As the US economy emerges from the global economic downturn, hampered by dwindling consumer spending, a weak labour market and tight credit, all eyes are on its exports as a way to kick-start economic growth and create jobs, writes Eleanor Wragg.
With increasingly keen competition from foreign exporters such as China and Germany, and a small business sector unaccustomed to foreign trade, the US has several obstacles to overcome before it can successfully export its way out of recession.
A major factor in increasing the country’s export competitiveness is the role played by the US Export-Import Bank (US Exim).
In March 2010, President Obama launched the national export initiative (NEI), which aims to double US exports from their 2009 level of US$1.58tn to US$3.16tn in 2015, providing a crucial boost to the economy.
Faster inflation in emerging markets means US goods are cheaper than goods from these countries, which suggests that if the US is to double exports, an overwhelming portion of that new export growth will come from developing economies – putting the US in direct competition with China.
“The support of US Exim is critical, because it is really focused on business with the new economies. In the new markets, there are large infrastructure and energy projects and project financing especially in the non-investment grade area for which access to international markets is not as easy. As a result, US Exim is not only an alternative financing strategy, but in many instances the only financing option available for projects,” says Valentino Gallo, global head of export and agency finance at Citi.
An expanding market
In January 2011, the US Exim agreed for the first time to match China’s cheaper financing terms in a US$477mn General Electric locomotive deal with the Pakistan government.
Elsewhere in the subcontinent, India, where the bank has a US$5.6bn exposure, is its largest portfolio in Asia and the second-largest globally.
“There’s a large increase in American exports to India. In India alone, the official financial plan is to spend a trillion dollars, and there’s talk of a few billion on top of that for the next five years,” says Fred Hochberg, president and chairman of the US Exim. “That’s for everything from roads to power to ports to airports. America makes those products.”
Speaking at the Confederation of Indian Industry in July 2011, Hochberg said that he expected India to become the largest portfolio for the bank.
In order to allow for this growth, the bank is looking to change its charter to increase its exposure limit. Under current regulations, the US Exim must be re-authorised by the US government every four years, and the current authorisation is set to expire on September 30, 2011.
“US Exim has requested an increased exposure cap to US$140bn. The US house of representatives has passed out of committee an increase to US$160bn. No senate action has yet been taken as of this date. However, US Exim is optimistic that it will receive an increase in the exposure limit,” says a US Exim spokesperson.
Today, as foreign demand for US goods outstrips domestic demand and the dollar drops to historically low levels, exports have reached the highest proportion of US output since commerce department records began in 1929 at 12.8%. Since Obama announced the NEI last year, US exports are up 16.8%.
Propping up US exports
“Fiscal year 2011 has been an extraordinary year for US Exim,” says Hochberg. “In the first nine months we authorised US$22bn, which is more than we did for the entire fiscal year two years ago.
“By August 4, we had already exceeded our largest authorisations year in history with about two months to go. Our largest year previously was fiscal year 2010 at US$24.5bn.”
Despite this growth, it remains to be seen if the government’s export growth goal is achievable.
To have any chance of meeting it, the proportion of exports made by SMEs must increase dramatically.
“US Exim has organised what we have called global access for small business, a series of forums that we have done around the country,” says Hochberg. “We also launched a product called express insurance, where we will provide the exporter with a quote on credit insurance within five days with a ceiling of US$300,000 per client. This really helps if the exporter needs to get started in a hurry.”
With no minimum financing fees or minimum annual insurance premiums, US Exim may also represent the best starting point for export credit insurance and trade finance for small-business exporters and companies new to international sales.
“I think the products themselves are competitive, and what we’re trying to do at US Exim is to take financing off the table so that the products can compete on their own. The value we at US Exim bring to the marketplace is in long-term infrastructure financing because banks are reluctant to go out on longer terms. There are a lot of small businesses operating from which banks and credit insurers have also pulled back,” says Hochberg.
It’s not just SMEs that export their products that the US Exim is targeting. It has also developed a supply chain finance guarantee programme to provide competitively priced working capital finance to SMEs who supply US exporters with goods.
“The programme is designed to support SMEs that don’t directly export their goods or services, but provide them to larger companies that eventually export overseas,” says Citi’s Gallo.
This provides an incentive for large exporting companies to arrange supply chain programmes whereby banks receive a guarantee from US Exim in relation to the extension of credit granted to the SMEs.
“This is an indirect way to stimulate exports, plus something that was never done before,” Gallo adds.
This addresses a former issue whereby US exporters would buy, for example, German-made inputs in order to obtain Hermes funding, as buying US products was more expensive due to the lack of ECA support.
Another way that US Exim supports SMEs is through its working capital guarantee programme (WCGP), which helps exporters to obtain the working capital needed to purchase inventory or raw materials, to manufacture, or to market exports.
Under the WCGP, US Exim provides repayment guarantees to lenders on secured, short-term working capital loans made to qualified exporters. The guarantee may be approved for a single loan to a revolving line of credit. If the exporter defaults on the loan, US Exim will cover 90% of the principal of the loan and interest up to the date of claim payment at the stated rate on the loan.
Despite these solutions, the bank still has some way to go to meet other competitiveness indicators.
“US Exim is a traditional export credit agency and is constrained by policy directives that make its programmes far less flexible than other export credit agency programmes in terms of policy requirements and operations,” says Eli Hassine, global head of export & agency finance and co-general manager of global trade finance at SMBC.
Nevertheless, of late, US Exim has shown some nimbleness in responding to market needs. When bank lending for aircraft exports dried up, US Exim offered put options for lenders and guarantees for bond issues – support that has now been extended to other sectors.
“What that means is that if you are funding US Exim, in the event of a catastrophe you have the ability to go back to the US government to obtain US dollars,” notes Peter Luketa, global head of export credit and global specialised finance at HSBC.
“If you’re comparing US Exim with other European ECAs, they are still to embrace that. What it allows us to do in effect is price our liquidity accordingly; in other words on a short-term basis rather than on a long-term basis, because if there is a dollar starvation of liquidity we have the ability to go back to US Exim.”
“The put option has been an instrument that has helped to confirm the appeal of US Exim-guaranteed loans as an attractive asset class, as we have seen that loans guaranteed by the US Exim have been priced better than loans priced by the triple-A European ECAs, with specific reference to the most competitive segment of the export finance market, which is represented by the aircraft financing business,” agrees Citi’s Gallo.
Given all of these incentives, banks are now finding it easier to promote US Exim financing as a viable option across sectors from transportation, locomotives, aviation and mining to infrastructure and communications.
“We encourage buyers to think about and analyse the all-in costs that include the financing component in their procurement decisions. In more than a few occasions, we were able to present a compelling financing offer with US Exim support that managed to tilt their buying decisions to buy US exports,” agrees Astar Saleh, managing director and head of export finance advisory at JP Morgan.
“It’s not the easiest route to do a deal. Pre-crisis, corporates would rather do bond funding or syndicated loans, because that’s easier to execute and there’s no restriction, from environmental, economic impact to content restrictions. But today, we’re seeing a surge in developed market to developed market ECA-supported loans. For example, the increase is seen in US exports with US Exim support to Spain, to Canada, Singapore and to other atypical markets for an ECA,” Saleh adds.
Room for improvement
The US Exim work does not exist in a vacuum, and some analysts are baffled as to why the US isn’t capitalising on other opportunities for export facilitation.
“The US Exim has to go hand in hand with macro fundamentals,” says Gregory Daco, principal US economist at IHS Global Insight, who adds the pending free trade agreements (FTAs) with Korea, Panama and Colombia to the list of goals the bank ought to strive for.
One other problem, competitively speaking, is that exports financed by US Exim are required to be shipped on US-flag vessels. The US-flag fleet is small and costly, so many transactions seek a waiver from the maritime administration to use foreign-flag vessels. If this waiver is not granted, both cost and time are added to US export performance.
“Potential buyers of US products see the shipping restriction as a big restriction. That said, even with that restriction we still see tremendous growth in US Exim financing; hence the financing part of it is an important component, but if there is a restrictive shipping requirement then that will obviously impact on the overall costs to purchase US products,” says JP Morgan’s Saleh.
Despite these restrictions and barriers, today it seems likely that the US will reach its objective of doubling exports, particularly because, as highlighted in an IHS Global Insight study, 2009 was the trough for US exports.
As the study points out, “in choosing to double exports from this low-point, and knowing that exports had already rebounded strongly in the latter part of 2009 and early 2010, President Obama took the easy route”.
“We see nominal exports reaching US$3.07bn in 2015, which is about 95% of the way,” says Daco. “Then, the following year, 2016, we would be at US$3.31bn, so higher than the target of US$3.16bn. In the middle of 2016, we should reach that target level. This is a forecast, so it hinges on how much more can be done, and my conclusion is that while macro fundamentals including the exchange rate and foreign growth will be the major drivers, the export initiative might be the factor that allows the US to reach that goal.”
