In the last two decades, south-south trade has grown dramatically – for most of the time, faster than world trade. This has been partly driven by emerging market ECAs backed by national governments keen to increase their country’s export volumes.
Despite their growing level of activity, emerging market ECAs have also managed to come out of the crisis in a relatively strong position, demonstrated by their low loss ratios.
Going into the crisis there was a huge demand for their products, and they were just as busy as OECD credit agencies, says Kimberley Wiehl, secretary general of the Berne Union.
“The biggest boom in the short-term trade credit was in China – and they worked very hard to achieve these increased business volumes,” Wiehl adds.
According to Peter Jones, ex-CEO of the African Trade Insurance Agency (ATI) and currently managing director of Green Capital Advisors, emerging market ECAs’ loss ratio stayed very low during the crisis, due to their “superior knowledge” of their customers and markets.
“Plus they were able to maintain credit lines on a selective basis, rather than the scattergun approach of the big [private] credit insurers where they just cancelled lines for all companies in specific sectors that were considered too risky,” Jones adds.
Although their profitability remained stable throughout the worst of the crisis, emerging market ECAs continue to face significant challenges that place them at a competitive disadvantage to ECAs in developed countries.
Emerging market ECAs also have to contend with factors such as a low awareness of credit insurance, limited reinsurance support and stiff competition from the private sector.
The lack of capital resources and state support aside, emerging market ECAs also have to contend with factors such as a low awareness of credit insurance, limited reinsurance support and stiff competition from the private sector.
Although new programmes are regularly introduced, with the IFC set to launch an ECA-focused initiative in the near future, there is no hiding the fact that emerging market ECAs are more restricted than their OECD counterparts.
Restrictions
OECD ECAs are predictably better capitalised than most ECAs in emerging markets, as they have been protected from the consequences of the financial crisis due to financial bailout and other governmental support.
Moreover, ECAs from rapidly growing high external reserve-holding emerging countries such as India, China and Brazil have been able to continue to fund their exports and essential imports on the back of continued government financial support.
But ECAs of smaller emerging markets who are under-capitalised and did not receive financial resources from their governments have struggled to support trade as a result of the tight credit market situation.
Among the biggest challenges faced by ECAs in small, developing countries is the lack of funding and support as well as the significant concentration of risk.
According to Jean-Louis Ekra, president of Afreximbank and chairman of G-NEXID, the UNCTAD-sponsored global network of eximbanks and development finance institutions, many emerging market ECAs are unable to fund their exporters because of the reduction of reinsurance cover for their guarantees. “As a result, their guarantees are unable to mobilise funding from the commercial markets at a reasonable price or at all,” he says.
Nasir Al Ismaily, general manager of the Export Credit Guarantee Agency of Oman (ECGA) believes that the very limited reinsurance support for insurance cover of ECAs in higher-risk countries is a major problem facing ECAs in emerging markets.
“Many of the buyers for whom cover is requested by ECAs in the region are sometimes not strong enough to qualify for it,” he says. “For such buyers, we have limited or restricted our exposure, while the exporters also retain a reasonable percentage of the risks. This ensures that the policyholder is careful in the selection of such buyers as he has vested interest in the risks.”
He further explains that ECGA reinsures its exposure with private reinsurers in order to improve its capacity in meeting the needs of its exporters.
A constrained credit rating, which may impact an ECA’s dealings with credit counterparties, is also high on the list of frustrations, as is a lack of credit information on buyers.
“One of the biggest problems we face is limited financial information for buyers or businesses in our region.”
“One of the biggest problems we face is limited financial information for buyers or businesses in our region,” declares Al Ismaily. However, he believes that this situation is beginning to change as a result of the increase of non-payments due to defaults and insolvencies.
The Omani ECA manager also highlights competition from the private sector, especially the large multinational credit insurers and brokers, as a concern to emerging market ECAs – though he concedes that this is not necessarily a bad thing.
“With a large number of players in the market, existing ECAs are forced to improve their products and market their services more vigorously,” he says.
Abdel-Rahman Taha, chief executive officer of the ICIEC, agrees that the level of awareness of credit insurance as an important tool in trading activities is still very low in many emerging markets. “This has resulted in the overall low penetration rate for the industry as a whole,” he says.
But, Taha notes that emerging market ECAs do tend to have higher risk tolerance with certain countries. For instance, they might have historic trading links with particular regions, and are happier to take on risks on certain countries compared to Western ECAs.
A multilateral solution
For countries that are struggling to overcome these obstacles, or which have yet to set up their own national ECAs, Peter Jones advocates the establishment of cooperative multilateral organisations akin to Africa’s ATI in other parts of the world.
This approach would be particularly beneficial for those countries where individual volumes and investments are not substantial enough to merit the establishment of their own national ECA.
“That is one of the key reasons why the ATI was formed, because you get huge economies of scale by having one institution covering a number of countries and providing their services to those countries, as well as achieving significant diversification of risks,” says Jones.
“The main players have had their credit ratings pulled down, but if you can start to create these co-operative entities that are properly structured and which are seen to be independent of their members from a financial and a governance point of view, then they can get a decent credit rating which allows them to be effective and compete on level terms with the existing players,” says Jones.
“If you can’t do that, it’s just another of the disadvantages for a small country – trying to create a standalone ECA.”
Stewart Kinloch at ATI is also keen to commend the advantages of the multilateral system, which, in essence, has one balance sheet, one accounts department and one name for underwriters to get to grips with whilst servicing the requirements of a number of countries rather than just one as in the normal ECA structure.
Yet Kinloch warns that these advantages are often undermined by shortcomings in the system. “It’s a catch 22 situation whereby a multilateral brings advantages that an ECA doesn’t have mainly in terms of efficient use of capital, but by the same token it has the disadvantage that it’s not going to be so partisan on behalf of any national interest,” he says.
The Asian Development Bank has been considering the possibility of setting up an Asian multilateral for smaller Asia and Pacific economies. Roland Pladet, senior guarantees and syndications specialist at ADB’s office of cofinancing operations and former chief underwriting officer of the ATI, has been looking at whether it would be possible to replicate ATI in Asia.
“We are exploring the idea. Generally, people have been receptive. We will probably undertake a feasibility study to see whether there’s take up and whether it merits the effort,” says Pladet.
He explains that the Asian situation is a little more challenging than in Sub-Saharan Africa. Developing Asia contains diverse geographic sub-regions within which the institutional development of national export credit mandates ranges from non-existent to very sophisticated.
“What I’ve come to realise is that geographically there may not be the critical mass that would make a pan-Asian multilateral solution work. The situation was more homogeneous in Sub-Saharan Africa in that most countries lacked a national export credit mandate and the pursuit of a multilateral solution by establishing ATI seemed logical and merited,” he says.
While Pladet has high hopes for a regional trade agency, he believes it may only be able to be implemented on a sub-regional basis.
Solutions to date
Efforts to support emerging market ECAs are being driven by multilateral financial institutions and regional development banks. To date, these initiatives have largely been in the form of mobilisation and provision of emergency funding to support emerging market countries’ trade.
The IFC, which coordinated the global trade liquidity programme (GTLP) and bilateral funding arrangements by members of the G-20, is set to launch another initiative to encourage emerging market trade.
The global export finance limited (GEFL) programme, which has been labelled as an “advisory group”, is still in its initial planning stages and has yet to be finally approved by the IFC.
The global export finance limited (GEFL) programme, which has been labelled as an “advisory group”, is still in its initial planning stages and has yet to be finally approved by the IFC.
According to Afreximbank’s Ekra, the new programme will provide direct guarantees to credit reinsurers to enable them to provide additional support by way of credit enhancements on a portfolio basis for the pool of credit insurance that reinsure for emerging market ECAs.
But market feedback on the IFC’s new venture is not altogether positive, with some industry experts concerned that the programme may infringe on areas where ECAs are already operating in.
“The question is, is it actually going to be additional, or is it just going to be diverting existing flows that would have otherwise happened?” asks one trade financier.
The OECD’s efforts to support emerging market ECAs have also been met with mixed reviews.
ECAs in the more developed non-OECD countries of China, Brazil, India and South Africa are the focus of the OECD’s outreach scheme, which looks to develop enhanced engagement with these countries.
Outreach to smaller, less developed countries is limited to the OECD’s attendance at the Prague Club’s annual meetings, where they facilitate information exchange on OECD rules, and issues such as the environment and bribery.
The OECD has limited ability in terms of its outreach programme, and there are many ECAs that are unaware of, or simply shun the organisation’s cooperation efforts.
“If the OECD is trying to outreach, it is just trying to make sure that developing country ECAs are constrained by its own rules,” says GTR’s source. “And I would be very hesitant to recommend that as a serious course of action for emerging market ECAs because they need as much flexibility as they can possibly get.”
