Volumes are stable, or increasing, in a risk environment that still poses major challenges, say senior officials at four ECAs from different regions of the world. Kevin Godier quizzes them on their shifting role in the trade and export finance arena.
Roundtable participants
- Khemais El-Gazzah, chief operating officer, Islamic Corporation for Insurance of Investment and Export Credit (ICIEC)
- Fred Hochberg, president and chairman, US Exim
- Helen Seemann, director, large corporate business, Swedish Export Credits Guarantee Board (EKN)
- Jef Vincent, chief underwriting officer, African Trade Insurance agency
GTR: How would you sum up the year 2013? What were the prominent trends?
Hochberg: 2013 was a standout year for US Exim. We approved a record 3,842 export transactions, 3,413 of which (nearly 90%) were small-business authorisations, for a total estimated export value of US$37.4bn. Our financing has helped support or create 205,000 export-related US jobs and generated more than US$1bn from earned interest and fees that was transferred to the US Treasury.
Seemann: It has been a year of continued high activity. The volumes have gone down from the historical heights during 2010/11, but are still on a level of around 50% higher than the beginning of the 2000s. Preliminary volumes in 2013 concluded at around SEK44bn (US$6.77bn). Telecommunications is the largest single industry covered and we still see a demand for cover in transactions to high-income countries in the OECD. We have guaranteed major transactions to Japan, Italy, Spain and the US.
Vincent: 2013 was a mixed bag. We saw a concentration of enquiries on sub-sovereign risk, mainly for power and infrastructure projects. Our export portfolio last year was stable. The main development at ATI in the last 12 months has been on the insurance of purely local transactions, with local companies insuring their risk on their distribution network and on public buyers and banks off-loading part of their exposure on local clients. The exports from our member countries are often inter-company contracts that are not insurable. We have also seen that ECAs can benefit from partnering with us. Our on-the-ground perspective means that we have direct contact with the risk that someone sitting somewhere in Europe, for instance, wouldn’t necessarily have. Sace, the Italian ECA for example, has been partnering with us on most of their transactions in our member countries since 2010 and they recorded a doubling of Italian exports to Africa in 2013 over the last 12 months owing to this partnership.
El-Gazzah: 2013 was a challenging year for ICIEC given the political turbulence and economic downturns in several member countries and worldwide. This has caused vigilant underwriting decisions to manage the risk of the corporation. As a result, ICIEC was not able to fully meet the market demand in many of its Islamic member countries. The total amount of business insured during 2013 reached its highest amount for the last 20 years at US$3.4bn, representing an increase of 9.4%. As per its medium-term business strategy, ICIEC managed to change the composition of its business portfolio to increase the share of medium-term and foreign investment insurance business lines from 28% to 33% compared to the share of its short-term business volumes.
ICIEC witnessed a growing demand for political risk insurance (PRI) cover in Africa, the Middle East and South Asia, with demand concentrated in Algeria, Bahrain, Indonesia, Lebanon, Pakistan and Senegal. The request for political violence cover is common in Mena countries. More specifically, ICIEC has observed an increasing demand for PRI cover from banks and financiers for financing of infrastructure projects in countries like Indonesia, Pakistan, Senegal and Turkey.
GTR: Do you envisage any major differences in business trends in 2014? Are there any signs of a change in terms of the level of business, the demand, product innovation or any other area?
Hochberg: We are a demand-driven institution, but we will continue to focus on the areas mandated by our charter, especially small business, a particular focus of mine.
Seemann: We believe volumes will stabilise at current levels. We also see signs of increased activity in the power industry, where, during 2013, we saw some postponed projects. Also we see the mining industry slowing down from last year’s record high.
Vincent: In 2014 we will definitely see a surge of transactions related to power generation, power transmission and infrastructure. Projects that have been pending for two or more years will come to maturity. There is a gigantic push from national governments, but also from initiatives like SE4ALL, to increase energy capacity and this can only be done through independent power producers who need assurances regarding the political risks that they will incur.
The other big development is on the transport side, from pipelines that will secure the transport of crude oil to the ports and railways that potential mining projects need particularly in the case of landlocked countries. Some of these projects are likely to be insured by the ECAs of the suppliers, or by Miga, but ATI definitely has a role to play. For instance, in one of our East African member countries we are now participating in a large railway project where we advised that there was no possibility of receiving bank financing with the existing plan. We are able to analyse a transaction from multiple perspectives. On the pure political violence and terrorism (PVT) front, the West Gate Mall incident has triggered an increase in demand for PVT cover, not only in Kenya but also in countries that have traditionally lacked a PVT market, such as Tanzania.
El-Gazzah: ICIEC will focus on enhancing its medium-term and PRI insurance business lines in the next three years in order to balance its portfolio between short, medium and long-term cover. On the short-term side, ICIEC will mainly concentrate on documentary credit insurance where the exposure will be on financial institutions, especially buyer credit facility insurance products. Furthermore, ICIEC’s newly-developed product, sovereign sukuk insurance, is being launched to the market at the beginning of 2014. We are expecting to receive a considerable demand on this specific policy from certain governments in our member countries.
As far as PRI is concerned, trends are largely pointing to growth in foreign direct investment (FDI) into developing countries and heightening awareness and perceptions of political risk among investors. We expect the demand for PRI to continue increasing, particularly in south-east Asia and Sub-Saharan Africa.
GTR: How does the risk environment look in terms of claims and losses?
Hochberg: The risk environment looks favourable. US Exim had a historically low active default rate of 0.237% for the last quarter of 2013, and we paid only US$48.8mn in claims in FY 2013 on a total exposure of US$113.8bn.
El-Gazzah: Claims to ICIEC increased by 10% in 2013 and we expect the trend to continue in 2014. Although the situation in the Eurozone and the US is showing some recovery, this is very slow and fragile. We still see more political unrest ahead in the Mena region, which may be converted into real claims payment during 2014.
Vincent: ATI’s portfolio of commercial risks is growing and that automatically comes with potential and real claims. After years of very limited income and virtually no claims, we will gradually see a loss ratio in line with the rest of the industry. As for political risk, the cover is shifting from straightforward ‘pure’ political risk like expropriation and currency inconvertibility to non-payment by sovereign and sub-sovereign entities. Here we are seeing sometimes significant payment delays that at times trigger claims. ATI is protected by its preferred creditor status so in these cases, we pay claims while we engage the governments to meet their contractual obligations.
Seemann: Indemnifications as a percentage of outstanding guarantees have been around the 0.2% level for several years and the outlook is that it will remain on that level. A major part of the indemnifications during 2013 was for transactions to Iran, concurred before sanctions against the country were introduced. The sanctions make it difficult to transfer payments from Iran.
GTR: The role played by export credit agencies since the 2008 financial crisis has enlarged significantly, as banks have pulled away. Do you expect this trend to continue permanently in the years ahead? Or have commercial banks already begun to re-expand their export finance business?
El-Gazzah: In our view, banks are coming back to the market and looking at increasing their export finance and related trade assets. However, as usual, banks are careful and slowly opening up; we believe that stronger partnerships will be formed between banks and ECAs. Risk mitigation instruments continue to be important drivers for this trend. We may witness many new innovative trade finance products in the markets in the years to come. Uncertainty over Basel III rules may however pose a challenge in this regard.
Hochberg: The ‘backfill’ posture of ECAs will probably not be as short-lived as once imagined. While gaps in export financing were exacerbated immediately after Basel III and the eurozone crisis, they still remain relatively large and highlight the important role played by ECAs.
Seemann: Banks are more active today, but we see a need for both banks and ECAs. The factors driving the continued interest in ECA financing is an interest from buyers to diversify their loan portfolio, the fact that ECA financing today is more well-known and that insecurity prevails as a result of the coming Basel rule implementation, as well as the future roll back of central bank stimulus.
Vincent: Since we are dealing mostly with export banks from outside our member countries, they typically mostly work with their local ECAs and so our view is quite limited here because we would typically not see these transactions cross our desk. In our member countries we have seen the withdrawal of the European banks but their niche has been taken up by South African banks and regional African banks. We are also seeing foreign multinationals setting up companies in Africa in order to access local funding, with the support of ATI, and to hedge their currency exchange risk.
GTR: Is there any sense in which banks hold back the ability of ECAs to do business?
Seemann: No, not at all, the export industry needs well-functioning banks to provide financing, take and share risks. EKN provide guarantees to both Swedish and international banks. This is needed in particular large and long transactions.
Hochberg: When banks are involved in our transactions, they actually increase efficiency since they can underwrite the transaction and provide funding.
El-Gazzah: Actually bank and ECA activities are closely intertwined. The two sides complement each other in supporting trade. ECAs have a huge role to play, especially in troubled times, to fill the gap created by the withdrawal of the private sector. At the outset of these relationships, there is a learning curve for sure, but once a structure is in place, it is smooth sailing. One important consideration in this regard is the role of the exporter in this relationship. We have noticed that the presence of a motivated insured in most cases really speeds up the process of getting banks on board. In our core markets ICIEC has been playing an instrumental role to help banks keep their lines open to support trade in post-crisis countries in the Mena region. ICIEC in the past has managed to encourage several commercial banks to change their risk misconception about certain markets especially in Africa, and today many of these markets are widely accepted in the banking community without insurance.
GTR: Is there enough long-term project debt available? What new sources of capital can ECAs draw upon to bolster funding support for projects?
Hochberg: There seems to be insufficient project finance capacity in the private sector, and that is one area where we fit in. We constantly strive to develop new products to address perceived market needs, such as when we created the capital markets funding mechanism to provide new sources of capital. We will continue to take the pulse of the marketplace to see how we might address gaps or insufficiencies.
Seemann: EKN covers both long and short-term transactions and follows exporters to the markets where they are active. In 2013 that meant 1,518 transactions in 115 countries. EKN does not provide or need funding since we are supporting Swedish export by issuing guarantees.
El-Gazzah: We do not provide funding. We believe there is adequate liquidity available for long-term projects here in the Middle East. There are a number of sovereign wealth funds and private offices in the Middle East which could potentially be approached to provide liquidity for project finance, since this is an asset class they may not normally have exposure to. We rarely see commercial banks involved on their own in financing projects but rather they are participating in syndication with ECAs to fund large infrastructure projects in Asia. We also observe their involvement in some infrastructure projects in Sub-Saharan Africa where the financing is led by multilateral and regional banks. Interestingly, we see a growing involvement of African banks in cross-border project finance particularly after some European banks have pulled away.
