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The OECD has relaxed down payment rules for transactions involving export credit agencies (ECAs) in emerging markets, in the wake of what it calls a “market failure” in the private sector.

Under the new rules, the OECD Arrangement on Officially Supported Export Credits has slashed the down payment requirement from 15% to 5% for sovereign borrowers in developing markets, so long as the transaction is guaranteed by a ministry of finance or central bank.

The policy, which comes into immediate effect, thereby also increases the maximum amount participating ECAs can officially support from 85% to 95% of the total export contract value.

The measures will run for an initial 12-month period and apply to any applications made during this time, with ECAs having to make a final commitment to any particular transaction within the next 18 months.

The moves come amid mounting pressure from industry associations and individual companies, who have called upon ECAs to relax requirements as purchasing countries face increasing financial pressure.

The OECD says that under “normal circumstances” buyers would have the possibility to finance the down payment with longer repayment terms, as financing banks would usually be able to source cover from the private insurance market.

But the Covid-19 crisis has thrown the market into disarray, the OECD says, with the private sector seemingly “very reluctant or even unwilling to provide this cover for developing countries”.

“Without such cover, banks are not ready to finance that portion of a project in countries, which are most in need of such projects. We are therefore in a situation of clear market failure that has to be addressed urgently.”

 

Boost for Africa

Experts say the rule change will offer a vital source of liquidity for critical infrastructure projects globally, particularly in Africa.

Gabriel Buck, managing director of boutique consultancy GKB Ventures, says that appetite is “limited” for sovereign risk among private banks and insurers in Africa, where funding costs and market pricing on sovereign debt is constantly shifting.

“It is really difficult for low to middle-income countries in Africa, even for social infrastructure projects such as housing and hospitals, to get the 15% down payment they need,” Buck says.

He argues that with the introduction of the new OECD rules, the continent’s financing prospects are likely to flourish.

“When it comes to developing markets such as Africa, this is one of the biggest game changers for sovereign ECA deals that I’ve seen in three decades. This is a huge shift and will provide sizeable beneficiation to low-income countries looking for infrastructure on a sovereign level,” Buck says.

“More projects will happen… the price of the associated debt will reduce, the tenor will increase and thus the project’s affordability and sustainability will improve.”

Taking the example of a renewable energy project in Africa, Buck explains that ECAs would previously offer repayment terms of anywhere up to 18 years on 85% of the transaction, but sovereign borrowers would have to accept terms of as short as five to seven years on the remaining 15%.

With this latest amendment, borrowers will now have better access to that longer-term financing for an additional 10% of the transaction.

Sovereign borrowers may still look to source financing from commercial lenders, Buck says, or they may use their own cash for the down payment. “I do not know what will happen, but I suspect it will be the latter. Some might decide it’s not worth doing a loan with the 5%.”

 

Why now?

Industry bodies had been calling for a re-evaluation of down payment rules within the OECD for years, long before the pandemic started wreaking economic havoc globally.

In November 2019, Business at OECD, the European Banking Federation and the International Chamber of Commerce said in a joint position paper that the OECD should allow for “more flexibility” on down payment terms.

They agreed that there should be some form of down payment as a risk mitigant to ECAs, deterring agencies from taking on 100% of the financing risk on an export contract.

But the groups flagged that in certain markets, such as Sub-Saharan Africa, it can be difficult to source funding for 15% of the transaction value, particularly with regards to large government contracts.

“The consequence is often delays or, ultimately, no export, as public sector contracts tend to be subject to the political cycle, with the result that the much-needed infrastructure is not built, or it is sourced from non-OECD countries, with a negative Sustainable Growth agenda impact,” the groups say in their paper.

Covid-19 only exacerbated this demand, with exporters having warned since the early months of the pandemic that they are facing difficulties exporting, with public debt levels reaching as much as 80% of GDP in some instances.

The British Exporters Association (BExA) had previously called for a similar temporary rule change in March 2020.

In a letter to Louis Taylor, CEO at UK Export Finance (UKEF), BExA urged the agency to approach the Secretariat of the OECD and request a boost in ECA involvement to 100% of the contract value, but only as a temporary measure and to support developing countries.

“Unless action is taken, export volumes will suffer,” the letter says. “Not just from the UK but from every major exporting country and developing countries will bear the brunt.”

Buck suggests that in addition to addressing such demands, the OECD’s decision may also have been driven by the actions of some ECAs that have already been providing support for down payment facilities.

He says that both the Japan Bank for International Cooperation and the Export Credit Insurance Corporation of South Africa have helped sovereign borrowers in Africa this year by providing “topping up” facilities, thereby increasing their overall support from 85% to 100%.

 

Private sector concerns?

Private sector players have warned that the move comes too little too late, and will simply crowd out new participants to the market.

One senior industry source tells GTR that the OECD’s Covid-19 response policy has taken over a year to announce, undermining its potential impact. “Introduced a year ago it might have been helpful,” they say.

The industry figure questions the current need for the policy and says it now has the potential to “crowd out the growing number of financial institutions, funds, asset managers, development finance institutions, as well as regional or local banks, playing in the 15% commercial loan space”.

“For them the announcement is not welcome nor justified and has the potential to distort and disrupt investment in this important area by these new participants and potentially crowd them out.”

They add the Arrangement’s ruling is far more wide-ranging and heavy handed than the policy change previously suggested by Business at OECD, which only proposed a new down payment approach for “very large deals” in Africa – ones where there was demonstrably no alternative capacity available elsewhere.

The new rules make “no distinction” on the size of transactions that can be supported, nor do they require that the lack of capacity be clearly evidenced, the source says, adding: “These are crucial omissions which should be remedied.”