Just weeks after the OECD moved to relax down payment rules for transactions involving export credit agencies (ECAs) in the developing world, questions have been raised over the reasons behind the decision.

Last month, the OECD Arrangement on Officially Supported Export Credits announced it would temporarily slash 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 OECD argued the move was necessary due to a lack of political risk insurance (PRI) coverage for these types of deals, leaving banks reluctant to finance the down payment portion of deals in regions such as Africa.

“We are therefore in a situation of clear market failure that has to be addressed urgently,” the OECD said.

But the private insurance and lending market has hit back, claiming that cover and funding is available for down payment loans, even in regions such as Africa.

In a letter sent to the OECD after the announcement was made, excerpts of which have been seen by GTR, one institution that invests in commercial loans argued that “while market capacity remains constrained for some countries, significant capacity remains available across many jurisdictions”.

Michael Creighton, executive director for credit and political risks at insurance broker Willis Towers Watson, likewise questions the timing of the move and the reason given by the OECD.

“The biggest issue here is the argument the ECAs have used, of a failure in the private market,” Creighton says.

He says there are “a lot of other reasons” the ECAs could have provided to support the decision, such as wanting their exporters to win contracts, or to fill funding shortages in emerging markets.

“While PRI capacity in emerging markets, and in particular Africa, has indeed been constrained over the last 18 months, the PRI market has remained open… well-structured transactions are still being supported by both commercial banks and PRI insurers,” he tells GTR.

“If anything the decision has been announced too late. This should have come when the ECAs introduced short-term reinsurance facilities in March 2020 to support the short-term trade credit market,” he adds.


Impact on banking sector?

The move is expected to be a boon for international banks and exporters in OECD countries, who will now be able to tap into greater levels of ECA support in emerging markets. However, Africa-domiciled lenders could see their business disrupted.

Creighton says certain commercial banks who have built their business models around capturing the 15% market could “suffer a bit – as will a few insurers”.

Chris Mitman, head of agency and export finance at Investec, tells GTR he wasn’t aware of any consultation with Africa-domiciled lenders, who could find it harder to participate in export finance deals on the continent.

“The 15% commercial loan market was an area of significant activity for them and the OECD has effectively shrunk that by up to two-thirds overnight.”

Such claims are backed up by Asanda Tsotsi, head of project and export finance for Standard Bank of South Africa, who says the decision could ultimately affect its business on the continent.

“By reducing down payment financing requirements, this could crowd out local institutions from the financing of these projects, which could be particularly impactful to the Standard Bank Group, which offers local banking solutions in 20 countries across Sub-Saharan Africa,” Tsotsi tells GTR.

Mitman says the move is also “not helpful” for asset fund managers who have been spying opportunities in the down payment financing market.

One such example is Acre Impact Capital, a private debt firm, which plans to set-up multiple export finance impact funds targeting the down payment portion of ECA deals across emerging markets.

Hussein Sefian, founding partner of Acre, says the firm is seeing a “good level of demand” from various investors, including development finance institutions, multilateral development banks and impact investors.

“We welcome any attempt to provide financing and improve affordability for projects across the African continent,” Sefian tells GTR.

“But as this change is only temporary, it could have unintended consequences for the industry as a whole. If you crowd out private sector lenders and insurers over the next year, the broader financing ecosystem could be disrupted by the time the rule reverses.”

Sefian suggests the OECD should take a more nuanced approach and consider more permanent solutions.

“For example, longer tenors for social infrastructure in markets such as Africa would be a better way of improving affordability of infrastructure for these countries. Another lever might be to play with the premiums, which should be an important consideration in the talks to modernise the OECD Arrangement. For instance, they might look to reduce pricing on projects that have environmental and social benefits.”


“Positive move” for Africa

Despite such concerns, others in the industry tout the potential benefits for sovereign borrowers in dire need of infrastructure funding.

Gabriel Buck, managing director of boutique consultancy GKB Ventures, refutes the idea that commercial lenders and funds are being unnecessarily crowded out of the down payment financing market.

“The commercial market is both more expensive and limited in capacity,” Buck tells GTR, adding that “Africa needs long-term, low-cost debt and this is what these OECD changes provide”.

Prior to the onset of the pandemic, 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.

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.”

Albert Rweyemamu, a senior credit and political risk underwriter at the African Trade Insurance Agency, says the new OECD changes are a “very positive move” for Africa and suggests the decision should be made permanent.

“The infrastructure funding gap is tens of billions of dollars annually. Water infrastructure, roads, power, irrigation systems – we need funding for everything.”

“The Chinese are more or less getting to the limit of their financing… they are slowing down funding. If China slows down, it is unclear where we are going to get capital, so the OECD’s decision to make it easier to support these deals is a positive thing… It’s always good for Africa to have more financing options.”