GTR assembled a group of export financiers in Asia to discuss topical trends in long-term financing.
- Aneesh Mahajan, regional head, Southeast Asia, structured export finance, project and export finance, Standard Chartered (chair)
- Anil Berry, CEO, Euler Hermes Hong Kong, head of commercial, Asia Pacific, Euler Hermes
- Rudra Kundu, structured finance – cluster Asia & Middle East, Nokia Siemens Networks
- Michael Lutz, head of STEF APR, UniCredit
- Sumanta Panigrahi, export and agency finance, Apac head, Citi
Mahajan: What are you seeing in terms of pricing, and what -are your thoughts on regulation?
Panigrahi: I can comment on pricing from a bank’s and from a client’s perspective. Pricing today is a blend of credit and liquidity. That is here to stay. The credit spreads are also far more reflective of the inherent credit risk. It is, however, also getting clouded by the embedded liquidity aspect, because perhaps Libor no longer reflects the true cost of funds, which is not consistent across all banks. Compounding this issue is the impact of the ‘overreach’ on the regulatory side which also has cost implications for the banking sector. The cost of compliance across banks today is quite significant. In the long run, pricing is likely to stabilise into a more representative mix of three factors: credit, liquidity, and the cost of compliance, in a slightly overregulated industry. Currently, however, these are causing the pricing bubble, as our industry grapples to adjust to the new paradigm.
Lutz: Liquidity costs vary a lot from one currency to another. Being a European bank, liquidity costs on euro-denominated facilities are much lower than, for example, US dollar, Australian dollar or other major currencies. You are right: compliance is a major concern. That is not even properly reflected in the overall pricing, because you invest in terms of working hours just to have, say, the customers’ due diligence completed, and it is not just a one-off but a repeating exercise. This is not yet reflected in the price. From my point of view, we still have a price composition that just consists of liquidity costs and risk costs.
Berry: We have seen pricing being very much linked to the risk that you write, so, if you are maintaining the cover, people are willing to pay more for it. Maybe that was not the case two or three years ago in terms of whether insurers were willing to maintain the risk and charge a higher price for it. Now, with the greater transparency we have with our customers, we discuss credit risks in detail with them and we find they are willing to pay for additional cover. That is true for markets like the Mediterranean, where we need to charge more for cover. Companies in Asia exporting to Europe understand the reason to pay more for credit cover.
Kundu: There is another side, which is a bit different from the pricing and regulation impact, and that is the price of political moves. Particularly in the Middle East and Africa, many countries are under sanctions. This limits the ability of many commercial players, such as banks, to do business there.
It is reaching such a proportion where the number of such countries under sanction increases regularly, the extent of the sanction increases, and these countries are large countries. Companies like us cannot afford to say, ‘We would not like to do business there anymore’. They have hundreds of millions of people living there. What is the direct impact of such sanctions? The Chinese will walk in.
This is directly impacting many companies where they are either constricting their business in the Middle East, or thinking of pulling out. We have pulled out from a few countries physically because we think that is becoming ineffective with the sort of business that we do with large rollout periods, large gestation periods and long payback periods. Unless we have support of the finance industry, you cannot do business there.
Lutz: At the same time, you have to be compliant with sanctions because you also have, presumably, business in that market segment which imposed the sanctions. If you are not compliant with their sanctions, you might run the risk of being blamed or fined by that respective government as we see in the US.
Kundu: Yes, lots of people have been victim to this. What I am saying is that I do not think enough voices are being raised. This is a big subject, and at the root of it is the unipolar nature of the world today. But I do not think people are thinking long-term enough because you are simply allowing lots of competitors to walk in who do not consider themselves subject to those same limitations.
Mahajan: So is there enough business for all banks?
Panigrahi: While we are potentially seeing a slowdown due to demand centres having a hiccup, at the same time it had been counterbalanced by the emergence of domestic demand in Asia. There is significant infrastructure development, which is permanently in a ‘catch-up’ mode for a lot of countries in Asia. The numbers are truly significant just to sustain and ensure that the basic requirements are met. One estimate by McKinsey puts it at US$8tn or so by the end of this decade. If you combine it with the impact of the Fukushima disaster and the wholesale shutdown of nuclear power in Japan leading to significant investment replace with other sources of energy, this is leading to an increased gas demand from centres in Asean and Australia.
Coming back to whether there is enough business, I believe there is, but the centres of demand are shifting. Within Asia specifically, there are far more sources of liquidity in banks than perhaps in other regions; therefore, we might be seeing elevated levels of competition. I am, however, convinced there will be continued demand for agency and ECA-supported financing, for investment, for long term capex, infrastructure and for short-term trade facilitated through insurance agencies and ECAs.
Lutz: That is exactly the point. More than 40% of all project finances globally are taking place in Asia. Even if you have still a substantial amount of liquidity in a market, there is enough business for the banks because banks have refocused on that segment. Banks have less intention of taking and holding large amounts. The willingness to syndicate facilities and share with other banks is much higher than five years ago, when a US$1bn transaction was maybe shared between two or three banks. Nowadays, you might have five banks. Therefore, from the absolute volume, you might not do more business than in the past, but you do it with more transactions, because you need more banks to get projects financed. On the other hand, you have huge projects coming into the market, and they need a lot of banks. If you have a US$10bn project, you need 20 or 40 banks just to manage the amount of debt requirement.
Panigrahi: It opens up the question of what the underlying currency of projects and borrowing is. Especially in Asia, it continues to be the US dollar. As long as this continues, you cannot discount the constraints faced by European banks, because, traditionally, they have been the providers of long-term US dollar book-and-hold deals for large, strategic ECA deals. Hopefully, it is a temporary step back for European banks; the vacuum that has been left is being filled in Asia by a lot of the regional banks and Japanese banks. It cannot, however, be discounted. Therefore, this also naturally balances some of the demand. The demand is there, but the gap left by some European banks stepping back creates a demand for some other banks.
To Rudra’s point, some smaller banks have taken this opportunity to open up market share and relationships. This is good for the industry and for people like us. We need to work together and distribute. There is no intention of hogging a deal and then putting it out. We want to distribute deals to other partners and so on. We have an originate-to-distribute model, which keeps sanity on pricing.
Mahajan: The competitive dynamics are very different for large deals versus small deals. If you look at financing requirement of less than US$200mn, it can be managed with or without ECAs. It is the larger deals with long tenors that offer opportunities to banks that have liquidity.
Mahajan: Let’s discuss the role of smaller ECAs in Asia. If we remove the heavyweights of Japan, Korea and China, there is not much volume to speak of.
Panigrahi: I have a simplistic view on this. When a child is small, it needs a parent or a guardian to guide it to become mature. The larger ECAs need to assist the smaller ones as they come up. That has to be the mechanism. There is inherent conflict in that because they are in competition with each other, just from a country perspective. However, if, as a global economy, cross-border trade needs to be facilitated through ECAs, there perhaps needs to be more co-operation on a wider basis; not only OECD.
Lutz: At the same time, you also need to have a developed banking market or industry to support export credit business. Even if you have helped develop an ECA to work like one of the big ECAs, it still lacks the possibility of having the necessary support from the banking industry. If you look at Indonesia, it now has an ECA, which has been taken out from the reporting function to Bank Indonesia. It is being attached to the ministry of finance. That is the first initial step to make it eligible for a real ECA.
At the same time, however, Indonesian banks are not entitled to take foreign risk. They are only allowed to lend locally. Automatically, then, you need to have foreign banks with an interest in co-operating with an ECA. Then it always depends on the willingness or benefits you can ultimately generate out of such a cover.
Kundu: It is unfortunate some smaller countries in Asia have not looked at this closely enough, probably because they have enough other problems. It is, however, a fact that, for many of these countries, their exports as a share of their economy have increased over the last few years. I have interacted with some of these smaller ECAs and, frankly, they are simply not there yet. Nor do they have the people, processes or systems, and more importantly they do not have the policies right. They have not been told yet that, ‘My country is going out to Africa, to Southeast Asia, setting up plants or selling from here, or setting up offices, and we need to drive this.’ I do not think that direction has been given to them yet.
Financing is a separate thing that can follow. Many of these countries have banks which are local, but frankly they have large balance sheets and large businesses. Those banks have been run by many local people who are doing well across the world, so that is pretty smart. That means you need to drive this in the right direction. Once you do that, the systems and people, which are the two things which drive the finance industry, will fall into place.
Mahajan: It appears the role of some of these ECAs is still evolving. Unlike the more developed OECD ECAs, some of the smaller ones have added value to their clients by acting as lenders in a broader syndicate and have a more flexible approach to justify support even if there is limited export in the traditional sense. We have seen Malaysia Exim providing lending support.
Panigrahi: I will give an example here. During a financial crisis or global economic slowdown the first thing that gets compromised is confidence along the supply chain. If you have your supply chain spanning multiple geographies all the way from the west to the east, credit concerns become paramount to ensure stability along the chain. That is where agencies can play a strong facilitation role in ensuring they are behind these exporters.
We receive a lot of queries, being a US bank, from our importers in the west who are importing from Asian manufacturing bases across Taiwan, Malaysia, Thailand, and so on, enquiring, ‘Is there some kind of support programme which can help us mitigate this risk, because volumes are massive and dependence is high?’ The main concern has been liquidity and access to working capital. Many of these countries did not have programmes to support their exporter base and I think, ultimately, it resulted in an increased cost of transactions because of the increased perception of risk. It is a kind of a contingency mechanism also, which is not there, which I think the governments need to think about, especially as the share of exports keeps growing. In times of stress, this gap is felt much more.
Kundu: Yes, it is also valid for Singapore; exports are big, but look at the volatility the economy is subject to. In 2009/10, there were quarters with huge drops, and that makes it so much clearer that it is so dependent on exports. Now, it is showing the reverse trend, which is very good, but if there was a stabilising hand at such times, it probably could help.
Mahajan: There is another angle for the smaller Asian ECAs as more manufacturing is done by global majors in these host countries. Take the example of India. There are opportunities in Southeast Asia where the equipment for, say, Caterpillar is not coming from the US but from India. If India Exim steps up for such exports, because it is creating jobs in India, possibly in collaboration with another better rated ECA, it could be an interesting model.
Panigrahi: We are at a unique juncture where, if you look at the growth rates in China and India, they are still attractive on an absolute basis, albeit lower than the past couple of years. Growth is plateauing while at the same time cost factors in China and India are rising.
The iPhone is designed in California and assembled in China, but then many of the core components are sourced outside China. If you look at South Korea, there is a similar trend in shipping. Korea has one of the highest market shares for shipbuilding – especially the more technologically advanced ships – but a lot of the blocks are made in China now through joint ventures by Korean or Japanese companies in China. This is going to go further south to Cambodia, Laos, Bangladesh, Sri Lanka and India on the technology side.
As this trend continues, if you link it back to our discussion on the emerging ECAs, there needs to be a wider framework of co-operation, reinsurance and government.