After a period of unprecedented disruption, the export finance market is now firmly focused on recovery, growth and innovation. The latest edition of GTR’s annual export finance roundtable gathers a group of regional and global industry heads to discuss the evolving role of export credit agencies (ECAs), changing patterns around claims, and the ever-growing importance of environmental, social and governance (ESG) reforms.
- Jonathan Joseph-Horne, managing director, global co-head of structured export finance, SMBC (chair)
- Yasser Henda, global head of export finance, BNP Paribas
- Chris Mitman, head of export and agency finance, Investec
- Faruq Muhammad, global head of structured export finance, Standard Chartered
- Sumanta Panigrahi, managing director and head of Asia, trade business architecture and functions, and export and agency finance, Citi
- James Pumphrey, managing director, structured trade and export finance, Deutsche Bank
- Richard Wilkins, Emea head of export finance, JP Morgan
Joseph-Horne: If we rewind to a year ago, we were still very much focused on the pandemic. Today, much of the world has moved on from pandemic-related crisis management, towards stimulating and driving recovery, as well as dealing with new challenges such as the impact of the Ukraine-Russia conflict.
Focusing on the recovery side of that equation, how do you now see the role of export finance? Do you see the export finance industry – and ECAs in particular – rewinding back to the roles they had before the pandemic, or do you see an evolved role that could be here to stay?
Pumphrey: The ECAs have evolved massively, and in my view, they’re not going to be returning to their pre-pandemic roles. Many ECAs have taken a lead in terms of developing new products and taking into account what the world needs in terms of government support. Historically, ECAs have always come to the fore in times of crisis, and now that we’re seeing multiple crises, not only are they at the fore but what they are providing is much more robust than perhaps it would have been a few years ago.
Of course, those Covid-related facilities may not be available going forward, but crucially, ECAs have changed their whole mindsets to be much more proactive. They’re still developing untied facilities, for example, and with the issues we’re seeing around energy security and food security, they will likely end up with a lot more focus on this kind of activity rather than traditional buyer credit.
In the UK’s case, there is also a growing sense that the thinking of UK Export Finance (UKEF) is much more joined up with that of the government, and potentially with other ECAs as well. We see that particularly in the ESG space.
Wilkins: Government responses to the Covid crisis were by necessity targeted towards supporting their domestic markets first, and several countries used their ECAs to direct liquidity towards their exporters. Multilaterals such as Miga introduced programmes to direct funds towards the more emerging markets that maybe lacked the ability to respond to Covid in the same way. There was a period where the focus was more directly on exporters themselves, rather than their exports via the traditional buyer credit.
Panigrahi: I agree entirely. ECAs are developing a wider perspective around the core value of the conventional export credit in its traditional form. In our discussions with clients all over the world, the preservation of liquidity has become vitally important to ensure sustenance through supply chain disruptions. The pandemic and the ensuing recovery have had longer-term consequences and have really highlighted the value of a strong balance sheet with appropriate diversity in funding sources and structures, potentially involving agencies.
What we have seen is that many of the default situations or crises that companies have faced are driven by scarce liquidity and refinancing risk on the balance sheet.
Treasurers and CFOs are concerned about potential refinancing risk and are seeking sustainable longer-term solutions – and even solutions around cash flow. Agencies are responding to this market need by coming out with wider eligibility criteria. We are starting to come out of the pandemic, only to be faced with new geopolitical challenges. The value and benefits of conventional ECA financing with its associated stability and the widening support for a range of financing structures, from short-term working capital to long-term project financing solutions, is again coming to the fore.
Henda: It’s worth remembering that the world has changed dramatically since the start of the pandemic. Right at the beginning, part of the crisis was because companies had halted operations, stopped producing, stopped sending their products to the end markets. If you see this business as like a tree that was shaken by this crisis, one of the parts of the tree that was affected was exports, and that meant significant transformation was needed.
One example which was mentioned earlier was the adoption of new products to support liquidity. We know some governments went directly to corporates through direct guarantees, but others went through their ECAs, and that meant a change for some ECAs in terms of product development and adjustment. Since then, the extent of the evolution we’ve seen – the pace of transformation and innovation – has been one of the most compelling and visible impacts of the pandemic on the industry, and ECAs in particular.
Muhammad: It is remarkable the way ECAs’ roles have evolved since the 2008 financial crisis, and they continue to become more relevant as they adapt to changes in demand. We now see significantly more transactions, and different types of transactions, supported by ECAs than ever before. If you took an ECA banker from 20 years ago and told them you had a Turkish contractor building a railway line in Tanzania, supported by Dutch and Swedish ECAs, they would wonder how that was possible.
Going forward, I believe we will see more European ECAs making untied programmes available, or making existing untied programmes easier to use. Again, that means their role will continue to evolve, and you will see different types of borrowers – even in developed markets – that are starting to look at ECA financing.
Mitman: It’s pretty clear that since 2008, ECAs are now much more visible as practical and proactive policy tools for their governments, as entities through which they can intelligently deploy support for trade and industry in a targeted way. This is a positive backdrop, and one which ultimately has allowed ECAs to be more proactive in product development, rather than a relatively unknown backstop tool for dealing with emerging market debt crises.
At the national ECA level I agree this product innovation will continue. At the multilateral level, the question is whether this will translate into a game-changing overhaul to the OECD rules, empowering ECAs to be even more relevant and play an even larger role in supporting world trade and development. On this point it is clear there is also unprecedented appetite and ambition for change from both banks and ECAs, and there are tantalising signs of support from governments and the EU for this as well.
Joseph-Horne: The stretching of the role an ECA can perform, beyond the traditional buyer credit, supplier credit type of product, has shown a tremendous level of agility and innovation.
That raises an interesting question about what ECAs’ current priorities are, and whether those are a reflection of a broader national strategy. What is your interpretation of those priorities, and at the same time, are there areas where you feel more could be done?
Wilkins: What ECAs are doing now is certainly part of a broader strategy from governments. For example, if you look at the increased focus on sustainability, the Paris Agreement on climate change and so on, those are major drivers that are coming from broader government policy.
If you look specifically at ECAs’ priorities during the start of the pandemic, the first goal was to ensure there was an export economy on the other side of Covid. If the domestic economy cannot be kept alive with jobs and factories, businesses will have nothing to export. The focus was much more on the domestic liquidity of those exporters than on buyer credits at that time.
I think that has changed how governments view ECAs, because they ended up using them in different ways during the pandemic. Now, we’ve seen European ECAs increasingly supporting domestic working capital facilities, and a lot of those have a green or sustainable angle to them.
Also, something that has come directly out of the Covid crisis and its impact on supply chains – and is even more relevant with what has happened in Ukraine – is a view that security is important, whether that’s food security, energy security, commodity security or actual physical security. Whether it is making sure you have access to critical minerals for use in batteries, energy production or consumption, constructing bigger plants to meet rising demand, or complying with requirements around climate change goals, we will see ECAs focusing intensely on these areas.
Panigrahi: Currently, two different aspects are driving ECAs’ strategies – the first of course are the conventional programmes to support pandemic recovery, and the other involves strategies in response to geopolitical challenges, leading to a need to build in resilience in supply chains spanning borders. Agencies are being driven to adapt their programmes to accommodate asks of national champions on this latter objective as they expand overseas.
Taking Korea as an example, the importance of supply chain resilience is critical to the chaebols as they expand overseas, and the Korean agencies are focused on ways to increase flexibility and cover for overseas investment projects. The programmes extend to the whole ecosystem that is supporting the national champions. This is not limited to Korea alone and is starting to happen across the board globally.
When we look at areas where agencies may not be giving support as much as they could, supporting local currency-denominated structures comes to mind. One of the consequences of the current macroeconomic and monetary measures is an increased volatility in exchange rates, especially in emerging markets. This is an area where I think more can be done, to evolve and adapt the support provided by agencies for local currency-denominated solutions to reduce the impact of foreign exchange volatility for borrowers and countries. There is clearly an increased concern around this aspect and an increased need for currency-hedged or indexed solutions to be structured. It’s not an easy problem to solve, but we as an export finance community will need to do more in this area.
Pumphrey: I agree with the points around supply chains, geopolitics and security, but one area where there is some nuance is around the impact of all of these things on ESG. When we went into Covid, ESG was becoming more and more important; the concept had really taken off, and we had the ICC white paper pushing those developments.
Then, as we have started to come out of the pandemic, we’ve seen these other crises, and while climate is still a key focus for governments, it has perhaps taken a bit of a back seat for some compared to the worries around energy security.
Not only has the need to ensure energy security perhaps mediated the immediate reactive need to protect the climate, but the ‘S’ in ESG also needs more focus. That’s an area where ECAs could probably do more, facilitating socially responsible projects – particularly in emerging markets, where without more concessional or favourable terms, some of those projects might not happen.
Henda: We all know governments’ priorities have changed with the pandemic, and in my view, one of the consequences is there is better alignment of ECAs with governmental priorities.
One way we can see that is there is a broader focus on creating value at large.
Many ECAs now have greater resources and are better aligned with their governments in looking to achieve those policies and meet those targets.
We’re seeing the development of new products, and there is a focus on markets that were not necessarily target markets for ECAs in the past.
Another priority for ECAs is transformation. We’ve seen all kinds of disruption in the market – new technologies, new industries and new supply chains – and transformation allows the ECAs to play a central role in support of various economic actors.
The flexibility you need to be able to support that is high on the agenda of the ECAs’ executive management.
Muhammad: ECAs should definitely be doing more untied programmes, and some European ECAs will probably have to make themselves more adaptable and flexible in order to provide that. We did see certain schemes introduced primarily in response to Covid, but looking ahead, I believe ECAs will continue to encourage more investment in-country rather than just in terms of supporting exports.
Mitman: Product innovation targeted at national trade priorities is showing no signs of stopping. I agree untied programmes would be helpful. A whole-of-government approach to trade promotion would also be a game changer for governments that can achieve it, bringing the various arms of government together in a co-ordinated way rather than the somewhat siloed approach now.
Joseph-Horne: One of the defining features of the pandemic response from the government side was the introduction of support schemes, particularly those targeted at sectors like transportation.
The general consensus is that the support shown towards those sectors was excellent and timely, but of course it is not a permanent solution when the underlying fundamentals have changed.
Many of those schemes are now coming to an end, and information from the Berne Union suggests we’re seeing an increase in claims, for instance on long-term business in the transportation sector. Do you think this is a sign of things to come or a reflection of a delay in default rates over the past couple of years?
Muhammad: In the medium term, say 12 to 18 months, there could be an increase in claims filed by banks.
By now, banks or guarantee holders will have figured out which entities only had issues related to the pandemic, and which ones had deeper problems. However, ECA transactions have always been considered a strong asset class, and generally we see banks have a good result when they do have to make a claim. That reaffirms the validity of this kind of cover.
Also, a number of countries were able to sign up for the Debt Service Suspension Initiative during the pandemic, and so had to introduce some more discipline into their financials.
As a result they were able to get a more robust recovery, and though they went through a lot of pain, are probably now in a better position than before the pandemic. Angola, Senegal and Côte d’Ivoire are looking positive, for example.
Wilkins: The support from ECAs in the aviation and cruise sectors was both excellent and timely – so hats off to the ECAs. We have, of course, seen a significant rebound in the aviation sector as people have begun to travel again, so where ECAs have paid, or will pay, claims for payment defaults in lieu of debt deferrals, it may not always mean permanent write-downs. Some airlines used Chapter 11, for example. Aircraft can be remarketed and sold, and that means in due course some of the money paid out will be coming back to the ECAs, and you’ll see recoveries improving.
The cruise sector also seems to be picking up again with bookings getting closer to pre-pandemic levels. On the other hand, there is a risk of global recession, and a conversation happening almost everywhere about the cost-of-living crisis, which particularly in Europe is driven by the rising cost of energy.
Private sector companies might end up cautious in terms of investment, looking at the outlook for demand, and with interest rates going up they could struggle with borrowing or even finding themselves closing. We will have to wait and see.
Pumphrey: In the aviation sector we have seen comments, for instance from the CEO of Heathrow Airport, saying this year has been a great year for business – but there are concerns that as the cost of living rises, people’s ability to spend money on travel could drop.
I would also expect that sovereigns that are dependent on energy imports could face a tough time ahead, compared with those that can benefit from strong energy exports.
Mitman: In a sovereign borrower context, which is most relevant for Africa, the good news is that claims are being paid. Individuals on the risk and business side within many banks, ECAs and others had never experienced a sovereign default like we saw with Zambia. Whilst a real default case is never welcome, it has been important to remind everyone that the product works.
Importantly we are also seeing some progress amongst government creditor actors in mapping a way forward on the debt restructuring in Zambia after only 18 months, even with the relatively new presence of significant Chinese loans in such a situation.
Panigrahi: The pandemic exposed sectoral issues across multiple industries, such as transportation. If demand falls significantly, to near zero, and everybody is impacted, then the support coming from agencies and government is highly appreciated but can defer the problem. As the world slowly comes out of that situation, hopefully that support means there will be companies who manage to navigate the situation effectively, but many corporates could also end up with weak balance sheets.
The next phase of the cycle is probably going to be companies that are already weakened. The pace of inflation, driven by supply chain dislocations, geopolitics and regional conflict, means input costs are higher and margins are getting thinner. How companies manage this situation could be tricky, and this is where we will see some potential stress.
Joseph-Horne: We’ve already picked up on ESG a little, but an interesting aspect to this discussion is the focus on energy and fuel security that has been created by the Russia-Ukraine conflict.
Clearly, on the one hand that can act as an accelerator for moving into renewables and reducing reliance on oil and – in particular – gas.
On the other hand, it can also potentially result in some aspects of ESG taking a back seat, such as the ‘S’ part of ESG, as people focus on the immediate energy crisis. Right now, where do ESG and the Sustainable Development Goals (SDGs) sit on the priority spectrum for export finance?
Mitman: In the short term it’s clear governments will act to secure national energy supplies, but the political tide and will to tackle climate crisis has such depth, breadth and momentum, it’s difficult to see that fundamentally changing. Every ECA and bank is critically taking its own steps to play a part in meeting this challenge.
However, there is a bigger opportunity – arguably a once-in-a-lifetime one – for the export finance market as a whole to play a significant role in helping deliver the SDGs, not just around climate but on the social side too. The ‘Sustainability in Export Finance’ white paper published almost a year ago at the UN General Assembly set out a crystal-clear picture of the role export finance is playing in the delivery of the SDGs and set out recommendations for growing this role.
On the social infrastructure point, while developed nations struggle with ways to decarbonise and pay for the sins of our fathers and mothers, and indeed our own sins, there is an opportunity in parallel to help developing nations with their social infrastructure where the need is most pressing for them. This should be without contention and an easy item to deliver in the OECD modernisation in terms of more affordable longer tenors akin to those already available for green and water projects.
Muhammad: The level of priority can vary from institution to institution, but speaking from the Standard Chartered perspective, ESG is an absolute top priority. We have made commitments towards various targets and sustainable lending is key.
Clearly, the events happening at the moment could – at a global level – push things out a little, but this is a transition exercise, and I don’t think the transition as a whole will be delayed as a result. There are more instruments coming into play to support sustainability, and on the other side, there more constraints on projects that are not meeting ESG standards.
There is more scrutiny, more pressure on borrowers and project sponsors to meet ESG requirements, and increasingly banks are asked to become a key component in following through on that. So while these questions are being raised for obvious reasons, I don’t think there is any change in direction away from ESG.
Pumphrey: There is clearly an immediate requirement to protect energy security in the three, six, 12 months ahead, and that has pushed some of the requirements that governments want to achieve a little bit further down the pecking order.
That is a short-term view, though, and hopefully a temporary one. By next year, hopefully things will be a bit more stable, and ESG will be back at the forefront. We have Cop27 coming up and there will be some clear messages from governments there too.
Panigrahi: Within ESG, there almost becomes a dichotomy in the market: the multilaterals are primarily looking at that social part of ESG, and it’s probably the highest priority for them, whereas the ECAs are primarily focusing on the environment part of ESG. Clearly, a lot of focus is on the ‘transition’ aspect of ESG as countries and companies update their plans to wean away their energy plans into more sustainable sources of energy.
Wilkins: Governments haven’t really set social targets to the same extent as climate change-related targets. We may see updates to the Consensus to coincide with Cop27 in November. But from a bank or corporate perspective, everyone has their own targets they are trying to achieve. It doesn’t matter which bank you’re talking to; they’re all focused on supporting sustainability in the broader sense, and not just on the environmental side.
Henda: It’s important to look at the huge steps that have been undertaken by our industry. You can see that just from the enormous contributions made to the ICC white paper.
Transformation is deeply set within the industry, not just among the banks but the ECAs as well. If you think about the expressions from governments for ECAs to play a stronger role around ESG, that is certainly one of the most promising and positive developments around new products in the last couple of years.
We’re still a little bit short when it comes to adoption of a framework though. We don’t yet have a common methodology allowing ECAs everywhere to be more supportive of new initiatives. It’s great to see those new products being developed, but without wider coherence in the industry, some gaps may widen, such as the gap in support to emerging markets.
Joseph-Horne: Beyond ESG, are there any other broad market themes that you expect could have an influence on our market for the rest of this year or running into next year?
Henda: There are clearly heightened risks across the board, but looking at ECAs in particular, there is a counter-cyclical nature to this business. As markets become more volatile, the choices around access to funding are more limited. ECAs can’t do everything, but that situation in the market means that ECAs are at the forefront of strategic decisions and expressions of risk appetite.
Muhammad: The ECA product has always been considered a counter-cyclical product. When things are more uncertain, and where there is more negativity in the market, ECA cover is viewed as a much more stable option from a borrower’s perspective, and I think that will prove the case again. Demand for ECA products will continue to be strong.
Governments’ priorities might change, that’s true, but I see that as an opportunity for ECAs to step up, fill the void and help banks provide liquidity. For that reason I expect we will see more untied programmes coming from ECAs that will open up that space.
There are a couple of other pieces too. The Ibor transition is happening, which means the industry has to convert older deals as well as factor that into new business, and there are still questions over whether Basel 3.1 will change the capital requirements for banks dealing with ECAs.
Wilkins: Historically, an ECA’s purpose has been to stimulate economic growth through trade and exports. What we’re seeing now is that the conversation has changed a little, widening to broader issues in recent years. This presents a different set of challenges for the industry.
Those concerns mean governments aren’t just looking at policies to drive economic growth, but are focused on things like securing fertiliser, gas and other commodities, while capping prices to consumers to maintain law and order and reduce the risk of civil unrest.
That means priorities at the broader sovereign level become more ‘defensive’, and focus is first and foremost on maintaining what you have rather than trying to expand through exports, and that will likely mean ECAs look more closely at the supply of energy, critical minerals, food and probably the defence industry as well.
Pumphrey: The threat of recession later this year, or into next year, will affect banks and ECAs’ risk appetites. If there is more caution at the sovereign level or the corporate level, that could make doing some deals a little more challenging. There may be more sovereign defaults, and that could affect pay-outs in certain markets. So I would agree with Richard; the feeling is probably a little more defensive rather than proactive.
Joseph-Horne: As a closing question, and I would encourage you to answer as briefly as possible, are you optimistic, pessimistic or neutral on what the state of the export finance market is going to be in 12 months’ time?
Panigrahi: I’m clearly optimistic.
The core value of export finance is really coming to the fore and is being widely recognised in current market conditions.
Pumphrey: I would agree.
Henda: For us, very optimistic.
Mitman: Optimistic, because the tide is with us as a market and there has never been better dialogue between ECAs and banks on key issues affecting the market.
If real ambition is shown in the modernisation of the OECD arrangement, then I’m even more optimistic.
Wilkins: The first rule of export finance is you can’t do export finance without being an optimist, so I’m optimistic too.