As global economic uncertainty has risen, so too has the
relevance and attractiveness of export credit agencies. Have they now reached
the peak of their activity, or is there more to come? Binyamin Ali (TFR) reports.
Export credit agencies (ECAs) have experienced a massive
surge in demand for their services over the last decade. From becoming involved
in (or extending their reach in) short-term credit financing, capital markets,
and in some cases covering risks associated with domestic operations, the remit
and competitiveness of ECAs has been pushed further and further to completely new
levels.
The 2008 financial crisis was an unquestionable catalyst in
creating the new role ECAs now play in global trade. As some banks tumbled and
others were bailed out by their governments, lenders and private insurers
pulled out from one industry after another, as consolidation and risk reduction
became the only viable strategy for the road ahead.
As providers of counter-cyclical support, ECAs began to step
into the areas the private sector vacated to support their national exporters.
For export driven countries such as Finland where exports of goods and services
accounted for almost 45% of GDP in 2008[i],
this meant changing their approach and finding new ways to support their
exporters.
''I have been with Finnvera for 18 years and when I joined we
were mainly covering bank risk and sovereign risk. The biggest changes I have
seen came after the financial crisis in 2008. We very quickly put up this
temporary financing scheme for export credit,'' says Topi Vesteri, deputy CEO
and group chief credit officer for Finnvera, Finland’s ECA.
''But as we know, there’s nothing as permanent as a temporary
state scheme. So it is now permanent and it is important for those exporters
who are competing with competitors from those countries who also offer funded
export credits.''
And with that, Finnvera’s remit was extended to include direct
lending. But in order to establish their export credit financing scheme,
Finnvera had to obtain a waiver from the EU as ECAs in EU states were
prohibited from covering ''marketable'' risks in 1999. The EU defines marketable
risks as ''risks for which in principle a market exists, i.e. there is a private
insurance capacity available to cover these risks.''[ii]
The definition adds, ''Which risks are marketable may evolve over time.''
''In the beginning it went very well,'' says Vesteri of the EU’s
attempt to remove distortions in the market created by private and public
credit insurers competing with each other.
''The private market was doing their job and covering the
short term risk in industrial countries for up to two years. But then when the
financial crisis hit, you could just see the private credit insurance market
closing their limits country by country and industry by industry. There was a
bit of both. There was a time when the private market was not covering anything
to do with the automobile industry or not covering anything to do with the
Baltic states.''
As well as struggling to secure insurance cover from the
private market, businesses also experienced difficulty in accessing liquidity.
Quantitative easing programmes were put in place in the US, the UK, Japan, the
EU, and more recently Sweden, as they sought to encourage lending and stimulate
growth. In the case of exporters, governments looked to their ECAs to innovate and
come up with solutions as what was considered ''marketable'' by the private
market pre-2008 had changed, and with that change in classification risk
appetites noticeably dropped too.
Defining flexibility
Owing to the flexibility ECAs must demonstrate in times of
uncertainty (as in 2008), it has become harder and harder to define them. The
diversity to be found in ECAs across the world hasn’t helped the pursuit of a
simple definition. They differ in terms of what they do and don’t do, right the
way through to who owns them and how they’re authorised. UK Export Finance
(UKEF) started out life in 1919 as a department of government (Export Credits Guarantee Department (ECGD)), which
continues to be wholly state owned, does not have a limited tenure, and
provides some of the most diverse financing and insurance structures of any
ECA.
Meanwhile Germany’s Euler
Hermes is completely privatised (Allianz is the majority stakeholder) and
exclusively manages the country’s export credit guarantee scheme. Export
Development Canada (EDC) defines itself as ''a self-financing, Crown corporation
that operates at arm's length from the government.'' EDC also has one of the
most comprehensive ECA mandates and has previously had stints where it was
tasked with supporting domestic trade and business opportunities by the
Canadian government.
The Export-Import Bank of the
United States (US Ex-Im) on the other hand has the capacity to provide credit
insurance, direct loans, loan guarantees and capital finance. But it needs to
be reauthorised every few years, depending on the length of its previous
reauthorisation. This last occurred on 4 December 2015 when President Barack Obama
authorised the bank until 30 September 2019. A delay in the nomination of key
positions to the bank’s board (owing to a political manoeuvre by Republicans)
has meant US Ex-Im is unable to exercise its full remit and can only issue a
maximum of US$10m in financing.
As a result, US Ex-Im has
effectively been unable to act in any meaningful way since June 2015, but given
the scale of the US domestic market, private banks and insurers have been able (in
places) to step in. In comparison, it is hard to see how a similar situation
would be sustainable for an export driven economy such as Finland’s, for
example.
Clearly, there is no one size
fits all structure or mandate for an ECA as individual countries have always
pursed their own interests, and their national credit agency has a role to play
in that strategy. Turkey’s ECA, Turk Eximbank (which is 30-years-old this year),
aspires to be an all encompassing one-stop shop with credit, guarantee and
insurance facilities, and has a key role to play as the country attempts to realign itself from being an exporter of consumer goods to an exporter of
capital goods.
''Now we support 7,700
companies in terms of loan and insurance support. We provide 6,400 companies
with loan facilities and 2,200 with insurance. We would like to reach out to as
many as 100,000 companies of which 65,000 are exporters. That is our long term
goal,'' says Adnan Yıldırım, CEO of Turk Eximbank. ''However, now, we are ready for more complicated and sophisticated,
mostly, capital goods. Turkey’s potential to transform our export portfolio
into capital goods production has been increasing.''
Turk Eximbank now covers
approximately 23% (US$30.3bn) of Turkey’s total export volume, and in providing
almost three times as many exporters with loan facilities than it does
insurance, reflects the global activity of ECAs. In 2016, ECA backed loans
accounted for 56.9% of ECA structures, while direct loans
accounted for 33.4%. The fact that loan-related structures account for so much
(93.9%) of what they are doing is a reflection of what ECAs currently are –
providers of liquidity and liquidity insurers.
Storm clouds ahead?
With only the OECD’s generous
Arrangement on Guidelines for Officially Supported Export Credits (backed as it
is by a non-binding ‘gentleman’s agreement’ and not by law) simultaneously acting
as the only check (for non-EU states) on the fulfilment of certain minimum
requirements and working to bring some degree of a level playing field to the
ECA landscape (participation in the Arrangement is voluntary, with China’s
Sinosure being a notable absentee), the mandate of the ECA is set to remain flexible
and the facilities at its disposal diverse.
Gordon Welsh, head of business group at UKEF, thinks this
flexibility will become even more crucial over the coming years as regulation
on banks grows more stringent, and the need for ECAs to innovate grows with
it.
''I think Basel III
will be a development to watch as it will make ECA-backed financing even more
attractive for banks. Whatever the outcome, UKEF is well equipped to help
bridge funding gaps should they arise with products like direct lending, export
refinancing and our capital markets offering,'' says Welsh.
''From June, we’ll be
partnering with banks to deliver government-backed trade finance support
directly to exporters for transactions under £2m, which should significantly
increase the scale of support we’re able to offer. We’ll also be making this
trade finance support available to companies in exporters’ supply chains.''
UKEF’s perception that a
functional ECA needs to innovate and remain proactive in order to give its
exporters a competitive edge shows no signs of softening, and the same is true
of credit agencies across the world. Last year, direct loans from ECAs
accounted for US$28.9bn of global export finance (23% of all export finance
volumes, but financial institutions retained the lion’s share, accounting
for 51.8% (US$64.2bn). As the combined effects of regulation and desriking, as
well as the rise in anti-globalisation sentiment, populism and protectionism
all come together to stifle trade and strangle its sources of finance, Welsh
remains confident of what this means for ECAs.
''The main point I’d
like to make is that I think the fast-changing global and political landscape
is making ECAs more relevant than ever. Our role is to provide certainty of
support in an uncertain market.''
