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Contents
1 Introduction
Berne Union elected officials, SG’s report: three challenges for the industry 16
committees and secretariat 6 Vinco David, secretary general, Berne Union
Foreword 11
Topi Vesteri, president, Berne Union
Investment insurance
Prague Club Committee
3 Expert Analysis
Innovative ways to invest in India 51 Taking SME support to the next level 71
Bill Brown, regional vice president, Asia, Katja Keitaanniemi, executive vice president
Export Development Canada (EDC) responsible for SMEs at Finnvera
2
Berne Union 2017
CONTENTS
3 Expert Analysis continued
Building and operating an MSME export Introducing the BECI Local Contractors
credit insurance facility in Brazil 73 Programme 101
Marcelo Franco, CEO at ABGF, and co-author Bonani Dube, marketing manager, BECI
Pedro Carriço, ABGF´s credit underwriting &
international relations executive manager
A new approach to mitigating offtaker risk
in African power 103
The importance of credit insurance for John Lentaigne, chief underwriting officer, ATI
national SMEs 76
By COSEC
Oil price developments and prospects 108
Dr Rouben Indjikian, Webster University,
Geneva
PRIVATE CREDIT AND POLITICAL RISK
INSURANCE MARKET
Risk aversion, financing and real services 111
Time to stand up and be counted 77 Professor Andreas Klasen, Offenburg
Peter Sprent, head of global financial risk at University, and Dr Simone Krummaker,
Liberty Specialty Markets and Audrey Zuck, University of Westminster
director, A2Z Risk Services
4 Member Directory
1
Introduction
Berne Union 2017
The 13 Member Organisations are institutional positions, held by the two largest volume
members from each of the ST, MLT and INV Committees, plus seven additional members drawn
from amongst all four Committees on a voluntary, rotating, basis. All positions are held for a
term of two years.
■ HBOR
6
Berne Union 2017
INTRODUCTION
Elected Officials
8
Berne Union 2017
INTRODUCTION
Prospective from the University of Paris V and
Committee
a specialisation in International Trade from the
"Ecole Européenne des Affaires"/EAP in Paris.
INV Committee Chair,
She is fluent in French, Spanish and
Christina Westholm-Schroder
English. She is a former Chairman of the
SERV Switzerland | Senior Relationship
Single Risk Committee of the International
Manager
Credit Insurance & Surety Association (ICISA)
Christina is responsible for 2014-2015 and an active participant in the
all aspects of Sovereign’s Bern Union.
transactional underwriting,
with particular focus on
capital markets and financial Prague Club Committee
institution business.
Christina is also relationship PC Committee Chair, Chris Chapman
manager for a number of Sovereign’s ECA NZECO New Zealand | Head of New Zealand
and Multilateral Agency clients. Christina has Export Credit Office
worked in the political risk field for more than
Chris joined New Zealand
30 years. Prior to joining Sovereign, she was
export credit agency 10
with the Multilateral Investment Guarantee
years ago, when it was in its
Agency (MIGA) for 11 years.
formative stage, and has
She joined MIGA as one of its first
supported NZECO’s growth
employees in 1988 and worked in several
both in terms of an
capacities, including regional manager for
expanded product range, as
Asia and Latin America and most recently as
well as increased exports and exporters
manager for syndications and business
supported. Chris has previously practiced law
development. In this capacity, she was also
in New Zealand and holds a Masters in
responsible for the Agency’s re- and
International Business, as well as a law
coinsurance activities.
degree, from the University of Otago.
Prior to MIGA, Christina worked as a
political risk insurance broker in the Bank of
America’s global trade finance department in
New York and as manager in the political risk
Berne Union Secretariat
department at AB Max Matthiessen in
Vinco David
Stockholm, Sweden. Christina has an MBA in
Berne Union | Secretary General
international business from Stockholm
School of Economics and Business Vinco David was appointed
Administration and an MBA in finance from Secretary General in 2017. A
New York University. Dutch national, he has over
30 years’ experience in
various aspects of credit and
INV Committee Vice Chair, Nuria Gorog investment insurance,
ZURICH Switzerland | Senior VP – Head of including more than 20 with
Credit & Political Risk, Continental Europe leading international credit insurer Atradius,
in diverse roles across strategy, product
Nuria Gorog joined Zurich in
development, economic research, project
January 2007 as Senior Vice
finance, underwriting and claims
President and Regional
management.
Manager for Continental
Most recently Vinco served as a
Europe – Credit & Political
Management Team Member of Atradius Dutch
Risk. Prior to joining Zurich,
State Business, the Export Credit Agency of
she served seven years as
the Netherlands. Prior to this he has held
Chief Underwriting Manager in Continental
positions at the Berne Union Secretariat and
Europe for Unistrat Coface (Coface Group).
the Netherlands Ministry of Finance. He holds
Previously, she was Business Development
an MA in political science and international
Manager -Credit & Political Risk- in the in
relations and a BA in economics and Italian
house insurance broker of Natixis (Cauri).
language and literature from the Free
Ms. Gorog holds a Master's Degree in Law
Reformed University of Amsterdam.
9
from the Universidad Autonóma of Madrid, a
Berne Union 2017
Nicole Cherry
Johannes Schmidt Berne Union | Team Assistant
Berne Union | Associate Director (Logistics and Business Administration)
(INV Committee Support)
Nicole joined the Secretariat
Johannes joined the in July 2016. Nicole provides
Secretariat in April 2016. He assistance to the Secretariat
is responsible for supporting Team, manages the office
the chair and vice chair of and is a key player in the
the INV Committee as well events and logistics
as its members (public, management of the Berne
private and multilateral Union meetings.
insurers) with regards to their membership. She moved back to the UK in December
In his role Johannes is also supporting the 2015 after living in Tanzania for six years
INV Technical Panel, a subcommittee where working with NGO’s and running a volunteer
technical underwriting issues are discussed organisation.
amongst INV Committee members. Nicole holds a Bachelor of Arts Degree in
Before joining the Berne Union, Johannes Film Production from Roehampton
was an underwriter in political risk insurance University, London.
and untied loans for Berne Union member
PWC, managing the German Government’s
Investment Insurance and Untied Loan
Guarantee Programmes.
Johannes holds a Masters Degree in
International Business of Macquarie
University Sydney and a Diploma degree in
Economics at the University of Ulm.
10
Berne Union 2017: President’s foreword
INTRODUCTION
Berne Union President
Topi Vesteri, Berne Union President, Deputy CEO and Group Chief Credit
Officer at FINNVERA, reviews the developments through the past year and
looks to increased growth in business for 2017.
insurance provided by private members of lower for 2017 H1 than for the same period
the Berne Union.6 last year – a positive development. A rough
Short Term business is the most fluid, and expectation from figures seen so far is that
in some ways the most indicative of the they might come in somewhere around $2.5
immediate health of the global economy. billion by year end.
With credit terms of 12 months or less, it is 2017 so far then, appears to show a natural
also less easy to draw inference from deal- continuation of the trends seen in 2016:
pipelines ahead of time. positive growth in new business, healthy
demand and a continued appetite for risk
from our members, despite an elevated
claims environment.
Prague Club Committee
Trade infrastructure,
members showed trade barriers and political risks
particularly impressive Taking a step back for a moment to assume a
more external view, there is a corresponding
growth in 2016, increasing mix of positive and negative factors at play.
almost 40% on 2015 levels. With respect to trade, at least, the banking
industry and broader infrastructure for
international finance is in a fairly robust state
The fact that turnover business covered is at present and there is generally good
only calculated at year end makes it difficult availability of funding.
to compare half year results in short term Some new markets have opened (or re-
business. Combined with recent changes to opened, rather) and many of us have been
some of the definitions used for Berne Union looking with interest at opportunities arising
data reporting – more on this later – we don’t from renewed access to economies like
yet have a clear picture for new short term Argentina and Iran.
business. However, based on initial reports of Welcome news in banking regulation has
aggregate credit limits, combined with the seen (some) ECA-supported transactions
results of the other committees, there is granted an exemption to the Basel-mandated
certainly some indication of growth also in Leverage Ratio and positive steps at The
the short term space. International Working Group on Export
Credits are moving us at least a few small
Claims still high, but manageable steps closer to establishing a set of universal
2017 so far is showing a continuation of the guidelines for export credits, beyond the
high claims seen in 2016: OECD framework.10
In MLT, $1.4 billion for 2017 H1 is 13% up on Despite this, however, there are a number
the same period last year, indicating that we of real and concerning barriers to trade which
may well exceed $3 billion for full year once give us pause:
again. Similarly, $200 million INV claims paid Political shocks, leadership changes and
in the first half of 2017 is a full two thirds of the emerging threat of nationalistic
the $300 million total paid in 2016 – again protectionist forces in several countries all
suggesting another elevated year, with present significant challenges for harmonious
respect to claims.7 international trade.
However, it should be noted that claims Iran’s reintegration into the global trade
arising from business with the longer tenors system has faltered due to uncertainty
of MLT/INV are conspicuously ‘lumpy’ and it surrounding remaining sanctions. As well as
is difficult to make any accurate inference this, in some places political risks have
from the results for a 6-month period only.8 increased substantially:
One notable trend, also following on from Nuclear threat, and the gulf between North
what we have seen in 2016, is that the vast Korea and the international establishment is
majority of MLT claims relate to commercial as wide and as tense as it has been at any
(as opposed to political) risks. In 2016 90% of time since the 1953 armistice; sectarian
MLT claims paid related to commercial risks conflict and terrorism in the Middle East and
and 2017 is showing a similar ratio for the first in Europe disrupt ever more lives, occupy
half.9 greater resources and feed more headlines.
In short term, indications are that claims The degree to which this environment
12 levels will remain historically high, but still indicates or produces an increasing demand
Berne Union 2017: President’s foreword
for political risk insurance cover is debatable. blockchain etc. are both exciting and taxing
INTRODUCTION
As ever there is a delicate balance between at the same time. As we are now beginning to
the forces driving demand and those setting see global banks and the biggest financial
capacity. institutions stepping in to take the lead on
Despite these challenges, most Berne development of these technologies in a
Union members have been relatively serious way, it is clear that the so-called
optimistic about the near future; a sentiment ‘disruptive’ trends are now very much in the
underpinned by the early figures we have mainstream; setting a standard for the future
seen, outlined above. Indeed, ours is an of all of our businesses.
industry which is more resilient than most As ever, there is a need to keep up with the
curve and a great opportunity to improve
business flow and efficiency through some of
these developments, but also a serious
Some new markets have challenge – such changes come with
considerable costs in terms of time, money
opened (or re-opened, and other resources and it is important to
rather) and many of us have ensure these investments achieve their
been looking with interest objectives.
The inextricable symbiosis of trade and
at opportunities arising technology also brings other risks. Cyber
from renewed access to security may well turn out to be the supreme
challenge of our times and one we must take
economies like Argentina serious heed of, both as insurers of trade risk
and Iran. and as financial institutions ourselves. As
business leaders, even as we look to the
future, we must also be prepared for the
and while there is currently a lot of present.
uncertainty, the value of credit insurance in an
uncertain environment is well understood. Creative approaches
Perhaps one of the most telling indicators to supporting SMEs
of the health of our industry – and the With its adroitness for efficiency and cost-
importance of credit and investment reduction, one of the challenges this kind of
insurance in the current environment – is the new technology is set to tackle is the market-
number of governments and institutions gap facing smaller business who, in a
currently expanding or setting up new export globalised world, often find themselves
credit facilities. In the past year, The Berne caught between the need to expand
Union’s Prague Club Committee (our externally, to export and to trade on global
seedbed for nurturing smaller and emerging horizons, and a paucity of finance in an
export credit insurers) has accepted three environment where exigent compliance and
new applicants and granted guest status to a narrow margins make small transactions
further two institutions just on the cusp of unprofitable for lenders.
establishing their export credit business.11 Providing better support for SMEs is a
Bringing together this global network of critical objective of many Berne Union
industry practitioners is the raison d’être of members, especially those with a mandate to
the Berne Union, and the more we invest in fill market gaps, and several colleagues have
the collective understanding of the industry, contributed thoughtful essays on the subject
the more resourceful we all ultimately within this publication.
become. New technology certainly helps improve
efficiency, and there is some great progress
Advances in technology being made in this area. But it is also important
Global partnerships and knowledge sharing that we find new ways of working. To better
make more sense now than ever. The understand and better serve these clients we
unprecedented pace of technological change must first educate them to better understand
and the immediate impact of this on us, and the environment they compete in.
everything from high-level business practice Many ECAs are now actively originating
to the behaviour and expectations of end- business – stepping in to cover the gaps in
consumers, have a huge impact on trade. financial infrastructure which are usually
Digitisation, fintech, insure-tech, denied to these sorts of clients.
13
Berne Union 2017: President’s foreword
Direct lending is one way to circumvent The objective of the Task Force has been
the challenge for clients beneath the to improve the detail, quality, consistency and
threshold for reasonably-priced bank finance, utility of Berne Union data, without
and this is an approach taken by more and significantly increasing the reporting burden
more ECAs. For growth-oriented SMEs and for members.
mid-cap companies especially, where the Industry sector reporting will introduce a
initial financing stage is so important to their finer grain of detail and add depth to our
development, this can provide an essential analysis of data. By recognising and
life-blood. accommodating the divergence between
Expedited applications, flexible risk real-world business lines and the artificial
policies, automatic claims processing and structure of the Berne Union committees, we
integrated products are amongst other should be able to present a better overall
creative solutions Berne Union members have picture of the industry and the business our
members are involved in.
This is a huge undertaking, presenting
Bringing together this both technical and pragmatic challenges:
refining definitions, database structuring and
global network of industry surveying the capability of members to
practitioners is the raison accurately capture and report the information
d’être of the Berne Union, requested. The progress we have made to
date has been excellent and would simply not
and the more we invest in be possible without the great effort and
the collective dedication of both members and the
Secretariat – to whom I offer thanks and
understanding of the warm congratulations.
industry, the more There is still much work to be done in this
resourceful we all area, but a proposed structure is ready to be
presented to the members for approval at
ultimately become. our 2017 Belgrade AGM, and we expect to
begin reporting under the new scheme for all
been implementing. data from 2018 onwards.
The ultimate goal and the likely future of
service to these sorts of clients is to become Communications
a genuine ‘one-stop-shop’ for all their Improvements to our data are of course
exporting needs – bringing together the incredibly valuable for Berne Union members
various moving parts and demystifying the directly, but they also add extra colour and
complexities of international trade. credibility to our external communications –
another area which has benefitted from high
Berne Union projects energy and increased activity over the past
These are all important subjects for the Berne year.
Union. Through our meetings, webinars, A project commenced within the
publications and specialist working groups, Secretariat last year to improve our
we continue to apply our collective efforts communications strategy and to engage
towards tackling the biggest issues in trade more directly and more regularly with the
finance and at the same time, improving wider industry. This has produced a number
access to knowledge and understanding of of positive outcomes so far, including the
the industry. establishment of a regular Berne Union
Through the course of the past year the newsletter, the ‘BUlletin’, and the launch
Berne Union has been pursuing a number of several months ago, of a brand-new
substantial initiatives several of which are association website.
already bearing significant fruit. The BUlletin, we hope, provides a hitherto
absent ‘voice for the industry’, providing a
Getting the data right focal point to channel the expertise of our
Data reform – an on-going BU project for a members, share insights from Berne Union
number of years – has gained new data, and present up to date research on
momentum under the direction of a specialist important topics for the industry.
Data Task Force, established towards the end For a collective of 82 member companies
14 of 2016. from 73 different countries across the globe,
Berne Union 2017: President’s foreword
the Berne Union has up until now existed with changes at the Berne Union in the past year
INTRODUCTION
a quite minimalistic online infrastructure – and I would like to also take this opportunity
perhaps it is a testament to the quality of our to pay tribute to some of those who have
meetings that face-to-face communication worked towards building, improving and
has sufficed for so long! In any case, the trend maintaining our rich and unique association:
of digitisation has not passed the Berne To Michal Ron, my Vice-President until last
Union by, and as of August 2017 we launched year – an exceptionally strong leader who
our new online web platform, combining our together with my predecessor Daniel Riordan
members only intranet with a revised external initiated the reforms we are currently
website. enjoying and who led the negotiations for our
The new BU web platform is both a tool of governance reform; to Kai Preugschat, who in
convenience and an instrument of his two years as Secretary General, recruited
opportunity: a more accessible (mobile the current highly motivated and professional
friendly!) website makes collecting and secretariat team, and who put the wheels in
distributing information or organising motion to get our many initiatives to come to
meetings much easier, and at the same time, fruition; to Laura Lind whose positive energy
the ability to connect and collaborate with and tenacity imbued the Secretariat team
geographically dispersed colleagues makes and MLT committee with a great vitality; to
for more fruitful and more efficient Ella Szukielowicz-Lindon, whose skill and
engagement. dedication made possible the smooth
We will continue to work to develop and integration of the Prague Club; and to
further improve upon all of these initiatives. Massimo Sarti, without whom the data reform
The endless objective is to reflect the project would never have gotten off the
community and spirit of the Berne Union in ground – indeed to all of the elected officials,
all of our output. management committee, secretariat and
active members for helping to make the
Future plans Berne Union special – thank you!
Next year, the Secretariat will relocate to new So, as we head into another year, there will
serviced office space in London. The physical be new offices, new websites and some new
relocation itself will be the end of a lengthy faces, but the same Berne Union. I hope you
process of research and deliberation, during enjoy the commentary from my colleagues in
which we carefully considered the suitability of the coming pages and look forward to the
a number of potential European domiciles. For view we see in the year ahead. ■
the time being, London still offers the most
suitable accessibility for both travel and Notes
employment, but we are conscious that the 1 MLT volumes have been declining fairly consistently
since a peak in 2011
unknown outcomes of Brexit may have a great 2 According to WTO figures, total value of cross-
bearing on this in future. The shorter lease border trade for goods and services in 2016 was
terms standard in fully-serviced contracts allow $-16.94 trillion. Since these WTO figures include
intra-company trade (which is uninsurable) the % of
us the flexibility to reconsider this decision in cross-border trade for which relevant credit risks are
due course, when the facts become clearer. covered by Berne Union members is in fact
Since March this year, the Secretariat has considerably higher
3 Figures quoted for 2017 are provisional
been operating under the able direction of a 4 Strong pipelines from several members could push
new Secretary General, Vinco David. Vinco final figures well beyond this
was previously the Chair of the INV 5 2016 cover provided reported by the INV
Committee was $112 billion – a record year, and 20%
Committee, and has been an active higher than in 2015
participate of the Berne Union for many 6 The same business is reported by ECAs in the MLT
years. Along with Vinco, I would like to give committee
7 In context, 2016 showed the highest INV claims in
recognition to the whole Secretariat team, the past 5 years - almost double any previous
who together are the embodiment of the 8 With MLT claims occurring on average 5 years into
Berne Union ethos: Associate Directors, the tenor of a given transaction, volumes over shorter
periods of time can appear relatively high, or low
Laszlo Varnai, Johannes Schmidt and Paul 9 Historically, the ratio of commercial to political
Heaney and Team Assistant Nicole Cherry. As claims paid is usually closer to 50%
President, and indeed as a Member, I am 10 The work of the IWG is especially crucial when one
realises that almost 2/3 of all ECA financing is
deeply grateful to all of these colleagues, and currently conducted outside of the OECD
all others who support our Berne Union Framework.
family with great work and dedication. 11 BANDEX (Dominican Republic); IE Singapore,
The export credit and business. Insured foreign investments from all
investment insurance Berne Union members meanwhile rose to $69
industry is currently in billion.
a rather healthy state, On the one hand, private insurers of trade
both for private and credit and political risk insurance were able to
public suppliers of expand the volume of their business to
cover. However, there almost $1 trillion – approximately 9% higher
are a number of risks than in 2015 and accounting for the first time
that could change this for more than 50% of total Berne Union
Vinco David
benign situation. business. Public insurers of short term trade
These risks are credit, medium/long term export credit and
clustered around three themes: premium foreign investments, meanwhile, generally
levels, claims and regulation. saw a small decline in volumes covered.
However, at $900 billion, this total volume for
Positive results for 2016 2016 is still a strong figure, and a positive
But first the good news. 2016 was a positive indicator of a healthy industry.
year for most insurers. Business levels
increased slightly to $1.87 trillion of insured Claims trends
exports and foreign investments (including Claims payments decreased in 2016,
guarantees and direct lending from a number compared to the previous year. In 2015 the
of ECAs – export credit agencies). Berne total volume of claims paid as a result of
Union members continue to provide support insolvency or political events was $6 billion:
for a significant proportion of world cross last year this figure was half a billion less.
border trade: 11%, benchmarked against the While this is a positive adjustment, it should
$16.9 trillion figure recorded by the WTO for be noted that, in context, these figures are
2016. still high – comparable in fact, to the levels
Applying a more fine-grained examination seen in 2009, at the depth of the credit crisis.
however, we can observe some variation in This leads to some observations about the
trends between the different categories of risks the industry is facing at the moment.
insurers.
New trade-related business for 2016 was Premium levels compared to claims
made up $1.63 trillion in short-term (ST) Premium levels in the private market are
export credit insurance and $134 billion in historically relatively low, both for short term
medium and long-term (MLT) cover provided business and for medium/long term credit
by official ECAs. Private members insuring and investment business. This is largely due
medium and long-term exports and state to strong competition between private
obligations reported $25.5 billion in new providers of cover.
INTRODUCTION
competition between the world’s three
largest providers: Euler Hermes, Atradius and
Berne Union New Business & World
Coface, although other private or semi-
Exports 2006 – 2016
private insurers also participate.
In the medium/long term credit and BU New business World Exports
(USD billions) (USD billions)
investment insurance area we have seen a
large increase of capacity over the last few
years, while demand has remained stable.
There are currently about 60 providers of this
type of insurance worldwide. Although this
business has certainly proved to be profitable
over the last few years, one can doubt
whether this is the main reason for growing
market participation from both insurers and
other capital market investors. Due to the
sustained low interest rates for currencies
such as the US Dollar and the Euro, investors
are looking for investments with higher
returns and one option is, indeed, credit and Berne Union figures on new business are seen to track trends in overall volumes of world
investment insurance. trade and are regularly benchmarked against WTO figures. Comparing the two graphs
also shows the resilience of credit insurance and the tendency for insured volumes to
We can see, then, that it is mainly drivers fall less sharply than the overall economy – demonstrating the counter-cyclical function of
from the supply side keeping premium levels the industry.
depressed and once interest rates start to
increase one can expect the supply of
capacity to wane, which may eventually lead Figure 2
to an increase in premium levels.
Figure 4. shows the total reported Berne Union New Business Private &
premium income for private members of the (USD billions)
Public 2006 – 2016
Berne Union (for both credit and investment
insurance) between 2005 and 2016, alongside
claims paid for the same period.
From the graph we can see that total
premium income for this business has
declined almost 17% between 2011 and 2015.
2016 figures suggest a stabilisation of
premium income, but with claims peaking
again, the loss ratio for ST business follows
suit; current indications put this at around
43%.
While this data only represents a subset of
Berne Union members – and does not
therefore give a complete picture of absolute
volumes – it is illustrative of the general trend Figure 3
towards softer pricing in the private market.
Figure 5. shows the average pricing – Berne Union Global Claims Paid
(USD billions) 2005 – 2016
calculated as premium income / exposure –
for each reporting line within the Berne
Union. In this graphic, INVS designates cover
for sovereign obligors, while INVO represents
credit cover for other private buyers. ST and
INVI are the short term credit and investment
insurance lines described above.
This illustration confirms the observation
that it is pressure from the supply side driving
down premium income, through pricing
competition, rather than falling volumes of
business.
17
Berne Union 2017
Regulation
Trade barriers have never been good for
trade. There is an abundance of evidence
that, on its turn, international trade is good
for prosperity. Self-evident as this may sound,
not all politicians enshrine this ideal in their
policies and calls for protection of national
industries are common these days. While
there are sometimes good reasons to
temporarily protect selective national
industries in their cradle phase; or a very
18 limited number of industries deemed as
Berne Union 2017
strategic for a particular country; in general, public insurers will attract lower capital
INTRODUCTION
protectionist measures eventually lead to a requirements than originally proposed. This is
decline in productivity. a laudable development, but may not tackle
Typically, these kind of political measures all areas of insured export and trade
rather lead to a misallocation of resources financing. It is primarily up to the banks – as
and ultimately harm the competitiveness of the institutions that are regulated – to see
those industries they sought to protect. Good whether a broader capital relief is needed to
examples are the US shipbuilding industry or fully continue financing trade and export, but
the so-called ‘zombie companies’ in China. as insurers of trade, members of the Berne
But also, of course, exporters to countries Union continue to stand behind the risk
that build trade barriers are affected. If, for transfer products they provide.
example, the US administration would
implement trade barriers, then certainly
countries like Mexico and Vietnam will feel We can see, then, that it is
the impact, given the large proportion of their mainly drivers from the
exports bound to the US.
Worryingly, the number of calls for supply side keeping
protectionist measures has increased of late, premium levels depressed
and notably in high income countries where
previously such sentiments have been rather
and once interest rates
exceptional. start to increase one can
As said, protectionism is not good for expect the supply of
trade, and hence not good for export credit
and investment insurers. Cross-border trade capacity to wane, which
may decrease, impacting on the topline of may eventually lead to an
insurers. But it may also lead to a riskier
environment with more insolvencies. There
increase in premium levels.
are at the moment no signs yet that this is
already happening, but this is certainly a On a more positive note: in the course of
development for our members to monitor. tackling these regulatory challenges, banks
Another area of regulation relevant to our have become more aware of the positive
industry is that of banks. Banks are essential impact credit insurance can have on their
for the financing of trade and exports, and for balance sheets – not only for capital
providing working capital to exporters and requirements reasons, but also by enabling
their suppliers. them to better manage their aggregates.
For very good reasons, this bank
regulation – now Basel III (some say Basel IV) In summary
and its implementation at national or regional The export credit and investment insurance
level – has become stricter, partly as a industry has recovered remarkably well after
consequence of the credit crisis. Banks have the global credit crisis. It is currently
become better capitalised and in general this reasonably profitable, largely due to the fact
is a good thing. But implementing these that claims are under control. But this may
regulatory measures with a broad brush change if claims were to continue at elevated
could lead to less capital being available for levels for longer periods. Claims levels can be
the financing of export and trade. That would, expected to rise if commodity prices remain
obviously, not be a good thing for export and low (affecting commodity exporting
trade, and thus, eventually, for prosperity and, countries) and if more trade barriers are put
more mundane, the topline of credit insurers. up, affecting countries with large exports to
Banks, in particular European banks, have countries implementing these protectionist
to some extent – and with support of the measures.
Berne Union – been able to demonstrate to Stricter bank regulation, too, can impact
regulators that the financing of export and trade and, hence, the results of our industry.
trade is not such a risky business at all; However, both exporters and members of the
certainly if covered by (public) insurers. The Berne Union have shown quite some
European Commission, for example, has resilience and adaptability to a changing
recently launched a proposal for the environment and despite these challenges,
implementation of Basel III whereby the there are compelling reasons for an optimistic
financing of trade and export covered by perspective on the future of the industry. ■
19
Berne Union 2017
Berne Union 2017
2
Data and
Statistics
Berne Union 2017
2,500,000 2,500,000
2,000,000 2,000,000
1,500,000 1,500,000
million
SD million
million
SD million
USD
USD
U
U
1,000,000 1,000,000
500,000 500,000
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
7,000 7,000
6,000 6,000
5,000 5,000
million
SD million
million
SD million
4,000 4,000
USD
USD
3,000 3,000
U
U
2,000 2,000
1,000 1,000
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
1,500,000 1,000,000
1,250,000
800,000
ll io n
million
l l io n
million
1,000,000
SD mi
SD mi
600,000
USD
USD
U
U
750,000
400,000
500,000
200,000
250,000
22
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Berne Union 2017
2,500 500
2,000 400
million
SD million
million
SD mi l l io n
1,500 300
USD
USD
U
U
1,000 200
500 100
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
ST Credit Exposure Paid 2016: Top 10 countries ST Claims Paid 2016: Top 10 countries
UNITED ST
STATES
TAT
TES
UNITED ST
STATES
TATES
T
GERMANY
UNITED BRAZIL
KINGDOM
FRANCE
UAE
UAE
ITALY
IT
TA
ALLY SP
SPAIN
PA
AIN
Other
Other
CHINA RUSSIA
SPAIN
SP
PA
AIN
INDIA
NETHERLANDS
HONG KO
ONG
KONG
SWITZERLAND
CHINA
BELGIUM
IT
ITALY
TAL
ALY
AUSTRALIA
AUSTRALIA
UNITED ST
STATES
TAT
TES
BRAZIL
SINGAPORE
RUSSIA
IT
ITALY
TAL
ALY
Other INDONESIA
VENEZUELA
IRAQ
IRAQ
23
GERMANY
INDIA
Berne Union 2017
MLT New Business – insured during each year MLT Exposure – at year end
p y
700,000
200,000
180,000 600,000
160,000
500,000
140,000
120,000 400,000
million
USD million
100,000
USD
300,000
80,000
60,000 200,000
40,000
100,000
20,000
0 0
2011 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Corporates
Corporates So
Sovereign
vereign O
Other
ther Pu
Public
b li c
Commitments Lending (T
(Total
To
otal
tal Exposure)
Projects
Projects Ba nks
Banks U nspecified
Unspecified
-Before
-Bef
effore Reinsurance
o Reinsur
Commitments
ance Lending (Total
(T
To
otal
tal Exposure)
-Bef
-Before
ore Reinsurance
efo Reinsurance
MLT New Business 2016: Top 10 countries MLT Exposure 2016: Top 10 countries
UNITED STATES
ST
TATES
T
UNITED STATES
ST
TATES
T
RUSSIA
TURKEY
ANGOLA SAUDI
SAUDI ARABIA
BRAZIL
EGYPT
Other
UNITED KINGDOM
UNITED KINGDOM
ANGOLA
Other INDIA
QATAR
QA
ATA
AR
CHINA
OMAN
CHINA
YA INDONESIA
KENYA
KENY
24
Berne Union 2017
3,500 6,000
3,000
5,000
2,500
4,000
2,000
million
SD million
million
SD mi lli o n
3,000
USD
USD
U
U
1,500
2,000
1,000
1,000
500
0
0
2012 2013 2014 2015 2016
2012 2013 2014 2015 2016
Po litical Risk
Political Risk Commercial Risk
Commercial Risk N PL
NPL Po
Political
litical R
Risk
isk Commercial
Commercial Risk
Risk Lending
MLT Claims Paid 2016: Top 10 countries MLT Recoveries 2016: Top 10 countries
SERBIA Other
LIBYA
LIBY
YA
BRAZIL CUBA
CUBA
Other PAKISTAN
PAKIST
A TA AN
IRAN
IRAQ
IRAQ
RUSSIA INDONESIA
SLO
SLOVAKIA
VAKIA
A
GERMANY
ARGENTINA
MEXICO
UNITED SP
PA
AIN
SPAIN
ST
TATES
T
STATES
RUSSIA
IRAN
UKRAINE EGYPT
BERMUD
BERMUDA
A
25
Berne Union 2017
INV New Business - insured during each year INV Exposure - at year end
125,000 300,000
250,000
100,000
200,000
75,000
million
USD million
million
SD million
150,000
USD
USD
U
50,000
100,000
25,000
50,000
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
INVI INVS INV
INVO
O
INVI INS INVO
INVO
INVI INVS INV
INVO
O INVI INVS INVO
INVO
INV New Business 2016: Top 10 countries INV Exposure 2016: Top 10 countries
CHINA
KAZAKHSTAN
KAZAKHST
TA
AN
RUSSIA
UNITED
D ST
TATES
T
STATES
UNITED
NITED ST
STATES
TATES
T
INDONESIA
BRAZIL
CHINA
Other
Other VIET NAM
TURKEY
KAZAKHSTAN
KAZAKHST
TAN
A
UZBEKISTAN
UZBEKIST
TA
AN
RUSSIA INDIA
BRAZIL
26
Berne Union 2017
125
300
100
250
200 75
million
SD million
million
SD million
USD
USD
150
U
U
50
100
25
50
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Transfer
Transfer Political
Political V
Violence
iolence Exp
Expropriation
ropriation etc
etc T
Transfer
ransfer Political
Political V
Violence
iolence Exp
Expropriation
ropriation e
etc
tc
Breach
Breach of
of Contract
Contract Unspecified
Unspecified Breach
Bre ach of
of Contract
Contract Unspecified
Unspecified
INV Claims Paid 2016: Top 10 countries INV Recoveries 2016: Top 5 countries
Other
CHILE
Other INDIA
BRAZIL
MEXICO
CUBA
CUBA
MOROCCO
MOROCCO
TA
ANZANIA
TANZANIA
SPAIN
SP
PAIN
A
PHILIPPINES
RUSSIA
SERBIA
A
AUSTRALIA
USTRALIA
UKRAINE BRAZIL
INDONESIA
27
Berne Union 2017
PCC New Business - insured during each year PCC Exposures – at year end
40,000 30,000
30,000
20,000
million
SD million
million
SD million
20,000
USD
USD
U
U
10,000
10,000
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
PCC Claims Paid - during each year PCC Recoveries - during each year
500.0
80.0
400.0
60.0
300.0
million
SD million
million
USD million
USD
40.0
U
USD
200.0
100.0 20.0
0.0 0.0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
28
Berne Union 2017
2016 was a year marked by a medium term trade credit insurance cover
number of major political and provided by Prague Club (PC) Committee
economic events. Low Members, for trade between and projects in
commodity prices (especially developing countries. Medium/Long-Term
record low oil), political shifts Business of the ECA members of the MLT
(Brexit, US elections, committee, on the other hand, bucked the
impeachment in Brazil) and new upward trend, as it continued pattern of
Làszlò Varnai currency volatility in both decline set in previous years.
developed and developing The aggregated figures of new business
countries have all left their covered give an indication of the broad
mark on world trade. Global trends in the activity of Berne Union
trade recorded its lowest members within each reporting committee
volume growth rate in over the course of 2016:
the last decade (just 1.3%) –
well below the 4.7% ■ The value of cross border trade
average since 1980, with supported by short-term trade credit
Paul Heaney merchandise trade reaching insurance was $1,634 billion
just $15,284 billion. ■ The reported value of new medium and
And yet, even in such a challenging long-term commitments was $134 billion
environment, following a general decline in ■ New investment insured was $113 billion
2015, Berne Union Members grew their ■ Prague Club Members reported $38
business again in 2016; supporting trade and billion new cover issued
investment of $1,919 billion – an increase of
more than 3% compared to their 2015 Berne Union Members collectively paid $6.5
performance. billion claims in 2016 – a historically high
This improvement was mainly on account figure, and a 4% increase over 2015. At the
of increasing business underwritten by same time, this was matched by $6 billion
members of the Short-term Export Credit recoveries collected – a significant
Insurance (ST) and Investment Insurance improvement, and more than double the
(INV) Committees, as well as the short and result for 2015.
29
Berne Union 2017
Medium and long-term risk and commercial risk shifted from 49:51 to
Investment insurance ended the year the year with $69 billion
and other cross border risk insurance worth new policies globally (+4%). Other
Under the INV reporting line, Berne Union growth areas include oil and gas projects in
members report insurance of overseas Russia and Egypt.
investments against political risks3, as well as Portfolio exposure for the INVI category
non-honouring of sovereign obligations4 and followed the lead of new business, ending
all other typical credit insurance protection 2016 at $145 billion. The largest exposure
against political and commercial risks for remains in China ($17 billion), Russia ($15
bonding, untied loans and such.5 This billion) and Kazakhstan ($9.7 billion).
includes medium to long-term trade credit At just $17 million, claims paid in this
insurance provided by private insurers. category in 2016 were actually considerably
The overall volume of new cover provided lower than a year before (-78%). These
under INV grew by 20%, reaching an all-time occurred as a result of expropriation
record of $113 billion, mainly recorded in the (Venezuela) and political violence (Libya). As
categories other cross border insurance mentioned above, the only noteworthy
(INVO) and state obligations (INVS). This recovery came from the Philippines ($37
substantial increase is partly due to the million) after an expropriation case.
additional business reported by new Concerning trade credit insurance of state
members joining the committee6, but would obligations (INVS), Members underwrote
have achieved a not insignificant 7% increase, 30% more business in 2016 ($17.7 billion). This
even without the inclusion of those is mostly business underwritten by private
institutions. Members with the majority relating to Asia
In 2016, both ECAs and private members (China, Vietnam and India).
reported significant increases in business in Much of this business tended to come in
the INV category, with most new business large chunks: 2016 totals include a large
underwritten in Kazakhstan, followed by the transaction of over $700 million in South
US and Indonesia. Improvement in all lines Africa in support of ESKOM and besides that,
resulted an 8% increase in the INV portfolio. as an ongoing trend, in Turkey there were a
Overall, claims paid under INV doubled series of non-honouring transactions totalling
during 2016, again resulting an all-time high close to $1 billion.
of $300 million. Of this $254 million was The $28 million in claims paid for INVS
recorded in the ‘other cross-border insurance’ during 2016 related to transactions in
(INVO) category, with the largest claims paid Tanzania and Puerto Rico. In terms of
in India, Spain and Brazil. recoveries, private members successfully
Recoveries followed suit, primarily relating recovered $7.3 million from Cuba.
to investments recovered after wrongful Other cross-border trade (INVO), showed
expropriations in the Philippines.7 the most growth of all of the INV sub-
categories – up 87% (or around $ 12 billion) to
Looking in more detail at the different $26 billion new policies issued in 2016.
insurance categories within INV: Notable demand came from: USA ($3 billion
Investment insurance (INVI) cover increase), Bahrain, Japan and Guinea
provided showed a very minor decline in total These high levels translate also into growth
volumes for all regions with the exception of of the portfolio as a whole: up by almost $4
Africa which is booming at $14.8 billion new billion, reaching $80 billion at the end of
business – launching it past Europe to sit as 2016.
the second highest region for new business, In a continuation of the trends elsewhere,
behind Asia. This unprecedented demand the INVO was also the largest contributor of
(+48% in African business), meant that INVI claims to the INV category: $254 million
throughout the year, with the top five underwritten, claims also jumped to $414
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Berne Union 2017
OeKB: introducing
EXPERT ANALYSIS
Austria’s more flexible
national content policy
In this article Ferdinand Schipfer, OeKB’s managing director of export
guarantees, ponders national content considerations from an ECA’s
point of view. Here, he outlines the motives, developments and
impacts of Austria’s policy now in place.
EXPERT ANALYSIS
assessment of a company‘s activities company’s importance for the Austrian
national content was not evaluated on a economy, it was particularly essential for us
single-project- basis, but on the basis of to find simple and clear criteria that can be
the annual turnover), compiled and provided by companies
we most typically expected the Austrian without any difficulties and in-depth analyses.
content in mlt projects to be at least 50 %. Finally, it should be mentioned that in case
of bigger multisourcing deals with only a few
New policy rules third-country partners supplying large
In a joint effort with the Austrian Federal portions, or in case of country-specific
Ministry of Finance, we have further portfolio restrictions, we will continue – as in
liberalised our respective rules close to one the past – to outsource high foreign content
year ago. We can now fully support certain parts by asking other ECAs or the private
medium and long-term export credits as long insurance market for re-insurance.
as the national Austrian content is at least
25% of the export contract value. Stronger Summarising…
emphasis than on the national content in the Export finance is often regarded as a dry and
individual transaction is now put on dispassionate topic. In reality, however, we are
economic aspects such as locational working in a complex and demanding
implications or other features that increase industry jointly with challenging partners
the future prospects of an export company. from different cultural backgrounds. We have
In spite of this change in policy, we to be familiar with global political contexts as
continue to be interested in a high national well as with the micro-economic project
value share in every single export deal. aspects and we should have a grasp how
However, we had to accept the trends people from other professional backgrounds,
mentioned above. how technical engineers and how lawyers
Moreover, many other European export think and communicate.
credit schemes such as those in Italy, the This mixture of skills enables us to assess
Netherlands, Belgium, Scandinavian countries country risk and risks associated with
or in Switzerland have embarked some time customers in our daily work, to evaluate
ago to be more liberal regarding national social and environmental aspects, to
content requirements, resulting in a potential understand the strategy of our competitors
loss of competitiveness for Austrian firms. and also to pursue a sensible approach
For us, when discussing this issue the most towards the question of national value added
relevant question is: which companies in content in exports.
Austria will most likely be relevant for the Despite its technical flavour, the topic of
Austrian economy and therefore for the ‘value added’ is an interesting and immensely
welfare of Austrian society in 10 years from important political issue. Being aware of
now? If there is some evidence on the firm different aspects is essential to decide on a
level and – ideally – also on the level of the policy that best fits the needs of a given
project that a company positively contributes country’s economy.
to the development of Austria as an Collaborating closely with the Austrian
attractive location for industry, then even Ministry of Finance, OeKB tries to make up
projects with a higher share of foreign inputs for the disadvantages in international trade
can be fully supported. that arise from the small size of the economy,
Firm-specific criteria include domestic the high share of SMEs, a low degree of
employment effects, current and planned political power and only a small number of
investment projects in Austria, R&D intensity, domestic firms with investments abroad. We
social and ecological conduct, the regional are striving to serve our business community
importance of a company or corporate taxes by taking decisions fast, by adapting the
paid in Austria. policy framework to mega-trends – such as in
Project-specific criteria include the the question of national content –, by
potential of future contracts triggered by this flexibility, innovation as well as by a dedicated
particular project or a project’s possible customer orientation.
reference character in a country/region. A Having been awarded recently by TXF the
good reason also could be the non- Exporter’s Choice award ‘Best Performing
availability of certain components in Austria ECA 2016’, we are confident that we are on
which are crucial for a project’s viability. the right track for the future. ■
39
Berne Union 2017
EXPERT ANALYSIS
achievements and
challenges
This year, Swiss Export Risk Insurance (SERV) is celebrating 10 years in
business. The milestone is the perfect opportunity to review its most
important innovations and challenges.
The export industry is in a state of constant year it was founded and, today, the PBR
change and public export credit agencies business accounts for three quarters of the
(ECAs) are always having to react to new total commitment of SERV.
market requirements. Switzerland, as an SERV’s importance was demonstrated
export nation, also faces a steady stream of after the financial and economic crisis of
challenges. Reacting appropriately to these 2008/2009, when many Swiss exporters
changes is the primary task SERV must experienced a slump in demand and their
accomplish to fulfil its mission. liquidity situation worsened. The abolition of
SERV must grapple with changes that are the franc’s floor against the euro by the Swiss
taking place at different levels, in different National Bank on 15 January 2015 placed the
areas of action and are determined, first and Swiss export industry under increased
foremost, by the activities of SERV’s pressure. SERV, through the temporary
customers. Its focus is therefore primarily on introduction of products to improve
the exporter’s perspective when trying to exporters’ liquidity management, helped ease
recognise trends and challenges as early as the pressure, especially for Swiss SMEs. Josef
possible. This is achieved by continually Troxler, CEO of the Swiss SME Ampegon AG,
observing the markets, regularly evaluating states: “SERV is vital to us. Thanks to its
customer needs, and systematically following support, we are able to take commercial risks
economic and political risks. that may break our neck.”
The new products – working capital
Proven support insurance, counter guarantee and refinancing
Export Risk Guarantee (ERG), which was guarantee – proved successful. Their period
founded as a measure against unemployment of validity was extended by four years in 2011
in 1934, has proven itself to be a means of and transferred into the permanent product
aiding economic growth. The changing needs range in 2016. Their success is evidenced by
of customers, however, demanded a their increasing demand, which accounts for
reorganisation. That is why SERV superseded 33% of new business.
the ERG as of 1 January 2007.
The change meant more than just a New trends
different name. It was a turning point. The New trends have become apparent in
organisational structure of SERV was recent times. SERV wants to accommodate
oriented towards efficient company these developments through different
management. Customer orientation remained lines of action to fulfil its mission for the
SERV’s highest priority – aiding the Swiss benefit of the export economy.
export economy in an even more targeted Globalisation is continuing. In addition to
manner. The possibility to insure private traditional exporters that produce on a grand
buyer risk (PBR) was introduced. The figures scale in Switzerland, there are more and more
today demonstrate that this change was enterprises in SERV’s customer base 41
necessary: SERV achieved positive results the concentrating on their management, research
Berne Union 2017
and development, financing and marketing structures. These require lots of time to
functions. That is why SERV also made its process and a vast amount of know-how. In
requirements concerning Swiss exporters’ addition, there is a growing demand for
content eligibility more flexible, as the digitalised business processing.
previous demands were no longer productive. SERV must be able to guarantee the best
SERV still adheres to the Swiss content possible cover and be able to deal with
principle, but it will cover export transactions
even if the Swiss content of the deal is less
than 50% of the insured amount. The
condition is that exporters can show that
their activities in Switzerland are worthy of Globalisation is
support in keeping with SERV’s business
policy objectives. Above all, service exports
continuing. In addition to
demand an adequate interpretation of the traditional exporters that
content, which must be decoupled from ideas produce on a grand scale
of classic machinery- or installation-based
transactions. in Switzerland, there are
Once-solid states have lost a considerable more and more
amount of creditworthiness because of their
high level of debt, ongoing economic
enterprises in SERV’s
problems, or political tensions. Government customer base
risks are sometimes greater than private concentrating on their
buyer risks in these countries. Swiss exporters
are also forced to enter new and difficult management, research
markets because of the stagnant demand and development,
from these countries.
On the one hand, large regions such as
financing and marketing
Eurasia, MENA, and South America – which functions.
had been established as target markets of the
Swiss export economy or considered to be
promising – were rejected due to political
tensions, military conflicts and collapsing special regulatory and technological risks, as
commodity prices, and they generate only a well as elaborate financing and cover
minimal volume of demand. On the other structures. These efforts must not be made at
hand, Swiss exporters are facing increasing the expense of the high standards that SERV
international financing competition and are maintains in the area of sustainability and will
confronted with competitors that are strongly further develop in accordance with national
supported by their export credit agencies. and international regulations. “It is now up to
SMEs are reaching their limits where SERV to develop new solutions and to tackle
financing their export activities is concerned, these new challenges, so that SERV will
and banks cannot always overcome this. continue to be a customer-oriented, reliable
SERV has also seen a rise in projects with instrument for Swiss exporters in the future”,
more complex sourcing and financing Peter Gisler, director of SERV, explains. ■
EXIM Hungary:
EXPERT ANALYSIS
supporting small
and large
Smaller ECAs like Hungary EXIM have a key role to play in both
supporting SMEs and partnering with other ECAs on large scale
project financings. By Zoltan Urban, CEO EXIM Hungary.
opportunities in the future for smaller ECAs The deal proves that Hungary plays an
and EXIM Hungary plans to take advantage important role in the global value chain of the
of these as much as possible. We trust that a energy sector, and that EXIM Hungary, with
smaller ECA like EXIM Hungary will also have its biggest ever participation as co-lender
the chance to play a significant role in a with EDC, is strengthening its presence in
large-scale transaction, which is a promising international export financing markets.
prospect for the future. This deal is not only beneficial for
The recently signed deal between General Hungary’s export relations but for its national
Electric, Indonesian power utility PLN economy as well. The exports generated by
(Perusahaan Listik Negara), EXIM Hungary this deal are worth more than $276 million,
and Export Development Canada (EDC) is and it directly and indirectly adds more than
the best example of international cooperation HUF27.21 billion to Hungary’s GDP.
between two ECAs. With this deal, EXIM Hungary has proven
that a small economy is able to compete with
PLN’s EXIM Hungary/ECD-backed more developed economies and provide an
loan adequate level of service. To further
The overall project value is in excess of $575 accelerate Hungary’s export activity in the
million, of which $453 million is co-financed future, EXIM Hungary plans to participate in
by EXIM Hungary (50%) and EDC (50%) with similar projects with domestic companies
a 12-year loan. The transaction includes the and, as a result, enhance the international
installation of eight General Electric mobile competitiveness of Hungarian exporters with
power plants in regions with low a special focus on SMEs. To help these
electrification rates in Indonesia. As a result, companies succeed in their export activity,
the installed capacity has been increased by financing would be provided by EXIM
500 MW, meaning that electricity will be Hungary up to the proportion of the
delivered to approximately 4 million Hungarian content of the given projects.
Indonesian homes. This project also Due to global changes, we believe that the
contributes to the Indonesian government’s role of smaller ECAs can increase in the
goal of installing 35GW of new power future and we trust that a key factor in our
capacity by 2019, which will result in a 99.7 % success will be developing our international
electrification ratio in the country. network and building new relationships. ■
EXPERT ANALYSIS
local support in a
global marketplace
Paul Radford, chief economist at UK Export Finance, talks about why –
and how – the UK’s export credit agency is allowing overseas buyers to
buy British and pay local.
Local currency financing in practice capacity or capability to lend for the terms
The attractiveness of this offering is evident and amounts required. The World Bank’s Rule
when you look at some of the transactions of Law Index can provide a good indication
we’ve supported. around governance indicators and
Take, for example, UK coach manufacturer information on currency convertibility is
Alexander Dennis’s delivery of 90 buses to readily available.
Mexico City’s transport authority Metrobus. Finally, to mitigate the risk of currency
These lightweight, fuel-efficient buses will volatility, we can include a crystallisation
drive along the Paseo de la Reforma, the clause as a condition of support. This clause
iconic ‘Champs-Élysées’ of Mexico City, is used to convert outstanding claims into the
easing overcrowding in a city of 20 million ECA’s host currency at a pre-determined
people. fixed exchange rate. However, it can be
Earlier this year, UKEF was able to
guarantee a loan in Mexican pesos (MXN) to
support the MXN 1 billion contract. This is the
first transaction UKEF has supported in Earlier this year, UKEF was
Mexican pesos, and helped ensure that the able to guarantee a loan in
buyer looked to the UK to procure the buses.
In 2015, UKEF became the first non-
Mexican pesos (MXN) to
Chinese ECA to guarantee a loan in offshore support the MXN 1 billion
renminbi when it supported an aircraft
contract. This is the first
delivery to China Southern Airlines. The
offshore renminbi is one of the most used transaction UKEF has
currencies in trade finance. This capability supported in Mexican
supports the UK Government’s wider
ambitions to strengthen trade ties with China
pesos, and helped
and consolidate London’s position as the ensure that the buyer
largest offshore renminbi centre outside Asia.
looked to the UK to
So UKEF’s local currency financing
offering is clearly good news for UK procure the buses.
exporters.
EXPERT ANALYSIS
guarantee: kick-starting
greenfield project bonds
Construction risk has long been an impediment for the use of project
bonds to finance greenfield infrastructure projects. The Credit
Guarantee and Investment Facility (CGIF) recently introduced an
innovative solution to mobilise long-term savings in local currencies in
developing Asia to finance greenfield infrastructure projects through
project bonds, discusses CGIF’s CEO, Kiyochi Nishimura.
COD
BOND
BOND
CPG
EXPERT ANALYSIS
risks. This is despite the fact that the projects
may have stable and robust cash flows during
the operational period, and even though the
construction period is far shorter than the . . . a bulk of private sector
operational period. financing will need to
There are many elements of risks during
the construction period which are highly
come in local currencies to
complex to assess. The investors, therefore, avoid the currency
need pricing of the bonds that ultimately
reflects these risks. This generally makes
mismatch, because many
bond financing for such deals economically of the infrastructure
unviable when the long-term bonds are projects rely on local
priced considerably higher based on risks
which are likely to be overcome in a relatively
currency revenues to pay
short period of time. By removing risks back their debt.
during the construction period entirely from
the transactions, the CGP facility eradicates
any rating penalties arising from such risks,
allowing bond investors to focus only on the institutional bond investors such as global
operational risks of the projects, and enabling insurance companies and leading pension
lower fixed interest rates to be applied from funds, have their own internal expertise and
the onset. manpower to supplement the project finance
banks in funding greenfield infrastructure
Changing project financing projects. But in the emerging economies of
landscape in ASEAN the ASEAN, there is little internal capacity
The CPG facility is anticipated to boost the among domestic bond investors, such as
use of local currency project bonds for new pension and insurance fund managers. It will
projects in the region by eliminating be very costly and time-consuming to
construction risks for bondholders investing develop expertise in-house.
in greenfield projects. The CGIF has developed a comprehensive
While local bank lenders in the ASEAN assessment framework that allows these risks
countries are liquid and usually very keen to to be measured and managed. Components
finance infrastructure projects, even on a of this framework will allow for expert
project financing basis often at attractive judgement of the various risk factors relating
pricing, bond finance can bring certainty to to the construction works as critical inputs in
project sponsors with fixed interest rates, the assessment. Risks are also managed by
which is a common feature of bond finance. the CPG’s boilerplate requirements for the
Moreover, while local banks can lend for up to various contractual agreements and risk
12 years or so, bond investors can provide mitigants that are consistent with
longer tenors of up to 20 years or even international project finance practices.
longer in some countries. While domestic bond investors in the
Stretching a finance tenor will improve the ASEAN countries may first rely on the CPG
project’s economics and create room to facility, the CGIF plans to share its
reduce the tariff levels. Finally, project assessment tools with these bond investors.
sponsors will be able to diversify their Replicating the CGIF’s assessment
funding sources. This is especially vital to framework, they will become familiarised with
overcome single group exposure limits the assessment of construction risks and will
imposed on bank lending In the Philippines. develop their own capacities in the future to
For example, there are only a small number of understand, evaluate and mitigate
leading domestic conglomerates engaged in construction risks to acceptable levels. This
a wide range of infrastructure projects, and will allow them to invest in greenfield bonds
single group exposure limits hinder the independently even without the CPG’s
development of greenfield infrastructure support. If this happens, it will fundamentally
projects. The CPG facility will unlock a great change the landscape of project financing in
variety of benefits of bond finance to green- the ASEAN countries. This may take some
field infrastructure projects. time but CGIF is committed to bring this
In the developed economies, major change to the region. ■
49
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Berne Union 2017
Innovative ways to
EXPERT ANALYSIS
invest in India
For the first time in its history, Export Development Canada provided
a loan to an Indian infrastructure leader, in India’s own currency.
Bill Brown, regional vice president, Asia, Export Development Canada
(EDC) talks through the achievements and challenges of the loan, and
if there is more to come.
said having a reputable institution such as the solution to our requirements,” she said.
EXPERT ANALYSIS
EDC, partner with IL&FS, on not only its first “You need solutions that work for the project
Masala ECB, but also its first funding from a you are doing. There was a lot of outside-
Canadian institution, speaks to the the-box thinking that they were willing
importance of the work that his company to do.”
does in India.
EDC targets companies such as IL&FS, Another foreign currency deal
whose procurement needs match up Based on the success of its experience in
naturally with Canadian expertise. Once EDC India, EDC opened a local peso account that
has a detailed understanding of a company’s offers new opportunities in Mexico. Until this
supply chain and business goals, its agents year, when an EDC customer was doing
provide introductions to qualified Canadian business in Mexico needing to complete a
companies with well-matched expertise. transaction in Mexican pesos, it had to go to
IL&FS is specifically interested in Canadian England. EDC responded to that quandary
companies that can help it innovate and by opening its first peso account in Mexico.
reduce costs in upcoming road, port, power, This marked the first foreign currency
sanitation, waste management and water account to be located within its local
projects. territory, outside the major international
financial centres.
A winning contract The account was opened in partnership
Canada’s IBI Group was one such company with Scotiabank Inverlat Mexico and
to succeed in getting a contract: “IBI saw represents an important milestone for EDC
India as a tremendous growth market,” said Mexico to establish new relationships and
Deepak Darda, director, India and South Asia diversify its borrowing base.
lead, IBI Group, Canada. “It provided us huge Having an account based in the exporting
opportunities where we could actually bring market facilitates existing business and
our Canadian expertise into the market, opens the door to opportunities that may
whether it was the national highway previously have been missed. By providing
programme in India, or the tremendous the same borrowing currency as local banks
growth that the Indian cities were with a same-day settlement period, EDC can
experiencing.” better serve current and future customers
Darda said they learned about the IL&FS who need that flexibility. To remain relevant
opportunity when they approached EDC for in an increasingly competitive market, it
connections with large-scale infrastructure needs to be able to match local bank
players.“ As a result, we have been awarded a financing and respond to Mexican customer
contract where we are providing our and prospect needs.
advisory services to evaluate a toll highway If the peso account is successful, EDC may
asset for IL&FS,” he said. look at exploring other local currency
Anita Ferreira, head of International accounts in markets, such as Singapore,
Business Group at IL&FS Financial Services Chile, and India. The bottom line is that to
Group India, said her company is delighted to remain relevant in today’s global economy,
be working with Canadians. “The thing that financial institutions and export credit
set the Canadian companies apart is that agencies must be creative with their
level of professionalism and their area of offerings in order to meet the needs of its
expertise and that they were willing to tailor customers and foreign markets. ■
Now summed up
in just one name.
Credendo is the new name of Delcredere | Ducroire, Credimundi, KUPEG, INGO-ONDD, Garant and Trade Credit
www.credendo.com
Berne Union 2017
EXPERT ANALYSIS
disrupted trade across
the MENA region
Karim Nasrallah, general manager of LCI assesses the evolution of
political risks and trade disruption in the MENA region.
relies heavily on energy exports, which make Standard & Poor’s is projected to continue to
EXPERT ANALYSIS
up around 80% of its revenues. The Kingdom grow at a moderate rate of just under 4% on
brought in top consultants from the world average, until 2020. One of the major
over, to work on a 2030 version, the goals of challenges that Egypt faced was the
which are focused on diversifying its unavailability of foreign currency, which led to
economy. the Egyptian Central Bank devaluing the
Prior to the decline in oil prices, the Saudi Egyptian pound, resulting in the slowdown of
Arabian government became both directly imports of different types of goods and
and indirectly involved in two wars, the impacting trade. However, the market still
growing turmoil in Syria, in addition to shows great potential in the industrial and
igniting a war in neighbouring Yemen. Both agricultural sectors, both major contributors
cases heavily impacted the country’s to the GDP. Other key industries in Egypt
economy due to mounting costs related to include textiles, food processing, chemicals
sustaining / fueling these wars. and pharmaceuticals.
These changes have impacted the number The Levant region witnessed disruptions in
of overdue and claim notifications in 2016, as trade as well, due to wars, turmoil and
well as early 2017, spiking figures. In addition, political instability in Syria and Lebanon in
this repercussion reflects the cost cutting specific. Due to the closing of land borders
strategy that the Saudi Arabian government between Lebanon and Syria, Lebanese
implemented to salvage the economic businesses were forced to ship goods via sea.
downturn. However, the falling oil prices actually kept
In the United Arab Emirates, and shipping costs at bay, which did not dampen
particularly in Dubai, an emirate that made exports greatly. However, the outlook for the
unfavourable headlines in the 2008 economic economy remains unstable, with little growth
crash that brought its economy to a near forecasted in the coming months. Trade in
standstill, many changes have been recorded Syria came to a near standstill due to the
in recent months. Whilst some positive ongoing war spanning across the country.
movement has been reported in specific
sectors of the economy, not all the news is The way forward
good. The outlook of trade in the MENA region, as
On the one hand, the number of defaulting well as globally, will continue to be uncertain
and runaway cases, which became the norm for the foreseeable future. The repercussions
when the financial crisis swept through the of the political risks that have made headlines
country, decreased in the first half of 2017. of late, are expected to surface over the
However, the Emirate is still exposed to have coming months. Businesses across the region
more runaway cases that will result in have adopted a ‘wait and see’ approach and
significant losses in the coming months. are taking conservative measures,
Moving to the most populous country in provisioning for any future disruptions.
the Arab world, with a population of over 90 Growth in the trade sector is unlikely to be
million, Egypt witnessed trade disruptions as recorded in the coming months and will
a result of growing political risks in recent remain relatively stable well into the near
years. Having the third highest GDP in the future.
MENA region, just over $336 billion (2016), Companies need to work on safeguarding
the country has been facing many ongoing their assets and insuring their trade
economic challenges. receivables to ensure they stay afloat in times
Egypt’s real GDP, as estimated by of turmoil. ■
Growth opportunities
EXPERT ANALYSIS
high for political risk and
credit insurance providers
Daniel Riordan, president of global political risk, credit & bond
insurance at XL Catlin, examines encouraging signs for the trade credit
insurance marketplace, and looks at regional opportunities and risks.
insurance and project finance protection all At the same time, claims paid in political risk
over the world, the insurance marketplace and lending fell sharply.
must continue to focus on delivering value. It The nature of medium/long-term credit
is more important than ever to listen to insurance means that claims take some time
buyers’ needs and provide products that to develop. Writers of long-term credit
meet those demands. insurance usually expect to see claims
For example, banks – longtime buyers of occurring around the five-year milestone.
credit insurance – are under increasing Although medium/long-term claims are lower
regulatory pressure. Their capital charges on in frequency than short-term claims, they can
cross-border loans, for example, are the be large. Insurers’ ability to select risks,
highest they have ever been. Financial monitor and analyse conditions and to
institutions that are involved in financing engage with the appropriate parties – such as
large and complex projects need and are government ministers – can mitigate much of
seeking capital relief. Credit insurance and the loss exposure associated with
project finance protection play important medium/long-term credit insurance.
roles in providing such relief. Larger capacity
and longer tenors from counterparties with How Berne Union can help
robust balance sheets are especially helpful The Berne Union has provided a valuable
to banks today, even more than in the past. forum for both analysing and promoting
Infrastructure development is often global trade since its founding in 1934. It will
conducted in stages over a number of years. remain important for Union members to
Such projects generally require more collaborate and pool our vast resources – not
protection over prolonged periods. It is just economically but also to share our
helpful for credit insurers, where possible, to expertise and help each other – to better
extend protection up to as long as 20 years. understand the dynamics in political and
This provides capital relief and reduces risk credit risks.
for sovereigns and financial institutions. It Working together, we can create more
also helps communities to realise the relevant products that serve the changing
projects’ benefits, whether it is a new rail line, needs of our customers. We can offer real
a port expansion, a toll road, an oil or gas solutions that reduce uncertainty arising from
facility, or another form of infrastructure. trade and provide capital relief.
There is enormous opportunity for Union
Claims environment members to engage in public/private
The claims environment in credit insurance partnerships that marry government support
has been relatively light in recent years. with expert analytical resources. Combining
Short-term export credit insurance, where our strengths in this fashion can help
tenors generally are 12 months or less, is members to identify and mitigate risks before
where the highest frequency of claims they become claims. Disruptions can amount
occurs. Berne Union members have over the to much more than temporary
past three years seen moderate increases in inconveniences; they can in some cases
short-term claims paid: $2.0 billion in 2014, jeopardise entire projects.
$2.58 billion in 2015, and $2.78 billion in 2016. Political and economic volatility are,
Short-term credit insurance premiums over ironically, constant forces in the current of
that period have fallen slightly. If the loss ratio global trade. Navigating uncertainty and
continues to rise without a corresponding mitigating risk are vital to sustaining growth
increase in premium, that eventually will hurt in trade. The Berne Union has played a critical
insurers’ results and create changes in the role in that for 83 years and will continue to
marketplace. The credit insurance market is do so. ■
healthy for the foreseeable future though.
On medium – and long-term export credit Daniel Riordan is president of global political
insurance and lending, claims continue to be risk, credit & bond insurance at XL Catlin.
fairly light, on par in dollar terms with short- Before joining XL Catlin, he held various
term claims. What has changed – and is likely senior executive roles in political risk,
to increase further – is the amount of specialty and global corporate property and
commercial risk claims. In 2015, for example, casualty insurance at a leading global insurer.
Berne Union members paid $1.34 billion in He has had a long association with the Berne
commercial risk medium/long-term claims. Union, serving as president from 2013 to 2015.
60 This nearly doubled in 2016, to $2.65 billion.
Berne Union 2017
EXPERT ANALYSIS
higher political risk
Rouben Nizard, economist for sub-Saharan Africa, from Coface’s
Economic Research Department, discusses the rise in political risk, and
how political risk assessment must be sharper in the coming years.
Coface published a study called ‘The rise and 12th in our 2016
rise of political risks’1 in March, presenting a ranking of the riskiest
new quantitative model of political risk. But countries (see graph
recent developments, both in emerging 1) in terms of social
economies and developed markets, pushed and political fragilities
Coface to review its methodology of political – behind the likes of
risk assessment because of the potential Syria, Central African
disruptions to business activity that they Republic, Afghanistan
entail. and Libya.
In the past 18 months there have been The constitutional
Rouben Nizard
elections or referendums in the United crisis and the
Kingdom, the United States, Italy, Spain, the constituent assembly elections happened to
Netherlands and France, which have grabbed spark mass protests. The Coface political and
the attention of investors, exporters and social fragilities index indicates that
country risk analysts. This has fuelled a lot of significant emerging countries could also be
talk about political risk. These political events potential tinderboxes in the near future,
are liable to shift radically the economic including Brazil, Russia and South Africa.
orientation of the countries involved. But they Notable events are a general election in
were often restricted to emerging economies Brazil, a presidential race in Russia and Jacob
with less robust institutions. Zuma’s succession as the head of South
Nevertheless, as a return to growth has Africa still loom over us.
failed to offer equal opportunities to all Much of the literature on political risks
economic participants, the past decade stresses that it is unpredictable and poorly
reminded us that social exasperation could designed policies which represent the main
grow indistinctively both in developed threat to business operation. The political and
economies and in emerging markets. social fragilities pillar in the Coface model aims
to detect weak signals leading to this type of
Detecting social frustration,
identifying political vulnerabilities
Social frustration can lead to a popular Graph 1
upheaval in emerging markets. It is on this
intuition that one key module of the Coface
political risk model is built, based on the full
scale example given by the Arab Spring
demonstrations, both in its violent and non-
violent demonstrations.
The model also builds on the assumption
that cracks in the foundations of the political
system, which may lie in the nature of the
regime, in the design of the institutions, in the
degree of political freedom or in the
cohesiveness of the population, expose all the
more a country to risks.
Venezuela, plagued by corruption, 61
inequalities, cronyism and corruption, was
Berne Union 2017
EXPERT ANALYSIS
the Ethiopia-Eritrea conflict responsible for
approximately 40,000 deaths per year. Data
for 2016, not yet fully available, suggest this
100,000-death threshold will be exceeded for
the third year in a row. Simultaneously,
terrorism linked essentially to Islamist
terrorism, is spreading as a form of political
violence. The global terrorism index compiled
by Coface multiplied by 2.8 between 2008
and 2016 (see graph 4), confirming a rise in
terrorist activities perceived in Syria, Nigeria,
Afghanistan, or Iraq, as well as France, Spain,
Germany, Belgium, the UK and the US.
Political violence, while not always
considered the main barrier to business
operation in the literature on political risks,
does raise business concerns. Full-scale
conflicts can potentially annihilate the entire
economic fabric of a country, meaning they Diagram: Coface Political Risk Index
are relevant in a political assessment. Indeed,
a surge in political violence can prove
undeniably harmful to business activity.
Some are directly vulnerable to political
violence: an unequal allocation of the country’s
oil resources in Nigeria, aggravated by ethnic
fractionalisation4, which is at the core of the
conflict in the Niger Delta, targets specifically
oil production facilities. Groups such as Niger
Delta Avengers (NDA) even declare that they
want to reduce Nigeria’s oil production to zero.
By targeting tourists in Soussa, Tunisia, Paris,
or Barcelona, terrorists attacked one of the
driving forces of the local economy.
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Founded in 2000, Tinubu Square is a software vendor, leading expert in trade credit risk
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corporations.
EXPERT ANALYSIS
driving Italian SMEs
worldwide
Tasked with sustaining Italian export competitiveness worldwide,
SACE’s new Italian Hub for Export and Internationalization is focused
on backing SMEs in new and innovative ways. By Alessandra Ricci,
chief underwriting officer, SACE.
A new model for SME support important new frontier for the hub.
What are the major features of this new Italian companies are still under-insured
model aimed at involving and supporting compared to those in other countries, as they
more SMEs? often view insurance as a cost rather than an
The "hub model” takes into account the important indicator of competitiveness. The
importance of SMEs to the Italian economy ratio of GDP to volumes insured by
and the strategic role played by exports. It
combines the capacity of intervention of the
public sector with the flexibility of a private
enterprise. There are several significant Promoting a more
implications for Italian SMEs: a range of evolved “risk culture”
services beyond the traditional export credit
support; a proactive approach vis à vis the
means promoting
client, and a focus on education, with education, but also
dedicated advisory services and analysis of
ensuring that those who
markets and exports.
SACE's 2016-2020 business plan includes develop it are rewarded.
the re-engineering of many products, from
export and credit insurance to protection of
foreign investments, from financial companies in Italy is about one-third of other
guarantees to factoring services, and from European countries.
bonds to equity investments and low-interest The hub emphasises advisory services
loans. aimed at providing companies with
Flexible integrated solutions have been managerial support and consulting on growth
developed for several core industries of strategies abroad. It indicates business
“Made in Italy” worldwide, such as the agri- opportunities in high-potential countries and
food and wine sectors. SACE provides proposes business-matching meetings, as
instruments that aim to sustain the entire well as financial and insurance solutions
product life cycle, from production to sale. It tailored to their needs.
offers protection of inventories and supports Promoting a more evolved “risk culture”
financial requirements for the production means promoting education, but also
processes typical of these sectors. ensuring that those who develop it are
SACE is currently digitialising the products rewarded. For this reason, the hub will
used by SMEs and upgrading the remote increasingly work with banks and financial
contact channels, both on and offline, to institutions so that companies which insure
boost accessibility. It has also increased its their receivables against the risk of default
domestic and overseas network, which today (thus protecting their revenue) receive a
has 14 offices in Italy and ten abroad. higher credit standing when seeking
Lastly, the theme of education is an financing. ■
Reaching out to
EXPERT ANALYSIS
exporting SMEs
For the third consecutive year, EKN, the Swedish export credit
agency, reports a record level for the number of small and medium-
sized business customers in 2016. Increasing numbers of such
companies are taking advantage of business opportunities in
emerging markets around the world, with the help of the Swedish
Government's export credit guarantees. By Carl-Johan Karlsson, head
of the SME business area at EKN.
EKN began a specific drive to reach out to Göteborg and Malmö (the second and third
more SMEs already in 2007. A separate largest cities in Sweden). During 2016, the
business area with particular focus on the local presence has been further increased
target group was created as a first step. The with a new office in Umeå (in northern
Swedish SME segment is a very diverse Sweden) and with more employees in
target group, and there are several challenges Göteborg, as well as with external finance
in reaching out to them in regard to export consultants in five cities throughout Sweden.
credit guarantees. The consultants have a well-developed
network in their regions and work closely
SMEs’ challenges with local industry and commercial banks.
In Sweden, approximately 14,000 companies They extend the reach of EKN’s regional
with exports to emerging markets have fewer presence.
than 250 employees. Most operate as sole
proprietorships and have limited resources Intensified marketing
and interest in expanding their exports. The Over the past two years, EKN has invested
segment's exports to emerging markets is more in advertising and various marketing
limited, as are the development plans for partnerships to reach out to SMEs. For two
reaching more markets. Many Swedish SMEs years in a row, EKN has been a partner to the
are also suppliers to the major exporting nationwide growth company competition, Di
companies. Gasell, run by Dagens Industri, the leading
There is a more widespread business Swedish business newspaper. This
culture among Swedish SMEs, compared to competition awards the most successful fast-
many other countries in Europe, not to insure growing SMEs in Sweden. Events around
their customer credit. It is more common Sweden enable networking with these
that Swedish companies demand advance companies and the opportunity to promote
payment. Only 20% of SMEs exporting to EKN and EKN's offer to the target group.
emerging markets responded that they offer EKN awards an annual prize to the growth
customers credit, according to a survey EKN company that has been most successful with
carried out in 2015. Of these, 24% reported exports to emerging markets. EKN has also
having used credit insurance, which is a big expanded its presence in social media and
increase compared to the previous year when has customised marketing messages to the
14% answered yes to this question. target group.
Another challenge is the low awareness of
EKN among the target group - an awareness Product adaptation
of less than 50% in 2016. The perception that For many SMEs it is not primarily to secure
government guarantees are only for large their receivables that they turn to EKN, but to
companies is also widespread among those strengthen their ability to get the bank to
who are familiar with EKN. provide financing. Banks that issue contract
guarantees and lend working capital and
Long-term focus investment capital can share the risk in the
After the financial crisis, EKN began a more sub-supplier with EKN. EKN's working capital
intensive drive to reach out to more SMEs. A loan guarantees and investment guarantees
new strategy for a greater SME focus was are important instruments for SMEs. The
adopted by management and the Board. guarantees have been developed to better
Clear results were able to be presented adapt to the needs of the target group, and
already in 2014. The number of guarantees to are now aimed at sub-suppliers too.
SMEs rose to record levels and the number of When companies insure their receivables
customers grew steadily. Since then, as with EKN, this can act as security for a bank
mentioned earlier, a new record was set in loan. This is the main reason why SMEs
three consecutive years. become EKN customers. Companies also
The key focus areas behind the positive need the banks’ support with working capital
development can be summarised in three credit and bank guarantees. When EKN
points; increased regional presence, intensified shares the bank’s risk on the company, it
marketing and product development. becomes easier for the company to obtain
finance from the bank. Around 97% of
Increased local presence Sweden’s local bank offices are aware of EKN,
In the first year of executing the new SME and collaboration with the banks is vital to
68 strategy, EKN established local offices in enable more SMEs to grow internationally
Berne Union 2017
with EKN’s assistance. Around 80% of working to further develop its relationship
EXPERT ANALYSIS
guaranteed transactions for SMEs come via with local bank branches around the country,
the banks. to increase their knowledge about how EKN
can enhance the bank's ability to finance
Firmly anchored small enterprises’ export business.
The SME focus is firmly anchored in EKN’s The challenges ahead include raising
Board and management and this has been awareness among SMEs, which, despite great
crucial to the success of the SME initiative. efforts, is moving slowly. This requires a
But even the principal - the Swedish continued high level of activity in terms of
Government - has explicitly given EKN the both extensive and targeted marketing. The
task of raising awareness among SMEs about SMEs also play a leading role for greater
how guarantees can strengthen export flexibility and efficiency in EKN's internal
capacity as part of the Government's export processes and product development. The
strategy. demand for strong commercial expertise in a
A couple of years ago, in 2015, the Swedish governmental structure increases for EKN’s
Government adopted a new export strategy employees.
with the aim of increasing Swedish exports Sweden is a country with a high level of IT
and encouraging more companies to sell to maturity and is at the forefront in the
emerging markets. It was stated that SMEs utilisation of the opportunities of web-based
need to increase exports, and a number of business models among entrepreneurs who
priority export markets among the emerging
countries were defined. Furthermore, the
export strategy established that the Swedish
governmental export promotion Only 20% of SMEs exporting to
organisations should improve their emerging markets responded that they
cooperation and facilitate contact channels
for companies. offer customers credit, according to a
Asia is an attractive export market survey EKN carried out in 2015. Of
In order to increase knowledge about SMEs
need for support from EKN, EKN has
these, 24% reported having used credit
produced a report for a number of years on insurance, which is a big increase
SMEs exports to emerging markets. The compared to the previous year when
reports have provided clear information that
the number of companies exporting to 14% answered yes to this question.
emerging markets in the SME segment is
growing year by year. The value of exports to
emerging markets from Swedish SMEs is also take advantage of the opportunities that
increasing. The number of SMEs exporting to arise in a digital and connected world. These
emerging markets reached record levels for companies are ‘born global’. The focus is not
three years in a row. At the same time, on one market at a time, but rather on ten or
exports to emerging markets account for only twenty. Exports are also becoming more
13% of the total exports of SMEs, according to service-based, and global value chains are
the latest survey conducted in 2015. becoming more complex. This requires
Asia is clearly the hottest growth market flexibility and agility for the relevance of
for Swedish SMEs. Asian markets account for export support.
nearly half of SMEs’ exports to emerging Swedish SME's exports to emerging
markets. It is also there that exports have markets, as previously described, are multi-
grown most strongly in the past five years - faceted. For example, EKN’s customers
the volume has increased 65% since 2005. In include companies selling ice hockey
2015, exports grew by 12%, and China is the equipment to Russia, forestry machines to
growth market that most companies are the Philippines, pilot boats to the United Arab
attracted by. It is a positive that SMEs are Emirates and blood analysis systems to
focusing on Asia, given the potential of these African countries south of the Sahara.
markets. However, there is potential for more
companies to achieve success with exports
Focus going forward and growth in new markets, and EKN
Because of the large proportion of guarantee continues to further extend the focus on
volume coming from banks, EKN is now reaching out to SMEs. ■
69
Berne Union 2017
EXPERT ANALYSIS
to the next level
Katja Keitaanniemi, executive vice president responsible for SMEs at
Finland’s Finnvera, explains what special measures the group takes to
look after smaller businesses.
sell or export to other SMEs – and the buyer business. The same specialisation is needed
credit information tends to be insufficient or on the credit manager side as Finnvera has
very scarce. In such cases, Finnvera can be separated its credit function from its client
more flexible. The experience so far is function. Finnvera has some 1,000 clients in
encouraging. If loss ratios turned out to be this customer segment taken care of by
higher, one could argue that the impact of around 20 highly skilled customer
these transactions for SMEs is very high and relationship managers, and the yearly
the SME-related buyer credit portfolio is only offering reaches to several hundreds of
a small fraction of Finnvera’s overall portfolio. millions of euros.
Focusing merely on products is clearly not Combining domestic financing solutions
enough - and may even be a bit old- with export credit agency offerings is not all:
fashioned. SMEs may not know which Finnvera is part of ‘Team Finland’, which
products they need or want. And client gathers various official actors together to
managers in commercial banks working with
growth oriented SMEs and mid-caps may
have gaps in their knowledge of financing
instruments used in foreign trade. To bridge
these gaps Finnvera has been organising In its risk policy, Finnvera
training programmes both for growth has introduced increased
oriented companies and their bankers. It is
now considering the next step: offering trade flexibility, a more
finance-related consulting services for SMEs. aggressive approach
As a domestic SME financier, Finnvera
offers a product palette that covers loans
to taking risk in SME
and guarantees from investments and exporters’ small
working capital to financing changes of transactions compared
company ownership, environmental
guarantees, start-up -guarantees, to larger exporters’
internationalisation guarantees, etc. Until transactions.
recently the products on offer also included
early stage Venture Capital ‘Seed Financing’
for innovative growth-oriented SMEs. The
special focus is to offer a palette that covers find synergies when serving customers. Team
financing needs from the start to Finland members include other important
internationalisation. And for the customer, it state-backed agencies or entities promoting
does not really matter which product is innovation and growth such as TEKES
being used: they just need financing or risk (organisation for financing research,
cover. development and innovation), Finpro
Finnvera focuses specifically on SMEs (Finland’s export promotion agency helping
aiming at growth and internationalisation. SMEs to export), and TESI (equity / venture
Our target clients are growing and capital provider). These groups share the
globalising enterprises - or ‘global’ same premises in the same office building. In
companies. The special unit that covers this total, 600 experts from four separate
market segment offers both domestic organisations now share a modern open
financing needs and export credit products. plan, multi-space office focusing on their
It is absolutely essential that our client joint customer base of growth and export-
relationship and credit managers can offer oriented companies.
solutions on a larger scale of financing needs We are quite sure that the next megatrend
so that domestic SME financing and export in public SME financing will be in external
credit guarantees as operational functions do focusing and cooperation, not any more in
not work in silos. internal concentration: how to combine
This of course requires some expertise forces with your colleague organisations to
from the personnel as they need to master a serve SMEs better. This requires a new
wider range of products. These particular attitude, but Finnvera is determined to
client managers focusing on growth-oriented remain in the frontline in finding new and
and export-oriented customers are very better ways to support SMEs. In the end, it is
experienced and have worked on both the results that matter: we need more ‘global’
72 domestic and the export finance side of companies! ■
Berne Union 2017
EXPERT ANALYSIS
an MSME export credit
insurance facility in Brazil
ABGF has been working on MSME full-range insurance cover aimed
at facilitating prospecting and exports to new buyers abroad.
Marcelo Franco, CEO at ABGF, explains the new offering and how
it was developed. Co-author Pedro Carriço, ABGF’s credit
underwriting & international relations executive manager.
process takes an average of five working days public information on export facilities.
if there is enough information on the buyer’s Export and credit insurance promotion is
data and risk profile. ABGF estimates that inherent to ABGF’s mandate and should be a
end-to-end processing should take constant focus of our activities, but we have
approximately 10 days. been very careful to avoid undercutting or
interfering with the market. Official support
MSME feedback good should come into play where there is a
The feedback from MSMEs that are in contact market gap or failure. Although a period of
with ABGF experts is highly positive and poor performance might open up space for
gives us fresh input to keep improving. So far, public support, we stick to the philosophy of
the MSME team has processed 338 not competing with private insurers.
transactions from 130 unique exporters in 22 Since pre-shipment should be an incentive
different countries, generating exposure of for export production, ABGF launched a
approximately $13 million. As of yet, there product that combines a full working capital
have been no claims filed. insurance facility with export credit risk cover.
Although ABGF was pushed to launch with Doubtless there is a market gap in MSME
a post-shipment only cover, the current working capital cover. Commercial banks are
product is now closely aligned with initial not willing to provide such a credit line
market requests for a complete MSME tool without appropriate protection, basically
encompassing pre- and post-shipment cover. relying on their credit scoring systems and/or
Eligible enterprises must make no more than recourse against MSME’s balance sheet. In
$3 million of total export sales yearly and have most cases, banks are unable to finance
total turnover of up to $30 million. Roughly MSMEs without regular guarantees. ABGF
speaking, in this example, 10% of the total has been studying this market and concluded
turnover can be insured by the current facility. that the most efficient cover would be a pre-
Behind the scenes, ABGF had a lot of and/or post-shipment product. Of course,
paperwork to do in parallel with the product, MSMEs served under the official support are
such as step-by-step online system expected to produce and sell abroad.
instructions and the export credit insurance To that end, ABGF has also been preparing
general and particular conditions, as well as a stand-alone pre-shipment cover, which
the actuarial and technical paper for pricing should be launched in the current year since
and risk assessment mapped to the correct the Guardian Authority has already revised
rating. We are very proud of the product and authorised the product.. The main task
rolled out, which we believe meets the needs for ABGF is to educate MSMEs and promote
of both exporters and banks. the official cover around the country, much as
We realised however that gathering it did previously with the post-shipment
together even the above-mentioned 23,000 product.
MSMEs already registered in officially Furthermore, ABGF has also been looking
compiled data and educating them about at prospecting cover for MSMEs that are keen
export credit insurance and the technicalities on exploring to overseas markets but do not
of this industry would be a big challenge. have enough resources to look for business
In addition, an online presence would not opportunities abroad. This should be
be enough to reach the rest of the challenging for MSMEs, and ABGF
addressable market of non-exporter MSMEs. understands that a complete service for
A toolkit, workshops and webinars have a these enterprises should include prospecting
role to play in reaching out to these firms, but as well as pre- and post-shipment cover.
there is still an important hurdle to overcome In short, the ABGF team has been working
in the management style and mind-set of on an MSME full-range insurance cover aimed
MSMEs to help them access a combination of at facilitating prospecting and exports to new
insurance and financing via an online tool. buyers abroad. We are convinced that MSME
export success depends on the facilities
Education and export cover provided as well as on the enterprises’
Our current priority is education on export- production ability and willingness to export. ■
related insurance and how to apply for cover
for overseas sales. But for those still outside *Guardian Authority is the Secretary for International
the export business, ABGF has been looking Affairs (SAIN) of the Ministry of Finance as a policy
maker which is responsible for the certificate of
at partnering with official banks and private
74 export representatives, campaigning for more
guarantee and for hiring ABGF, as fully state-owned
enterprise, to run the export credit guarantee business.
Brazilian Guarantees Agency
The importance of
credit insurance for
national SMEs
By COSEC
COSEC’s board of directors lead an important export on average to twice as many countries
rhetoric for the relationship between credit as those without such insurance. These
insurers and SMEs, focusing on the companies are increasingly aware of the need
opportunities won and lost in Portugal, and to protect commercial credit risk and also
the introduction of a new tool. political risk, when exporting to non-
The financial crisis of 2008 was marketable risk countries, where the
detrimental to the Portuguese economy and commercial and political risks are significantly
led the Portuguese companies to better higher than those encountered in marketable
assess the relationship with their customers risk countries.
and the risks that may arise from launching Considering the challenges that the
new business abroad. The approach of Portuguese SMEs are facing in the credit risk
Portuguese companies to a risk mitigation management, and taking into account the
tool, reflects the advantages of credit specificity of the SMEs market, COSEC offers,
insurance, namely protection against financial together with the banking sector, simplified
losses (customer debts) and the safe and standard solutions that support
management of their financial needs. companies in the management and control of
In an increasingly competitive market, it is of credits in the internal and external markets.
paramount importance to create favourable Although nowadays most banks offer
conditions for the development of SME short and mid-term financing, tailored to the
business, with solutions tailored according to needs of each SME, the truth is that access to
their needs. Portugal is a country that has finance remains one of the major challenges
several opportunities, support and incentives for these companies. The role of banks is very
that stand out for the quality and accuracy of important, since through the diversity of their
analysis, so that it is ensured that the distribution network, they not only promote,
investment made will bring real returns both to but also facilitate companies’ access to these
the exporting companies, or to the ones that types of solutions. In our experience, the
intend to develop their internationalisation, as complementarity of banking with credit
well as to the supporting entities (state, insurance is very relevant for SMEs. COSEC’s
banking, insurance companies). credit insurance has allowed many SMEs the
During this period, COSEC has made access to bank financing. Through the
intensive efforts to better support SMEs and endorsement of the export credit policies,
to spark their interest by launching the new banks are more willing to support export
export credit insurance solutions into the transactions for SMEs. This type of solution is
market. Credit insurance is a fundamental not only highly valued by the companies, but
tool to avoid possible defaults, both in cases also contributes to the enlargement of the
where trade is carried out domestically, and market: for instance, COSEC has grown, in
in transactions involving the export of its the past years, 25% in the number of
products or services to market and non- new clients. ■
marketable risk countries.
Not surprisingly, a study on SMEs
conducted at European level by our
76 shareholder Euler Hermes, concluded that
most companies using credit insurance
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EXPERT ANALYSIS
be counted
The volume of private insurance market credit risk mitigation is
growing – but does the industry do enough to voice its activities
and concerns to regulators? By Peter Sprent, head of global
financial risk at Liberty Specialty Markets and Audrey Zuck,
director, A2Z Risk Services Ltd.
Over the last 20 years, the private sector relief. More recently,
insurance market covering non-payment risk private insurers have
has gone through a transformation in both been partnering with
scale and capability that has not been fully banks to help manage
recognised other than by users and providers portfolios of
of this credit risk mitigation tool. exposures already on
Not only has the private market grown the books of the
exponentially in terms of numbers of bank. For example,
participants and per risk capacity, it has also Risk.net’s Risk Awards
confidently withstood the global financial 2017 named BNP
crisis and weathered the recent commodity Peter Sprent Paribas Credit
downturn, supporting clients paying billions Portfolio Manager of the Year for its
of dollars of claims in the process. Berne innovative approach, which included the
Union numbers show the significant amount sharing of existing facilities with the private
of credit insurance coverage provided by market, with the specific aim of obtaining
private sector members in 2016, although it is capital savings while avoiding some of the
worth noting that most private sector downsides of traditional credit portfolio
insurers are not members of the Berne Union. management tools such as credit default
swaps.
More banks using private insurers In this period of growth, underwriters have
Banks have been active users of non- concentrated on developing their products
payment coverage from the private market and building their teams, platforms, pricing
for over 20 years but this has increased models and client and broker relationships.
substantially since the global financial crisis. Engagement with a wider audience of
A large majority of participants in the stakeholders has taken a back seat.
International Chamber of Commerce (ICC)
Trade Register report for 2016 are clients of Raising private insurer profile with
the private market, although only export regulators
credit agency (ECA) support of trade Recent changes announced or contemplated
transactions is acknowledged in the report. In by bank regulators – the ‘Basel IV’
addition, banks active in the financing of consultation on changes to the internal
trade receivables benefit from billions of ratings based models, and the European
dollars of coverage provided by whole Commission’s amendments to the Capital
turnover insurance policies. At the long-term Requirements Directive (CRD 4) and Capital
end of the financing spectrum, eight out of Requirement Regulation (CRR) – have
the 10 most active project finance banks are highlighted the need for the private market to
core clients of the private market. take a more proactive role in ensuring that its
Traditionally, banks have used non- voice is heard as regulators continue to revise
payment insurance to manage counterparty the capital framework for banks.
limits and credit risk when considering new While there is significantly more to be
transactions. Since its acknowledgement by done to recognise the role the private market
the Basel Committee,1 many banks have also plays in supporting international trade and 77
been able to deploy this product for capital investment, many private insurers have
Berne Union 2017
increased their profiles in finance industry designed to ensure that private insurers
associations and other international always maintain sufficient capital to fulfil
institutions. their payment obligations to policyholders.
Private market membership in the Berne In the rare event of an insurance company
Union is growing, as is participation in the insolvency, applicable law and regulation in
International Association for Credit Portfolio most jurisdictions would ensure that, as
Managers (IACPM) and in the International policyholder, the bank stands in a
Trade and Forfaiting Association (ITFA), privileged position ahead of regular
which formed an insurance committee to creditors
address its members’ interest in the product. ● As witnessed by the BNPP example
In its submission to Basel IV, ITFA noted that mentioned above, private insurance is
“insurance, although a conditional product, flexible in application, with the ability to
has responded consistently in paying claims commit quickly to coverage once risk
to banks under non-payment policies, analysis has been satisfactorily completed.
justifying banks’ treatment of insurance Looking specifically at the proposed
policies as guarantees.”2 amendments to the CRD4 and CRR, while the
rationale for excusing loans insured by ECAs
Private and ECA – are they from the leverage ratio is consistent with the
eqivalent? risk weighting of zero for banks’ exposure to
The private market product is equivalent to their own governments in local currency, we
ECA coverage in as much as: believe that the focus solely on ECAs’
● Performance is uncorrelated to underlying provision of credit risk protection is a missed
risk opportunity.
● There is a direct claim against the insurers, The private market is an important partner
which are located in strong and stable for banks, and private insurers are an
jurisdictions increasing presence in international
● Coverage is provided by highly rated institutions supporting the financing of the
entities (generally minimum A- financial global economy. However, the private market
strength rating from Standard & Poor’s or has yet to pull together coherent and
equivalent rating agency) consistent data to demonstrate to regulators
● Insurers conduct their own credit analysis and other interested parties the performance
before a risk is selected to be covered, of the private insurance product that
providing independent validation of the warrants more explicit recognition of its merit
counterparty risk. as a credit risk mitigant. With the help of
The ICC’s 2016 Trade Register noted that banks, industry groups, and private insurers
medium- and long-term trade finance is low willing to provide more comprehensive
risk largely because transactions are covered premium and claims data, we believe we can
by investment-grade ECAs sponsored by prove that the size, scale, professionalism and
high-income OECD governments which have other benefits of the private insurance market
never defaulted on a valid claim3. The private justify greater recognition. ■
market also has an excellent track record of
paying out valid claims, but information is
patchy at best. While brokers have been Notes
providing their claims data as proof4, there is 1 Basel Committee on Banking Supervision: QIS3, FAQ
E: Credit Risk Mitigation, FAQ6
a growing need for more detailed and 2 Letter to the Basel Committee on Banking
comprehensive data to support the wider Supervision dated 24 June, 2016
adoption of the product by banks and help 3 2016 ICC Trade Register report, pp 51 and 73
4 For example, BPL Global, a specialist trade credit risk
convince regulators and government bodies broker, notes that over the last 30 years and in
that the product is a strong credit risk respect of claims for exporters, traders and banks,
mitigation option. overall 95.5% of their claims for non-payment were
settled in full; 3% were settled amicably but not for
In addition to strong claims performance, the full amount because of operational issues with
the private market has other unique benefits: respect to the underlying transaction; and only 1.5%
● Multi-line insurers’ other lines of business were denied either for breach of policy condition or
because the client could not produce evidence to
are highly uncorrelated with credit default support the claim.
coverage
● The prudential regulatory regimes in the
main jurisdictions impose substantial
78 capital requirements on private insurers,
Berne Union 2017
EXPERT ANALYSIS
for insurers prepared to
embrace change
The credit insurance industry needs to break into new geographic
markets and adopt new technology to keep pace with changing
regulation and stay cost competitive. By Jérôme Pezé, CEO and
founder, Tinubu Square.
advantageous position they should be aiming In fact, many insurance companies are
for. This is a challenge that must be faced. already overhauling and updating the
While they have met the demands of their services they offer to customers. A few have
traditional core markets including brokers, embarked on the digital transformation of
insureds and reinsurers, and even the needs their organisations. Such moves have
of extended enterprise, including trade required vision, a methodical approach,
associations, banks, regulators and investors, commitment and consistency. But it positions
what they now have to do is face the such players in the forefront to take the
challenges of disruptive technologies and benefit of the opportunity offered to the
innovations that will have an impact on their credit insurance industry as well as to fulfil
business. This includes new payment and their mission to the business community.
settlement solutions, changes in the supply
chain and technology developments. Best practice – rules and provision
One topic that is causing ripples Provision of best practice enhances
throughout the industry is blockchain processes and good governance for mid-
technology, with one of the main concerns sized and smaller companies and is reaping
being the databases that store details on dividends in the form of support from
buyers. These are no longer the sole domain reinsurers. Instead of maintaining their focus
of the credit insurers, and as new entrants on traditional products, insurers should be
come into the market, offering more keen to build tailor-made solutions and adopt
economical access to buyer information, a multi-niche, customer-centric strategy to
insurers will have to compete on a new stage. boost growth.
This is a challenge that will require fresh There are ‘golden rules’ that insurance
strategies and specialised services to keep companies really should abide by and which
existing clients engaged and attract they will be aware of. They include: Identifying
prospects, and is particularly pressing in that they are capable of operating effectively
terms of meeting the individual needs of within the market; that they can oversee local
clients in different geographical territories relationships and partnerships with a good
and industries. cultural understanding; that they can
If credit insurers don’t want to fall behind accordingly empower their partner with know-
they will need to be more effective, not just in how transfer; that their products and services
the way that they choose to communicate are competitive; and that they have access to
but in the speed with which they deliver local up-to-date intelligence. With these in
information. It has to be in real-time so that place, it is then much easier to diversify
the credit limits of buyers are up-to-the- geographically and across different market
minute and any area of risk can be assessed sectors with unfamiliar economic cycles.
accurately. With emerging markets growing in
Technology is crucial to this. Not only does prominence and accessibility, competitive
it enable the insurer to make informed insurers can use their unique expertise and
decisions based on accurate information, it knowledge, supplemented by local
also speeds up the process, avoiding a partnership help, to build culturally and
frustrating wait for clients. The same applies economically appropriate solutions. In reality,
to payments, which may continue for some any geography is accessible if you have the
time to be transferred in the traditional way strength and business intelligence to tackle it
but which will inevitably start to use confidently. There is a trend for companies to
blockchain technology in the years to come. offer expertise in multiple niche areas, and
Blockchain is part of the ecosystem that diversification helps to spread risk, as long as
the insurance industry is now operating in. the insurer is able to support each of those
Critical mass is no longer the key competitive areas within the golden rules.
advantage as work-around solutions have Now is the time to cast off the cloak of
emerged, but flexibility and the benefits of convention and look around for partners that
innovation are becoming paramount. The can help make inroads into new markets. It’s
sooner that the market starts to work with the time to embrace technology that delivers
technology providers, the sooner digital and more accurate intelligence, and it’s the time
operational transformation can take place. to start honing convincing arguments about
With the right checks and balances in place, why credit insurance is needed in these vast
insurers should not be afraid to embrace emerging geographies. The opportunities for
80 technology progress. market penetration are too rich to ignore. ■
Berne Union 2017
EXPERT ANALYSIS
- from local market players to
ongoing globalisation
Rob Nijhout, executive director - International Credit Insurance &
Surety Association (ICISA) – on how surety members are seeing
nowadays an increasing number of international companies operating
cross border
reason the product cannot mature. Overall, market, while in other countries they continue
the surety market continues to offer large to compete with sureties.”
capacities and excellent security and is very
well positioned to take up competition with What kind of surety bonds does a
banks. The more we are able to share this surety insurance company issue
message with lawmakers and beneficiaries, The secured contractual obligation can have
the more surety will penetrate the markets.” many forms, for example, constructing a
building or being compliant to legislative
Surety data regulations. Nijhout likes to give two
“Global surety premium is estimated to be examples of surety bond contracts: “The first
around EUR 9 billion”, Nijhout says. “Members one is the failure of a contractor (principal) to
of ICISA account for around EUR 5 billion in
premium income with a loss ratio of 16.3% in
2016. Insured exposure grows year on year
and, in 2016, this was reported at EUR 460
billion.” The most recent ICISA
Among the largest surety markets are the survey among surety
US, Korea and Italy, while the Chinese market
is growing rapidly. “Surety members of ICISA
members reported a strong
are active on all continents. Asia and Africa overall decrease in claims
are particular growth markets, although
supporting legislation and regulation is still
over 2016, with an increase
lacking in many countries. Similarly, a lack of in written premium and in
adequate insolvency legislation in some insured exposure.
countries in the Middle East and North Africa
region holds back the growth of surety in
certain countries.” Nijhout predicts a positive
outlook for surety bonds. “With an improved complete a contract in accordance with its
economic outlook and a focus on terms and specifications. But also the failure
infrastructure in leading economies, the of an enterprise to pay taxes or customs
demand for surety bonds is expected to duties to a government or department
increase. Ample capacity and risk appetite (beneficiary) can be a situation covered by a
add to this,” he says. surety bond.” Nijhout says the most common
types of surety bonds can be categorised in
Surety and banks seven types. “There are customs, tax and/or
Surety bonds and bank guarantees are often similar bonds, bonds concerning concessions
seen as similar products, with competition and licenses, judicial bonds, bonds
between the two product lines as a result. concerning purchases of goods and/or
Nijhout notes that “this is a generalisation and services, bonds concerning leases, bonds
does not apply to every country. Bank concerning construction and/or supply
guarantees and surety bonds also differ in contracts and, last but not least, financial
wording and conditions of cover. Surety bonds. But this list is not complete, there are
bonds are typically conditional while bank many types of other bonds as well.”
guarantees are normally on demand”. Nijhout concludes by reiterating how the
Differences between surety bonds are bonding industry is now developing is a very
country specific. “In the US, for instance, surety positive way. “In most OECD countries the
bonds are required by law for government product is now seen as a valuable alternative
funded projects. In Europe the market is often for insuring large infrastructural projects and a
divided between banks and sureties. A solid alternative for bank guarantees. The
determining factor in this distinction is the development of multi-country players will
amount covered by a surety bond, where in probably speed up the developments in
the US 100% bonds are common, while in countries where the surety industry is not yet
Europe this percentage is much lower, a household product and surety bond
depending on the country involved.” legislation needs to be improved. But I dare to
Legislation and regulation also play a part, predict that the ongoing process in the
as does the bank’s appetite for bank industry will continue over the next five to ten
guarantees, Nijhout explains. “In some years. The industry will continue growing from
82 countries banks have pulled back from this local market players to more global players.” ■
Berne Union 2017
For more than sixty years, the Paris Club has requirements
been engaged in the coordination of imposed on local
sovereign creditors’ recovery activities governments by
granting considerable debt treatments multilateral
towards more than 90 countries, for an institutions have led in
aggregate amount of debt equal to $583 the past decade to a
billion. Export credit agencies (ECAs) have lesser recourse to
always played a significant role in such sovereign guarantees
restructurings, since a substantial portion of for export credit
claims held by the 22 Paris Club creditor transactions. This
Paola Valerio
states refers to credits owned by their tendency has – in turn
respective ECAs. – translated into a revised role of the Paris
Along with the standard rescheduling Club. Debt cancellation, in fact, currently
agreements, additional major actions have represents a minor portion of Paris Club
been implemented to allow relief in the long- activities however in parallel new challenges
term period and to restore debt sustainability and topics are raised.
of highly indebted countries. One of the most Sovereign debt restructuring is facing
relevant examples is represented by the so- significant evolutions which imply
called HIPC Initiative1, jointly launched by the considerable challenges and require new solid
World Bank and the International Monetary instruments to promote development and
Fund back in 1996. debt sustainability.
Under this initiative, the international
financial community, governments and ECAs The outreach success and best
have worked together on the same side to practices
ensure that the most indebted poor The sovereign debt restructuring landscape
countries, especially in the African continent, these days is facing a significant evolution in
could maintain sustainable debt levels. As a terms of participation. New sovereign
result, various countries benefitted from creditors have joined the international arena,
significant restructuring agreements and such as South Korea and Brazil3. Furthermore,
cancellation treatments. To date, debt subject to the agreement of permanent
reduction packages under the Initiative have members as well as debtor countries, the Club
been approved for 36 countries, 30 of which may also invite ‘ad hoc members’ which can
are in Africa, providing $76 billion in debt- follow the discussion during the monthly ‘Tour
service relief2. During the period 2005-2016, D’Horizon’ and participate in specific
SACE took part in almost 20 of these negotiating sessions. The scenario would not
multilateral agreements for the be complete without mentioning the
implementation of the HIPC Initiative within increasing role of private creditors, which sets
the Paris Club framework, providing new challenges for coordination.
bilaterally 100% debt cancellation. The Recent discussions, as the ones that
Initiative is currently coming to an end: annually take place during the meetings of
nowadays, only few additional countries the Institute of International Finance (IIF) and
84 remain eligible for HIPC assistance. the Paris Club, which are used to gather
More generally, strict sustainability official and private creditors, demonstrate
Berne Union 2017
that synergy among actors is more crucial to the commodity crisis as well as the
EXPERT ANALYSIS
than ever. The boundary between officials development of large infrastructure projects
and private creditors is becoming less and (e.g. dams, railways, power plants), have
less defined. The widespread issuance of contributed to the resurgence of sovereign
sovereign bonds by emerging countries and debt and sovereign guarantees on public or
their subsequent purchase by both private semi-public buyers. At this stage the involved
and sovereign entities are putting the countries are not requiring recourse to the
spotlight on the need to reinforce Paris Club, however this might be the case in
coordination among these two spheres. the distant future.
Another emerging issue is the enlarged
basket of solutions proposed within the Paris Path for new challenges ahead
Club. Creditors are becoming aware of the Further discussions on other contingent
necessity to build up and implement instruments are ongoing within the Paris Club
sustainable development instruments which forum with the aim of preventing the
should be as resilient as possible. To this occurrence of debt distress. The prevailing
purpose, new financing instruments have objective is to avoid vicious circles of
been developed recently to promote indebtedness, whereby economic treatment
sustainability and avoid future sovereign debt is postponed to when no other options are
crises, allowing beneficiary countries to react available or the debt sustainability is already
and rebuild their macroeconomic indicators jeopardised. On the other end, the utilisation
in the medium and long term. Moreover, new of the aforementioned contingent
sustainable financing schemes have been instruments might mitigate the cyclical nature
promoted during these years within the Club of indebtedness, reinforcing the economic
with the purpose of encouraging high–return recovery of external debt levels5.
investment projects in debtor countries. By In this spirit, the Paris Club and its
way of example, in February 2015 the Paris members, with the support of the major
Club agreed on an innovative proposal by the financial institutions, are engaged in a strict
authority of Seychelles for financing marine monitoring of countries’ conduct and
conservation through a debt repayment economic performance. ECAs play a very
operation named ‘blue buyback’. important role since they can rely on updated
Notwithstanding previous experience on pre- information on payment track record.
payments within the Paris Club, this initiative Nowadays several emerging countries are
has been internationally recognised as one of facing a critical situation due to external
the most successful and best-sustained contingences such as, among others, the
economic reform programmes conducted drop in commodities prices. This holds
with the support of the IMF.4 The Seychellois particularly true for those African countries
pre-payment was partially financed by an that structurally depend on the export of
NGO while profits would be used in the near commodities. The debt ratio of these
future for the development of environmental countries is now approaching the pre-HIPC
protective projects. levels and this worrying trend of debt re-
In a similar spirit in November 2015 a debt accumulation might suggest the need for a
restructuring agreement was offered to the new debt relief initiative.
Caribbean island of Grenada. For the first All these issues bear considerable
time in the history of Paris Club treatments challenges. A robust coordination among
the agreement included the ‘hurricane creditors along with their strong engagement
clause’, a provision which allows vulnerable is more important than ever and the
states to obtain a rapid additional debt relief implementation of sustainable mechanisms to
in case of environmental shocks, which might support emerging countries is, without any
severely affect their economies. doubt, a win-win strategy for all players. ■
Finally it is worth mentioning that in the
past few years, as a counter-trend, sovereign Notes
risk has re-emerged in ECA-backed 1 Heavily Indebtness Poor Countries.
transactions. Taking into account SACE’s 2 Debt Relief Under the Heavily Indebted Poor
Countries (HIPC) Initiative, IMF Factsheet, April 17,
experience, back in the 1990’s sovereign risk 2017.
represented a substantial portion of the 3 Korea join Paris Club in July 2016 while The
portfolio which sharply declined over the Federative Republic of Brazil on November 2016
respectively as 21st and 22nd member of the Club.
following 10 years. However, increased risk
levels in certain emerging markets, also due
4 Paris Club annual report 2015. 85
5 IMF paper “Too little, Too Late”, 2013.
Berne Union 2017
Leading Mexico’s
banking transformation
The Government led by President of Mexico Enrique Peña Nieto has driven
the transformation and modernisation of the Mexican Government by
different reforms, one of them the Financial Reform with special emphasis
given to the development banks, particularly Banco Nacional de Comercio
Exterior (BANCOMEXT), whose core mandate is to foster international
trade and activities linked to export and foreign currency generation.
In the last four years, the outstanding credit portfolio balance grew
175.2%, from MXN 80 billion in December 2012 to MXN 219 billion as of
June 2017. The credit portfolio growth has been greater than that of the
entire group of commercial banks in Mexico, achieving this in a
responsible way; for reference, our past due loans rate is 1.1%, meanwhile
the credit reserves covers 2.0 times the past due loans and our capital
index reached 19% as of June 2017.
86
Berne Union 2017
Iran: sanction-related
uncertainty is still
hanging in the air
John Blackwell, senior communication and marketing manager at
Atradius, explains why Iran still has a long way to go before its
economy is fully back in the international arena.
EXPERT ANALYSIS
system is the main challenge attacks in Tehran in June, and polarisation
One of the major obstacles facing potential between reformers and hardliners increased.
international investors in Iran is that global The hardliners retain a lot of power in Iranian
banks (including non-US banks) are still society, for example through the Islamic
reluctant to facilitate investment and trade Revolutionary Guards Corps, which are
deals in order to avoid any risk of incurring US involved with many companies in key
fines for breaching remaining non-nuclear strategic sectors in Iran.
sanctions. For instance, because of existing The situation is not helped by the fact that
US dollar clearing restrictions, money Iran's banking sector is generally in bad
transfers or the opening of a letter of credit shape, which makes re-integration into the
(LC) with Iranian banks in US dollars can only global financial system even more
be arranged outside the US banking system. challenging. The sector is dominated by
Iran attempts to tackle this hurdle by trading state-owned banks, whose activities are
more often in euros. A number of mostly small strongly guided.
and medium-sized non-US banks have re- The Iranian government continues to exert
established correspondent relationships with substantial influence in the background on
Iran, but major global banks that are better some partially-privatised banks. These
equipped to finance the bigger projects have directed lending practices, combined with
remained on the sidelines. poor risk management, means the ratio of
Banks’ uncertainty over sanctions should non-performing loans is high, at around 11%.
be seen in light of the still-high political risk in This is also reflected in government payment
Iran and in the Middle East in general. Iran's arrears, while capital buffers are extremely
tense relationship with the US must also be low (Capital Adequacy ratio of 5.8% in March
taken into account. US President Donald 2015) and on a downward trend. The IMF says
Trump has imposed new, albeit limited, recapitalisation of a number of state-owned
sanctions in response to Iranian ballistic banks is therefore urgently needed.
missile tests. Relations cooled further amid Banks also have trouble obtaining funding
the US travel ban imposed on several Arabic because they are dependent on domestic
countries, including Iran. A modified version savings, and have to compete with unlicensed
of the ban came into effect in July. financial institutions. This has led to high
But a fully-fledged re-introduction of interest rates, depressing banks' profitability.
sanctions by the US would not be effective Iran is still on a 'black list' for money
without the cooperation of Europe, China and laundering and terrorism financing, which
Russia. Moreover, the risk that a 'hardliner' puts off correspondent banks from dealing
would come into power in Iran and escalate with the country as it requires additional due
the situation has subsided after the re- diligence.
election of the reform-oriented President Iran has at least started to address the
Hassan Rouhani in May. various problems in the banking sector. It is
But political tensions remain. Iran's working with the Financial Action Task Force
regional rivalry with Saudi Arabia – a US ally – to address the deficiencies in its frameworks
has intensified since the recent diplomatic rift for anti-money laundering and combating the
and economic boycott of Qatar, as Saudi financing of terrorism. The government also
Arabia and Iran are at opposite sides of the attempts to patch banks’ balance sheets by
conflict. Rouhani's position has come under clearing its arrears to the banking sector via
domestic bond issuance. A new encourage FDI inflows because it would likely
comprehensive banking law, which is vital to require a devaluation of the official rate to
upgrade Iran's financial supervision and align it with the market rate. The official
implement reforms, still needs to be finalised. exchange rate is currently moderately
A large scale recapitalisation seems overvalued by 5–7%, according to the IMF.
inevitable, but there is no progress to be Last but not least, Iran’s population is
reported here so far. large, young and relatively well-educated.
This forms a solid base for economic
Macroeconomic indicators remain diversification and boosting the private
favourable sector economy. But structural reforms are
Iran's macroeconomic fundamentals are required in order to fully utilise these
good. Public finances are healthy with a strengths, for example in the labour market to
modest fiscal deficit and a very low public address job mismatches and increase female
debt level, estimated respectively by EIU at participation; and the business environment
2.7% and 14.3% of GDP in 2016. The Rouhani to cut red tape and address other
administration’s prudent fiscal policy means institutional and market inefficiencies. There
the budget has also become less dependent is plenty of scope for improvement. The
on oil revenues, for instance due to sales tax unemployment rate is high, especially among
increases. Iran plans to replenish its Oil the young (29.1%), while the participation rate
Stabilisation Fund with revenues that occur is low especially for woman (14.2%). Iran
when the oil price exceeds the budgeted currently ranks poorly on the World Bank
amount of $55 per barrel in order to build a Doing Business scale at No. 120.
buffer to absorb future budgetary shocks.
The current account is expected to remain in Iran’s outlook has improved, but
surplus, and external debt is almost non- downside risks are there to stay
existent (around 2% of GDP). This of course To conclude, Iran’s economic outlook has
improved since sanctions were lifted and
growth potential is promising. However, high
The success of the Rouhani- political risk and the weak banking sector are
potential pitfalls for doing business with Iran.
administration in reforming the These are not likely to be solved in the near-
economy partly depends on how much term. The success of the
it needs to compromise with the Rouhani-administration in reforming the
economy partly depends on how much it
hardline opposition at home in light of needs to compromise with the hardline
the increasingly assertive stance of the opposition at home in light of the increasingly
assertive stance of the US and its regional
US and its regional allies. allies. It also depends on whether major
international banks begin servicing
partly reflects Iran's disconnect from the transactions with Iran. Export financing and
international capital market. Iran also investment deals are logically more exposed
demonstrated excellent payment morale, to those risks.
when it repaid arrears to credit agencies that We acknowledge the potential of this
were built up during the sanction period. sizeable market once it completely opens up
Iran’s international reserve position is to foreign trade but there remain a number of
strong, at around 21 months of import cover risks in doing business in Iran. Some
in 2016. Central bank access to the reserve inconsistencies remain in the desire of the
improved when frozen assets were released government and other authorities in doing
following the removal of nuclear sanctions. business with Western trade and investment
Monetary policy is also prudent with partners. The election of Donald Trump as US
relatively stable inflation (single digit in 2016) President also dampens interest of US
and exchange rates. The alignment of the companies in working with Iran, also freezing
official exchange rate with the parallel free funds and resources of listed persons/entities.
market rate, which has been postponed, is It is also still not clear that money can be
now planned for the beginning of 2018. This transferred out of the country directly and
would remove economic distortions and put legally through banking channels.
the central bank more in control. It would also Consequently we remain very restrictive and
90 make Iran more cost competitive and may off cover on Iran. ■
Berne Union 2017
A Cinderella story
EXPERT ANALYSIS
From civil war to Africa’s darling in under five years, Côte d’Ivoire
poses challenges and opportunities for investors. By George Otieno,
CEO, African Trade Insurance Company.
noting. First, there is a political element inspector-general’s office and the country’s
driven by speculation that these mutinies are financial intelligence unit have also been
led by Guillaume Soro, the president of the strengthened – but capacity remains an issue.
National Assembly, who led the rebels during Clearly more needs to be done on this front
the civil war and who has expressed a desire but the ambitious pace of the government’s
to be the next president. This runs counter to policy agenda coupled with the endemic
President Ouattara’s selection of former nature of corruption means that this is likely
prime minister and long-time ally Daniel to be a slow process.
Kablan Duncan as the vice president in early
2017. It is a newly created position under the Banking sector risks
revised constitution meant to signal the The reported 26 banks in Cote d’Ivoire manage
president’s choice for his successor as he is about 80% of the country’s financial sector
mandated to step-down in 2020. assets, with the rest covered by insurance
The second aspect to the theatre of companies. Ten foreign-owned banks
succession politics is that the government’s dominate the sector, accounting for 51% of
preoccupation with politics may give way to assets, followed by seven subsidiaries of
its taking the eye off ongoing implementation regional banking groups, five locally-owned
of critical reforms. These include banks and four public banks, which account for
recommendations from the World Bank such about 10% of the sector’s assets – though this
as reducing the start-up time for a business is decreasing as the government continues to
to 24 hours; lowering processing and privatise and restructure public banks.
transaction times at the Abidjan Port for both With a population of 22 million, Côte
exports and imports; setting up credit d’Ivoire is attractive to foreign banks because
information bureaus; establishing a it is one of the largest economies of the West
commercial court of appeals and creating e- African economic bloc – ECOWAS. It is West
government platforms to simplify a number Africa’s strongest economy, representing
of operations such as filing and payment of about 40% of the West African Economic
taxes and tariffs. and Monetary Union (WEAMU) GDP. Banks
reason that establishing a base in the country
Bribery and corruption provides entry to French-speaking West
Corruption is, of course, not specific to Côte African countries in the WEAMU block that
d’Ivoire, where it is characterised as includes Benin, Burkina Faso, Guinea-Bissau,
entrenched. For instance, corruption still has Mali, Niger, Senegal and Togo.
an impact on judicial decisions, contract Overall, the sector has seen an increase in
awards, customs and tax issues, with bribery bank loans and improved access to banking
reported at every level of the civil service. At services. But the country still lags behind
a lower level, foreign companies may neighbours Togo and Senegal because one in
encounter petty corruption in business eight Ivorians are reluctant to deposit savings
transactions – tax officials, for example, may in formal financial institutions.
be overenthusiastic in enforcing laws in the The greatest risk to the banking sector is
hopes of receiving bribes. high exposure to indebtedness to the
The former militia leaders, who helped country’s five largest borrowers, representing
President Ouattara end the post-election about one-third of their assets and three-
conflict in 2011, are reported to be one of the times their capital – which poses an increase
most visible sources of corruption. A 2013 UN in credit risks. These borrowers are reported
panel of experts cited a military economic to be public and private entities in the agro-
network of former leaders, who held powerful business and commerce sectors.
military positions in government, In 2015, the stock of bank non-performing
participating in smuggling, illegal trade and loans (NPLs) increased by more than private
parallel tax. sector credit – an estimated rise of 75% net of
Corruption by its very nature is difficult to provisions, indicating an increase in bank credit
root out. The government has been trying to to small-and-medium sized enterprises (SMEs),
make headway in this area with modest which have high default rates and arrears from
measures that include a new anti-corruption financially weak public companies.
force established by the gendarmerie. It has The IMF has encouraged the restructuring
led to a considerable reduction in demands of public banks and faster implementation
for bribes at police checkpoints on major of financial sector reform to resolve some
92 thoroughfares. The Finance Ministry’s of the challenges stemming from
Berne Union 2017
government arrears and falling oil prices. Another risk area showing stellar results is
EXPERT ANALYSIS
expropriation. While there is a public
The ever-present scourge of expropriation law in place, there have not been
terrorism any cases of government expropriation of
Overall, there is an increased threat of attacks private property. In fact, private expropriation
by radical Islamists in West Africa. Côte as a way to settle contractual or investment
d’Ivoire shares a border to the north with Mali, disputes has historically been a larger problem
a known hub of jihadists in the region, which – but under Ouattara’s presidency these have
increases the likelihood of attacks within the seen a noticeable drop off.
country. In March 2016 the country
experienced its first significant attack at a A country on the move with a
popular tourist site in Grand Bassam, 40km progressive strategy for future
east of Abidjan, by six gunmen affiliated with growth
Al-Qaeda in the Islamic Maghreb. France’s President Ouattara, much like the current
intelligence services indicate that these types president of the African Development Bank
of attacks, targeting tourists in countries such Akinwumi Adesina, sees food production as a
as Côte d’Ivoire and Senegal, outside the major factor in plotting the country’s future
previously targeted Sahelian countries, are growth strategy. The rationale goes that a
likely to continue. country that can feed itself will be able to
In response to a growing extremist feed the world.
presence along its border with southern Mali, To this end, the government is focusing on
Cote d’Ivoire has stepped up security in creating a market in the 300 million West
northern areas and predominantly Muslim African region, where about 100 million are
neighbourhoods in the commercial capital of
Abidjan. The government is also working
closely with religious leaders and Muslim As our newest member, we at ATI see
organisations, requesting that they notify great opportunities in Côte d’Ivoire,
police of newcomers and suspicious activity.
They’ve also sent reinforcements to their particularly in the infrastructure
northern border. (construction, energy and roads) and
Côte d’Ivoire leads the charge in
services (banking) sectors.
these risk areas
In addition to economic indicators, Côte estimated to be middle-income. The
d’Ivoire is also leading Africa in two risk areas government is investing in processing in-
which emphasise the country’s commitment demand commodities such as cocoa, palm
to improving the business environment – oil, rubber and rice to reduce costly imports.
contract frustration and expropriation. The strategy is already paying off, with the
There is a low risk of contract frustration government negotiating with Swiss
largely because the peaceful transition to the companies interested in making juice to sell in
Ouattara government decreased fears of the region. Cemoi, the French chocolate
retaliation against French companies by the maker, recently opened a factory to make
previous president, who saw France as the products for eventual export to other West
main culprit behind his eventual ouster. African countries.
Beyond this, Côte d’Ivoire is one of the best As our newest member, we at ATI see
countries in sub-Saharan Africa for enforcing great opportunities in Côte d’Ivoire,
contracts – supported by the creation of a particularly in the infrastructure
specialised commercial court in 2012. The (construction, energy and roads) and services
average time to resolve disputes is estimated (banking) sectors. While there is tremendous
to be even lower than the OECD average, momentum, the true test will be the country’s
though the cost is about the same as the ability to transition peacefully through
continental norm. another election cycle. The ability of
New investment, telecoms and mining countries within the ECOWAS region to pull
codes, and the establishment of a business together to avoid widespread political
facilitation centre are all meant to reduce instability – as in the recent cases of The
disputes caused by issues including Gambia and Burkina Faso – gives reason to
allegations of collusion between government believe in the power of the community to
officials and companies. reign in bad behavior in 2020 and beyond. ■
93
SUCCESSFULLY GROWING OUR
PORTFOLIO IN FRONTIER MARKETS
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Berne Union 2017
EXPERT ANALYSIS
crisis – how it is unfolding
and potential resolutions
Despite the recent signing of a major ECA-backed project financing –
Coral FLNG – the Mozambican government needs to ensure that the
path for large investment in mining and LNG projects is cleared.
Cooperating with donors in solving the debt crisis remains paramount.
By Benoit Fugah, head of the political, economic analysis and research
unit at ECIC South Africa.
EXPERT ANALYSIS
estimated at approximately $10 billion. The Mozambican government needs to
ensure that the path for large investment in
Status and management of mining and LNG projects is cleared.
Mozambican debt Accordingly, cooperating with the donors in
Mozambique’s government failed to make solving the debt crisis remains a paramount
coupon payments on a sovereign Eurobond parameter. In this process, Kroll’s findings will
in May 2016, and January and March 2017 dictate the direction of the decision-making
because of a deteriorating economic and by IMF, G-14 and bondholders. Meanwhile, the
fiscal situation. country is currently in default and there are
Ratings agencies reacted by downgrading no visible signs of alternatives.
the country’s long-term foreign currency Pursuing former ministers with the
rating to “restricted default”. Mozambique’s intention of prosecuting them is likely to
debt has therefore become unsustainable. cause discord in the ranks of the Frelimo
The country is now experiencing debt ruling party, which could spill over into
distress with rescheduling of instalments or political instability in the run-up to the 2018
repayments due to lack of funds. The recent and 2019 elections.
decision by the WB and IMF and G-14 donor Even if the government had to go down
aid partners to suspend all balance of legal avenues, it might lose the case and see
payments and budget assistance crippled the some of the assets being attached in foreign
interbank market. US dollar supply ran dry,
causing persistent depreciation of local
currency. “What was thought to be a new funding
The high degree of uncertainty over the option has turned into a financial
future of negotiations between the
government and bondholders means the
burden. Interest payable on issued
country will continue to struggle with low bonds continues to increase as
economic growth. Access to credit markets investors demand higher returns for
will remain closed, while any deal with the
IMF will likely have to wait until some kind of perceived risks. This has resulted in a
arrangement has been made with number of African countries appealing
bondholders.
This scenario is costly to GDP growth, which
to the IMF for help in restructuring their
is expected to reach just 3.4% this year – the public debts.”
worst performance in more than a decade. A
lack of credit will constrain the government's jurisdictions. Nonetheless, responsibility of
fiscal position, forcing cuts that could well debt default would be shared between the
exacerbate already elevated levels of political banks, the advisers and the Mozambican
risk. However, this outlook is unlikely to deter government. It is also possible to pursue a
progress in the development of the country's different route to maintain good relations with
substantial gas fields by ENI and Anadarko, the capital market players through negotiations.
economy's one bright spot. The government's The government can admit the responsibility
minimal role in the project has meant that of the debt and negotiate the restructuring
progress has not been affected by the via one financial facility (regrouping all debts),
significant levels of political risk. with new terms and longer tenor. This option
The authorities have revamped efforts to is likely to be the most preferable if the
enhance public management, removing from government wants to see the continuation of
the pipeline of priority investment all the IMF support and FDIs inflows. ■
projects that have not been subject to a
feasibility study and evaluation. All projects Notes
exceeding $50 million are subject to a www.imf.org/en/countries/resrep/moz
mandatory technical assessment and http://data.worldbank.org/topic/external-
debt?locations=MZ
approval by the Investment Evaluation
Rhula Intelligence solutions, weekly media review No.
Committee prior to inclusion on the budget. 167: 10-17 February, www.rhula.net
In an attempt to control foreign currency, www.reuters.com/article/us-mozambique-politics-
the Central Bank has reverted to a form of idUSKBN1330KV
moral persuasion where it issues instructions
on currency trading.
http://www.reuters.com/article/us-mozambique-debt-
idUSKBN15C0QD
97
Berne Union 2017
Argentina: opportunities
EXPERT ANALYSIS
for business and
cooperation next door
Since the rise of China, Argentina has been demoted to Brazil's second
largest commodities trading partner, but this has not stopped Argentina
finding new opportunities for business. ABGF's executive manager,
Pedro Carrico, discusses the new avenues pursued by Argentina, as well
as how political transitions have impacted on the ECA.
weakened as the government encountered On the domestic front, after the longest
fiscal difficulties and Congress focused on the recession in a century, Brazilian credit
coming elections. As a result, fewer and fewer markets have shown signs of normalising
projects moved forward. again, with the Central Bank reducing policy
If the system was reluctant to assume rates and loan quality deterioration ceasing.
more risk, demand from exporters was Financing availability for medium/long term
similarly subdued. Applications for medium exports has returned, although at a lower
and long term cover in Argentina in the level than previously seen and with a plethora
previous decade had been concentrated of compliance requirements. As a result of
mainly in public works led by large improved conditions in both countries, new
engineering and construction firms that opportunities for export contracts started to
mobilised suppliers back home to provide a emerge in earnest in 2017. There has been a
substantial share of equipment and significant shift in demand for cover:
machinery used in the projects. As the engineering and construction firms have yet
second Christina de Kirchner administration to submit new applications while capital
drew to a close, decision making came to a goods manufacturers have returned from
halt due to generalised uncertainty over their long absence. According to market
policy direction in the next government. A list news, it seems that although competition
of approved projects with promise of cover from other exporters has increased,
never broke ground during this period and Argentina simply has not been concluding
remained stuck in the pipeline after the public works transactions lately. In other
Mauricio Macri administration was words, Brazilian engineering firms are not
inaugurated. In addition, the financing for necessarily missing out on export
these transactions was called into question opportunities to Argentina because of
when the recession in Brazil brought about internal and domestic issues. Proof of this
spending cuts and dried up credit in the may lie in the fact that the Macri government
system. Financing difficulties were apparently has yet to revise the list of priority
compounded by the involvement of some of infrastructure projects in Argentina.
the engineering firms in corruption Having said this, there is no doubt that
investigations that all but shut them out of competition has intensified with the
the credit markets. On top of all this, broad normalisation of Argentina’s financial
bilateral trade negotiations encompassing relations with the rest of the world.
supply chains, non-tariff trade barriers, Fortunately, it is often the case that even
Mercosur relations, and trade/export when transactions are closed by firms from
financing were frozen during the political third countries, part of the production of
transitions in Argentina and Brazil. Had these goods sold to Argentina has a good chance
talks advanced, there was hope that a of occurring in Brazil, given the
framework agreement on the project pipeline manufacturing presence maintained in the
would have been part of the package. country by a large number of multinational
Gradual political and economic firms. Furthermore, increased competition
stabilisation allowed for the disagreements also has an effect on the ability of exporters
between the two countries to begin slowly and lenders/insurers to extract additional
being resolved with the new governments in guarantees from their buyers. The new
place. A concurrence of economic government, naturally reticent to offer
management approaches to include more sovereign guarantees due to its laissez-faire
market-friendly policies helped to prod approach, has been able to resist calls for
negotiations forward. In the meantime, the such commitments. As a result, more creative
backdrop was evolving favourably: the solutions need to be developed, proposed
resolution of the long-lasting battle with and negotiated within the context of
hold-out creditors and renewed market transactions, bringing together parties that
confidence in the direction of economic may be unfamiliar to each other in more
policy taken by President Macri’s team complex structures involving a larger number
reopened international credit access to of players and steps. As necessity is the
Argentina. External liquidity fears subsided mother of invention, the future seems to be
and investors were able to focus once again bright for cooperation and risk sharing
on the country’s enormous potential in opportunities between the Brazilian ECA and
various sectors, from energy and logistics to other export credit insurance industry
100 manufacturing and services. players. ■
Berne Union 2017
EXPERT ANALYSIS
Contractors Programme
BECI has historically provided construction guarantees to the top end
of the market. Now, to address the growing needs of local contractors,
BECI has introduced the Local Contractors Programme. By Bonani
Dube, marketing manager, BECI.
A new approach to
EXPERT ANALYSIS
mitigating offtaker
risk in African power
Africa’s continued growth hinges on improvements to the energy
infrastructure and innovations in power sector financing are vital to
reducing Africa’s $40 billion energy sector funding gap. By John
Lentaigne, chief underwriting officer, ATI.
demand in order to participate. The result is equity and first-loss junior positions. This
EXPERT ANALYSIS
often reflected in a higher rate of defaults on model, implemented by the African
such high cost or marginal PPAs over time, Development Bank, ensures greater risk
leading to international arbitrations and law sharing, which helps attract more investors.
suits. This is generally a vicious cycle that will Fixed-income products such as
further deter future investors. infrastructure project bonds (with debt that is
Figure three outlines the historical typically covered by government-issued or
mismatch in Africa between the total cost of corporate offerings with an insurance wrap
energy production and tariff revenues. provided by multilaterals) and covered bonds
With these well documented challenges, (securities that are backed by a pool of loans,
much needed innovations are being which stay on the credit issuer’s balance
developed and, in some cases, successfully sheet) are also being used more frequently in
implemented as a means of addressing the Africa. They offer a double recourse to the
energy sector financing gap. issuer and the pool of loans – the
diversification of the pool can help mitigate
Existing innovations from investors the impact of project default.
The Milken Institute, an economic think tank,
hosted investors in a forum designed to offer A new innovation by KfW and ATI
new financing options for Africa’s energy There are insurance products available to
sector. Broadly, it was felt that Africa could mitigate offtaker risks, principally arbitration
address the funding gap while appealing to a award default insurance. This responds after
wider variety of investors by tackling the IPP has taken the defaulting sovereign to
credit/sovereign risk, improving deal international arbitration and obtained a
implementation and time to completion, and judgment that is subsequently not honoured.
mitigating financial risk through an increased The downside to this option is that it is timely
variety of product offerings. and expensive. Smaller IPPs may well also be
Some of the solutions outlined included
alternatives to current risk mitigation tools
such as sovereign guarantees, which were “There are insurance products available
perceived by investors as untrustworthy. A
put/call option to the sovereign was listed as
to mitigate offtaker risks, principally
a viable alternative. These effectively function arbitration award default insurance. This
as a guaranteed sale of the power plant to
responds after the IPP has taken the
the government at a specified price if the
offtaker doesn’t pay as scheduled. They are defaulting sovereign to international
structured as such to have no effect on the arbitration and obtained a judgment
sovereign balance sheet. The “Sponsor”
rating model was another option cited. It
that is subsequently not honoured. The
basically substitutes a better-rated “sponsor” downside to this option is that it is
for the sovereign to issue debt that would
timely and expensive.”
then be repaid through a loan to the
government. The World Bank utilises this
model by issuing bond offerings to fund insolvent by the time a judgment is reached.
infrastructure projects while the government But obtaining a cleaner ‘protracted default’
repays the bank to cover the bond. insurance (that responds, for instance, after
Other options outside the area of six months of default by the offtaker) is
sovereign risk include developing more frequently a challenge given the poor
effective and uniform rating systems. They financial health of many sovereign offtakers.
could assess projects across the entire Because of the perceived high risk of
energy spectrum and across countries and offtaker default, we (the African Trade
regions in Africa. Investors could then quickly Insurance Agency - ATI) in partnership with
assess projects and expedite their due Germany’s KfW, in June 2017 launched a new
diligence and decision making process. instrument, the Regional Liquidity Support
Participants also suggested the development Facility (RLSF). It is designed to tackle the
of structured portfolio options that would offtaker liquidity risk for renewable energy
allow investors to participate in different IPPs. Usually, such IPPs – especially when
tranches of an investment portfolio, such as project financed - rely on the predictable and
junior, mezzanine and senior debt as well as regular cash flow of the PPA for debt service
105
Berne Union 2017
Supply and demand instability relative decrease of its crude oil imports, will
EXPERT ANALYSIS
Fundamentally, the slow response of supply make OPEC supply management policies less
and demand in the short term, was effective. It depends on OPEC and non-
continuing to be the main reason of price OPEC oil exporting countries cooperating
instability and volatility. However, major and how future markets develop. For
spikes and falls in prices during the last five instance, the expected demand for oil
decades also reflected the policy changes in products and the supply of crude oil, given
the OPEC price and supply management the energy policies, climate change
initiatives. The build-up of stocks partly restrictions, technological innovations and
softened these effects as stock drawdowns cuts in investments in current and
and replenishments were moving against the perspective oil fields.
increase and decline in prices. The excess of Hosts of organisations and experts are
tax imposed on oil products such as gasoil following price developments on a daily basis.
and diesel in importing countries, and export Prices are still gravitating around $50 in the
tax on crude oil in exporting countries, also main commodity exchanges which determine
influenced supply and demand. Tax the current spot and future prices. Market
mechanisms, international trading practices, participants are actually hesitating between a
domestic economic policies are among the quite flat contango (expectation of increasing
factors altering crude prices. prices in future) and backwardation (the
The elasticity of low prices for crude oil contrary expectation). In spite of the conflicts
supply and demand is also an important and political risk in the Middle East and
factor. It explains why prices after increase or Venezuela, market participants consider
fall do not adjust quickly to the market level. supplies and stock enough that they do not
For example, consumers do not react to need to react to events, which historically
increased petrol prices by the similar were considered as important game changers.
decrease in consumption, if at all. Yet crude Specialised press follows and tries to explain
oil producers continue to sell supply in spite the small fluctuations in price and changes in
of a fall in prices. Massive cuts in investment, differentials between Brent and WTI spot and
especially new projects, took place with a futures pricing. Thus, there was around a 3%
time lag due to price declines after 2014. increase in the price of Brent crude on August
When prices increase, producers will also 19, 2017, subsequently characterised as a
need to consider new investment decisions, ‘jump’ in price by the media.
while projects in turn will need a few years for Let us look at the long and short-term
realisation. Whether new streams of oil will determinants of the current relative stability
enter the market with high prices or at least in of oil prices at around $50 per barrel. The
contango is a big question. Short-term spread between future prices of September
elasticity of supply is very low and can increase 2017 and say April 2018, will become much
only if there are under-used productive lower compared to the August 2016 price
capacities. The developments in crude oil expectations for September 2016 to April
markets reflect the geography of production 2017. The dramatically lowered spread
and the main players, as well as the state of suggest that markets do not expect much
economic cycles and geopolitical events. change in the supply and demand balance.
The supply and demand balance in the
The impact of shale oil and gas mid-term has the potential to differ and could
The question today is what main forces are create conditions for price increases due to
determining current prices – which have been the growth of the world economy, especially
relatively stable since last year. Shale oil and emerging economies such as India, Indonesia
gas, along with the emergence of the US as and others. It is also relevant to note that
one of three biggest oil producers, with a China continues to import crude oil, with a
view to increase its stocks in an environment pace of technological innovation and, more
of relatively low prices. In spite of the country’s importantly, its diffusion. Apart from electric
efforts to develop electric cars, an increasing cars, innovations such as the Internet of things
middle class in those countries will use more (IoT) may permit to better management of
hybrid models with lower petrol/diesel energy consumption and waste avoidance.
consumption rates, still increasing demand for Better construction materials used in
those products in absolute terms. residential areas and industrial complexes can
The progression of infrastructure to also contribute to energy conservation. Good
produce electric cars needs investment, while news may in addition come from technologies
hybrid cars will continue using existing petrol capturing Co2 and other emissions, while
stations. In this sense, expectations of producing crude oil and oil products and
investors for electric cars could be proved consuming the latter. Technology solutions
excessive, at least in a mid-term. Also in spite could seriously limit the level of Co2 emissions,
of climate change commitments of most protecting the environment.
countries, the inertia in structural change To conclude, the short term prospects and
towards gas and renewables, as well as the market expectations suggest very small
pace of energy consumption will probably changes in pricing, albeit volatility around
not permit governments to meet the Paris existing price levels may persist. The mid-
climate accord commitments – as a result of term prospects could suggest a potential for
policy measures. So an increase in demand considerable price increases. At the same
without enough increase in supply, due to the time, it is difficult to predict prices in the
explained time lags, may bring about long-term due to the pace of technological
considerable increase in crude oil pricing. This changes and dynamics of the world economy.
is the most probable scenario, considering Looking at the last decade, the global crash
that technological breakthrough and drastic of 2008 reflects how the governance of
policy measures will affect the sector in the global monetary policy and financial
next two to three years. arrangements still cannot predict and tame
For the long term, the big unknown is the future boom and bust cycles. ■
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Risk aversion,
EXPERT ANALYSIS
financing and real
services
Risk will always be there, and it is how that risk is covered which will
keep the conversation moving. Professor Andreas Klasen, Offenburg
University, and Dr Simone Krummaker, University of Westminster,
discuss the how risk and financing will move forward with one another,
as well as challenges along the way, looking at results from the Global
CEO Survey and other sources.
The global economy would not exist but for a mitigate negative
complex series of institutions and rules, which trade effects of
governments, international organisations, and financial constraints
private bodies have created over the previous due to market failures.
decades of globalisation. Since the 1950s,
many multilateral organisations have adopted Main objectives
a rule-based approach that have given states and research gap
increasing confidence to liberalise their The Global CEO
economies and reduce tariffs, quotas, and Survey was launched
other barriers to trade. As a result, the in 2015 by researchers
Andreas Klasen
expansion of international business activities from Offenburg
through a multilateral trading system University, the
provided a major pillar for growth enjoyed by University of
many countries in the last century. Westminster and the
However, firms are exposed to several London School of
dimensions of risk when they export their Economics and
products and services or set up foreign Political Science (LSE)
manufacturing operations: Political risk, to better understand
commercial risk, currency exposure as well as what factors influence
cross-cultural risk. In addition, international exporters’ demand for
trade is embedded in a well-developed and credit insurance.
functioning financial environment. Financing Simone Krummaker Although some
is crucial for trading partners in order to scholars discussed
bridge the time lag between export order aspects of corporate insurance demand with
and payment for goods and services regard to exporters, there is limited research
produced. Scholars strongly support the concerning the demand for export credit
argument that companies need adequate insurance associated with firm-specific
provision for their export transactions. factors.
Factors such as export transaction volume The study follows an explorative qualitative
and credit period can considerably increase approach and an explanative quantitative
costs of financing. approach, both informing each other. Data
As a consequence, firms require cover was collected via surveys with qualitative and
from private credit insurers and government quantitative questions, open-ended
export credit agencies (ECAs) for political interviews, as well as publicly available
and commercial risks linked to export documents including annual reports. Multiple 111
transactions. ECAs are also important to rounds of qualitative data collection via
Berne Union 2017
interviews ran simultaneously with the that larger firms have more weight in
collection of data via questionnaires. This negotiating the terms of credit insurance
research was conducted with CEOs, COOs facilities.
and managing directors from 35 export credit Transaction cost of risk management is
and political risk insurers in both public and most relevant because the effort of building
private forms. In addition, more than 100 up a fully-fledged risk management function
interviewees from governments, exporters, as well as the related knowledge is not
project sponsors, buyers, as well as increasing proportional to firm size. Larger
commercial banks and development banks
participated. The selection was driven by the
aim to include a variety of participants from Larger exporters not only
different regions in order to cover
organisations from different cultural and
have more professional
national backgrounds. Full research results risk management
will be published by the end of this year. functions but also more
Risk aversion knowledge about markets
The risk management function of credit for risk and insurance
insurance is a significant factor for exporters’
insurance demand. This applies for both
products available.
private credit insurers and government
agencies. As discussed by Mayers and Smith exporters not only have more professional
(1982) the structure of ownership affects the risk management functions but also more
firm’s risk aversion and consequently their knowledge about markets for risk and
demand of insurance. Focusing on publicly insurance products available. Once a growing
listed corporations, theory assumes that their firm has installed such a risk function,
shareholders and investors are holding a well- benefits are that more resources are available
diversified portfolio, thus are neutral with to manage risks efficiently. In addition, most
regard to firm-specific risks. In contrast the interviewees mentioned that risk aversion is a
insurance purchasing behaviour of single key driver due to a rise of geopolitical risk,
owners of sole proprietorships can be and SMEs’ lack of knowledge about buyers
explained with their individual risk aversion. and markets. The evidence indicates that
Because rather small companies have only a there is a strong relationship between small
limited number of shareholders, firm size has firms’ demand for coverage against those
been connected to risk aversion. Size leads to risks and the perceived or actual risks. Private
a relatively smaller diversification regarding credit insurance as well as ECA cover can
the equity structure and can also lead to a alleviate some of these issues.
risk-averse attitude of an exporter.
In our research, nearly all interviewees Financing function
mentioned that small and medium-sized Financing of the specific trade transaction is
companies have a higher need than large a key determinant for companies to purchase
corporations to cover risks associated with government export credit insurance. Liquidity
international trade via insurance agreements. for transactions is a relevant factor of risk and
According to the empirical data, the size of financial management including, for instance,
the exporter drives demand for cover hedging. Purchasing insurance can be
through three main motives: The transaction necessary to safeguard liquidity for
cost of risk management, knowledge about transactions, and insurance enables
foreign buyers and markets, and business companies to realise financial advantages
diversification. Interviewees also mentioned such as more consistent cash flows. This
EXPERT ANALYSIS
insurance context. It is of vital importance for
the company to structure financially sound
export transactions in order to safeguard
cash flows. In addition, firm-level evidence
Some European ECAs
indicates that exporters cut back exports have been pioneers in
more than other companies if financial
institutions are not able to provide adequate
offering advisory services
credit facilities. to exporters. They provide
Insurance increases the opportunities for managerial and advisory
exporters to receive financing from
commercial banks and mobilises additional
support for the definition
funds otherwise not being available. Thus, the and implementation of
bank which finances the transaction plays a
decisive role in the demand for coverage
market-specific
against these risks. The role of the financial international growth
intermediaries is also emphasised in the topic strategies.
of financing for SMEs. Several statements in
the interviews describe that external
financing for SMEs is more difficult than for
larger companies, which often have long and able to provide efficient services for the
active relationships with several banks. In administration and processing of claims as
addition, there is often no sufficient offering well as the prevention of losses due to, for
from commercial banks for ‘small ticket’ instance, economies of scale. Government
transactions below €5 million due to limited export credit agencies also have a specific
risk appetite and competition. Tight financing knowledge and are well versed in risk
conditions also become apparent both for analysis. This includes the assessment of
very large transactions, as well as projects country risks and foreign buyers’ financial
with longer maturities and in risky markets. ratios. Providing real services for their
Although interviewees mention that customers, insurers have a comparative
financing is one of the most important advantage concerning the development as
functions of credit insurance, there are also well as the application of risk management,
other findings leading to potentially opposing and have mechanisms to control adverse
trends: less traditional international players outcomes.
are now active in export finance in general. Some European ECAs have been pioneers
Many commercial banks’ activities are volatile, in offering advisory services to exporters.
and trade and export finance bank strategies They provide managerial and advisory
change quite often. Global financial support for the definition and implementation
institutions have shown less appetite, and a of market-specific international growth
large number of correspondent banking strategies. Insurers also support exporters in
relationships have disappeared. This is identifying business opportunities in
related, in particular, to the changing countries with sales potential, proposing
regulatory environment including Basel III financial and insurance solutions. In
(some say Basel IV) implications and collaboration with universities and industry
AML/KYC requirements. As a consequence, associations, some ECAs developed training
direct lending (i.e., funding directly provided initiatives and seminars dedicated to
by government export credit agencies) exporters. These workshops and training
becomes much more important now. Several sessions allow participants to acquire
ECAs enhanced their financing programmes, strategic and operational skills needed for
introduced specific direct loan programmes successful internationalisation.
for transactions up to €5 million for medium-
term projects, or work on a more competitive Other factors
direct lending offering for SMEs. In addition to risk aversion, financing and real
services, demand for credit insurance is
Insurance services associated with agency conflicts. These
Several studies mention insurance services as agency conflicts between shareholders and
an additional argument for corporate outside creditors are caused by a non-
insurance demand. Private credit insurers are linearity of rights or claims for payment. This
113
Berne Union 2017
4
Directory
Berne Union 2017
The Berne Union member directory has moved online – this allows us to ensure that member information and
contact details are always current and accessible. For contacts and more detailed information about each member
please visit:
https://www.berneunion.org/Members
DIRECTORY
ECGC India EXIM R Romania
Export Credit Guarantee Corporation of India Ltd Eximbank of Romania
SERV Switzerland
Swiss Export Risk Insurance
SID Slovenia
120 SID Inc, Ljubljana