V Recent Developments in Export Credits
- International Monetary Fund
- Published Date:
- December 1995
Officially supported export credits54 represent a large share in the external debt of developing countries and economies in transition. In 1992, they accounted for more than 20 percent of the total external indebtedness of these countries, and for 37 percent of their indebtedness to official creditors.
Total Export Credits
Total export credit exposure to developing countries and economies in transition increased from an estimated $380 billion at the end of 1993 to around $420 billion at the end of 1994 (Chart 8).55 The increase in total export credit exposure to developing countries and economies in transition in recent years is attributable to some extent to an increase in agencies’ exposure in the form of arrears and unrecovered claims (resulting from payment of insurance claims by agencies, usually in the context of Paris Club reschedulings). However, the most important source of increases in exposure since 1992 has been an increase in new export credit commitments, driven in part by more aggressive export promotion as well as a resurgence of import demand by many developing countries.
Chart 9, which is based on Berne Union data, shows new commitments by export credit agencies from 1988 to 1994. During this period, annual new export credit commitments to developing countries and economies in transition rose from $24 billion in 1988 to $60-70 billion in the period between 1991 and 1993, and again to $90 billion in 1994.56 This overall increase in new commitments masks substantial variations among countries. There was a marked increase in new commitments to low-income countries, mostly to some of the largest countries such as China, India, and Indonesia, while some other countries attracted little new finance. In particular, new commitments to heavily indebted poor countries in 1994 remained low.57
Financial Performance of Export Credit Agencies
Despite the increase in export credit activity, the financial performance of most export credit agencies has remained weak as measured by net cash flow, the indicator of financial performance most commonly used by the agencies themselves. Throughout the late 1980s and early 1990s new claims payments, which have been over $10 billion in each year since 1990, exceeded premium income and recoveries by a wide margin. Chart 10 shows the effect on agencies’ net cash flow of premium income, recoveries, and claims in the period between 1990 and 1994. Claims in 1994 increased to over $14 billion, reflecting in part rescheduling agreements with Algeria and the Russian Federation. This was offset by an increase in recoveries (in part arising from refinancings for the Islamic Republic of Iran) and in premia (arising mostly from higher new commitments) so that the combined cash flow deficit of export credit agencies in 1994 was $5.5 billion, down from $6.2 billion in 1993.
Chart 8.Export Credit Exposure, 1987-94
Sources: Beme Union; and IMF staff estimates.
1 For definitions of the concepts used in this chart, see Officially Supported Export Credits: Recent Developments and Prospects, World Economic and Financial Surveys (Washington: International Monetary Fund, March 1995).
Chart 9.Officially Supported Export Credits: New Commitments, 1988-94
Sources: Berne Union; and IMF staff estimates.
In response to continued deficits, almost all agencies have in recent years taken steps to improve their risk assessment procedures. All agencies have now moved toward more realistic pricing of political risk. This has been reflected in a steady rise in premium income over the last several years. Agencies have also developed a set of criteria for country risk assessments, in many cases relying heavily on quantitative indicators. Agencies reported that they attach most weight to payments and economic performance, including performance under IMF arrangements. Agencies also use financial indicators such as debt and debt-service ratios and levels of international reserves in assessing risk, and attach increasing importance to the policies of the borrowing country government toward the private sector, a libera) trade and payments system, and the development of a sound and well-functioning banking system.
New Commitments and Cover Policy for Specific Countries
The increased focus on risk assessment and the preference for less risky borrowers has been reflected in the direction of new commitments in recent years. Chart 11 shows new export credit commitments in the period between 1992 and 1994 to a number of major borrowers. The rise in new commitments to China is particularly striking. By the end of December 1994, export credit exposure to China had risen to $37 billion, almost twice the level of commitments at the end of 1992. New commitments in 1994 alone amounted to almost $17 billion. Competition for business in China is intense among agencies, resulting in the continued subsidization of exports in the form of tied-aid credits.58 Similarly, there has been a continued increase in new commitments to Indonesia, which is also a major recipient of tied-aid credits. Hong Kong and Saudi Arabia, which are generally regarded as low-risk markets by export credit agencies, have also been major recipients of new export credits. In the case of Hong Kong, most of the new commitments were for short-term credits, so that exposure, which had doubled between 1991 and 1993, remained broadly unchanged. In the case of Saudi Arabia, the new commitments were a mixture of short-term and medium- and long-term credits, and export credit agencies’ exposure rose from $4% billion at the end of 1993 to almost $7 billion at the end of 1994.
New commitments to India and Turkey also rose in 1994, reflecting agencies’ perceptions of the effects of these countries’ adjustment and reform efforts. New commitments to Mexico and Algeria also remained substantial, with cover policy for both countries being broadly unchanged in 1994, although agencies are cautious over Mexico given the developments in early 1995, particularly on commercial risks, and continue to be concerned about political developments in Algeria. Venezuela experienced a drop in new commitments, reflecting a deteriorating policy environment and the accumulation of payments arrears; most agencies are now off cover for Venezuela.
Chart 10.Export Credit Agencies: Premium Income, Recoveries, Claims, and Net Cash Flow, 1990-941
Sources: Berne Union; and IMF staff estimates.
1 The figures for 1993 and 1994 are for all Berne Union members. The figures for earlier years cover most, but not all, Berne Union members.
Chart 11.New Export Credit Commitments in Selected Major Markets, 1992-94
Sources: Berne Union; and IMF staff estimates.
Note: Total export credit exposure (commitments, arrears, and unrecovered claims) in selected major markets in 1994 (in billions of U.S. dollars): China 36.8, Hong Kong 10.8, Indonesia 24.4, Russia 16.6, Saudi Arabia 6.9, India 13.5, Mexico 18.7, Turkey 15.4, Algeria 25.3, Venezuela 8.8.
Most agencies describe their cover policy for the Russian Federation as restrictive, and agencies stress that they continue to attach considerable importance to the negative pledge clause waiver approved by the World Bank, which permits them to securitize their lending.59 Nevertheless, new commitments increased significantly in 1994, largely attributable to a single substantial project—a $ 1.9 billion contract insured by Italy for the supply of machinery to Gazprom. Repayment is to be made through an escrow account, with the additional security that the extra supplies of gas engendered by the new equipment will be exported to Italy. However, apart from this project, recourse by agencies to securitized lending to the countries for which the World Bank has waived its negative pledge clause remained limited in 1994. mostly because of a reluctance on the part of debtor country governments to participate in securitized borrowings.60 More generally, and with few exceptions, cover policy for the Baltic countries and the other countries of the former Soviet Union (excluding Russia) has remained very restrictive, and the volume of new commitments has been small.
Institutional and Policy Changes
In August 1994, participants in the Arrangement on Guidelines for Officially Supported Export Credits (the OECD Consensus) agreed modifications in the Consensus designed to tighten the rules governing provision of tied-aid or “mixed” credits beyond the restrictions agreed in the Helsinki Package in 1992.61 The use of such credits has been a source of concern, because of its scope for distorting competition and trade, and because the use of aid resources as an instrument of export competition diverts resources from the poorest countries that generally do not receive export credits.
The package agreed in August 1994 (the Schaerer Package) contained a number of measures designed to tighten and simplify the implementation of the earlier agreement, including restrictions on “grandfathering” of credits already in the pipeline when changes are made, the abolition of the subsidized SDR interest rate on export credits, and a tightening of the definition of concessionality in the calculation of tied-aid credits. The agreement also set in motion new work on areas not so far covered by the Consensus, including export credits for agricultural products and the setting of premia and related conditions.
The increased emphasis of export credit agencies on providing cover for exports to the private sector in developing countries continued in 1994. and in some countries some agencies have reversed their usual practice of charging higher premia for private sector buyers than for public sector buyers.
In cofinancing between export credit agencies and multilateral institutions, the World Bank remains by far the most important partner for agencies. However, the level of cofinancing with the World Bank has continued to be less than desired by agencies. A new scheme for cofinancing with the European Bank for Reconstruction and Development (EBRD) was put in place in 1994, but projects supported under the scheme have so far been limited.
There were also changes in the organization of export credit agencies themselves. COFACE (Compagnie Francaise d’Assurance pour le Commerce Ex-terieur, the French export credit agency) was privatized in 1994 by the sale of its publicly owned shareholders62 to the private sector. The Government of Japan announced plans to merge the Export-Import Bank of Japan and the Overseas Economic Cooperation Fund (OECF) in 1999.
For a detailed description of the role of export credit agencies in financing developing countries and economies in transition, and of the basic features of official support for export credits, see Officially Supported Export Credits: Developments and Prospects, World Economic and Financial Surveys (Washington: International Monetary Fund, March 1995); appendix I contains a glossary of terms. This section updates the information provided in the earlier paper based on information from the Berne Union, the OECD, and individual export credit agencies.
While the trends reported here are clear, specific figures need to be interpreted with caution. The problems that arise in discussing export credit statistics are discussed in detail elsewhere (Ibid., appendix II). Figures supplied by the Berne Union for 1994 have a wider basis than in earlier years as they include data reported by some smaller export credit agencies. The Berne Union also expanded its debtor country coverage by 19 countries in 1994; total export credit exposure to these countries amounted to $9.2 billion, of which $0.9 billion was in the form of short-term commitments and $0.5 billion was in the form of arrears and unrecovered claims.
These figures do not include the intra-OECD commitments by export credit agencies, which in 1994 were three times commitments to developing countries. Berne Union members’ total commitments in 1994 were $376 billion, an increase of 9.1 percent over the 1993 level. In discussing export credit activity, a distinction needs to be made between commitments and disbursements. Berne Union data focus on commitments, but the disbursements of insured credits arising from these commitments often occur months or years later. Similarly, the Berne Union does not collect information on repayments of insured credits, except in cases where these have resulted in claims. For these reasons, it is not possible from the Berne Union figures to clearly assess net flows in any given year.
While precise data are not available, of the $90 billion new commitments in 1994, only about $1 billion are reported by agencies to have been to heavily indebted poor countries.
Tied-aid credits are discussed in more detail below.
The World Bank’s negative pledge clause policy is described in detail in Box A9, and in Officially Supported Export Credits: Developments and Prospects, World Economic and Financial Surveys (Washington: International Monetary Fund, March 1995), p. 21. In March and November 1993, the World Bank adopted changes in its general negative pledge clause policy to provide for countryspecific waivers under certain conditions. Eligible countries are granted a waiver for an initial period of two years. To date, only Kazakstan, Russia, and Uzbekistan have sought and been granted waivers under this policy.
Ibid., p. 23.
A detailed description of the operation of the OECD Consensus is published elsewhere (Ibid., appendix III). Export subsidies in the form of “mixed” or tied-aid credits are a powerful and oftenused instrument of competition in loans to certain countries considered good risks. These credits generally involve projects funded in part by export credits and in part by tied-aid resources, which are used either as a grant or applied toward reducing interest rates on the export credit.
The financial institutions that hold a majority of shares in COFACE were themselves privatized.