Policymakers in Brussels and capitals across the continent have been preoccupied in recent years by how Europe can be more competitive against the economic might of China and the US.
Export finance, and the support offered by export credit agencies (ECAs), is seen as being able to play a key role – as long as it is flexible and well-targeted.
In this Industry Perspective, Stephan Cors, managing director and head of export finance solutions at ODDO BHF, lays out what he sees as the main themes in export finance, assesses recent reforms in the bank’s home market of Germany, and explores how ECAs can help Europe flex its economic muscles.
GTR: What are the main forces shaping the export finance market at the moment?
Cors: The main structural and cyclical forces shaping the ECA market right now are heavily influenced by geopolitical realignment, especially marked by the trade war and the growing creation of bilateral trade blocs. From a European perspective, the Russian war in Ukraine has pushed exporters to find new markets and then altered export flows.
We see growing demand for capex investments and ECA activity in countries like Vietnam, Bangladesh and Indonesia that need manufacturing and engineering imports, as well as big infrastructure projects in energy, road and rail. The same counts for West Africa, although with a slower execution rate of transactions.
Defence is also a big topic. ECA instruments are increasingly being used to complement funding sources already available to the defence sector, not just because of traditional needs but due to the sheer magnitude of demand. The German defence industry has full order books, which are due to increased government spending on defence. Here, classic corporate banking, lending, capital markets, bonds and ECAs are all coming together.
On top of this, sustainability and ESG considerations remain significant. European, and especially German, manufacturers have a competitive advantage in green technology. Buyers in emerging markets need those technologies, not just for climate goals, but to reduce energy costs. In some places, especially from the US, there is less enthusiasm about sustainability. But for European industry, this is still important.
GTR: How have reforms in Germany and elsewhere helped broaden the scope of the export finance banks like ODDO BHF can provide?
Cors: The “flex & cover” reform introduced earlier this year in Germany has been a great step forward for the German ECA, Euler Hermes. So far, more than 20 German exporters have received a three-year certificate, meaning they no longer have to prove in every application that 51% German content is achieved. There are discussions with many more companies that have applied for flex & cover.
The process is now much more flexible. However, as always, the devil is in the details. While the government has eased the requirements, it still wants clarity on sourcing and has certain expectations about the degree of non-German or non-European supplies included in a project. As a political instrument to foster national exports, a certain flexibility and case-by-case approach is understandable – keeping in mind unfair competition and intellectual property issues – but the lack of clear-cut criteria is hampering predictability and execution time. The challenge is that while companies are enthusiastic about flex & cover, real support will depend on each project’s specifics. It’s important for banks and the industry to have more guidance about the process, which is still somewhat lengthy and complex.
This flexible approach isn’t limited to Germany: Finland, Austria and France have also introduced more dynamic policies. Similarly to those countries, the German ECA now accepts foreign EPCs [engineering, procurement and construction contractors] as beneficiaries. There is even an understanding that the ECA should be flexible on content requirements if no German or European contractor is available for a project.
GTR: What could be done to make it easier for European companies to access ECA support and therefore make them more competitive in the global market?
Cors: Euler Hermes has improved its shopping line cover product as part of its reforms this year, like that offered in Italy and Austria. Previously, strict eligibility meant only sovereign or highly rated corporates could access the product, which limited its relevance for emerging markets, as tier-one corporates seldom rely on financing. There is movement toward allowing a wider range of corporates, so we definitely welcome that. But it could be improved further by expanding its reach to banks in importing countries. Local banks, with their understanding of local corporates, are very effective intermediaries and could be great distributors. From ODDO BHF’s large correspondent banking network, we know them quite well and interest has been expressed for this kind of product.
A recommendation would be to push Euler Hermes to include EPCs from other European countries when considering whether a project meets the minimum content requirements, which would make it easier for German exporters to get support from the ECA even when their individual contribution to a project does not meet the agency’s normal thresholds. This combination of reforms would allow banks and export finance to make financing broader, more flexible and more responsive to the realities of international trade, especially for banks like ODDO BHF.
GTR: The European Investment Bank (EIB) recently said it plans to play a bigger role in providing reinsurance or guarantees for ECAs and even directly to commercial banks – do you think that will help?
Cors: It may be a relief to smaller European ECAs, because it will help them distribute and get reinsurance help from the EIB. It should also allow more capital to be allocated to some countries where cover limits are being reached or cover is not being given, for example Angola or Turkey. We hear about reinsurance, but there’s also an ongoing discussion in the industry about the role of direct government lending and whether public actors should step in. ODDO BHF believes commercial banks must have skin in the game. We advocate the classical export finance model, where banks arrange, structure and hold positions on their own books.
We are there during periods of market or loan distress, when you need someone to keep calm and carry on. That’s why, for me, the classic ECA role of guaranteeing up to 95% but still making sure commercial banks keep their role is still the product of choice for us.
GTR: How do you see the future competitive landscape between export finance banks playing out?
Cors: European regulators need to keep in mind how the US de-regulates on capital requirements. A decision on Basel endgame is expected early next year, and if capital rules are eased, then the mismatch with the EU would widen even further and it would put European banks in a more difficult situation, including in export finance. Although we benefit from capital relief due to the ECA guarantee, there are still uncovered portions. It’s not in the interest of European countries that the financing industry is at a disadvantage. This needs to be taken into account and is a concern.
