions.Even countries wellrespected for theirdemocratic stability, have shown vulnerabilityat times.
Doing business with and in other countries isvital for the growth of companies of all sizesand sectors. But in addition to businessopportunities for internationally activecompanies through trade and foreign directinvestment, exporters and investors operatein an environment characterised byheterogeneous political systems, economicconditions and cultural behaviour. When firmsexport their products and services or set upforeign manufacturing operations, they areexposed to several dimensions of risk:Political risk, commercial risk, currencyexposure as well as cross-cultural risk.Exporters often require insurance cover forpolitical and commercial risks linked to exporttransactions (Klasen, 2014). Export creditagencies are important to mitigate negativetrade effects of financial constraints due tomarket failures (Badinger and Url, 2013).Political risk insurance is a risk mitigation toolforeign direct investors regularly use.
Recognising that risk aversion and riskmitigation as the only motive is not adequate,several authors have provided a theoryfollowing evidence that firms purchasesubstantial insurance amounts (see, e.g.,Mayers and Smith, 1982). This theoreticalframework about insurance demand in generalhas been extended and tested by a number ofauthors with empirical studies on corporatedemand (see, e.g., Hoyt and Khang, 2000).However, it is still not yet well understoodwhat drives the corporate demand forinsurance due to difficulties in data availabilityand challenges in measuring the theoreticalconstructs (Krummaker and Schulenburg,2008). There is also limited evidence on thequestion why exporters and foreign investorsuse export credit and political risk insurance asan essential risk mitigation tool.
Background andresearch design Due to this researchgap, the internationalresearch projectDemand for ExportCredit and PoliticalRisk Insurance hasbeen launched in2015. The projectconducted by
researchers from Offenburg University, theUniversity of Westminster and the LondonSchool of Economics and Political Science(LSE) follows an explorative qualitativeapproach and an explanative quantitativeapproach, both informing each other. Datawere collected via open-ended interviews, viaa survey with qualitative and quantitativequestions, as well as from annual reports.Multiple rounds of qualitative data collectionvia interviews run simultaneously with thecollection of data via questionnaires. Thisempirical study was conducted with morethan 35 export credit and political riskinsurers in both public and private forms. Theselection of insurers was driven by the aim toinclude a variety of suppliers from differentcountries but also to cover both publicagencies and private commercial insurers. Itwas the intention to cover organisations fromdifferent cultural and national backgroundsbut also from more mature to young insurers.The participants of each insurer was the CEO,COO or Managing Director.
The rise of geopolitical riskGeopolitical risk is in the core of export creditand political risk insurance. The evidenceindicates that there is a strong relationshipbetween the demand for coverage against
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Demand for exportcredit and politicalrisk insuranceBy Professor Andreas Klasen, Offenburg University, and Dr Simone Krummaker, University of Westminster
Andreas Klasen
those risks and the perceived or actual risks.These findings are supported by the resultsof the survey, in which 65% of therespondents expect political risk to increase.Additionally, being asked to name the top fiveof the most important risks to the globaleconomy, the most often mentioned risk wasthe risk of geopolitical conflicts, followed by arecession in China and volatility in oil andcommodity prices. It can also be seen fromthe data that the country rating influencesthe opportunities for importers. In countrieswith lower ratings, investment and financingis more difficult and comes usually withadditional requirements. Credit export andpolitical risk insurance can alleviate some ofthese issues. Companies intend tocomplement private credit insurance with government offerings, and governmentexport credit agencies and political riskinsurers can be regarded as insurers of lastresort.
The importance of financingIn export credit and political risk insurance,the question of how the transaction isfinanced is often tightly associated with therequirement to transfer the export credit orinvestment risk to a public or private insurer.Thus, the bank which finances the transactionplays a decisive role in the demand forcoverage against these risks. The role of thefinancial intermediaries is also emphasised inthe topic of financing for SMEs. Severalstatements in the interviews describe thatexternal financing for SMEs is more difficultthan for larger companies, which often havelong and active relationships with severalbanks. Some arguments also point out, thatthe 2007/8 financial crisis has made it evenmore difficult for smaller companies to obtainsubstantial financing via banks. Statementsalso emphasise that SMEs actually wouldbenefit even more from risk transfer viaexport credit or investment insurance. Asthese companies have less expertise indealing with these instruments, financialintermediaries could take the role in advisingthe companies and to connect the financingof export trade with the financing question.
Signalling and stakeholdersThe interviews reveal that many exportersand foreign investors are concerned aboutthe impact of the risks of international tradeon the firm’s balance sheet. The key reasonhere is to avoid earnings volatility, as this is ingeneral considered to be a feature of risky
firms. This motive is closely connected withthe factors of signalling to stakeholders.Insurance is assumed to be a means ofsignalling risk of the company to markets andstakeholders, as companies with insurancecontracts will have a lower earnings volatilitydue to insurable unsystematic risk.
Regulation A further trend showing is regulation with75% expecting a high or very high impact on trade. This is also reflected in the datafrom the interviews. Tightened regulationsand rules internationally are expected tomake foreign trade for companies moredifficult and therefore will have an impact onthe demand for insurance. Both internationaland national regulatory regimes influencedemand and, in particular, higher bankingregulation negatively impacts the availabilityof small ticket loans. Preliminary results alsoshow that global standards as well asharmonised products and policies affectdemand, and national content policies play animportant role for government export creditinsurance.
SMEs as key customersOne of the most mentioned reasonsinfluencing the demand for export credit andpolitical risk insurance is the size of thecompany. According to the empirical data,company size impacts the demand throughthree main factors: Transaction cost of riskmanagement, knowledge and diversification.Another argument was that larger companieshave more weight in negotiating the terms ofan insurance agreement. Nearly all of theinterview participants mentioned that SMEshave a higher need than large corporations tocover risks associated with international tradevia insurance agreements.
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When firms export their products andservices or set up foreignmanufacturing operations,they are exposed toseveral dimensions of risk:Political risk, commercialrisk, currency exposure aswell as cross-cultural risk.
larger companies have more professional riskmanagement or finance functions. They alsohave more knowledge about markets for riskand financing products available. This factorcan also be labelled as transaction cost of riskmanagement, because the effort to build upa risk management and the relatedknowledge is not increasing proportional tofirm size. Once a growing company hasinstalled such a function, the benefits are thatmore resources and knowledge are availableto manage risks efficiently. In smaller firms,the insurance portfolio is often managed inthe finance, accounting or law departmentwithout a dedicated function. Thus, time andknowledge is limited and as a result, smallerfirms’ often not only lack sophistication butalso might let go benefits and opportunitiesof professionally organised export credit andpolitical risk insurance coverage.
TrendsBesides factors driving the demand forinsurance directly, some more subtle trendswere explored asking if and how these trendsmight shape future trade and therefore thedemand to cover related risks. In addition tofurther financial crises, the respondents areconcerned about geopolitical issues, such asshifting of power towards Asia as well asfragile multilateral relationships. Anothertrend emerging from the survey isdigitalisation. 85% of the respondents believethat this will have a high or very high impacton global trade. It emerges from theinterviews that export credit and political riskinsurers at the moment see changes comingup in how the internal processes anddistribution of their insurance products willbe made simpler and quicker. No clear pictureyet emerges about the impact ofdigitalisation on trade directly.
Preliminary resultsThe project will be completed at thebeginning of next year, but there are alreadyseveral important initial findings emergingfrom this research. Preliminary results showconcepts emerging from the data whichenrich the current theoretical landscape onfirms’ demand for export credit and politicalinsurance. The project will also haveimportant implications for a number ofparties involved in export credit and politicalinsurance. This includes private and publicinsurers, guardian authorities and policymakers. The concept of the size of thecompany, for example, does not seem to
influence the demand of insurance directly,but rather via factors which are aconsequence of size effects withincompanies. The context of financing and riskmanagement for SMEs differs significantlyfrom those 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. Companies seem to expect a level-playing-field, as well as more harmonisedproducts and policies. Furthermore, contextfactors such as the macroeconomic andgeopolitical environment are important. Asmany participants expect some of thesefactors to be more volatile in the nearerfuture, this will have an impact on thedemand for export credit and political riskinsurance. Furthermore, digitalisation is a keychallenge for the industry, and companiesexpect solutions for new and innovativeapproaches. ■
Andreas Klasen is Professor of InternationalBusiness at Offenburg University and SeniorHonorary Fellow at Durham University. As aPartner with ATRx, he advises governments,multilateral development banks andmultinational firms on strategy, innovationand process improvement. Until 2014, heserved as Vice President of the Berne Union.
Simone Krummaker is Senior Lecturer atthe University of Westminster in London anda Senior Research Associate at the Center forRisk and Insurance, Hannover. Before enteringacademia, Simone has worked more than tenyears in the insurance industry where sheheld positions such as underwriter and HRcontroller.
ReferencesBadinger, H. and Url, T. (2013) Export Credit Guaranteesand Export Performance: Evidence from Austrian Firm-Level Data, World Economy 36, pp. 1115-1130.
Hoyt, R.E. and Khang, H. (2000). On the Demand forCorporate Property Insurance, Journal of Risk andInsurance 67, 1, pp. 91-107.
Klasen, A. (2014). Export Credit Guarantees and theDemand for Insurance, CESifo Forum 15, 3, pp. 26-33.
Krummaker, S. and Schulenburg, J.-M. von der (2008).Die Versicherungsnachfrage von Unternehmen: Eine empirische Untersuchung derSachversicherungsnachfrage deutscher Unternehmen,Zeitschrift für die gesamte Versicherungswissenschaft97, 1, pp. 79-97.
Mayers, D. and Smith jr., C.W. (1982). On the CorporateDemand for Insurance, Journal of Business 55, 2, pp.281-296.
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The 2015 Berne Union statistics for the tradecredit insurance market shows an interestingtrend over 2014 and perhaps one worthy ofnote to us all. The numbers suggest that ourindustry has reached an inflection pointduring 2015 where claims have reached theirhighest level since the global financial crisisand total premiums have declined for the firsttime in some years. This backdrop isprevalent at a time where capacity continuesto enter the market according to the Arthur JGallagher Market Report which shows thatthe available market capacity in Trade Risksterms grew by some 3% over six months toJuly 2016.
These latest statistics reflect anincreasingly complex market for creditinsurers where the traditional tools fordampening losses are measured against newentrants keen to grow portfolios. This picturecontinues into late 2016 and in a persistinglow investment yield environment it is set tostay this way moving into 2017. The cocktailof outcomes will pose challenges for insurersbut also some significant opportunities.
Risk is risk…Loss activity is at its highest level since 2008,reflecting the unsettled and uncertaingeopolitical environment. The list of eventsthat has led us to where we are is endless and
truly global in itsreach. Political eventsin Brazil haveexacerbatedeconomic pressuresand vice versa. TheMiddle East andNorth Africacontinues todominate theheadlines where the
rise of ISIS, the threat of terrorism, massmigration and complicated social andpolitical allegiances put problem-solving onthe difficult to impossible scale of plausibility.
The frozen issue that is Ukraine and Russialingers. Turkey is clearly undergoingfundamental restructuring in social andpolitical terms that will clearly resonate intothe economy. The doubts over the Chineseeconomy persist and that feeds itsnervousness into an already affectedcommodity market. The South China Seaterritorial disputes rumble onwards and NorthKorea seems intent on developing its nuclearcapability.
The migrant issue in Europe, as well ascurrency union, continues to tax itspoliticians. “Brexit means Brexit” but at thisstage no one can say what it actually means.The USA also goes to the poll booths with acampaign that is as divisive as living memorycan serve. Against this backdrop it is littlewonder that smaller news items like the India-Pakistan peace talks breaking down,Venezuela, and South African political andsocial instability, struggle to capture thelimelight.
Other substantive issues that often fail tograb the headlines include climate change,growing wealth inequity, the end of theliberalism, the lack of trust in institutions aswell as a lack of faith in expert opinion. It isfascinating that Dun & Bradstreet, in theirGlobal Bankruptcy Report 2016, suggestedthat their Global Risk Index has worsenedwith 92 countries out of 132 having a worserating than at the start of 2008.
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2016: The tipping pointBy William Clark, head of UK Trade Credit at AIG
William Clark
Available market capacity – July 2016
(Total possible maximum USD million per risk)
2,059
2,500
2,000
1,500
1,000
500
0
CA
PAC
ITY
Project Risks (CEN)
Trade Risks Political (CF)
Trade Risks Commercial (CR)
Financial Guarantee (FG)**
CompanyLloyd’s
1,380
1,954
1,350
1,704
835933
352.5
RISK TYPE
Source: AJG CPRI market update for July 2016
It is little wonder therefore that ourindustry has seen a significant pick-up inlosses but its probably fair to say that theselosses are not in the same shape or form asthey were during the crisis of 2008. If thefinancial crisis largely impacted thedeveloped economies then the commoditycrisis has impacted the developing ones.Berne Union statistics show that short-termcredit insurers paid $2.58 billion in claims in2015, up from $2 billion in 2014, withsignificant increases in claims paid in marketssuch as Brazil, Russia, Saudi Arabia, HongKong and Mexico.
Moving into 2016, the larger insurers havereported increases or at best flat trends intheir loss ratios, reflecting the increase inboth claims frequency and severity in anumber of markets. The Association of BritishInsurers notes a surge in the number ofinsureds claiming on their trade creditinsurance policies, with £150 million paid outfor customer insolvency or late payment lastyear, a 42% uplift. The ABI concludes that UKbusinesses continue to face risks witheconomic volatility in many export markets.
What is important to note, however, is thatthese losses are not at the level of 2009 and2010. Insolvency rates in many markets areseemingly benign driven by low inflation, lowinterest rates and low energy prices with theexception being those allied to commodities.Insolvency trends are not expected to changematerially in 2016 but the usual healthwarnings have been put out that this couldchange as governments struggle to findeconomic levers that will grow theirrespective economies.
Its all about trade…While the market has experienced growth inthe overall number of policyholders, at thesame time there has been a decrease inglobal premiums. Of the total businessvolume, Berne Union stats show a drop inshort term export credit insurance between2014 and 2015 to $1.6 trillion, down from $1.7trillion. Medium and long-term export creditinsurance for periods in excess of one-yearamount to over $154 billion, down from $166billion in 2014 and new transactions ininvestment insurance (INV) was down to $97billion, from $99 billion in the previous year.
To some extent this year-on-year declinecan be attributed to reporting changes froma large Berne Union member, which hassomewhat distorted this year's results.Seeking to exclude this factor however, it is
difficult to believe that this decrease can beattributable to a reduced risk outlook.Perhaps part of the explanation lies in thefact that there has been an overall drop inglobal trade volumes.
World Trade Organisation figures showthat exports shrank by over 10% in 2015,largely fuelled by a 45% decrease in worldenergy prices. What is interesting to note isthat the last negative figure posted in worldtrade terms was in 2009. More interestinglystill is the fact that this figure is against the
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ST New Business – insured during each year
Source: Berne Union statistics
ST Credit Limits 2015 – top 10 countries
Source: Berne Union statistics
backdrop of anaemic and shrinking growthnumbers since 2012.
According to the WTO, growth is set toremain sluggish in 2016 at 2.8%, unchangedfrom the 2.8% increase in 2015 as GDP easesin developed economies and picks up indeveloping ones, and as a result of low oiland other commodity prices. Its fair to saythat our industry is unlikely to receive anypremium dividend in 2016 based on worldtrade volumes or prices.
There is however euphoria in the market,driven by excess capital and downwardpressure on rates in other classes ofcommercial insurance/reinsurance and assetclasses. This has resulted in a surge in playersentering the credit space and increasingcapacity and available limits.
There are currently over 50 credit marketsin London whereas five years ago there wereless than 30. Another factor is the transitiontowards excess of loss (XL) products andsingle risks where "shared risk" relationshipsare becoming prevalent. This has naturallylowered barriers to entry.
Beyond the tipping point…Given the more challenging operatingenvironment the pressure is on for theinsurers not only to add more capacity but toremain committed to the line, as well ascontinue to innovate and attract newpolicyholders. There is a recognition that theindustry also needs to continue to work on
rebuilding its reputation following thefinancial crisis. It is clear that many clientswere lost to our market after 2008 and thetrade credit insurance market that emergedfrom the crisis set a tone.
What has become apparent over the lastsix to seven years is that customers havemade clear their issues with the product andasked for more certainty. Whole turnoverinsurers' right to reduce or cancel the creditlimit on a buyer at any time was exercisedfrequently during the downturn as carrierssought to react to buyers' credit problemsbefore they worsened. The consequence ofthis led to the growth of non-cancellablelimits as well as limit withdrawal noticeperiods. This has offered insureds morecertainty of cover and greater transparency.
Certainly the growth of XL products hasseen a growing cooperation betweenpolicyholders and insurers. Insureds aredemonstrating a more sophisticatedapproach to risk management and, inexchange for a robust programme, awillingness to retain their slice of risk.
There is also a growing relationship withthe banks and commodity traders wherethere have been significant changes to policywording and risks that have yet to beproperly tested. Early signs suggest thisevolution has not always been to the benefitof credit insurers ... or indeed the banks ortraders. Our experience in this space over thenext year or so will be a journey of changeand opportunity.
The next step as the credit insurancemarket continues its evolution of productsand services is how we use technology. It willmove from a policy support tool to an omni-channel, client concentric distribution tool.For some of us it would be comforting to feelthat this is some way off. However, the arrivalof supply chain finance businesses thatprovide capital as well as technology tocontrol and, importantly, initiate risk is fullyup and running.
Blockchain is widely canvassed as the nextbig thing and it could prove to be aconsiderable source of disruption asapplications are developed for trade finance.HSBC, Bank of America Merrill Lynchtogether with the Infocomm DevelopmentAuthority of Singapore are among thosecurrently focusing their attention onautomated letter of credit transactions andbeyond. For credit insurers today suchdevelopments need to be in the SWOTanalysis boxes of threat and opportunity. ■
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ST Claims Paid – during each year
Source: Berne Union statistics
The impact of digitalisation is widelydiscussed in all lines of insurance. What is theimpact for credit insurance?
Let us take a look back, what has shapedand influenced the short term creditinsurance industry in the past 20 years? Alarge consolidation and an extension to aworldwide scope took place. In 1995 everycountry had two to three national creditinsurance companies with limitedinternational scope and only a looseworldwide network to exchange information.Credit limit decisions on overseas buyers tookseveral days.
Nowadays the industry has three largeinternational players and a number of highlyspecialised niche market insurers. Today’scommunication with customers and brokersis performed by email and online exchange oflimit requests, decisions and assessments ofthe buyers. Competition is fierce and everyplayer is fighting for market share viaexcellence in service.
Digitalisation will take communication to anew level. Clients expect more informationabout the credit limits of buyers and on themarkets of the buyers. Access to thisinformation must be any time, and at theirconvenience.
In an environment of the ‘internet ofthings’ or industry 4.0 as it is called in somemarkets, we see a new level of connectivity
between companies.Machines and robotswill communicate toeach other. It will beimportant for thecredit insuranceindustry to findsolutions toparticipate in thisdevelopment. Theconnection to this
new mode of communication will be animportant component of future success.
In today’s world, credit insurers havealready established direct links betweenclients’ CRM systems and their own systems.An individual exchange of credit limitrequests is no longer required. Once the CRMsystem identifies the need for an increase inany credit limit, the information is exchangedautomatically via the online link withouthuman intervention. This way of exchanginginformation needs to be developed further.For the moment, connection to mobiledevices for example is only at an early stageand could be a major field of development forthe future.
Modes of payment may also change in thefuture. There are already some companiestransferring money not only in the traditionalway via banks, but by using blockchaintechnology. This way to transfer money
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Digitalisation: One aspectof the future of short termcredit insuranceBy Olaf Lipinski, regional director risk management, Euler Hermes World Agency
Olaf Lipinsk
Digitalisation will take communication to a new level.Clients expect more information about the credit limits of buyers and on the markets of the buyers.Access to this information must be any time, and attheir convenience.
purely via the internet is just one example ofthe array of emerging trends, and the creditinsurance market needs to understand thisnew way of payment in order to developsolutions that fit into this new environment.
New developments and technologies donot only require new methods ofcommunication with clients, but also newproducts. Besides today’s whole turnoverpolicies, the market for the cover of singletransactions will develop and grow into alarger share of the total market. Singletransactions, however, require new anddifferent pricing models. Managing theconcentration of risks is far more challengingwith a bigger market share of singletransaction cover in the short term creditinsurance market.
In the world of the ‘internet of things’ newsources of information are available, meaningthat new connectivity opens the door for newinformation on market participants. This willchange the way credit insurance assessescompanies. In today’s world, credit insuranceplayers have developed a first-rate system toassess balance sheets, payment records,market sectors and country developments.All credit insurers make great efforts togather this information and assess the data.The data is stored in a systematic way toallow the combination of automatic andmanual assessment. The final assessment isexpressed in a rating scale whose quality isverified by the probability of defaults. Alreadytoday this information adds up to a hugedatabase.
In the future the importance of thedatabase will increase even further.Alternative databases and assessments ofcompanies outside the credit insuranceindustry might appear. But the strengths ofthe credit insurance industry lie in the longtrack record of interpreting the data andexplaining the results to customers. Newalgorithms are developed outside the creditindustry, but an algorithm without expertinterpretation will not satisfy the demands ofour clients.
Although today’s databases are impressivein size, this will not be sufficient for therequirements of the future. The key tosuccess lies in the combination of exploring
new data sources by taking the opportunitiesof the ‘internet of things’. In order to developnew algorithms in addition to today’sassessment and explaining the results to ourcustomers. Big data analysis gives newopportunities in the assessment of data,which needs to be integrated in the existingassessment systems.
All these challenges require investment innew technology and products. Most of thesetechnologies are at an early stage ofdevelopment, quite a number will fade away,
and only a few will set new standards. Whocan say today, which role blockchaintransactions will be used five years fromnow? How big will the market share be? Orwill it already be replaced by a differenttechnology? The players in the market haveto decide and allocate resources in thedevelopment of technologies withoutknowing if these technologies survive thenext decade.
The credit insurer who is the first to findsolutions for communication with the clients,develops new products and pricing schemes,and makes advances in big data analysis willhave a competitive advantage over its peers.In a world of ever faster changingtechnologies, however, this competitiveadvantage might not last for long.
Players in the market need to find ways toallocate their resources efficiently inresearching different technologiesconcurrently. The key to sustainable successwill be a constant review of the progress ofdifferent technologies, paired with fasterdecision-making to invest in newtechnologies, and discontinue old orunsustainable technologies.
This is definitely an interesting challengefor our industry. ■
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In a world of ever fasterchanging technologies,however, this competitiveadvantage might not lastfor long.
New developments and technologies do not onlyrequire new methods of communication with clients,but also new products.
The availability of trade finance is essentialfor a healthy and well-functioning tradingsystem. Up to 80% of global trade issupported by some sort of financing or creditinsurance. Global and regional surveysundertaken by the ICC, the AfricanDevelopment Bank and the AsianDevelopment Bank, have pointed to theexistence of relatively large gaps in provision,particularly in developing and emergingeconomies where trade is growing at thefastest rate. Total trade finance gaps areestimated to be $1.6 trillion, of which $700billion is in developing Asia. Gaps exist in allcontinents, including in Europe.
Other surveys, emanating in particularfrom business organisations (WorldEconomic Forum), emphasise that in regionssuch as Africa, the Caribbean or for PacificIslands, lack of access to trade finance isviewed as the number one or twoimpediments to exporting. Without tradefinance, opportunities for trade, growth anddevelopment are missed. Small and medium-sized enterprises are particularly affected,while larger companies are benefitting fromthe extra-liquidity provided by quantitativeeasing policies of many central banks.
This is a time to act: first, trade is adynamic process, in which labour-intensiveindustries are regularly reallocated in newparts of the world, depending oncomparative advantage. Garment factoriesrelocate to countries such as India,Bangladesh, Vietnam, Myanmar and reachingto Ethiopia and Rwanda. The frontiers of
international trade areexpanding. New linksinvolve new players,investors, and traders.It also requires tradefinance.
At the same time,global financialinstitutions haveshown less appetiteto do business in
developing countries since the globalfinancial crisis of 2009. A large number ofcorrespondent banking relationships havedisappeared. Local banks and non-banks indeveloping countries are not always in aposition to fill the gaps, although in themedium-run, one could expect markets to clear.
In the meantime, there is a particularconcern that SMEs in developed anddeveloping countries – particularly in thedeveloping ones, face lasting challenges intheir integration into global trade. SMEs areknown to be leading drivers of trade,employment and economic development. Indeveloping countries, the few alternatives tobank financing such as inter-companylending and factoring may simply not exist. Trade credit insurance may not beavailable, and the legal framework forfactoring may not be in place. As a result,when a bank reject requests for tradefinance, SMEs may be left with no alternativebut to pay its trade cash, go informal, or findanother second-best solution – sometime
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The challenge of the trade financefunding gapBy Marc Auboin, counsellor for trade and finance, WTO
Marc Auboin
Without trade finance, opportunities for trade, growthand development are missed. Small and medium-sizedenterprises are particularly affected.
the transaction is just forgone.Action is needed to address these
financing gaps. This was highlighted in theUN's Financing for Development Agenda. TheWTO Director-General has been issuing areport (Trade Finance and SMEs, available atwww.wto.org) looking at these issues indetail. It brings together the recent surveysand research to highlight the scale andgeography of the gaps in trade financeprovision, considers the actions currentlybeing taken and outlines potential futureaction.
These actions includes, along with WTOtraditional partners in trade finance:
Enhancing existing trade financefacilitation programmes to reduce thefinancing gaps, from $30 billion currently to$50 billion. Trade finance facilitationprogrammes were never designed toeliminate all market gaps, but they allowSMEs and their banks locally to engage ininternational trade, thereby building capacityand experience. The WTO director-generaltarget is inspirational but achievable.
Reducing the knowledge gap: we knowthat part of the financing gap reflects theknowledge gap which exists regarding theuse and knowledge of trade financeinstruments, be they funded instruments,guarantees, credit insurance. Local financialinstitutions may lack the human and risk-taking capacity. Professional organizationsfrom the private sector should step up theircapacity-building activities. The Berne Unionmay support this effort – similar to FactorsChain International stepping up training infactoring, and multilateral development bankscontributing courses to the newly establishedInternational Chamber of Commerce's (ICC)Academy. The objective in the WTO report isto train 5,000 qualified trade financeprofessionals, in particular in developingcountries. Berne Union members maycontribute to this objective, and developcourses and training reflecting the specialneeds of the credit and investment insuranceprofessional. This collective effort is notabout training bankers, company treasurersor any other category of operator, but aboutteaching the best practices (techniques,
instruments, regulation, fintech, etc.) in eachsegment of the profession of supportingfinancially international trade.
Maintaining an open dialogue with tradefinance regulators to ensure that anddevelopment considerations are reflected inthe implementation, and eventually design, orregulations.
Improving the monitoring of tradefinance provision. We need to improve themonitoring of trade finance provision toidentify and respond to gaps, particularlyrelating to any future crisis. The WTO willcontinue to support ongoing efforts of the
ICC and Asian Development Bank. The BerneUnion may continue to work with otherorganisations in gathering data, facts andanalysis, which may support policy decisionsduring crunch times.
Strong inter-institutional dialogue andcoordination will be required to take suchaction/initiative forward, including with theBerne Union.
On trade finance, the WTO and its partnershave the flattering reputation of being able todeliver. Since 2009, the various actors,including the private sector (Berne Union,ICC, Factoring International), multilateraldevelopment institutions, and the WTO havebeen meeting in a consultative group, theexpert group on trade finance, to discussareas of potential cooperation. Under thisnew WTO-led initiative, let us hope that theBerne Union keeps the same level ofmobilisation and partners with the WTO withnew ideas and projects. ■
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The frontiers of international trade are expanding. Newlinks involve new players, investors, and traders. It alsorequires trade finance.
Part of the financing gapreflects the knowledgegap which exists regardingthe use and knowledge oftrade finance instruments,be they fundedinstruments, guarantees,credit insurance.
In today’s economy, access to global marketsis essential for small- and medium-sizeenterprises. Businesses are increasinglyspreading their risks across regions andunlocking flexibility to capture demand aseconomic conditions shift. The Export-ImportBank of the United States (Exim Bank) equipsAmerican exporters with the protection andliquidity to enter new markets and diversifytheir portfolio of customers. When UScompanies or their customers are unable toaccess export financing from the privatesector, Exim fills the gap by furnishingAmerican businesses with the tools necessaryto compete for global sales
At Exim Bank, we recognise that smallbusinesses form the bedrock of the Americaneconomy. In fact, according to the SmallBusiness Administration, small businessescreate two out of three net, new private-sector jobs in the United States and employhalf of the domestic workforce. Smallbusinesses are therefore critical to what Exim does.
Exim Bank authorised more than 2,300transactions in financing and insurance forthe direct support of American small businessexporters in FY 2015, not including supportfor small businesses in the supply chains oflarger exporters. This represented nearly 90%of Exim Bank’s total transactions and morethan $3 billion in dollar volume.
Yet companies can only leverage Eximsupport if they are aware of our menu ofproducts, which is why we’ve redoubled ourefforts to bolster understanding of andaccess to Exim Bank’s trade finance solutions.Through digital outreach and on-the-groundregional support, we’re educating Americanexporters more than ever on how Exim Bank can:
Mitigate the risk of foreign buyernonpayment, empowering firms safely tooffer competitive credit terms.
Unlock workingcapital, allowingbusinesses toadvance againstexport-relatedinventory andaccounts receivable.
Make possible term financing forforeign buyers of US-made capital
goods to meet customer demand.
Digital outreachAs the information journey forbusinesspeople has evolved, so has EximBank’s outreach. Over the past two fiscalyears, we’ve forged a significant digitalpresence to educate small Americanbusinesses and connect exporters andexporters-to-be with on-the-ground supportand expertise.
We do this by offering digestible digitalcontent covering the fundamentals of tradefinance and Exim Bank support. This contentprimarily assumes the form of eBooks, “Howit Works” videos, checklists, and so on. Wehost webinars for industry- and geo-specificaudiences. We’re active on social media,where we’ve increased our follower base by116 percent over the past two years. Byreaching a broader audience and makingtrade finance more accessible, interactive,and understandable, we can better supportthe international growth of American smallbusinesses and connect them with theappropriate solution, whether from EximBank or the private sector.
Throughout our digital interactions withAmerican exporters, we’ve also madeavailable clearer paths to consultations withExim Bank experts. Accessing governmentsupport should be easy. We’re striving to beas available, responsive and helpful as 115
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Small business is bigbusiness for US Exim BankBy Jim Burrows, senior vice president of small business, US Exim Bank
Jim Burrows
possible to the small business community.Our local Exim Bank specialists promptlyrespond to online requests for exportconsultations. More than 100 of our new smallbusiness customers this fiscal year firstconnected with our team digitally.
Finally, we’ve ramped up digital outreachto multiplier networks such as economicdevelopment organisations, partner agencies,chambers of commerce, lenders and brokers,all of which are often critical steps in anexporter’s path to support. The better weserve the community that interacts with ourend user, the more we can grow Americanexports. To that end, we’ve created a “DigitalToolkit” (http://grow.exim.gov/digital-toolkit)to equip these entities with illustrative tradefinance content.
One of the true pleasures of my work isthe excitement from exporters learning of oursupport for the first time – observing therealisation that a deal once thoughtimpossible, a deal that could grow thebusiness and make a meaningful impact onthe company and its employees, is nowwithin reach. Our digital presence is makingmore of these moments possible, and we’relooking forward to expanding the projectsand the conversations.
Local support for small, AmericanexportersEven in the digital age, small businesses needon-the-ground, face-to-face support availablein their backyard. Our 12 regional offices,strategically located throughout the country,are dedicated to providing just that supportand education exclusively to small businessesat no cost. Offices are staffed with seasonedtrade financiers, many of whom haveextensive international and corporate bankingexperience – they’ve seen it all, and no deal istoo small. If a company is exporting US-madegoods or service, our team is there to help.And if Exim isn’t what the company needs,we will point it in the right direction.
We’re continuing our efforts to growexports from US small businesses throughour Global Access Forum events each year.The events familiarise US companies andfinancial institutions with US governmentfinancing and insurance programmes. Localeconomic development organisations;national industry groups; and a wide varietyof business, financial, and governmentalpartners help bring these resources intocommunities across America. The forums aretown hall discussions – often co-hosted by
members of Congress, the Department ofCommerce, SBA, the US Chamber ofCommerce, and local officials – which providesmall companies with insights from existingExim Bank customers and information on US
government tools that can equip them toaccess foreign markets. Exim Bank recentlymarked the fourth anniversary of its firstGlobal Access Forum for Small Business,having hosted 93 forums since launchingJanuary 2011.
To strengthen our relationships with thelocal organisations that foster small businessgrowth across the country, we recentlylaunched our Regional Export PromotionProgram (REPP), a joint effort between EximBank and regional organizations with a viewto stimulating US export sales. REPP seeks tobuild on Exim Bank’s regional outreachthrough increased joint marketing and theprovision of tailored content, dedicated call-center support for members, a new onlineportal and lead referral system, as well as anewly streamlined and automatedonboarding process. Organisations eligiblefor membership include local, regional, orstate economic development organisations,or World Trade Centres that assist smallbusinesses.
Small businesses fuel American job growthand prosperity. Many powerful governmentresources are now available to support theirexpansion, but an “if we build it, they willcome” approach simply isn’t enough. That iswhy we at Exim are working every day, on theground and online, to start conversationswith small businesses about boosting that jobgrowth and prosperity. ■
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At Exim Bank, werecognise that smallbusinesses form thebedrock of the Americaneconomy. In fact, accordingto the Small BusinessAdministration, smallbusinesses create two outof three net, new private-sector jobs in the UnitedStates and employ half ofthe domestic workforce.
AOFI is the official export credit agency ofthe Republic of Serbia established for thepurpose of export promotion anddevelopment of foreign economic relations.Our aim is to strategically improve businessconditions for the Serbian export-orientatedeconomy and overall promotion of theexports of Republic of Serbia.
Exports play an important role in theSerbian economy, influencing economicgrowth, employment and the balance ofpayments.
Small and medium-sized enterprises(SMEs) and entrepreneurs are recognised asthe backbone of the economy and a keysource of economic growth, dynamism andflexibility in advanced industrialised nations,as well as in transitional and developingcountries, such as the Republic of Serbia. TheSME sector in the Serbian economy accountsfor the largest number of active companies,portion of GDP, total exports and imports,and for the majority of employment.
Due to the fact that the world financialcrisis had adversely effected the alreadyvulnerable SME sector in Serbia, thegovernment set up a policy framework forSMEs, providing assistance through businesssupport instruments, with a particular focuson which problems they were to address, and
the way theinstruments aredelivered.
The government ofthe Republic of Serbiarecognised theimportance of SMEsector, especiallyexport-orientedcompanies, for thedevelopment of our
economy. The year 2016 has been proclaimedas “The year of entrepreneurship” and thegovernment has adopted a strategy tosupport the development of SMEs,entrepreneurship and competitiveness for theperiod from 2015 to 2020.
Despite the important role of SMEs, whichis even more emphasised in times of crisis,the sector is facing significant problems whenobtaining necessary financial resources andmaintaining liquidity.
It is of great importance for Serbia tosecure the development of the SME sector asthis will primarily determine the furthercourse of the Serbian integration into theEuropean Union.
AOFI, as one of the instruments of theSerbian government to boost thecompetitiveness of Serbian exporters in
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Small business support: AOFI’ssupport to the development ofSMEs, entrepreneurship andcompetitiveness in the Republic of Serbia
By Dejan Vukotić, chief executive officer, AOFI
Dejan Vukotić
Small and medium-sized enterprises and entrepreneursare recognised as the backbone of the economy and akey source of economic growth, dynamism andflexibility in advanced industrialised nations, as well asin transitional and developing countries, such as theRepublic of Serbia.
foreign markets, recognises that providingsupport to the SME sector is crucial both inachieving one of strategic aims for AOFI, andmeeting the adopted strategy for SMEs andcontributing to the overall goal of the Serbiangovernment.
There are several services in AOFI'sportfolio by means of which we are able toprovide support to the SME sector. In thedomain of financing we provide: directlending, guaranteeing and factoring services.In the insurance domain we provide: short-term insurance against commercial risks, andwe are currently developing medium to long-term insurance services.
Being familiar with the needs andobstacles SMEs face, AOFI took steps toassess the sector before we were ready tooffer modified services specific to SMEs.Some of them were: to make our serviceseasier to use; to react promptly to requestsfrom SMEs; and make sure our employees areinformed and prepared to appropriatelyhandle customers. So far, our services are wellrecognised by SMEs.
Case studiesHere are three examples from our practice forprovided support to SMEs:
1. ST insurance against commercial riskAn SME approached us requesting exportcredit insurance. The company belongs to themetals industry, and was established in 1992with 31 employees. The core business of thecompany is the trade of iron in domestic andforeign markets, and the manufacturing ofiron products.
The company had the opportunity to signan export contract with a foreign businesspartner. However, the problem for successfulrealisation of the project was insufficientfinancing capacity. AOFI considered theclient’s situation and proposed providing
short-term export credit insurance to be usedas collateral to the bank to obtain thenecessary funds to finance the deal.
The client submitted the request forinsurance and we researched the buyer, aSwedish company that manufactures wireproducts, chains and springs, with 100%ownership of five affiliates worldwide. Two ofthe affiliates are based in Balkan region.During the process of issuance of the policywe found out that the client will delivergoods to two affiliates of the buyer based inour region. We assessed those two affiliates.Unfortunately, neither of them had sufficientcreditworthiness. We made additional effortsin order to support the client and decided tocover the risk with a guarantee from theSwedish owner.
The client achieved a turnover from €1.8million in 2015, out of which exportsamounted to €15,000. Now, with the businessAOFI supported, the client will realise theproject totalling €1.2 million which willsignificantly increase the turnover of theclient.
The recognised needs of the client in aproper and prompt way by AOFI led torealisation of the contracted business. Theissuance of the policy impacted the increaseof the volume of export business not only forthe client, but also for AOFI and overall forthe Serbian economy.
2. GuaranteeingThis company was founded in 2007 inBelgrade. It is 100% owned by a privateindividual. The company is engaged in hydro-works, recording the current status, repairand construction of projects. Much of theconstruction is on water, under the water, orin hazardous or inaccessible areas.
In April 2015 the company concluded aconstruction contract with a foreign investorin Montenegro, to carry out construction
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The government of the Republic of Serbia recognisedthe importance of SME sector, especially export-oriented companies, for the development of oureconomy. The year 2016 has been proclaimed as “Theyear of entrepreneurship” and the government hasadopted a strategy to support the development ofSMEs, entrepreneurship and competitiveness for theperiod from 2015 to 2020.
works in a Montenegrin marina, a part of thePortonovi Resort Village. The total contractedvalue of the transaction amounts to €19.5million. For the implementation of the work a
subsidiary was established in Montenegro. Inthis business, both companies were actingtogether as one contractual party. The worksshould be completed by mid-October 2016.Payment shall be made monthly, for worksexecuted before the 25th of the previousmonth.
In order to perform the marineconstruction works, the company wasrequired to provide a performance guaranteein the amount of €1.9 million, which wasissued by a bank. AOFI issued a counterguarantee in the same amount, thus allowingfor the contracted works to commence.
Until the end of first half of 2016, bothcompanies performed and invoiced nearly85% of the works, approximately €16.4million. Out of that amount the companiescollected €14.3 million. The majority of theworks were realised in 2016. During 2015, theworks carried out valued €2.8 million, while inthe first half of 2016 the amount of the workscarried out was €12.7 million.
Through the realisation of the project, theSerbian company realised the export ofservices (construction works) amounting to€1.4 million, six times higher than thecompany’s 2014 exports. Indeed the companybecame predominantly an exporter, withexports amounting to 80% of total turnover.For the period from 1 January 2016 to 30June 2016 the exported services amounted to€1.7 million which exceeded the level of totalexports in the previous year. The realisation ofthe project resulted in the growth of thecompany's turnover in 2015 to RSD 230.9million (€1.8 million) representing growth of70.5% compared to 2014, with an increase in
EBITDA margin to 33.8% in 2015, whileEBITDA amounted to 29.4% in 2014. Realisedturnover for the first half of 2016 reached thelevel of turnover at the end of the last yearand amounted to RSD234 million (€1.89million).
The implementation of the project involvedhiring an additional workforce, which resultedin both companies engaging 134 workers inorder to complete the contracted works.Prior to the conclusion of the contract therewere 15 employees.
3. LendingThe business activity of this AOFI client is theproduction of equipment for the distributionof electricity and equipment for electricenergy management. It was founded 1992with 100% private capital. The company isengaged in the production of mediumvoltage disconnectors.
With continuous innovation and significantinvestments in development, the clientintroduced in its production program polesubstations, medium voltage disconnectors,modern composite insulators for networks ofmedium and high voltage, etc. All productsare made out of high quality materials, testedby both domestic and foreign institutions.The company was selling the majority of itsproducts domestically, while exportsaccounted for 20% of its turnover.
Having recognised the export potential ofthe client, AOFI supported the client’sbusiness in Tanzania in 2014. The dealincluded the delivery of silicon insulators. Thevalue of the contract was over €2 million.Since the client needed funds for therealisation of the export business, AOFIapproved a short-term loan in the amount of€900,000.
AOFI’s support saw company turnoverincrease by 111%, from RSD242 million (€2.1million) in 2013 to RSD512 million (€4.23million) in 2014. Export revenue grew from€450,000 in 2013 to €2.2 million in 2014.Company profits grew from RSD23 million(€200,000) to RSD106 million (€876,395) in2014. The share of exports in total turnoverincreased to 50%.
Based on our experience and theassessment of the needs of SME sector, wefound out that the critical precondition is toensure proper communication with clients,understand the day-to-day obstacles theymeet, provide simplified access to servicesand offer them the most appropriate servicein a timely manner. ■
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Despite the important roleof SMEs, which is evenmore emphasised in timesof crisis, the sector isfacing significant problemswhen obtaining necessaryfinancial resources andmaintaining liquidity.
The moment of completion is always the highlight of any technological project. To successfully
export skilful engineering needed in projects like these, German and European industries trust
the experts at KfW IPEX-Bank. We have been off ering our partners individually structured
long-term fi nancing solutions for over 60 years. We know our customers, their countries and
industries. They can rely on us from start to fi nish – from the idea behind it all along the entire
development process to its global marketing. For further information about our bank and
more special moments, visit us at www.kfw-ipex-bank.de
∆Constructed. Financed. Exported.
Iran suffered massively from the economicsanctions imposed by the United States andthe European Union. The Iranian oil and gasindustry was especially badly impacted, withoil revenues collapsing from approximately$118 billion dollars (2011) to around $42 billion(in 2013).
For more than 10 years of doubts and longnegotiations about the non-military purposeof the Iranian nuclear programme, the UNSecurity Council (USA, Russia, China, France,Great Britain) as well as Germany, Iran andthe EU, agreed in the summer of 2015 acomprehensive plan to end the dispute, andsigned the so-called Joint ComprehensivePlan of Action (“JCPOA”).
The aim is to prevent the possibleconstruction of an Iranian nuclear bomb andto ensure the exclusively peaceful use ofnuclear energy in Iran. The Islamic Republichad to reduce their centrifuges to around6000 and to reduce the stocks of enricheduranium drastically.
In January 2016, the International AtomicEnergy Agency (IAEA) confirmed that Iranhas taken first steps to dismantle theirnuclear programme. This automatically led tothe so-called “implementation day”. In aconsequence several sanction relaxationstook place, as agreed in EU resolutions of2015. However, the sanctions are only partially
lifted. A series ofsanctions, includingfor example the saleof heavy weapons,still remains in placefor a few years.
While the EUsanctions against Iranwere eased, the USsanctions must still beobserved. Those trade
restrictions for US persons or non-US personswho are “owned or controlled by a USperson” continue to exist – with a fewexceptions.
When it appeared that after a long periodof negotiations the sanctions would be eased,many exporters intensified their sales effortsin order to get a head start with importantcontracts. Without sanctions, Iran will onceagain have access to many industrial goodsand freely be able to sell oil on the worldmarket. Many Western countries are waitingto be able to do business with the IslamicRepublic again.
Following the European Union’s ease oftheir Iran-sanctions earlier this year, severalECAs have reactivated their cover policytowards Iran. At the same time, banks havestarted their business again. This began withIran’s connection to SWIFT and continued
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The opportunities andchallenges of Iran'spost-sanctions eraBy Michael Sobl, trade & export finance, DZ-Bank
Michael Sobl
While the EU sanctions against Iran were eased, the USsanctions must still be observed. Those traderestrictions for US persons or non-US persons who are"owned or controlled by a US person" continue toexist – with a few exceptions.
with trade finance products, such as simpleremittances, document collections, letters ofguarantee (LGs) and letters of credit (LCs). It has to be mentioned, that there are bigpolicy differences between the banks. In thepast some banks were severely punished andthus are reluctant to do any business in Iranat all. Others more actively promote theirdelivery capability.
The most significant barrier continues tobe the remaining US sanctions. This leads to acertain dilemma for banks to follow theEuropean rules on the one hand, while theyalso have to obey to the US rules. This cansomehow be compared to the Helms-Burtonact vs. several EU resolutions that doingbusiness in Cuba made difficult. But that isanother topic.
With the above mentioned trade financeproducts the banks do not yet satisfyexporters’ needs. What is needed is takingIran risk. That would mean confirming LCsand to provide ECA-covered loans. So far, nobanks have established significant credit linesfor Iran. As long as no lines are established,no ECA facilities would be feasible.
Initial transactions would be limitedprobably to country risk assets, meaning astate guarantee to be issued by the Ministryof Finance would be necessary. In such a casethe MoF could divert transactions to specificindustries. Most likely that will beinfrastructure.
Meanwhile some third-country banks openLCs in favor of EU-banks, which they in turncan confirm. However, such transactions mustcomply strictly to the requirements that stillremain, since even the EU sanctions have notbeen lifted completely.
One of the biggest fears is still the factthat the so-called snap back clause couldenter into force. This clause has beenincluded in order to reactivate possiblesanctions, if Iran would disregard for examplerestrictions with regard to their nuclearprogram.
An eight member panel (called the JointCommission) has been created, to serve as adispute resolution mechanism. The members
of the panel are the five veto-wieldingmembers of the Security Council, plusGermany, Iran and the European Union. If amajority (5) finds Iran to be cheating, theissue is referred to the Security Council. Nosingle country has a veto. The language ofthe nuclear deal says that the vote in theSecurity Council would not be to reimpose
sanctions. Rather, the Security Council mustdecide whether or not to continue lifting thesanctions. And if they fail to do so, the oldsanctions would automatically resume after30 days (snap back).
This framing obviates the prospect of aRussian veto, and it all but assures that if theWestern countries believe that Iran ischeating, sanctions will automatically be re-imposed. Such a snap back provision couldlast for 10 years. It is understood that the snapback would not affect contracts agreedduring the period where no sanctions applied.
It also has to be noted that due to adecade of financial and economic isolation,the Iranian banking system also sufferedimmensely. Besides fundamental economicchallenges, basic banking problems – such ascorruption, a “high” percentage of non-performing loans, weak central bank liquidityand illiquidity of banks, banks’ inability tofollow modern standards for financialdisclosure, taxation, capital requirements anddue diligence – have still to be resolved. Notsurprisingly, foreign banks are not rushinginto Iranian markets at the rate manyexpected. ■
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One of the biggest fears is still the fact that the so-called snap back clause could enter into force. This clause has been included in order to reactivatepossible sanctions, if Iran would disregard for examplerestrictions with regard to their nuclear programme.
Following the EuropeanUnion's ease of their Iran-sanctions earlier this year,several ECAs havereactivated their coverpolicy towards Iran. At thesame time, banks havestarted their business again.
Eight months after the implementation of theJoint Comprehensive Plan of Action (JCPOA)on 16 January 2016, Iran’s oil sector has beenable to regain access to some of its marketsin Asia and Europe. According to the officialreports, Iran’s oil export to Asia in June 2016has doubled since the previous year, reachingits highest level since 4.5 years ago
China, India, Japan and South Korea havein total imported around 1.7 million bpd inJune 2016 and Iran’s oil exports to the Asianemerging markets is expected to increase inthe coming months. Although the issue ofvolatile oil prices is still a serious concern forthe oil exporting countries, the success of theOil Output Freeze plan will make acontribution to bringing back the stability.
On the other hand, the governmentauthorities have made considerable progressin restoring macroeconomic stability underdifficult circumstances. As a result, inflationhas declined from 45% in 2013 to around 8%in 2016, the foreign exchange market hasstabilised, and some key reforms have beeninstituted. In addition, the country's economicgrowth has reached 4.4% in the first quarterof the Iranian current calendar year (20March 2016- 20 June 2016) comes from therecession of 2012 and 2013 caused by thesevere impacts of sanctions.
The implementation of the JCPOA bodeswell for the current outlook. Increased oilexports, along with lower costs of trade andfinancial transactions with the Iranian banksreconnecting to the international financial
system, would allsupport the economyto experience a realGDP growth of 4–4.5% over themedium term asprojected by IMF.
Thanks to themeasures taken bythe government toimprove the
macroeconomic environment, all indicatorsare now moving in favour of the growth ofthe country’s economy and investment. Thislays the ground for the country to pursue itsambitious yearly plan to absorb $50 billion inthe form of foreign direct investment, foreignportfolio investment, and other debtinstruments during the country’s nextDevelopment Plan. To this end, The ExportGuarantee Fund of Iran (EGFI) as Iran’sofficial ECA, whose national mandate is tosupport the country’s out-bound exportcredits, is to help the country reach this aimby cooperating with other ECAs.
In line with the government’s economicpolicies, the Central Bank of Iran hasmanaged to rejoin SWIFT, reintegrate theIranian banks to the international financialsystems by establishing 472 correspondencerelations with banks around the world, createa framework to combat money launderingand the financing of terrorism, improve itssupervision over the risk managementpractices in banks and their compliance with
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The outlook for theIranian marketBy Arash ShahrAeini, board member and deputy CEO, Export Guarantee Fund of Iran (EGFI)
Arash ShahrAeini
Thanks to its sound economic conditions of the early2000s, Iran became the number one recipient of longterm financing in the world as the exposure of majorECAs on the country reached $30 billion in 2007.
international standards such as the Baselrequirements and to increase the banks’capital.
However, with all the measures taken sofar, Iran’s banking system still faceschallenges. Major European banks are stillreluctant to re-establish their bankingrelations with Iranian banks, as theirstakeholders are concerned about theprobable punitive reaction of the US’s Officeof Foreign Assets Control (OFAC). However,Iran is trying to get letters of comfort fromthe OFAC to assure the said banks that theywill not face any probable consequences ifthey decide to resume their banking relationswith Tehran.
Thanks to its sound economic conditionsof the early 2000s, Iran became the numberone recipient of long term financing in theworld as the exposure of major ECAs to thecountry reached $30 billion in 2007.Meanwhile, Iran's public and private sectorsare well aware that it is difficult to reach thesame international standing withoutremoving the concerns of foreign financiersand investors. But with more than 50 years of
positive experience of ECAs working withIran, there is an optimistic outlook for thefuture.
There have been quite few cases whereIran has had payment defaults which werenot due to an unwillingness to pay, but weredue to restrictions caused by the sanctions.Since the implementation of the JCPOA,most of Iran’s outstanding debts have eitherbeen re-paid or re-scheduled. It can beconcluded that with an effective riskmanagement, a more positive cooperativeenvironment can be expected in future. ■
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Thanks to the measurestaken by the governmentto improve the macro -economic environment, allindicators are now movingin favor of the growth ofthe country’s economyand investment.
The last two years have been a time ofimportant shifts for Brazilian exporters. Aftera decade of almost uninterrupted risingcommodity export earnings, Brazilian basicmaterials suppliers saw their sales overseasdiminishing considerably from 2013 onwards.At the same time, even though the Braziliancurrency depreciated from overvalued levels,capital goods exports from a historicallyactive industrial sector have not yet beenable to recover the share in total exportsrecorded before the commodity boom.Successive increases in manufacturingworkers’ earnings, and lagging productivitygrowth, led to rising unit labour costs since2011, which were only reversed – and solely inUS dollar terms – halfway through 2015. Sincemost Brazilian industrial firms focus on thedomestic market and use exports as anopportunistic adjustment mechanism, it isunderstandable that an improvement in unitlabour costs in foreign currency has notresulted in a large change in their totalproduction and exports. Nevertheless the factremains that as the favourable terms of tradehave reverted back to the long-term mean,Brazilian foreign trade has adjusted moreslowly than was hoped.
The economic slowdown that held ourattention for almost two years is partly toblame for this delayed reaction, but otherstructural factors contributed as well. Unlikecommodity producers, the manufacturingindustry’s engagement, or even re-engagement, of export markets is notoriouslydifficult, especially in an increasinglycompetitive world economy with establishedglobal supply chains that are suffering fromdemand scarcity and productiveovercapacity. The manufacturing sector alsotends to concentrate a larger number ofsmaller companies than the commodity
segments of theeconomy whoseproducers can alsocount on the salesfacilitation providedby trading companiesfor their exports.Furthermore, smallmedium enterprises(SMEs) in Brazilseldom have strong
in-house expertise or the experiencenecessary to deal with the complex processof exporting. As a result, the five hundredlargest exporting companies account for 80%of all Brazilian exports, leading to theconclusion that there is a significantuntapped potential for SMEs to diversify theirclient base and contribute to foreign tradevolumes.
The challenge, as in other parts of theworld, is how to provide, in a cost-effectiveway, the instruments SMEs need tosuccessfully target overseas markets. Short-term export finance in Brazil has traditionallybeen provided by official banks with vastnationwide networks of branches. Yet evenwith their mandates to finance exports, theseinstitutions cannot always service SMEswishing to sell abroad to potentially riskierclients because of the combination ofoperational costs, lack of security andexpected losses. Past experience shows thatthis financing gap will persist even as thereturn of economic growth brings downinterest rates and rekindles banks’ riskappetite, justifying the formulation of a publicpolicy action to correct what can be deemedas a market failure. In this sense, a SME exportcredit insurance scheme was introduced in2015. The product met with good acceptanceand has gained traction by using the official
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Trade and exportfinance in Brazil:Outlook and challengesBy Marcelo Franco, chief executive officer, Agência Brasileira Gestora deFundos Garantidores e Garantias (ABGF) and Pedro Carriço, executivemanager, international credit assessment
Marcelo Franco
bank’s extensive network and clientknowledge as well as a simplified processbased on online interaction betweenexporters, bank branches, and ABGF.Incidentally, greater contact with SMEs hasalso led ABGF to begin evaluating thepossibility of providing overseas marketprospection support.
The experience of rolling out the SMEproduct also uncovered another gap in theBrazilian trade finance market. Given thedifficult liquidity conditions in the financialsystem and worsening global risks, localprivate short-term export credit insuranceproviders were forced to turn down cover forsome clients’ export markets. An opportunitypresented itself for ABGF to grease thewheels of trade finance by sharing risks withlocal short-term insurers when there isperceived room for official support to fill thegaps that arise in periods of extended stress.
Another financing gap that stymies theparticipation of some firms in export activityis the difficulty they have to contract bankguarantees or surety bonds when these aredemanded by foreign buyers. Some industriesare more prone to face this obstacle thanothers: defence contractors, for instance, dueto banks’ compliance policies. Also, somesolid soft commodity exporters burdened byforeign currency denominated debt fell victimto the credit crunch and devaluation that hitBrazil in the last two years. Long-termcontracts for foreign sales helped to balancecash flow needs of these Brazilian enterpriseswhile their domestic operations managethrough a slowdown. The needs of thesecompanies have opened the door to thecreation of products to assist new clients fromindustries up to now unknown to ABGF.
On more familiar ground, larger corporateentities, that have traditionally made use ofofficial support for exports, have faceddifficulties stemming from the peculiarities oftheir access to overseas markets. For manymachinery and heavy equipment makers, thepath to foreign markets was regularly as amaterials supplier to Brazilian engineeringfirms executing construction projects abroad.The building and civil construction market,however, has experienced a sharp decline inbusiness performance, both domestically andinternationally, since the beginning of 2013,primarily due to the commodity cycledownturn. As a result of slowing demand,capital goods manufacturers have had toredirect their sales strategies to reach newbuyers directly. This is a slow process, but the
first signs of a successful adaptation havebegun to manifest themselves in theapplications for cover received by ABGF inthe second half of 2016.
In parallel, many of the Brazilian civilengineering firms that led large exportcontracts have been absent from new coverdemand as they are reviewing theircompliance frameworks. They haveimplemented new corporate governance thatwill likely change their approach to newbusiness, irrespective of whether it is abroador domestic. For the most part, thecompanies are moving in the right directionof higher transparency and strongercompliance standards.
Even for the civil aircraft market – ABGF’sother main source of business – changesabound. The last couple of years have beendevoted to sales campaigns to renew the USregional fleets. Now that this phase has run itscourse, the Brazilian manufacturer will focus onperfecting and marketing its new generationaircraft. As with any complex product launch,the company has to maintain revenue sourcesto bridge the transition period. It is true thatthere are opportunities in the private jet anddefence transport segments, as well as in newgeographical markets, especially Asia, anddemand for cover is expected to growgradually in the next few years.
The crisis in Brazil has provided theBrazilian ECA with another opportunity. It hasbeen partnering with the commercial banks inMLT financing. Their interest has come just intime to pick up the slack from the recedingofficial banks. Most of them are foreign bankskeen on supporting structured deals incompliance with ECAs best practices. Thoughthe banks have shown some appetite for LatinAmerican and African countries in MLTfinancing, there is some expectation thatinsurance can evolve into an unconditionalguarantee for some competitive sectors. Suchchanges would be positive once the requiredlegislative changes have opened the door toreinsurance and similar forms of risk sharingwith other export credit agencies.
In conclusion, trade and export finance inBrazil have come upon some unexpectedhurdles, but we see the system working andrevamping its own policies and products inpreparation for higher demand for exportcredit insurance facilities in the next couple ofyears. The outlook is positive and ABGF is afirm believer that the Latin American marketwill bounce back, with project and structuredfinance re-emerging as an opportunity. ■
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BECI has over 19 years as an export creditagency providing credit insurance (bothexport and domestic) to the Botswanabusiness community. Although BECI has beenin business for this long, it is still strugglingwith low penetration rates for the creditinsurance product more especially on theexport credit insurance. Appreciation anduptake of our services and products haveremained constrained to little growth in termsof the Premiums and critical mass needed forprofitability. With a population of just about 2.1million, and given that unemployment andpoverty levels are pretty high at 18% and 20%(according the World Bank’s April 2016 report)respectively Botswana also presents a verysmall market for local business to tap into. Ourresearch has shown that with a broad spreadof risk (where a company has a large numberof trade credit customers), credit insurancewill be more attractive to the businesses.
Botswana, like the rest of Southern Africancountries, has also been grappling with power& water shortages, drought and low economicgrowth which have made doing businessdifficult. This has contributed to a number ofcovered buyers’ insolvency (non-payment ofan account and/or admission by the companythat they are unable to settle a debt) directlyimpacting our operational costs. A number ofbusinesses who cannot service their accountsgrew by 25% from 2013 to 2015 increasing theclaims costs while policy cancellations grewby 10% year on year from 2013.
The salvages in Botswana are below otherECAs average of 70%, mostly because all thecompanies will be near bankruptcy at the timeclaims are paid and the recovery/collectionprocess starts. The legal collection process canalso take long (up to three years) especially
where a debtor entersan appearance todefend.
Despite thesechallenges theenvironment inBotswana has alsopresentedopportunities to BECIfor products likeimport/export
financing, short term domestic tradefinancing, medium to long-term export creditinsurance and investment insurance, and theneed to set up a credit information servicesfunction to compete with the only creditbureau in the local market.
Two well established ECAs in the regionhave shown interest to assist train and equipour staff with the relevant skills. This willplace BECI in a better position to fully exploitall opportunities and proactively manage allrisks to the business.
Currently BECI is looking to review itsbusiness model to be able to take advantageof these opportunities. The review of theorganisational structure and alignment offunctions and roles is undergoing changes toimprove efficiency benchmarking with otherECAs of the same size. BECI has also made adeliberate move to collaborate more withgovernment agencies and parastatalsworking on economic diversification, exportstrategy, business development like CitizenEconomic Development Agency, LocalEnterprises Authority, Botswana Investmentand Trade Centre etc. This relationships willput us at the forefront of advancing ourinterests and increasing our productawareness to a broader market nationwide. ■
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BECI: Business opportunities,challenges and changeBy Cowell Habana, general manager, BECI
Cowell Habana
Two well established ECAs in the region have showninterest to assist train and equip our staff with therelevant skills. This will place BECI in a better positionto fully exploit all opportunities and proactively manageall risks to the business.
As one of the world’s largest and fastestdeveloping countries, China still heavily relieson the engine of exports in driving itseconomic growth. The Chinese governmenttakes export credit insurance as a top priority(in fact the first and foremost in its mostrecent policy blueprint) to encourage andboost Chinese exports. Following thisdirection, together with the impetus to breakthe monopoly of its official ECA, China’sMinistry of Finance decided in late 2012 toopen its short term export credit insurance tocommercial players. In January 2013, PICCbecame the first insurance company to getthe license and mandated to expandoutreach to SMEs and to work on acommercially viable basis.
Being Asia’s largest non-life insurancecompany, PICC has a market share of morethan 34% in the Chinese property andcasualty insurance industry, in which creditinsurance is a sub-category as defined in theChinese Insurance Law. We are especiallystrong in corporate business, with more than2.5 million corporate clients for which PICCprovides various kinds of products. In
addition, above170,000 full timeemployees work inour 4,500 branchesand sub-branches allover China. Many ofthem are not new toexport creditinsurance, as PICCused to be the firstand the only
insurance company to underwrite thisbusiness for 13 years before Sinosure becameindependent from us in 2001. All of the aboveadvantages add up to become the growthsoil of our export credit insurance: huge clientbasis and extensive sales and servicenetwork. PICC is present within one hour’sjourney of every Chinese exporter.
While we are mobilising our full strength tosatisfy the demands of our existingcustomers and to make our entrance into themarket a significant one, the official ECA ofChina, Sinosure, is working very hard andaggressively to push up the penetration rateof export credit insurance, but not for a profit.
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PICC: Our three measuresto survive and competeagainst a dominant player
By Zhongzhu Chen, general manager of credit insurance and surety, PICC
Zhongzhu Chen
China still heavily relies on the engine of exports indriving its economic growth. The Chinese governmenttakes export credit insurance as a top measure (in factthe first and foremost in its most recent policyblueprint) to encourage and boost Chinese exports.
Competing with such a fearless player in sucha red-hot market as China, PICC has adoptedthree measures in order to compete andsurvive.
First, to compete professionally. There hasalways been an argument for playing BIG firstinstead of professionally. Yet as the first stateowned financial enterprise to be publiclylisted in an overseas stock exchange (HKEX)as early as in 2003, PICC puts underwritingprofits as its highest priority and requiresevery business line to make money to answerto our shareholders. We do not want tosacrifice the interests of our treaty reinsurerseither. If we need their long time trust andsupport, we have to adopt and adhere to theworld best practices. The standards of theworld’s best commercial credit insurancecompanies are the ones we work by.
Second, to train our own staff and makeour own underwriting decisions. Unlike otherplayers that followed us to get their licenses,PICC’s top management have decided fromthe very beginning to build up a specialisedteam and nurture our own staffs to make ourown underwriting decisions. Its Departmentof Credit Insurance & Surety enjoys the samestatus as Motor Vehicle InsuranceDepartment (the latter has an annualpremium of more than €30 billion), reports directly to PICC’s top managementand hires the most employees at ourheadquarters. We are active in ICISA andapplied to return to Berne Union as soon aswe became qualified. We do our own policyand buyer underwriting decisions to makesure that we satisfy the demands of our owncustomers.
Last, but most importantly, to make fulluse of our advantages. As the requirement toget the export license has long been nullified,every business on the Chinese soil could beour potential client. Our competitors are
present mainly in the big exporting cities andcannot afford to build their own sales andservice force extensively. With ourorganisational competitive edge, PICC movedvery fast and soon beat off other players insmall and medium cities in the western andmid-western provinces where the exporters
long for localised services in connection withother kinds of non-life insurance products.
On a playing field that is not yet levelledout and that is dominated by a giant officialagency, we have managed to survive,compete and make inroads. Our business hasgrown significantly and steadily, earnedprofits for the past three years. About 90% ofour 16,000 clients are small and mediumexporters, making the product more availableto SMEs in more remote areas. We admit thatwe are still at the inception and there is along way to go. The most important thing isto live up to our original high ideals yetrespond nimbly to changing opportunities. ■
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There has always been an argument for playing BIG first instead of professionally. Yet as the first stateowned financial enterprise to be publicly listed in anoverseas stock exchange (HKEX) as early as in 2003,PICC puts underwriting profits as its highest priorityand requires every business line to make money toanswer for the shareholders.
On a playing field that isnot yet levelled out andthat is dominated by agiant official agency, wehave managed to survive,compete and makeinroads. Our business hasgrown significantly andsteadily, earned profits forthe past three years.
Business is changing as rapidly as the MENAregion is transforming. The evolution of riskin the MENA region, to a more risk-averse,diligent approach, is due to the variousevents that have unfolded regionally andglobally. Take the political unrest that hasrippled through numerous countries and theongoing turmoil in Yemen, Syria, Iraq, Turkey,Libya and Egypt, which have together,created a climate of uncertainty. The sharpdecreases in oil prices too, have played amajor role in impacting various nationaleconomies. In addition, although the fulleffect of the sanctions being lifted on Iranafter nearly 40 years have not been felt,some countries and businesses have beenaffected – both positively and negatively.
With headlines coming out of the regionbeing made on a daily basis, some countriesare seemingly more affected that others inthese times. Take for example Saudi Arabia,an oil-rich country which took a hit when itsoil production and prices plummeted. Inaddition, the construction sector has been
greatly impacted inSaudi Arabia, where itis facing seriousdelays in paymentsand default ofpayments from somecompanies. TheKingdom isundergoing a rigorousplan to diversify itsinvestments into
other sectors, to shift the heavy reliance onoil.
The United Arab Emirates on the otherhand has seen various changes in its tradesector, which has been significantly affected,such as in the food sector. This is due to theevolution of the geopolitical situation withIran and currency devaluation in someAfrican countries, which were main importersof food from the UAE.
Another market that has been impacted isEgypt, known as a ‘risky export market’. Thisis due to the significant devaluation of the
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Changing region,changing business
By Karim Nasrallah, general manager, Lebanese Credit Insurer (LCI)
Karim Nasrallah
Trade credit insurers in the MENA region have had to adapt to very specific adverse market conditions, and trade credit insurance, which protects a company’sbiggest asset, trade receivables, continues to transformas a result of the repercussions of regional and global developments.
local currency, the Egyptian pound, as well asthe new regulations and controllingmeasures taken by the Central Bank ofEgypt, which have resulted in slowdown ofimports of different types of goods.
Other countries too, have felt slighteconomic shocks, and companies are alteringtheir business models and taking preventivemeasures as they have become more riskaverse.
Trade credit insurers in the MENA regionhave had to adapt to very specific adversemarket conditions, and trade creditinsurance, which protects a company’sbiggest asset, trade receivables, continues totransform as a result of the repercussions ofregional and global developments. Despitethere being a spike in the demand for tradecredit insurance policies after the ArabSpring developments, numerous factors intrade credit insurance have changed, such asthe approach towards underwriting, how riskis viewed, and how insurers cover differentsectors.
Some notable steps that few trade creditinsurance companies operating in the MENAregion are taking in these challenging timesinclude:
Focusing on more ‘stable’ markets such asOman, Kuwait and Egypt, to developbusiness prospects and reach. Despite thedifficult economic situation beingexperienced in these countries, the creditdefault remains positive and stable. Forexample, despite the fact that imports toEgypt are deemed risky due to the currencyfluctuation and foreign exchange restrictions,as well as difficulties in obtaining foreigncurrencies, the domestic policies that areissued in the Egyptian pound are showingfavorable performance.
Companies in trade credit insurance arealso being more vigilant when it comes toKYC or ‘know your customer’. Prospective
clients are now subject to a completeanalysis, including: Prospect FinancialPerformance, Prospect Credit Managementand previous performance, a review of theline of business they operate in, type andquality of customers etc.
In addition, in order for companies togrant coverage for each customer, thisdecision is significantly influenced by macroanalysis factors such as the country, sectorand subsector performance in which theyoperate.
In summary, the challenges that regionaland global changes have brought on tobusinesses will result in a more risk averseclimate, with companies being moreattentive to ‘red flags’ before venturing intobusiness with clients or countries. ■
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Despite there being aspike in the demand fortrade credit insurancepolicies after the ArabSpring developments,numerous factors in trade credit insurancehave changed, such as the approach towardsunderwriting, how risk is viewed, and howinsurers cover differentsectors.
Companies in trade credit insurance are also being more vigilant when it comes to KYC or ‘know your customer’.
In July 2015, the French government decidedto transfer Coface State guarantees’ activitiesto Bpifrance; the decision was approved inDecember 2015 by the French parliament.This is the culmination of a process ofreflection and analysis that began with thecreation of the public bank Bpifrance, tostreamline the State financial support forFrench exports around this new stakeholder,which placed internationalisation at the heartof its strategic objectives. It’s the end of achapter, but, most important, it is a story thatwill continue.
One-stop-shop approachThe management of State guarantees will beceded to Bpifrance Assurance Export, a newsubsidiary of the Bpifrance group createdspecifically for that purpose. All the teamscurrently in charge of managing the Stateguarantees at Coface will be transferred toBpifrance Assurance Export.
The combined expertise of Coface and theBpifrance group will provide a full rangeservices for export activities through a one-stop-shop approach to simplify the offer forour customers and promote more publicsupport tools with Bpifrance’s local networkand a continuum of financing solutions, from
companies’ earlydevelopment phase tomaturity, even forsmall amounts.
This transfer aimsto further boost theSME embrace ofglobalisation, and alsoto better meet thelarger companies’requirements.
Direct guarantee in the name of theFrench StateCurrently the guarantees are granted byCoface on behalf of the French State.
French law applies for the transfer of allState guarantees’ subscribed policies and willsimplify the current guarantee framework witha direct guarantee. Bpifrance Assurance Exporttherefore will manage the entire portfolio, notonly on behalf of the French State but also inits name. This direct guarantee from theFrench State was a longstanding request frompolicyholders, especially for larger transactionsin which each basis point saved on the pricingof the financing determines thecompetitiveness of the French offer.
The transfer of the activities, portfolio andteams is scheduled to take place no later thanthe 31st December, 2016. Until then, a broadcooperation between Coface and Bpifranceensures a seamless continuity of service to allinsured parties and export companies andthe continuance of good relationship withCoface partners worldwide.
Insurers ‘rights and obligations will not bechanged. The continuity of contracts will bemaintained in favour of all policyholders andother beneficiaries.
All players involved are aware that thistransfer is a crucial issue to succeed indeveloping French exports for all kinds ofplayers from small to large companies. ■
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Transfer of the stateguarantees fromCoface to BpifranceBy Maëlia Dufour, sous-directeur, direction des garanties publiques, Coface
Maëlia Dufour
In July 2015, the Frenchgovernment decided totransfer Coface Stateguarantees’ activities toBpifrance; the decisionwas approved inDecember 2015 by theFrench parliament.
During the 2015 ordinary session of theNational Diet of Japan, the Act for PartialRevision of the Trade and InvestmentInsurance Act has been enacted. Under theAct, the Japanese government is to takenecessary measures to change NipponExport and Investment Insurance (NEXI) intoa special stock company fully funded by thegovernment, abolish the Trade ReinsuranceSpecial Account of the Government, and haveNEXI succeed to the assets and liabilities ofthe Account after NEXI changes into a special stock company, to be implemented inApril 2017.
The revised act is to change NEXI into astock company in order to enhance itsgovernance, and also to make thegovernment hold all the issued shares of theorganisation, considering the characteristicsof trade insurance which will cover risks notcovered by private insurers.
The revised act is to abolish the TradeReinsurance Special Account of the
Government as areinsurer for NEXI,and to have NEXIsucceed to the assetsand liabilities of theaccount with the viewto centralisingaccounts related totrade insurance,thereby streamliningthe government’s
administrative and fiscal system.In addition, aiming to ensure the payment
of insurance claims even in case of anemergency, e.g., frequent occurrences ofinsured events, the revised act stipulates thatthe government shall take necessary financialmeasures when it is deemed difficult for NEXIto procure funds necessary for conductingbusiness operations.
The revised act requires the government to stipulate the criteria for insurancecoverage for NEXI, which is an organisation
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NEXI’s transformationto a stock companyand its futureBy Kazuhiko Bando, chairman and CEO, NEXI
Kazuhiko Bando
In May 2016, Prime Minister Abe delivered an initiativetitled Expanded Partnership for Quality Infrastructure.Through the initiative, Japan will encourage exports of its high-quality infrastructure and construct win-winrelationships that contribute both to domesticeconomic growth and to economic development ofpartner countries.
to implement the national policies includingthe fields to be focused on, in order to reflectthe government policies in the coverage oftrade insurance. It also stipulates that thegovernment may deliver opinions to NEXIconcerning certain significant projects.
The new NEXI will continue to promoteinternational transactions by Japanesecompanies including infrastructure export byimproving its managerial flexibility, efficiencyand agility while maintaining unity with thegovernment in terms of trade policy.
In May 2015, Prime Minister Shinzo Abeannounced the Partnership for QualityInfrastructure to accommodate huge demandfor infrastructure in Asia by providing high-quality investments. It was announced thatJapan, to strengthen its collaborativerelationship with Asian Development Bank(ADB), will provide approximately $110 billion(about a 30% increase) for “qualityinfrastructure investment” in Asia over thenext five years. This initiative is to play acatalytic role in further mobilising financialresources and know-how from the privatesector across the globe to Asia, a region full
of potential, in such a way that promotesinfrastructure investment that the regionneeds, both in terms of quantity and quality.
Also in May 2016, Prime Minister Abedelivered an initiative titled ExpandedPartnership for Quality Infrastructure.Through the initiative, Japan will encourage
exports of its high-quality infrastructure andconstruct win-win relationships thatcontribute both to domestic economicgrowth and to economic development ofpartner countries. To this end, Japan will aimto provide, among all, financing ofapproximately $200 billion in the next fiveyears to be allocated to infrastructureprojects across the world, including those fornatural resources, energy, etc. In addition,Japan will further improve related measuresfor promotion of quality infrastructureinvestment.
Following the announcement, NEXI startedvarious capability enhancement measuresincluding creation of insurance for sub-sovereign transactions. NEXI also madeefforts to help Japanese companies toincrease competitiveness in the overseasmarket by actively supporting theirinfrastructure projects including power andtelecommunications and agriculture.
To survive in the international competitionin the ongoing economic globalisation, publicand private sectors must continue to worktogether. NEXI will continue to providequality insurance services that meet diversebusiness needs. ■
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The new NEXI will continue to promote internationaltransactions by Japanese companies includinginfrastructure export by improving its managerialflexibility, efficiency and agility while maintaining unitywith the government in terms of trade policy.
To survive in theinternational competitionin the ongoing economicglobalisation, public andprivate sectors mustcontinue to work together.
Japan, to strengthen itscollaborative relationshipwith Asian Development Bank, will provideapproximately $110 billion (about a 30% increase) for“quality infrastructureinvestment” in Asia overthe next five years.
The energy sector represents a bold newfrontier for export credit agencies (ECAs).Increased involvement in this sector makesgood business sense. With an estimated 1.1 billion people globally living without accessto electricity and another 2.9 billion relying ondangerous and polluting biomass for theirdaily needs, – the social and environmentalimperatives are quite high.
This article is written from the perspectiveof the African Trade Insurance Agency’s (ATI)areas of operation and experience. The intentis to focus on areas that we feel must beaddressed in underwriting energy sectortransactions.
ATI is a multilateral institution operating inand based in Africa. Each of the countries inwhich we operate has a unique investmentenvironment and a few commondenominators:
Many of our countries are under developedeconomies;The regulatory framework is often poorlydeveloped or undergoing significantchange; and Often, payment obligations are beinginsured but additional political risks may beincluded.
Underwritingenergy projects is notan exact science.Several considerationsare specific not onlyto the nature of thetransaction but alsoto the country inwhich the project isbeing undertaken andthe parties to the
project – especially the client(s). Theunderlying transaction is often based on akey contract, e.g. a power purchaseagreement. The clauses of this contract needto be critically assessed when underwritingthe transaction.
Based on our experience, there are threeareas that require scrutiny:
1. Nature of the transactionEnergy transactions are often long-terminfrastructure-related projects structured forproject financing. This is an importantconsideration because recourse is oftenlimited to repayments from a single offtaker.The ability of this offtaker to meet theirobligations is critical. In our countries there is
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Exploring new opportunities in the energy sector: Keyconsiderations to underwritingsuccessful projects
By Benjamin Mugisha, senior underwriter, Africa Trade Insurance Agency (ATI)
Benjamin Mugisha
Many African governments try to avoid back-stoppinginfrastructure projects undertaken by their agencies. Inthe absence of the preferred government guarantee,investors may instead be given a diluted form ofsovereign support. It is important to assess not only thetangibility of this support but also its legality.
a large variance in the track record andreputation of each off-taker. Partial solutionscan be structured e.g., escrow accounts,liquidity guarantees or reserve accounts. Wehave found it prudent to cover default on anarbitral award rather than straight non-payment.
2. The clientTypically the transactional client will either bea lender or equity investor. In some cases,both will seek insurance. It is important toconsider the insured’s due diligence to keyissues likely to delay or deter the project.Examples include:
Carrying out pre-feasibility and feasibilityassessments that address all concernssuch as the social, environmental andtechnical aspects. For environmentalaspects, more often than not, complyingwith national requirements is not enough.It may be necessary to benchmark againstglobal standards;Sound contracts for implementation andoperation of the plant; andNegotiating a bankable agreement withthe off-taker. Many African governmentstry to avoid back-stopping infrastructureprojects undertaken by their agencies. Inthe absence of the preferred governmentguarantee, investors may instead be given
a diluted form of sovereign support. It isimportant to assess not only the tangibilityof this support but also its legality ; and
3. Other playersOther parties can also have an important rolein underwriting considerations. The existenceof donor funding, multilateral agencies, ECAsand development finance institutions, allcontribute to both appetite and the pricing ofa transaction.
SummaryI would like to leave you with some specificareas to consider when underwriting energytransactions namely:i) Project structure;ii) Financial strength and track record of the
off-taker or buyer;iii) Contractual agreements between the
insurer and risk party, with specificemphasis on standardization, tariffs,definition of force majeure, immunity,governing law, dispute resolutionincluding arbitration, termination andtermination payments, assignment, off-taker/buyer payment support,transmission/interconnection risks.Without experience, developers andequity investors could overlook some ofthese aspects so the underwriter willneed to double check their assumptions;
iv) Credit enhancements and risk mitigationinstruments including guarantees, swapsand liquidity facilities;
v) Possible success and failure factors;vi) Environment and social aspects; andvii) The rights of the insured and whether
these can be subrogated to theunderwriter;
ConclusionWe end as we started. Energy specialistunderwriting is not a science. No two projectswill be the same and always expect theunexpected! ■
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Underwriting energy projects is not an exact science.Several considerations are specific not only to thenature of the transaction but also to the country inwhich the project is being undertaken and the parties tothe project – especially the client(s).
Energy specialistunderwriting is not a science. No two projects will be the same and always expect the unexpected!
IntroductionExport credit agencies offering only ‘purecovers’ i.e. only credit insurance, have beeninstrumental in promoting international tradesince the dawn of the century. Creditinsurance is an insurance activity with aunique mitigation capability when managedwith a clear credit underwriting policy with asmany parameters like maximum liability,percentage of cover, etc., to cap the losses atany point in time. Another aspect of thecredit insurance’s ability to mitigate the risk isthrough some consideration of theprobability of default and underwritingoptions which will address the stresssituation. Due to its underwriting capabilityand short term maturity, any relevant adversechange can be managed before the end of aone year horizon with even the reduction ofexposure.
The loss ratio’s graph for an enterprisewould get amplified at the crest withoutcredit insurance mitigation arrangement.Credit insurance demonstrates the ability togo through the economic cycle withindividual reviews of the buyers monitored bygeography and industry. The exposure couldalso be already restricted on a buyer whiletaking into account the sensitivities of thesector. Thus credit insurance has a uniquecapability to smoothen the risks through theeconomic cycles and thereby reduce itsadverse impact on a worst case scenario.
Credit riskAs regards credit exposures, there is a cleardifference between bank credit and creditinsurance. Bank loans are given to an entityon a ‘going concern’ basis particularly indeveloping economies and the facility wouldhave to be invariably renewed, barring someexceptional situations. Credit insurance is alsorenewable, but also cancellable by eitherparty. Should the debtor undergo changes,say, declining creditworthiness, bank creditremains unchanged at 100% debt. Whereas ininsurance, only amounts committed with
invoices sent to anaffected debtor isstuck and appropriateaction to reprice,contain, reduce oreven deny a cover forfuture is possible.Hence the bankingmodel cannot beadopted straightawayto credit insurance,
given the above clarity on the specific natureof insurance.
SolvencyGuidelines on bank credit risk under Basel IIare specifically applicable to business risk justas the Underwriting Risk Model is for thecredit insurance line of business. Creditinsurance is widely used by financialinstitutions to mitigate their risks wherein therisk gets transferred to the insurancecompany. In the Insurance business, SolvencyII directives define a credit risk (in respect ofthird party debtors) of an insurance company.Solvency II considers only a 12 monthtimescale. This means that the calculatedSolvency Capital Requirement (SCR) must besufficient to guarantee the solvency for theinsurer over this period. This also dictatesthat the SCR calculation must be inconsonance with the Enterprise RiskManagement (ERM). If the business modeland/ or the behaviour of the assumed risksrepresent a longer term view, the capitalcalculation should also be accordinglyaddressed.
Credit risk as accepted in Solvency II isassociated with three sub categories of risks :a) Premium and Reserve risk – a simple
model based on Value at Risk [VaR] overthe volume of premiums and reserves.
b) Lapse risk – is the risk that a substantialvolume of policies would be cancelled ornot and its effect on solvency.
c) Catastrophic risk – risk of simultaneouslarge claims and the risk of recession.
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Walking a tight ropeBy Geetha Muralidhar, chairman and managing director, Export CreditGuarantee Corporation of India
Geetha Muralidhar
Specific parameters of credit insuranceand their influence over a one year horizonrisk on capital computation would be thatpolicies include insurance features therebylimiting the risk by way of a) maximumliability, b) consideration on the basis of aportfolio and c) the backing of reinsurance.However, in the current global situation, post2007, adequate ERM is warranted whileensuring solvency over a longer time scale,say at least three to five years.
Each insurer can, however, use a modelthat is best suited for its purpose with thecondition that it obtains authorisation fromthe regulator, if the latter permits suchconsideration.
Credit risk modelThe important features in a credit risk modelwill be factors like the ability to pay, and thedefault probability of a buyer. The modelcould take into account a number of factors:industry, country, etc. Each buyer ischaracterised by a default probability andwith the given default probabilities the modelcould use the fact that a company will bedefaulting if it's ability to pay is lower than acertain threshold.
In another approach, in addition to default/ non default approach, factors like liquidity,dilution of capital, size of company, legalstructure, etc., can also be built in.
After obtaining the buyer rating and fixingthe exposure limit, the buyer level, exporterlevel, group level, etc., exposures can beaggregated. Analysing the risks individuallyand allowing subsequent aggregation is agenuine Insurance method.
Sometimes assumptions result inunderestimating the extreme events. In orderto compensate for this, the intensity ofcertain critical connections between factorscan be deliberately worsened in the model.This approach, NORTA [normal to anything],can be applied on the whole portfolio. Theoutcome will complement the benchmarkapproach in credit insurance and enableadjustment of tail distribution.
Accounting – reserves and provisionsCredit insurance also follows accounting onaccrual basis with a ‘going concern’ concepti.e., to maintain accounting records with the assumption that it would continue tooperate indefinitely. Reserves are estimatesan insurer needs to pay future contractobligations. Reserves make up a significant
portion of an insurer’s liabilities.Estimates of outstanding claims can
be provided for on a case-by-case basis and using statistical methods at the portfolio level.
For the purpose of clarity, it may beunderstood that reserves strengthen thefinancial position of the insurer to meet futureunknown losses and liabilities; whereasprovisions are made to meet known lossesand liabilities with amounts not being certain.Free reserves are created when enoughprofits are made whereas provisions arecreated even if there is a loss in business.
Reserving (Technical Provisions) is of twocategories:a) Premium based – unearned premium
reserve (UPR), unexpired Risk Reserve(URR) which includes Premium DeficiencyReserve (PDR).
b) Loss (claim) based – Incurred But NotReported (IBNR), Incurred But NotEnough Reported [IBNER], Catastrophic(CAT) reserves, etc. Reserves are requiredto cover unexpired risks and meetunknown losses.
Apart from the capacity derived from theabove reserves strength, the extent ofexposures that may be retained also needs areview. The relevant retention policy is alwaysa function of the financial robustness of aninsurer. In this regard, the most importantfactors are solvency, regulations, underwritingcapacity, financial strength, corporatewillingness to take risks, reinsurance support,portfolio composition and large risk and CATprotection. As a matter of prudence,Exposure retention is almost always linked tothe net worth of an insurer.
Thus export credit insurance is a capitalintensive business with a demand for singlehigh value risks which are backed by largeorders. A boom will warrant more capital asthe jump in business would be morepronounced than in other lines of insurance.
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The objective is topromote exports and notmaximise profits. Thestability of support by anECA is paramountparticularly in aneconomic downturn.
Pricing and reserves – ECGC’sexperienceECGC, perhaps the only ECA subject toinsurance regulations, has a regulatorybalance sheet based solvency ratio of 9.79and an economic capital based balance sheetsolvency ratio of 2.3 which depicts thefinancial robustness at present. The majorchallenge is to address the need for a decentreturn on capital, while pursuing the objectiveof export promotion in keeping with thevision and mission with which ECGC was setup. So pricing is a tight rope walk withinvestment income being the saviour.
Global data availability of congruentproducts is a challenge while pricing newproducts. Products of different ECAs aredirectly not comparable. So, even proxy datais not available. Historical data of existingproducts is used for pricing new products.However, the relevance of historic data in thechanging dynamics of global business cycleneeds to be considered while pricing newproducts. Demanding customers with specificneeds seek a customised product andpressurised insurers succumb by cutting ratesand losing spread by tossing out establishedpricing techniques.
ECGC has an ‘experience rating mechanism’in place for covers issued to exporters andbanks. The effect of large claims is reflected atthe renewal time with the withdrawal of NCBand/or loading of premium rates andreduction in the percentage of cover. ECGCdoes not factor in reinsurance arrangementsinto pricing of any product.
A reserve for unexpired risk requires to becreated to the extent of premium incomeattributable and allocated to succeedingaccounting periods which is 50% of netpremium income.
ECGC’s specific reserving methods…a) outstanding claims reserve / claim
estimate reserves are accounted on thebasis of accepted and acknowledgedclaims which the insurer expects to settle.
b) Unexpired risk reserve calculated at 50%of the net written premium of the financialyear (as per the regulator).
c) Premium deficiency reserve (PDR) …if theresult of ‘unexpired risk reserve’ less thesum of (expected claims cost plus claimshandling expenses is positive) then a PDRis not required or else a PDR would needto be created for the deficit. Actuary hasto certify the expected claim costs.
d) IBNR claims reserves. A point estimate I.e.,a deterministic approach is being used to
calculate IBNR. Normally 85% to 90% ofclaims incurred are paid within two years.Long tail claims are expected to fully runoff in eight years (repudiation,representation, litigation cycles, etc). PureIBNR is calculated on a net of reinsurancebasis.
Balancing actConstraints faced by ECGC over a period oftime, owing to regulations and compliance incarrying out its mandate, have been causingconcern in the Indian context. They exist inthe areas of pricing, product profile,prudential exposures, etc.
Price moderations in response to marketdemand/slump or decrease in exports cannotbe effected in a timely manner withoutestablishing viability through actuarialassessment. Similarly, in quick response tomarket demands, a new product ormodifications to existing products cannot beintroduced until actuarial certification isobtained. As in motor or marine insurance,each risk needs to be measured through lifecycles, namely: performance, claims, recovery,etc. This kind of analysis may not be directlyrelevant to export credit insurance offeredwith a promotion objective of an ECA.
An overall surplus is not sufficient and noproduct can subsidise another as perregulations while ECAs operate on a longterm financial sustainability as per budgetaccounting method and not on an annualbasis surplus as per regular insuranceaccounting. The objective is to promoteexports and not maximise profits. Thestability of support by an ECA is paramountparticularly in an economic downturn. Mostof the credit insurers have mono linebusinesses and concentration risk is anotherchallenge with country, sector, buyer risksbeing highly volatile.
ECGC has to worry about concentrationrisks which results in lost export opportunities.Support for bank lending to exporters is alsonot wholesome owing to the prudential riskmonitoring which affects the credit flows tothe export industry. ECGC is indeed walking atight rope since it has been subject toinsurance regulations while balancing its rolebetween the mandate of export promotionand the compliance of insurance regulations.In order to empower the organisation for anenhanced role, it is time to review the presentstatus and reinforce its role in consonancewith its goals having already imbibed thediscipline of regulations. ■
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IntroductionThe needs for infrastructure in developingcountries are enormous. There is a huge gapbetween these needs and the financing thatis available from government’s own resourcesand funds from Development FinanceInstitutions (DFIs)1. According to the WorldBank2 the lack of infrastructure comes atenormous economic and social cost. Over 1.3 billion people – almost 20 percent of theworld’s population – still have no access toelectricity. About 768 million peopleworldwide lack access to clean water; and 2.5 billion do not have adequate sanitation;2.8 billion people still cook their food withsolid fuels (such as wood); and one billionpeople live more than two kilometres from anall-weather road. This strong unmet demandfor infrastructure investment in developingcountries is estimated at above $1 trillion ayear. In addition – and further increasing thefinancing gap – countries face the enormoustask to attract huge amounts of finance tocombat climate change3 and to achieve theUN Sustainable Development Goals (SDGs).4
Involvement of non-developmentfinanciers5 such as commercial banks, officialExport Credit Agencies (ECAs)6, PrivateInsurers (PRIs) and capital market investors istherefore crucial. Through closer andimproved cooperation more financing couldbecome available to bridge the currentfinancing gap. This explains why themobilisation of non-developmental sources ofcapital is of great importance to developingcountries and their strategic developmentpartners among which the DFIs. It impliesalso a redesign of the DFI strategies.
Report of WorldEconomic Forum’Building on theMonterreyConsensus: TheUntapped Potentialof DevelopmentFinance Institutionsto Catalyse PrivateInvestment” (2006).“There remains a
critical role for MDBs to make direct loansand grants, and provide policy advice. Butgiven the potential availability of privatecapital in most developing countries as wellas the sheer scale of investment needed tofulfill the MDG targets and infrastructurerequirements in them, the overwhelmingmajority of the more than 200 expertparticipants in this project took the view thatthe weight of DFI activities should shift overtime from direct lending to facilitating themobilisation of resources from the world’slarge private savings pools – international anddomestic – for development orientedinvestments through:1. wider use of risk mitigation instruments to
alleviate part of the risk faced by investors;and
2. stronger direct support for capacitybuilding to strengthen the enablingenvironment for investment”
A pure lending focus is no longer sufficient.DFIs have to enhance their role as catalyst fordevelopment. This means among others thatmore resources have to be allocated toproject development to increase the number
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Financing gaps, mobilisation and theimportance of enhancedcooperation between developmentfinanciers and Berne Union members
By Paul Mudde, Sustainable Finance & Insurance
Paul Mudde
A pure lending focus is no longer sufficient. DFIs haveto enhance their role as catalyst for development.
of bankable projects. For the lack of bankableprojects is currently one of the largestbottlenecks in financing infrastructure. Aninteresting initiative of the DFI community isthe International Infrastructure SupportSystem (IISS), which is a public projectmanagement tool enabling government andpublic sector agencies to improve theirproject preparation activities.7 FurthermoreDFIs have to develop strategies with concretetargets, the right incentives and products (e.g.guarantees) to mobilise non-developmentalsources of capital. There are, however, someserious challenges regarding the currentmobilisation agenda of the DFI community.
Measurement of mobilisation: Whatgets measured, gets doneThe problem with mobilisation is that eachDFI has its own definition of mobilisation andsystem to measure mobilisation impact. Formany DFIs it is a common practice toattribute the entire (co)financing of a projectto their financial intervention, which leads tounrealistically high mobilisation figures anddouble counting in case two or more DFIs areinvolved in a project, which is also partiallycofinanced by commercial banks. Thecommercial bank financing is accountedtwice as mobilised capital by two differentDFIs. Furthermore DFIs do not make adistinction between the mobilisation of otherdevelopmental sources of capital (e.g. fundsfrom other multilateral or bilateral donors)and funds from non-developmental sources(commercial banks, capital markets, ECAsprivate insurers), which again lead to a formof double counting. Some DFIs include intheir mobilisation figures cofinancingprovided by third parties even when the DFIhas not played an active role in arranging thecommercial (co)financing. Other DFIs requirea true arranger role (with payment of anarranger fee) to distinguish mobilisation fromcofinancing. Mobilisation is oftenmisunderstood and figures reported are notcomparable and do not always relate to anactive catalyst (arranger or risk transfer) roleof a DFI. An example is a recent press releaseof leading Multilateral Development Banks(MDBs) about their the joint climate financereport, which states that “climate financetotaling $81 billion was mobilised for projectsfunded by the world’s six largest multilateraldevelopment banks (MDBs) in 2015. Thisincluded $25 billion of MDBs’ direct climatefinance, combined with a further $56 billionfrom other investors”8. The $56 billion
concerns cofinancing in general of which thevast majority concerns parallel cofinancing, inwhich the MDB was not actively involved.And furthermore it is likely that a large shareof the $56 billion concerns financingsupported by ECAs.
World Bank Financing for development post2015 (October 2013).“Faced with limited direct lending capacitygoing forward, and the fiscal constraints ofmany of their major shareholders, it isincreasingly important for MDBs to fullyutilise their catalytic role and leveragingpotential to mobilise additional financingfrom diverse sources.”
These and other imperfections are recognisedby the OECD DAC, which explains whycurrently discussions take place to develop acommon system for the measurement ofmobilisation of private capital. Thus far theOECD DAC has conducted a few pilot surveyswith a joint measurement methodology for alimited number of DFI financial instruments(among which for development guaranteesand A/B loans), but the suggestedmethodologies are unfortunately not realistic.The focus of the OECD DAC is to measure themobilisation by DFIs, which are defined asmultilateral and bilateral organisations with anexplicit developmental mandate. A few ECAs/ public investment insurers with a dualmandate (i.e. promotion of exports/investments and development) are part of theOECD DAC survey’s (e.g. JBIC and OPIC), butmost ECAs are excluded from this exercise.The OECD DAC approach ignores that publicnon-developmental sources of capital (amongwhich ECA insurance capacity) can bemobilised for the focus is on private capital. Itdiscourages cooperation between DFIs andECAs, which is unfortunate because ECAs arevital in financing infrastructure in developingcountries.
The OECD DAC pilot methodology tomeasure mobilisation through developmentguarantees suggests that the entire principalloan amount can be reported as mobilisedcapital irrespective the type of cover (partialrisk or partial credit guarantees) and thepercentage of cover that is provided. From atechnical point of view it would be better toinclude in the mobilisation figure only theuncovered part of the loan (e.g. 10%)9. Byreporting the full loan amount the systemignores that the DFI itself has to allocate riskcapital to provide the guarantee and the fact
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that the DFI already reports this guaranteeexposure as its contribution to development.In a sense the current OECD DAC approachfor guarantees could lead to a new form ofdouble counting. Moreover this methodologyis a disincentive for a DFI to seek reinsurancefor its guarantee exposure, for the full loanamount is already captured in the OECDmeasurement system.
It is noteworthy that the OECD has not(yet?) developed methodologies to measuremobilisation through insurance of DFI loanexposure or reinsurance of DFI guaranteeexposure, while both risk transfer techniquesare very effective tools to mobilise capitalfrom ECAs and PRIs. Only a few DFIs makeuse of these risk transfer techniques10.
There are many other outstanding issuesregarding DFI mobilisation practices and theOECD efforts for a common methodology formobilisation calculations, which is quiteconcerning given the enormous challenges inbridging the financing gap. Successfulmobilisation strategies require an adequateand realistic measurement system. Withoutsuch a system mobilisation will be suboptimalor an artificial exercise, which is obviously notin the interest of developing countries.
Mobilisation of private capital ismuch more than only PPPThere is tendency within the aid community tonarrow the discussions on the mobilisation ofprivate capital to the development of publicprivate partnerships (PPPs), in particularthrough project finance. The latter concernsprojects that have the potential to generatesufficient income to repay commercial debtfinancing and pay dividend to equity investors.The too narrow approach ignores fourimportant facts, namely that (1) mostinfrastructure assets in developing countriesare currently owned, managed and financedby the public sector11 (2) many infrastructureprojects cannot be financed on a projectfinance basis, because the projects do notgenerate sufficient cash flow and (3) many, in
particular high-risk, countries lack an adequatePPP framework and/or attractive investmentclimate and last but not least: (4) privatecapital can not only be mobilised for privatesector sponsored PPP projects, but also fortypical public sector projects, whereby thegovernment (sovereign) or a sub-sovereignentity (e.g. municipality) or state ownedenterprise (SOE) acts as borrower orguarantor. This is for example relevant formost transport, electricity distribution, climateadaptation and water projects. Most roads,railways, regional airports, harbours, drinkingwater & sanitation projects are and will likelyremain typical public sector projects in manydeveloping countries12.
In India, which is the most advanced inprivate sector participation in infrastructure,64% of the country’s infrastructure isfinanced and managed by the public sector.In most other developing countries, the shareof public sector infrastructure is likelysubstantially higher. PPP can contribute toinfrastructure, but is clearly not the panacea.DFIs’ infrastructure – and mobilisationstrategies should therefore also focus onpublic sector infrastructure.
The opportunities for the mobilisation ofcapital for public sector projects aresubstantial. Many governments in developingcountries – in particular middle-incomecountries – have good or reasonable accessto the private market and can obtain supportfrom ECAs and PRIs for MLT financing forpublic sector projects. This concerns inparticular countries that are rated in OECDECA risk categories 2 to 4, but opportunitiesalso exist in countries with a higher riskprofile. The impressive overlap of exposuresof for example IBRD/IDA13 and Berne Unionmembers on many countries show there arehuge opportunities for cooperation andalignment of operations (see table I). Theseopportunities should be explored and utilisedto mobilise more financing for developmentand to improve aid efficiency and aideffectiveness.
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In order to avoid distortion of competition betweenpublic sources of finance caused by pricing differencesand to strengthen the complementary role of DFIs, DFIsshould consider applying the OECD minimum premiumsystem for the pricing of their MLT cross-border traderelated lending and guarantee operations.
Official ECAs and PRIs are an importantsource of capital for MLT financing ofinfrastructure in and trade with developingcountries. The total MLT exposure of all ECAs+ PRIs was in 2014 approximately $936billion14, which is more than two times the$422 billion exposure of all leading MDBs(see table II). The mandates of ECAs and PRIsare obviously different than those of MDBs,but they have an important developmentalimpact in facilitating imports and investmentsin developing countries. This is not measurednor communicated by the ECA community,which partially explains that theirdevelopmental role is not adequatelyrecognised within the aid community.
Another reason why the ECA and aid
communities do not know each other verywell is that aid and official export creditissues and regulations are discussed indifferent international meetings withrepresentatives from different ministries ofgovernments / government agencies. There ishardly any strategic interaction between aidand export credit representatives.Furthermore, discussions in the OECD DACfocus primarily on measuring and improvingsocial and environmental impact ofdevelopment activities, which are the PeopleP and Planet P dimensions of sustainabledevelopment. The Profit P dimension ofsustainable development – how scarcedevelopment capital can be used in the mosteffective and efficient way and crowding out
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Table II: The global portfolios of leading MDBs and MLT exposure of BU members (2014 in million $)
Exposure ExposureMDB outstanding Berne Union members outstanding
IBRD/ IDA 153,691 MLT export credits 701,657
IFC 36,622 MLT investment insurance (3) 234,580
ADB 58,492
IaDB 74,836
AfDB 18,906
EBRD 29,783
EIB (only outside EU) (2) 49,490
Total 421,820 Total 936,237
BU exposure in % of MDB exposure 222%
MDB exposure in % of BU exposure 45%
Source: Berne Union, MDB annual reports and calculations by Sustainable Finance & Insurance
Please note:(1) MDB exposure concerns: loans outstanding, equity investments and guarantees outstanding(2) EIB ‘s portfolio regarding business outside the EU is approximately 10% of its total business portfolio(3) The MLT investment insurance exposure of Berne Union members includes MLT insurance exposure of four multilateral insurers, i.e. MIGA
(in 2014: approx. $12.4 billion), ICIEC (in 2013: approx. $898 million) and ATI (in 2014: estimated at approx. $800 million) and Dhaman (in2014: estimated at approx. $800 million).
Table I : Top 6 IBRD/ IDA borrowing countries, OECD ECA rating and BU MLT exposure (in billion U$)
OECD ECA IBRD / IDA BU MLT Country risk outstanding exposure
rating loans at year end Country (July 2016) (July 2016) 2015 (*)Brazil 4 16.1 42.6
Mexico 3 14.7 24.9
Indonesia 3 16.8 40.1
China 2 16.5 32
India 3 37.4 23.7
Turkey 4 11.3 39
Source: World Bank and Berne Union.
(*) The figures concern MLT export credit and investment insurance exposure of all Berne Union members.
of market based finance be avoided (i.e. thecomplementary role of development finance)– is in fact not or much less discussed withinthe aid community. Aid efficiency and aideffectiveness are important topics in theOECD DAC, but the focus is on donorcoordination and alignment of operationswithin the aid community. Alignment of DFIoperations with non-developmental sourcesof capital is unfortunately not high on theinternational aid agenda.
The two worlds of development financeand ECA finance seem to operate in splendidisolation and opportunities for enhancedcooperation are not explored and used totheir fullest potential.15 An example of this arerecent OECD G20 documents aboutfinancing infrastructure16 in which nothing ismentioned about the important role of ECAs.The focus in these G20 reports is on the roleof DFIs, ODA and the need to involve capitalmarket investors in infrastructure. ECAs haveto reach out towards important internationalbodies such as the G20, the UN and the aidcommunity at large. Cooperation starts withsharing of information and knowledge.
From DFI loans to DFI guaranteesAlthough it is generally recognised thatguarantees are the best instrument to directlymobilise private capital and many multilateralDFIs have a guarantee program (e.g. partialrisk and partial credit guarantees), guaranteesare hardly used. Currently less then 1,5% of thetotal business of leading MDBs concerns MLTguarantees. For bilateral DFIs this is muchlower. The main business of most DFIs is toprovide MLT loans to governments andprojects in developing countries. The problemwith loans is that they do not or hardlydirectly mobilise any additional capital fromthird parties. For export promotion purposesmost governments around the world havebeen working for decades successfully on thebasis of ECA guarantee schemes, strategicpartnerships and risk sharing with commercialbanks. This is not the case for developmentfinance although these same governments areshareholders of MDBs and own bilateral DFIs.
Today development policymakers and DFIsdiscuss extensively “innovative ways” toinvolve capital market investors ininfrastructure projects in developingcountries, but most institutional investors willlikely require adequate risk mitigation (e.g.through guarantees) to invest ininfrastructure assets in countries with a toolow credit rating. Without adequate
guarantees it will be difficult to crowd inthese investors in infrastructure projects indeveloping countries.
There are many reasons why guaranteesare underutilised. For example for sovereignprojects17 – this is for most MDBs18
approximately 90% of their business – thepricing of sovereign loans and sovereignguarantees is the same, which implies that aMDB loan is always cheaper than acommercial bank loan/ capital market bond +a MDB guarantee. The interest margin for(sovereign) MDB loans or the premium for(sovereign) MDB guarantees are not riskbased, but for all MDB borrowing countriesset at the same low non-market based level. Itdoes not take into account that theadministration costs of guarantee operationsare in general substantially lower than forloans. In MLT guarantee business guarantorscooperate closely with commercial banks,which originate, negotiate and manage theloan and relationship with the borrower.Commercial banks also have to ensure thatsocial and environmental risks in a project areadequately managed. DFI lenders have to doall the work by themselves and incur thereforehigher administration costs than guarantors.19
In the commercial market PRIs offer forcomprehensive cover premiums, whichroughly range between 70–85% of theinterest rate margin of commercial bankloans. The margin retained by banks coversthe counterparty risk on the insurer, theuncovered part of the loan, administrationcosts incurred by the bank and a profit.
The current discriminatory pricingpractices of MDBs for sovereign loans /guarantees are therefore a huge disincentiveto make use of guarantees.
In the private sector operations of MDBs,lending is also the dominant form of support.MIGA is the largest multilateral guaranteeprovider, but then limited to political risks. IFChas a partial credit guarantee programme,which can provide comprehensive cover(including commercial risks), but it is hardlyused. In DFI private sector operations lendingis preferred and mobilisation of funds fromthird parties is mainly done through A/B loanprogrammes. Apart from inconsistent pricingpractices and a bias towards lending thereare various other internal and externalconstraints for the multilateral DFIcommunity that hinder the optimal utilisationof guarantees. It is important to addressthese issues to enhance the guaranteeoperations and strengthen the mobilisation
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impact of multilateral DFIs.If for example leading MDBs instead of
loans would provide 90% partial creditguarantees, they would mobilise 10% of non-developmental sources of capital. Taking intoaccount the current loans outstanding ofleading MDBs, this would imply $42 billion20
of additional finance for development, whichwould obviously assist in bridging thefinancing gap for infrastructure, climatechange and UN SDGs.
The Addis Ababa Action Agenda Financingfor Development (July 2015)“An important use of international publicfinance, including ODA, is to catalyseadditional resource mobilisation from othersources, public and private”
It can also be used to unlock additionalfinance through blended or pooled financingand risk mitigation, notably for infrastructureand other investments that support privatesector development.”
An important regulatory barrier – in particularfor bilateral DFIs – is the fact that guaranteesare not adequately recognised within theODA21 framework of the OECD DAC. ODAmeasures development finance flows andguarantees are contingent liabilities, whichonly lead to a financial flow when a claim ispaid. This clearly shows that the current ODAdefinition is out dated and hindersinnovation22 of development finance. Arevision of the definition – by includingguarantees as viable ODA instruments – istherefore urgently needed.
The strategic country dialoguesbetween developing countries and DFIsIt is common practice within the DFIcommunity to develop together withgovernments of developing countries acountry strategy on how to finance thedevelopment objectives of a country. In theseso-called country strategy dialogues thediscussion is focused on the developmentpriorities of governments and how muchdevelopment finance (only in the form of loansand grants) can be obtained from the DFI andother potential donors. This is subsequentlydescribed in a Country Strategy Paper, whichoutlines the cooperation between a DFI and arelevant developing country for a periodbetween in general 3–5 years.
Whether the development objectives canbe financed through other (market-based)
sources of capital (e.g. commercial banks,capital market, and / or ECAs/ PRIs) and howscarce DFI capital can mobilise these othersources of capital (e.g. through guaranteesand risk transfer) are unfortunately not partof this dialogue or the country strategypapers. This gap in the dialogue leads to thesituation that alternative sources of financeand DFI guarantees are overlooked and thatscarce non-market based DFI finance issometimes “crowding out” market-basedfinance. It is even likely that for some aidrecipient countries market-based finance iscomplementary to non market-baseddevelopment finance. But should this not bethe other way around?
World Bank Global Financial DevelopmentReport 2015 / 2016: Long-Term Finance.“Mobilising private long-term finance requiresa different approach than direct financing.
MDB interventions need to support, andnot replace or undermine, the formation ofsustainable markets”
In the world of officially supported exportcredits a so-called commercial viability testhas been developed to avoid that tiedconcessional loans crowds out commercialfinance23. This test ensures that non-marketbased finance operates complementary tothe market. It would be in the interest of theinternational aid community (DFIs and OECDDAC) and developing countries to develop asimilar commercial viability test for untied aid.In this way it can be avoided that scarce non-market based funds are unintentionallycrowding out private capital. It will alsocontribute to define more precisely thecomplementary role of non-market based DFIfinance and enhance the developmentalimpact of DFI operations. This is obviously ofgreat importance to developing countries.
Other sources of capital and how they canbe tapped should therefore be part of thedialogue with aid recipient countries. Giventhe limited knowledge about alternative(commercial) sources of finance and howguarantees can be used to mobilise thesesources within many DFIs, ministries ofdevelopment cooperation and aid recipientcountries capacity building is crucial.
Potential topics for cooperation DFIsand Berne Union membersAs explained both worlds hardly know eachother. So apart from addressing the strategicDFI topics mentioned above it is important to
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start with a dialogue at senior level betweenthe aid community and official ECAs andexplore potential areas for cooperation. Herebelow follows a list of topics where DFIs andBU members could potentially cooperatewith one another, but very likely thesuggested dialogue will provide much moreinteresting opportunities.
1. Insurance for DFI loan exposure andreinsurance for DFI guarantee exposure.Like commercial banks MDBs could coverpart of their loan / guarantee exposure withECAs and PRIs. A good example is MIGA,which reinsures approximately 40% of itsgross exposure with ECAs and PRIs. If leadingMDBs would follow this practiceapproximately $169 billion of additionalfinance (40% of $422 billion) could becomeavailable for development. Important is aswell that through enhanced cooperationMDBs could not only mobilise additionalfunds for their borrowing member countries,but likely also at terms and conditions thatare more favourable than what ECAs andPRIs normally offer (e.g. longer tenors andlower premiums). The preferred creditorstatus of MDBs warrants for a morefavourable coverage than for a commercialbank loan24. Enhanced cooperation hastherefore two important benefits namely:more capital for development and at betterterms and conditions25.
2. Development of A/B loans for sovereignborrowers.A/B loans in which the A part is funded by aDFI and the B part is funded by commercialfinanciers, are currently mainly utilised byMDBs, such as IFC, EBRD and ADB, tofinance private sector projects. The DFI actsas lender of record for B loan participantsand B loan providers benefit from thepreferred creditor protection of the DFI.Given the arranger role of the DFI the B loancan be reported as mobilised capital by theDFI. Obviously the risk mitigation providedthrough A/B loans is much lower thanthrough DFI guarantees and in general thetenors and other terms of conditions of B
loans are less favourable than commercialbank loans that benefit from DFI guarantees.This is mainly caused by the limited riskmitigation effect and limited solvencybenefits of A/B loans.
A/B loans are currently not used for thefinancing of public sector infrastructureprojects. It is important to explore potentialcooperation between DFIs, commercial banks,ECAs and PRI’s in this area. ECAs and PRIscould cover part of the sovereign B-loans. Thestructure implies a selective sharing of thepreferred creditor status, but this is nothingnew. In 2015 IBRD/ IDA shared its preferredcreditor status through its revolving $400million guarantee for a $1 billion 15 yearsovereign bond for Ghana26 and MIGA has itsNHSFO cover, which has amongst othersbeen used to cover a commercial bank loan tothe government of Bangladesh.27
3. Blending.Blending concerns the utilisation of ODAgrant money to mobilise financing fordevelopment. In particular the EU28 makesuse of blending, but the vast majority of thegrant money that is currently used is onlydirectly mobilising finance of EU DFIs and notcapital from non-development financiers,such as ECAs and commercial banks. It isimportant to open the blending facilities toECAs and commercial banks in particular toincrease the availability of finance to relativelyhigh-risk markets. For example first lossguarantees to ECAs for business with high-risk countries could increase the availability ofMLT finance for these countries. ECAs couldalso participate in untied DFI concessionalloans, which benefit from ODA subsidies toachieve concessional interest rates (mixedcredits). This can contribute to freeing up DFIcapital, which can subsequently be used forother (non-trade related) developmentobjectives.
4. Utilisation of OECD ECA pricing systemby DFIs.Both DFIs and ECAs are backed by financialresources from governments. Both are publicsector finance institutions.
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There is tendency within the aid community to narrowthe discussions on the mobilisation of private capital tothe development of public private partnerships (PPPs),in particular through project finance.
DFIs currently provide non-market basedloans to sovereign borrowers and marketbased loans to other (mainly private)borrowers. They sometimes compete withECA supported financing. In order to avoiddistortion of competition between publicsources of finance caused by pricingdifferences and to strengthen thecomplementary role of DFIs, DFIs shouldconsider applying the OECD minimumpremium system for the pricing of their MLTcross-border trade related lending andguarantee operations. This can be easilyimplemented for the private sectoroperations of DFIs, because they applymarket based pricing, but requires likely astructural change in the practices of DFIsovereign lending.
At the same time the pricing of directlending in the OECD premium frameworkneeds to be reviewed, for the pricingdifference with guarantees / insurance doesnot accurately reflect market practices andthe lower operational costs of guarantors /insurers. Furthermore, an adequate premiumdiscount for ECA cover provided to MDBswith a preferred creditor status has to bedeveloped.
5. Strategic cooperation, coordination &information sharing.5A. Input for country strategy dialogue.As mentioned before the country strategydialogues between DFIs and aid recipientcountries cover currently only developmentfinance. Market-based finance alternativesincluding ECA or PRI backed financing are notpart of the dialogue. In the interest ofdeveloping countries it is important that DFICountry Strategy Papers29, describe in detailall market based financing alternatives thatare available for a country. This should includefinancing options in domestic andinternational bank and capital markets andinternational ECA support. Furthermore, itshould include how DFI guarantees can beused to mobilise these sources. This will assistdeveloping countries and DFIs to identifywhich development priorities can potentiallybe supported by ECAs/ EXIM banks.Obviously this concerns mainly projects thatrequire imports of goods and services fromabroad. DFI support can then be focused onfinancing development priorities of thegovernment, which lack an import component(and therefore also likely no ECA support).
In requests for financing of individualprojects DFIs should consider the potential of
ECA support. They can opt to buy ECA coverfor their loans or guarantees that are used tofinance imports of goods of services orcooperate with commercial banks (co-arranger role?), who can arrange the ECA /PRI cover. In this way more financing couldbecome available for development.
5B. Developmental impact of ECA business.ECAs should consider describing in theirannual reports the developmental impact oftheir operations and how they contribute tothe UN SDGs. In this area ECAs can learn alot from the DFI community.
5C. MLT financing issues in developingcountries.Both DFIs and ECA face challenges infinancing projects in developing countries. Itwould be good to share experiences with oneanother with the objective to feed thedialogue between DFIs and developingcountries so that important issues can beaddressed at the appropriate governmentlevel and incorporated in countryprogrammes of DFIs. This could includeregulatory issues in a country (e.g. legal PPPframework), the role of the public sector inPPP projects and various constraints orcomplexities in underwriting public andprivate sector infrastructure projects.Obviously a structural exchange ofinformation on country specific issues will alsohave benefits for both ECAs and DFIs. It willassist them in underwriting concrete projects.
5D. Reliable credit information about sub-sovereign borrowers and state-ownedenterprises (SOEs).In many countries governments are not onlyprivatising infrastructure through a.o. PPPstructures but also decentralisingresponsibilities to lower levels in the publicsector: i.e. from central government to sub-sovereign level (e.g. municipality) or a SOE.This implies a.o. that in many PPP projectscommercial banks and ECAs are supposed toaccept sub-sovereign off take risks without aguarantee from the government. It alsoimplies that more sub-sovereign entities actas borrower or guarantor in typical publicsector infrastructure projects, whereas in thepast these projects benefitted from sovereignguarantees. The decentralisation strategy ofgovernments can only be successful and willallow them only to refrain from providingsovereign payment guarantees, if and whenthe sub-sovereign entity or SOE is financially
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sustainable and able to stand on its own feet.If that is not the case decentralisation andPPP’s with unsustainable sub-sovereigncontract parties will fail. The projects willremain unbankable. DFIs, ECAs andgovernments in developing countries have ajoint interest to increase the number ofbankable sub-sovereign public sectorinfrastructure projects.
DFIs and ECAs could share informationwith one another about acceptable andunacceptable sub-sovereign and SOEborrowers and the issues that they face inunderwriting these (potential) borrowers.This information could subsequently beshared with governments in developingcountries so that they – in close cooperationwith DFIs – can take appropriate action
towards self-sustainability of sub-sovereignentities and the SOE sector. Obviouslyexperiences in underwriting sub-sovereignand SOE risks can be shared on a no namesbasis so that sensitivities with individual ECAsor DFIs can be avoided.
The Berne Union could play an importantintermediary role in strategic dialogue.
6. SMEs and access to finance.In many countries the SME sector is facingchallenges in obtaining finance. For thatreason many governments, ECAs and DFIshave developed special SME programmes tosupport the SME sector. In this area ECAs andDFIs can learn from each other.
Noteworthy is that various ECAs acrossthe globe, in particular the three large privateinsurers Euler Hermes, Coface and Atradius,have substantial short-term (ST) creditinsurance programmes that cover tradefinance all over the world. The vast majorityof these ST trade credit insurance businessconcerns supplier credits which are coveredon a portfolio basis. As a consequence, the
ST insurers have a large database withreliable credit information on many buyers/borrowers all over the world among whichmany SMEs. This data can be used forunderwriting purposes to assist DFIs andgovernments in developing countries todevelop successful SME finance or guaranteefacilities.
7. Setting up ECAs and / or EXIM banks indeveloping countries.People in the business of international tradefinance are fully aware how important ST andMLT credit insurance and finance are for thedevelopment of countries. Exports generatehard currency income for countries, taxincome for governments and createsustainable jobs. This explains why manygovernments have set up ECAs and / or EXIMbanks in their country. These institutions forman important part of the financialinfrastructure of a country.
Still a lot developing countries lack anadequate ECA or EXIM bank. In this areaDFIs, governments and ECAs couldcooperate with one another in setting up newECAs/ EXIM banks or to assist existing ECAs/ EXIM banks to enhance their operations. Itcan create a win-win for all.
8. Supporting south-south trade andinvestments.DFIs could focus their support on south-southtrade and investments where the exportingcountry lacks an ECA / or EXIM bank or wherethe national ECA or EXIM bank facesconstraints in insuring / financing trade andinvestments. DFIs could act as guarantor forsouth-south trade and investments orcounter-guarantee guarantees from ECAs witha too low credit rating. By doing that theywould support development in both exportingand importing developing countries.
Concluding remarksAs explained closer and better coordinatedcooperation between DFIs and ECAs iscritical to increase the availability of financingfor development. This is not only in theinterest of DFIs, ECAs and developingcountries, but also of developed countries ofwhich many are major shareholders of DFIs.Many developed countries increasingly facechallenges in their own country, which aredirectly or indirectly linked to problems andchallenges in developing countries. Migrationcaused by war and civil unrest and likely toincrease due to climate change is just one
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The two worlds ofdevelopment finance andECA finance seem tooperate in splendidisolation and opportunitiesfor enhanced cooperationare not explored and usedto their fullest potential.
example. Fundamentalism and terrorism,caused by poverty and a lack of knowledge,freedom and a sustainable future, affects allcountries. Economic downturns of majordeveloping economies negatively affectinternational trade and investments.Developed countries have a clear self-interestto further enhance the development ofdeveloping countries.
It is therefore time for a structural dialoguebetween the international aid community andBU members, which should primarily focuson what can and should be done to mobilisemore resources for developing countries.Let’s think outside the box, work togetherand create a 1+1=3 in the interest ofsustainable development for both developingand developed countries.
Where there is a will, there is a way, so itmust be possible to move successfullyforward. The UN SDGs, which includeinfrastructure, climate change, partnership fordevelopment and the importance ofmobilisation provides the direction aboutwhat needs to be done, so it is now primarilya matter of bringing people andorganisations together and build thenecessary bridges between them. ■
Notes1 There are multilateral and bilateral DFI’s the most well
known multilateral DFI’s are IBRD/IDA, IFC MIGA, ADB,IaDB, AfDB, EBRD and EIB. Examples of bilateral DFIsare public sector development banks / agencies such asKfW (Germany) and AfD (France) and private sectordevelopment banks such as DEG (Germany), Proparco(France) and FMO (the Netherlands).
2 See: http://www.worldbank.org/en/programs/global-Infrastructure-facility
3 At Copenhagen in 2009, developed country parties tothe United Nations Framework Convention on ClimateChange (UNFCCC) committed to a goal of mobilisingjointly $100 billion a year by 2020 from public andprivate sources to support climate action in developingcountries.
4 UNCTAD estimates that the UN SDGs require a totalinvestment of $2.5 trillion a year over the next 15 years.This includes investments for infrastructure and climatechange.
5 This includes private capital and capital from publicnon-developmental sources such as official ECAs andsovereign wealth funds.
6 Many governments in the world have set up an officialECA with the objective to support exports and foreigninvestments of their national business community.
7 The IISS-system has been developed by the SustainableInfrastructure Foundation (SIF), which acts as executingagency for all participating development banks amongwhich ADB, AfDB, BNDES, DBSA, EBRD, IaDB and theWorld Bank group.
8 See: http://www.worldbank.org/en/news/press-release/2016/08/09/81-billion-mobilised-in-2015-to-tackle-climate-change—-joint-mdb-report. It is interesting tonote that the press release speaks about mobilisation byMDBs whereas the report itself refers to cofinancing ingeneral.
9 Among all MDBs only ADB reports under its guaranteebusiness the uncovered part of the loan as mobilisedcapital. MIGA reports the covered exposure (which
includes covered principal loan amount and interest).ADB considers insurance of loan exposure andreinsurance of guarantee exposure as a viable form ofmobilisation. Although MIGA is very active inreinsurance, the reinsurance business is not reported asmobilised capital.
10 For multilateral insurers such as MIGA, ATI and ICIECrisk transfer through reinsurance is a common practice.For most DFIs that mainly provide loans this is not thecase. Only a few DFIs make use of risk transfertechniques, among others ADB for its ST Trade FinanceProgram. Risk transfer for MLT DFI financing /guarantees is less common.
11 See report “ infrastructure productivity: How to save $1trillion a year“ by Mc Kinsey in 2013.
12 It is noteworthy that most PPP projects in developingcountries concern electricity generation / energy andtelecom projects. See the PPI database of the WorldBank.
13 Not only the exposure of IBRD/IDA but also exposure ofother MDBs is concentrated on middle income countrieswhere ECA and PRI cover is in general available.
14 This figure concerns the MLT exposure of all membersof the Berne Union, which is the leading globalassociation of credit and political risk insurers. Thefigure covers both MLT officially supported exportcredits and MLT investment insurance. It is estimatedthat at least 80% of the MLT business of BU membersconcerns business with developing countries
15 For example in the OECD DAC aid donor countriesdiscuss the developmental impact of their activities. Inthose discussions only multilateral and bilateralorganisations with a formal developmental mandateparticipate. As a consequence official organisations thatdo not have an explicit developmental mandate such asECAs are not part of the OECD DAC dialogue. ECAsdiscuss their operations a.o. within the OECD ExportCredit Group and the Berne Union. DFI’s do notparticipate in the OECD export credit and Berne Unionmeetings.
16 See a.o. G20 / OECD guidance note of diversification offinancial instruments for infrastructure and SMEs, July2016.
17 Sovereign projects are projects in which the centralgovernment acts as borrower or guarantor.
18 Examples of MDBs with a large sovereign loan programare: IBRD/IDA, ADB, IaDB, AfDB. The sovereign loanportfolios of EBRD and EIB are substantial as well butare lower than 90% of their total loan portfolio.
19 The operational costs of MIGA are for examplesubstantially lower than those of lending DFIs.
20 The total exposure of IBRD/IDA, IFC, ADB, AfDB, IaDB,EBRD and EIB (only outside EU) was in 2014approximately U$ 422 billion.
21 Official Development Assistance (ODA) is the mostimportant form of development aid provided by theinternational donor community. The current definitionrecognises grants, concessional loans and financialcontributions to MDBs as ODA. Guarantees are onlyrecognised in case of a claims payment.
22 Although the DFI community frequently discusses ingeneral terms “innovative and new ways of financing”,amongst others in the OECD DAC, this regulatory ODAissue has thus far not been solved.
23 See the OECD Arrangement on officially supportedexport credits.
24 OECD ECAs should recognise that cover for MDB loanor guarantee exposure deserves a lower premium thanthe regular OECD minimum premium. This deviationfrom OECD minimum premium rules should be includedin the list of “permitted exceptions” of the OECDpremium regulations. The lower premium for DFI loan orguarantee exposure is a standard practice among PRIs.
25 The topic that through closer cooperation better termsand conditions can be obtained is not part of the OECDDAC surveys on mobilisation.
26 See IBRD/IDA press release of 18 November 2015 “NewWorld Bank Guarantee Helps Ghana Secure $1 Billion, 15-Year Bond”
27 See MIGA press release of 16 December 2015 “MIGAGuarantee Backs Sirajganj 2 Power Plant in Bangladesh”
28 For more information about EU blending it is referred tothe following webpage:http://ec.europa.eu/europeaid/policies/innovative-financial-instruments-blending_en
29 Within the World Bank the Country strategy paper iscalled a Country Partnership Framework (CPF).
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The latest studies and publications are nowtalking about the digital revolution in foreigntrade. In an age where payment transactions,cash management and treasury are largelyprocessed digitally, foreign trade processingis still paper-based – and yet foreign tradehas dramatically changed since the 1990s atthe latest. Nowadays, exporters andimporters are linked up to one another incomplex value chains. Information aboutinventory and supplier needs is recorded andexchanged digitally. Although tracking &tracing functionalities allow merchandiseshipments to be traced, accompanyingdocuments are recorded and sent in paper-based form. The United Nations Conferenceon Trade and Development states that 60 to70% of all data elements must be recordedseveral times. All of this leads to highinefficiency characterised by long processingtimes and high risk of error. The paper-baseddocument-sending process, in particular, cantake several days – if not weeks – under somecircumstances.
Requirements for financial serviceprovidersNaturally, financial service providers areespecially important in foreign trade. Theysupport their customers' value chains byassuming risks – whether they arecounterparty or country risks – and theprovision of liquidity in the form of financing,letters of credit, collections, and guarantees,which are financing and risk protectioninstruments that are hundreds of years old. Inrecent decades, hardly anything has changedin paper-based processing, apart from thetechnical recording in back office systems.The sending of documents under a letter of
credit or collection isdone by mail orcourier service. Banksnowadays certainlyoffer some of theircustomers thepresentation of theirdocuments inelectronic form asimage files (e.g. PDF)for preliminary
examination or even printing it out remotelyon behalf of the customer. However, theactual border-crossing dispatch betweenbanks takes place in paper-based form, as before.
The relatively high processing costs for thebanks that are associated with this arereflected in the processing fees that must bebilled to the customer. This is certainly one ofthe reasons why the demand for thesetraditional documentary paymentinstruments has been constantly diminishingrelative to foreign trade development and hasbeen replaced by the open account form ofpayment. Nonetheless, these instruments arestill extremely important in sensitive businessfields (such as commodity, project, and plantand equipment financing).
Existing digital foreign tradeinitiativesThe first paperless trade processing initiativesare now more than 30 years old. In thisregard, international organisations like theWTO (World Trade Organisation),UN/CEFACT (United Nations Centre for TradeFacilitation and Electronic Business), UNECE(the United Nations Economic Committee ofEurope), and others have implemented
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Digital trade: Wish,vision or reality?The blockchain euphoria!
By Urs Kern, senior manager, corporate business, EMEA, SWIFT
Urs Kern
programmes and standards, and publishedspecifications and guidelines.
It is not surprising that owing to theirstrong trade activity, Asian countries can bedescribed above all as trendsetters forpaperless trade. For example, as early as inthe 1990s, South Korea initiated a project forautomating the sector's overarching tradeactivities. In 2003, the National PaperlessTrade Facilitation Committee was established,made up by both government representativesand private sector companies. Finally, u-TradeHub, a platform for paperless tradeprocessing, was introduced in 2007.
The platform provides a system for Koreancompanies through which they can processall activities related to foreign trade –including marketing, customs clearance,foreign exchange trading, and paymentstransactions. The portal also facilitates theelectronic drawing up and sending of tradedocuments like bill of lading, certificate oforigin, and insurance certificate.
The corresponding trends can be seen inother Asian countries as in Taiwan (Trade-Van) or Hong Kong (Trade-Link), for example.Meanwhile, twelve APAC countries havejoined together to create a supranationalnetwork, the Pan-Asian E-CommerceNetwork or PAA.net.
In customer-to-bank communication, theSWIFT standards (MT798) are worthy of aspecial mention because they at least allowthe electronic exchange of letter of credit andguarantee data in a uniform multi-bankstandard.
The initiatives described above and anumber of others have certainly beensuccessful in partial sectors. Thus, forexample, customs clearance is now electronicin many countries, but so far there has notbeen a revolution in the digital foreign tradeworld. At best, one can talk about anevolution. The reasons lie in the complexityand the specific requirements.
Requirements for digital foreigntradeIn principle, the following aspects andcharacteristics of foreign trade and itsprocessing must be considered:
1. Tracking & tracingDigital trade is basically about data exchangeand thus about data telecommunication.Unlike conventional telecommunication,however, the receipt of data is not enough, asits traceability is also important. Datapossession is frequently associated withrights such as the right to the goods, forexample. In this respect, data senders andrecipients as well as process participants, ifapplicable, must be able to trace the origin ofthe data, its current location right now andwho possesses it.
2. Number of data setsStudies have demonstrated that up to 27different companies and participants areinvolved in the foreign trade process withmore than 40 documents and 200 dataelements. Unlike what happens in paymenttransactions where, for example, only onepayment transaction file must be transmittedwith a limited data amount, the foreign tradeprocess is a lot more complex. The triggeringand processing of the payment is only thefinal step. Before that, a lot of data (e.g. frominvoices, transportation documents,certificates, etc.) must be exchanged, whichis linked to one another as well. Discrepanciesquickly lead to process inefficiencies andeven to delayed merchandise deliveries.
3. TrustForeign trade has always been based ontrust. If there is no full trust, one can fall backon risk protection instruments such as theletter of credit, for example. In the digitalprocess the term trust must be expanded todata quality, data origins and security. Risk
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In recent decades, hardly anything haschanged in paper-basedprocessing, apart from thetechnical recording inback office systems.
It is not surprising that owing to their strong tradeactivity, Asian countries can be described above all astrendsetters for paperless trade.
protection instruments should be set asidewhen data is submitted instead ofdocuments.
4. InteroperabilityConsidering the number of processparticipants and the quantity of data, auniform platform as well as formats andstandards seem illusory. In this respect,interoperability must be achieved to securean exchange through various platforms andapplications.
5. ComplianceInternational trade is covered by a host ofregulations, such as know-your customer andanti-money-laundering policies, and tradeembargoes. Such regulation is becoming notonly more comprehensive and changeablebut also more strictly policed, exposing notonly financial institutions but also corporatesto the risk of reputational damage and fines.Effective compliance is thus a key driver ofperformance and a significant operationalburden. Filtering technologies like the onefrom SWIFT should be embedded,respectively linked in or to any digital tradesolution.
Furthermore, the different views on foreigntrade processing must be taken into account,given that it is not possible to consider it aspurely traditional transaction business. Thesignificance lies in the value and complexityof the underlying transaction – that is, thegoods. Therefore, the basic requirements forthe creation of a business case are not thesame for all participants. So, where does theeuphoria for the subject of digital trade thatis being observed come from? The answerlies mainly in blockchain technology.
BlockchainSimply expressed, blockchain is a databasesubdivided into different transaction blocks.The blocks are important, as they contain arecord of the latest transactions. The blocksare stored in various distributed ledgers(peer-to-peer), linked to one another, andencoded using highly complex cryptographicmethods. The blockchain is only valid whenall blocks lead back to the genesis block.
A very high potential is attributed to this distributed approach precisely ininternational business, because unlike today, no varied central networks have to be maintained and linked up. Through thisdistributed approach, the problem of tracing a foreign trade transaction described
in this article is secured. Many banks are currently conducting
feasibility studies (e.g. HSBC together withthe Bank of America Merrill Lynch and theInfocomm Development Authority ofSingapore). Everybody agrees thatblockchain technology is, in theory, anoutstanding approach for changing foreigntrade processes sustainably in the future.
Further initiatives employ a partiallydifferent approach but still pursue the samepath. Thus, providers like essDOCS andBolero have been on the market for a long
time with an electronic bill of lading. Theowner of the bill of lading is stored in the"title registry", which also secures the transferof the right of ownership.
The Bank Payment Obligation (BPO)developed jointly by the ICC and SWIFT is anirrevocable undertaking to pay geared to thesubmission of consistent data. Since the BPOwas introduced two years ago, banks such asthe UniCredit Group and Commerzbank havealready successfully executed initialtransactions based on this new paymentguarantee instrument.
ConclusionSurely, total paperless trade processing isnowadays equally more vision and wish thanreality. To what extent the new technologieswill really lead to a revolution of foreign tradeprocessing remains to be seen. Feasibilitystudies must first demonstrate theirusefulness in practice. The complexity offoreign trade business that must be resolvedis high. At any rate, however, the potentialoffered by Blockchain Technology & Co. isthere and maybe the future lies in combiningvarious approaches. There are many visionsright now, and without a vision there is noreality – or as the Swiss writer FriedrichDürrenmatt (1921 – 1990) already said: "Youshould never stop imagining the world thatwould have been the most reasonable one".■
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Where does the euphoriafor the subject of digitaltrade that is beingobserved come from? Theanswer lies mainly inblockchain technology.
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4Directory
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Berne Union MembersThe Berne Union has 82 member companies (including 3 observers) from around the world. The membership is diverse – member organisations may be private or state linked, small or large. Together, they represent all aspects of the export credit and investment insurance industry worldwide.
The Berne Union member directory has moved online – this allows us to ensure that memberinformation and contact details are always current and accessible. For contacts and more detailed information about each member please visit
http://www.berneunion.org/about-the-berne-union/berne-union-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 Indonesia PT.Asuransi Asei Indonesia (Asuransi Asei)
ASHRA IsraelIsrael Export Insurance Corp Ltd
ATI MultilateralAfrican Trade Insurance Agency
ATRADIUS The Netherlands Atradius NV
BAEZ BulgariaBulgarian Export Insurance Agency
BANCOMEXT Mexico Banco Nacional de Comercio Exterior S.N.C.
BECI BotswanaExport Credit and Guarantee Company
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
ECGA O OmanExport Credit Guarantee Agency of Oman(S.A.O.C.)
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
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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 Germany (State)Euler Hermes Deutschland AG
EH GROUP Germany (Private)Euler Hermes SA, represented by Branch Office Euler Hermes Germany
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. Hungarian Export Credit Insurance 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
HISCOX BermudaHiscox Political Risk
HKEC Hong Kong Hong Kong Export Credit Insurance Corporation
ICIEC MultilateralIslamic Corp for the Insurance of Investment &Export Credit
IGA Bosnia and HerzegovinaInvestment Guarantee Agency
JLGC JordanJordan Loan Guarantee Corporation
KAZEXPORTGARANT KazakhstanKazExportGarant Export Credit InsuranceCorporation
KREDEX EstoniaKredEx Credit Insurance Ltd.
KSURE KoreaKorea Trade Insurance Corporation
KUKE PolandExport Credit Insurance Corporation Joint StockCompany
LCI LebanonLebanese Credit Insurer
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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
SACE ItalyServizi Assicurativi del Credito all’Esportazione
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
TASDEER QatarQatar Export Development Agency
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
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Notes
