Vinco David has been the secretary general of the Berne Union, the global association for the export credit and investment insurance industry, since March 2017. Here, Shannon Manders gets his take on matters affecting the association’s ECA members in particular.
GTR: What has been the demand for export credit agency (ECA) cover over the past 12 months? Which markets and sectors have been noticeable hotspots for ECA cover?
David: In 2017 we saw an upturn in ECA cover for medium and long-term (MLT) credits, after three years of a slight decline in new business. These MLT credits are largely for the export of capital goods and infrastructure investments. This higher level of new commitments also seems to be holding up in the first half of 2018: the total level of MLT commitments of ECAs was well over US$700bn at the end of the first half. During this period, Southern and Eastern Asia were hotspots for exports covered by ECAs. Together, both regions accounted for nearly a quarter of all ECAs’ new MLT business. The strongest growth was seen in Bangladesh: power plants and equipment continue to be an important sector. The second major region was the Middle East and Northern Africa, where major sectors were still oil and gas and infrastructure, but also power.
As a single country, the US stood out as a destination market in the first half of 2018 and accounted for 10% of all new business. ECA-covered exports to the US comprised ships – including cruise ships – telecoms and general capital equipment.
GTR: What has been the demand for investment insurance – the cover of investments against political risk – of late?
David: In actual investments covered there has been modest growth. Our data showed a decline in 2017, but this was due to a change to a different, and more accurate, reporting by our members. There is still a large demand for investment cover against political risk. This demand is met by both ECAs and private insurers. New cover provided in 2017 was around US$100bn. And investment insurers do pay claims. In 2017 alone this amounted to well over US$500mn.
GTR: Now more than ever, we are seeing increased competition between ECAs, with new processes and products – including direct loans – being developed. How do you see this evolving? Where does that leave private insurers?
David: Both ECAs and private insurers continue to develop their products and services to meet demand from exporters, banks and investors. There is indeed some competition between ECAs and private insurers, but in many cases they are complementary rather than competitive. Private insurers have grown their MLT and political risk insurance books, but this has not been at the cost of ECAs. Jointly they have grown the market. Private insurers also reinsure ECAs, which adds to market capacity. The last few years have been rather benign economically.
The question is what will happen if there is a real hit, or downturn in the global economy, leading to large claims. Would there still be a large pool of private market capital for credit and investment insurers? Or what would happen if interest rates really start to rise? Would new, recent entrants in the private insurance sector then withdraw again, or stay? In that case I foresee some decline for credit and investment insurance in the private sector. However, this market can absorb some contraction without a squeeze on new business.
ECA direct lending has indeed been a noticeable development over the last few years. This was not related to any lack of insurance capacity, but rather less bank financing, or perhaps the perception of less bank financing, for exports, in particular export finance for SMEs. Indeed, whereas before the credit crisis SMEs could often choose between multiple banks, nowadays this is often limited to their house bank. And these banks now have higher standards for know your customer requirements and have higher capital requirements than before.
GTR: ECAs are under continuous scrutiny from NGOs, regulators and the like in terms of environmental and social issues: how are you seeing ECAs responding to that?
David: ECAs are, by their very nature, public institutions, answerable to their government guardian authorities. Therefore, they are embedded in the environmental and social policy of their respective national governments. In addition to that, ECAs from OECD countries have developed an extensive set of guidelines and rules for environmental and social issues, and more recently, also human rights. These rules can go even further than the Equator Principles, subscribed to by many banks. In addition, many ECA have reached out to national NGOs, not least to get a better mutual understanding. ECAs and NGOs in OECD countries also meet from time to time.
GTR: Do you see rising protectionism and trade wars as a threat to ECA business?
David: Protectionism and trade conflicts are rising. So far, we have not seen a rise of claims related to this. But there are definitely considerable risks, both at exporter level and on a more macro level. If an exporter is faced with cross-border trade restrictions, or tariffs that make export no longer feasible, then this exporter may have to look for other markets. But he will not always succeed. This could lead to a loss of income, and even insolvency. And this, in turn, could lead to a reaction in the supply chain. This is just one example where political measures lead to commercial losses. And ECAs will then have to pay more claims, obviously.
On the macro level, these restrictions and conflicts can lead to losses. Free trade is good for economic growth. There are a few exceptions to this, for example for nascent industries, but generally there is ample evidence of the positive impact of free trade. Less free trade will lead to lower economic growth globally. One good example is US shipbuilding, an industry which is very well protected. As a consequence, it has not innovated as much as shipbuilding in other countries,and thus US shipbuilders find it difficult to compete on the world market.
Trade restrictions can also lead to goods being exported to markets where there are less restrictions. These markets could then be overflowed, leading to more supply than demand, and thus depressed prices. Exporters might then be forced to sell their goods at a loss, which is not sustainable.
The good thing, though, is that markets will also find a new balance. But it may take a while before there is a new equilibrium, and in the meantime a lot of harm can be done to exporters. Thanks to ECAs and private insurers, these risks can be managed.