Trade-related rhetoric is heating up around the world and the role of export credit agencies has come into sharp focus. Eleanor Wragg reports on a competitive market.
For years, export credit agencies (ECAs) toiled dutifully in the background, providing encouragement and protection where needed, enabling exporting to take place. By the turn of the century, there were serious debates about whether ECAs may have outlived their usefulness and become anachronistic, in what was then a pro-trade environment. Then came the global financial crisis, which gave ECAs a renewed lease of life, as they worked to fill gaps left by banks and helped to prevent a bigger fall in trade volumes. Today, as the language around trade becomes couched in pugilistic terms of ‘winners’ and ‘losers’, there is a growing feeling that among ECAs, too, the gloves are off.
“Until recently, the main objective of an ECA was to give to its national exporters the same tools that were available in other countries. They wanted to offer the same in order to be at the same level as their competitors; they didn’t want to differentiate on the high side. Now, there is something different going on. They want to be the best ECA to win the battle of exports,” says Henri d’Ambrières, founder of HDA Conseil and technical advisor to the Banking Commission of the International Chamber of Commerce (ICC).
Bankers agree. “In the immediate aftermath of the crisis, everybody had a political imperative to export their way out of recession, so governments put pressure on their ECAs to support exporters again, which emboldened them,” says Simon Sayer, global head of structured trade and export finance at Deutsche Bank. “They started looking at ways they could do more for their exporters, albeit in slightly hushed tones. What has happened over the last two years is that it has become much more visible, and not just that; the ECAs themselves are quite keen to make a bit of noise about it as well, because they are keen to show that they are doing all they can to support exporters and the economy.”
Speaking to GTR, Lawton King, spokesperson for US Exim, says that the bank “does in fact note a trend of increased competition among ECAs”, adding that “this trend can be seen, for example, in the growth of exportrelated programmes introduced by both OECD and non-OECD members alike, which falls outside of the purview of the OECD arrangement”.
André Gazal, global head of export finance at Crédit Agricole CIB, believes that the reasons for this trend are manifold.
“We are seeing the combination of a shrinking market and a counter-cyclical scenario, which means that they have to make more effort in promoting their products and their countries. Furthermore, some governments are also more proactive in enacting trade policies which promote exports as one of the tools to contribute to an increase in GDP. Over time, some ECAs may have felt that they had lost some ground; others felt that this was a key tool in their trade policy that was insufficiently used. This is, to an extent, behind the increasing attractiveness of some of these ECAs to exporters and borrowers alike,” he says.
Good news for exporters
What this means for exporters is new products and programmes, offering more flexibility, fixed interest rates and more relaxed national content rules.
For example, legislation passed by the British Parliament in March 2015, which widened the powers available to UK Export Finance (UKEF), now allows support for working capital facilities to companies that supply exporters. It also means UKEF can meet the financing preferences of overseas buyers who might wish to use an integrated financing package to support UK prime contractors as well as UK subcontracts through non- UK contractors.
What’s more, the legislation also explicitly spells out UKEF’s ability to support the export of “intangibles” such as intellectual property rights, software licences and broadcasting rights.
“Some ECAs, such as UKEF and Sace [Italy’s ECA], have been particularly aggressive in developing new products, allowing a more liberal application of their support or promoting their products more widely. This can be seen, for instance, where they have been more proactive in directly marketing to borrowers. Some have set up some regional hubs, others have communicated more widely some credit limits that they have put in place for certain countries,” says Gazal.
Gordon Welsh, business group director at UKEF, tells GTR: “I think having an effective ECA offering to complement the high-quality goods and services being exported is a powerful tool in any country’s trade offer. UKEF’s role is and always has been to make UK exports happen, and we want to make sure that we’re being as innovative and flexible as we need to be. This year has seen a number of industry firsts for us: the first loan to the Kurdistan regional government, an innovative hybrid project finance/reserve-based lending structure, and an expanded local currency financing offering now covering 40 currencies.”
Another development in the ECA space has been the relaxation of local content rules. “World trade is global, so exporters source globally, and not just in their own country. To enable these exporters to export and at the same time to source in countries where they can best source, many ECAs felt the need to relax their rules for national sourcing, or national content,” says Vinco David, secretary general of the Berne Union, which counts among its members several official ECAs.
Third-party reviews tell us we now have at least as many tools in our armoury as any other ECA, and more than many.
Gordon Welsh, UKEF
“Third-party reviews tell us we now have at least as many tools in our armoury as any other ECA, and more than many,” says UKEF’s Welsh. “For any ECA, increasing national content in a project will be a major factor in providing support. UKEF’s minimum UK content requirement is less than some other ECAs, but we of course look to make sure that we have as much as possible. Building relationships between UK exporters and buyers abroad through the support we offer is an important part of our offer.”
Along with UKEF, other ECAs with lower national content rules are those of Belgium, Italy, Sweden and Finland.
“They approach it from the viewpoint of national interests,” explains David. “Frankly, there are different theories here. There are some ECAs that keep the notion of national content, because they want their exporters to screw bolts in their country, so they keep a minimum of national content, maybe 20%. Other ECAs say, well, manufacturing is maybe not so important anymore, so if a national exporter manufactures abroad, then it is still good enough for our insurance, as there are other benefits, such as dividends for the parent company, or for instance research activities still done in the home country.”
This development was illustrated most recently in May when Reuters reported Iranian deputy roads and urban development minister Asghar Fakhrieh- Kashan as saying UKEF could offer some support to US plane manufacturer Boeing for aircraft purchases by Iran, likely on the proviso that a proportion of the jet parts are made in the UK.
Boeing’s home ECA, US Exim, has been operating with just two board members for two years and therefore does not have the quorum needed to approve aircraft financing guarantees on anything more than US$10mn. Indeed, a 2016 competitiveness report by US Exim cited one lender as saying that the lapse in US Exim authorisation forced bankers to introduce their exporter clients to other ECAs which “opened their clients’ eyes to the abilities of other ECAs”.
This new way of working reflects in a large part the economic reality of the interconnected supply chains that span the globe.
“Geographic borders are less constraining today than they were, at least in part because trade is also more complex. Supply chain ecosystems, integrated economies and sectors, such as the North American auto sector under the North American Free Trade Agreement (Nafta), result in products that include multiple components that often travel across borders several times before assembly into a final product, hence the complexity in delineating where the role of one ECA might ‘stop’ and another begin,” says Alexander Malaket, president of Opus Advisory Services International and deputy head of the ICC Banking Commission’s executive committee.
He adds that “certain ECAs will now look significantly beyond traditional requirements of domestic content or national interest, for example, in considering whether to support a deal – they might even finance, or take an equity interest in, a foreign firm on the possibility that this firm could become a buyer of exports from the ECA’s home country – one illustration of intra-ECA competition that would not have arisen in the past”.
ECAs continue to co-operate and collaborate with each other, especially on large deals.
“On the large transactions where you have a number of ECAs working together, there is a tendency for them to not want to be the one who lets the side down or lets their exporters down, so they will sometimes go the extra mile. There is the concept of matching under the OECD as well, where if you can demonstrate that another country is offering better terms, then it is possible to match those terms, so you do get a little bit of a competitive tension between the ECAs,” says Sayer.
Good news for banks?
As ECAs expand their reach and make it easier for exporters to take advantage of the financing they offer, this raises the question of the role of banks and the extent to which they, too, may face competition from ECAs.
However, Welsh at UKEF stresses that the ECA’s role is, “to complement rather than to compete with the finance industry; we’re here to provide banks with the risk capacity to support their customers, so much of our support relies on banks’ appetite to take it up. We make sure that our products work for the industry by engaging closely with the British Banking Association, for example consulting with them in product development on new support like direct lending.”
Indeed, direct lending by ECAs is something of an issue for banks, with some concerned that it has the potential to create unhealthy competition.
“Bankers have to be honest: they have asked for years for tools for refinancing,” says d’Ambrières. “It becomes more competitive is when there are direct lending facilities, because if there is a direct lending facility and the direct lender is the only way to get a fixed rate, an exporter will go to the ECA rather than to the bank. However, I don’t believe this is coming from the ECAs themselves; it is something which is coming from public bodies such as the ministry of finance, as most European ECAs cannot act as lenders.”
“I think there is inevitable collateral damage, albeit not intentional, in that some ECAs are using more direct lending products to promote themselves,” adds Crédit Agricole’s Gazal. “It is fine as far as we are concerned, as long as it is not intended to sideline the banks. If it is complementary, meaning that there is not enough capacity in the market, or they need to do it because that’s the only way the business is going to get done, fair enough. But we would like to make sure we continue having a collaborative effort and that there is continued communication and co-operation going forward between ECAs and banks, because we need each other. It is a kind of symbiotic relationship. It just so happens to also be in the interest of exporters and borrowers.”
If you can demonstrate that another country is offering better terms, then it is possible to match those terms.
Simon Sayer, Deutsche Bank
The changing trade landscape
Although political changes, such as Brexit or the new US administration, indicate a shift in global trade ideology, so far there are few apparent practical instances of this happening. Nonetheless, “ECAs, particularly those operating under a public policy mandate, will be directed to reflect the political will of their national leadership”, says Malaket.
This could lead to something of a divergence in the ways ECAs operate, as d’Ambrières points out. “Some ECAs would consider that export credit is a tool to win this economic battle, while some others would be much more cautious and would do something only if they are asked to do something. You have some ECAs which are reactive, and you have somewhich are more proactive.”
“ECAs do not think in terms of competition,” says the Berne Union’s David. “They think in terms of helping their national exporters. That’s a slightly different angle. ECAs are not there to say: ‘I have to compete with that other ECAor to win from that other ECA. ‘How can we help our exporters?’.”
With countries competing for primacy in trade, a growing share of export finance has begun to take place outside of the OECD, with trade finance from development finance institutions (DFIs) or initiatives such as so-called untied lending, which in many cases implicitly pay for the donor country’s exports.
“Recent evidence suggests that DFIs are increasingly co-operating with or competing against ECAs,” says US Exim’s King. “As DFIs are not party to the OECD arrangement, they may be able to offer financing on terms that are usually better than those available in the market but that are not governed by the OECD rules. This possibility leads to the re-emergence of blurred lines between trade distorting, rather than altruistic and developmentally focused, aid and export credits that the arrangement was intended to prevent.”
Meanwhile, while untied lending isnot governed by the OECD terms and conditions, the practice has been that governments loosely follow them, albeit often with longer tenors or longer grace periods.
“The host governments have a lot more freedom with these schemes, because they are not bound by the OECD. They have a lot more freedom to use those schemes aggressively, and I think we are going to see more and more of that,” says Deutsche Bank’s Sayer.
The US’ Overseas Private Investment Corporation (Opic) is a case in point. The new Trump budget initially proposed eliminating it, but it is now rumoured to be giving it an extended lease of life, enabling it to be used as a tool to implement US overseas foreign policy. “The expectation is that Opic is going to become much more politicised and much more directed towards supporting US trade, and that theme is also present with the otherentities around the globe that do this, like KfW [the German development bank] and Nexi [the Japanese ECA],” says Sayer.
It remains to be seen what the trade landscape will look like in a few years as anti-trade and anti-globalisation ideology become a feature of international discourse. What is clear, however, is that the role of EAs is changing rapidly, and competition – overt or otherwise – with others could well become a prominent element of their activity.
