I Summary and Conclusions
- Christopher Jarvis, Balázs Horváth, and Michael Kuhn
- Published Date:
- December 1995
Export credit agencies play a critical role in financing for developing countries. Their primary objective is the promotion of national exports through insurance or direct extension of export credits, but their support for exporters also gives importers in developing countries access to finance in situations and on terms that are not available from private markets.
Officially supported export credits have been growing in volume. Between 1988 and 1993, new export credit commitments nearly tripled from $24 billion to nearly $70 billion, and by the end of 1993 the total exposure of export credit agencies (excluding intra OECD business) had grown to an estimated $380 billion and accounted for more than one fifth of the total external debt of developing countries and the economies in transition. In the course of 1994, total exposure has risen further, to over $400 billion. The driving force behind this resurgence in export credit activity has been more aggressive export promotion by many governments, which has reinforced the demand for investment goods in a wide range of countries.
Officially supported export credits remain an essential component in the financing strategies of most developing countries. For many, access to officially supported export credits, usually on the basis of sovereign guarantees, is a crucial step toward establishing creditworthiness and thus access to a wider spectrum of external finance. For others that have already been able to adopt a more diversified financing strategy, official support for export credits can help secure credits for imports of investment goods and for projects on terms that are not available from private sources alone. Export credits are also an increasingly important source of financing for economies in transition.
The importance of export credits, their recent growth, and the trend toward more extensive reliance by official bilateral creditors on export credits as an instrument of financial support raise a number of issues regarding the role and limitations of export credit financing, especially for economies in transition. This paper discusses these issues, and covers the steps that export credit agencies and their guardian authorities have taken to improve the quality of their risk portfolios, the problems that still remain, and the challenges that agencies will face in the coming years.1
Agencies know that problems remain in their business, and that for all the benefits for their exporters, there are also costs. Creditor governments have had to fund substantial cash flow deficits during the past decade, and for many agencies these are continuing at a high level. In reaction, most creditor countries have recently re-examined their approach to export promotion, and many agencies have responded with institutional and structural changes designed to improve their risk management techniques. In particular, virtually every agency has modified and refined its system of country risk assessment, with the aim of identifying creditworthy borrowers with whom their exporters can do profitable business while minimizing business that has a high risk of future losses.
However, even with improved risk assessment techniques, agencies sometimes find it difficult to react appropriately to developments in borrowing countries, especially in major markets. In particular, agencies recognize that they need to guard against their tendency to stay on cover for too long in countries that do not have apparent debt-servicing difficulties but are pursuing policies that could lead to future debt problems. This tendency has led them to continue cover in some cases where the countries’ policy performance and the agencies’ own risk assessments have indicated a more restrictive stance. Discipline on their side is complicated by the fact that early warning signals are usually not conclusive. But agencies have also continued or even expanded support for exports to countries that have pursued clearly unsustainable policies, and their continued willingness to do so has in some cases delayed the implementation of corrective policies.
Conversely, most agencies remain slow in reopening cover for countries that have had poor payments records in the past but that have more recently strengthened their policies in the context of IMF-supported adjustment programs. They are particularly cautious in reopening cover in low-income rescheduling countries and in countries that have reached agreements involving debt and debt-service reduction in the Paris Club, But they have also been slow in reacting to improvements in the policy environment of some middle-income rescheduling countries and have found it difficult to adapt their cover policies to take full advantage of profitable business opportunities with the emerging private sector in developing countries and the economies in transition.
In attempting to improve the quality of their risk portfolios, agencies have become particularly keen on providing export credit cover to countries they consider low-risk markets, and they compete vigorously in such markets. This has resulted in the continued extensive use of tied-aid (or “mixed”) credits as an instrument of competition, sometimes in ways that distort trade, divert scarce aid resources, and mitigate against a commercially based approach to the financing of large projects. The recently intensified consultation process within the Organization for Economic Cooperation and Development (OECD) resulting from the tied-aid credit disciplines of the 1992 reforms (the “Helsinki Package”) to the Arrangement Guidelines is expected to reduce over time the scope for such distortion. This could free scarce aid resources for the poorest countries and free exporters to compete on the basis of the quality and price of their products rather than the terms of the associated financing.
Limitations of Export Credits
Agencies are faced with particularly strong pressures to help exporters gain an early foothold in countries seen as future growth markets, such as many of the economies in transition. In some of these cases, export credits have also been used as a channel for significant financial support, even though country risk assessments indicated the need for a much more cautious stance. The potential problems arising from these pressures have at times been compounded by the fact that support has been provided on inappropriately short maturities or for exports that were not competitive in world markets. There has also been a tendency on the part of some creditor countries to treat export credits as a form of general balance of payments support. This can lead to misconceptions and problems. The nature of export credit finance imposes limits on the role agencies can be expected to play in the overall financing of developing countries. Export credits are linked to new imports of specific products and are expected to be repaid relatively quickly. This suggests that such credits are generally not well suited to substitute for general balance of payments support and should not be relied on as the major source of net financing for prolonged periods. As experience has demonstrated, countries that use export credits for the bulk of their financing needs without developing alternative sources of financing are likely to run into debt-servicing difficulties, which, in turn, require Paris Club reschedulings—at a considerable cost in terms of creditworthiness.
In cases where they would otherwise not consider support, agencies have sought to establish security arrangements in the form of offshore escrow accounts. Escrow-secured lending has not yet become a major element in the financing of these economies, partly because of governments’ reluctance to authorize the setting up of escrow arrangements, and partly because agencies are wary of taking on commercial risk in uncertain legal environments without sovereign guarantees. However, some large deals involving escrow accounts have recently been concluded on this basis, and a substantial number of agencies saw no possibility for providing export credit cover without security arrangements for many economies in transition, including in particular the countries of the former Soviet Union.
Escrow-secured financing has the potential to generate additional foreign exchange, provided that it is targeted closely toward the rehabilitation of enterprises in the export sectors and the development of new sources of exports. These potential benefits need to be weighed, however, against the costs of escrow accounts in reducing flexibility in mobilizing and managing foreign exchange. These costs fall most heavily on the borrowing country governments. In particular, governments need to guard against a proliferation of escrow accounts in a manner that encumbers a large part of foreign exchange earnings; they also need to take into account the danger that extensive reliance on securitization packages could reduce access to nonsecuritized lending over an extended period, even with improvements in policies. There are also costs for other creditors: a number of export credit agencies noted the difficulties they faced in justifying nonsecured lending when other agencies had obtained securities; and the proliferation of escrow accounts would also raise serious concerns for the multilateral institutions, including the IMF, at a time when these institutions are being called on to provide a growing share of the financing for these countries.
Notwithstanding these problems and concerns, the overall assessment of this paper is a positive one. Officially supported export credits continue to provide developing countries with the opportunity to secure financing in circumstances and on terms that would not otherwise be available; and as the quantity of new export credit commitments has increased, there has been a corresponding increase in these opportunities. On the agencies’ side, there is evidence of a trend toward more rigorous evaluation of requests for export credit cover. Export credit agencies have refined their systems of country risk assessment, with the effect that the link between new financing and appropriate debtor country policies has been reinforced. Other developments include an increased emphasis on financing for the private sector; more open discussions with debtor countries on how export credits could be used most effectively in cases where cover is limited; the establishment of credit facilities for a wide range of goods and on appropriate maturities; careful project selection; and closer collaboration with other agencies and multilateral institutions.
At the same time, agencies are facing increased competition from private insurers, commercial banks, and other private creditors in markets perceived as low-risk, and the appetite and capacity of private financial markets to take on risks can be expected to grow further with the rapid development of financial markets. This means that the demand for official support will shift further toward high-risk ventures, and agencies will be confronted with increasingly difficult moral hazard and adverse selection questions. They will therefore need to find new ways to promote exports and to apply their new risk assessment techniques in a consistent and timely manner.
For borrowing countries, the centrality of the policy environment in the risk assessment process means that they will need to ensure that they pursue prudent and consistent macroeconomic policies. The strong emphasis on payments records in the risk assessment systems of most agencies implies that borrowing countries will also need to be scrupulous in meeting their obligations to secure and maintain access to new credits. Finally, the importance that agencies attach to structural reforms, notably the development of a well-functioning financial system, and the putting in place of a clear and consistent legal framework, means that borrowing countries, and especially some economies in transition, have much to gain by accelerating and deepening their reform efforts in these areas.
Structure of the Paper
The remainder of the paper is organized as follows: Chapter II discusses the significance of officially supported export credits in total financing for developing countries and economies in transition. It describes the recent increase in the volume of export credits and the recent institutional changes in export credit agencies. It also discusses recent developments in the financial position of export credit agencies. Chapter III examines the major issues currently facing export credit agencies, including risk assessment, the limitations of export credits, the difficulties agencies have in reacting appropriately to deteriorations in the policy environment in competitive markets, the continued extensive use of mixed credits by agencies, and agencies’ policies on low-income rescheduling countries. Chapter III also covers two issues of particular interest: lending to the private sector and the challenges posed by the economies in transition. Chapter IV discusses the links between risk assessment and cover policy and provides a description of agencies’ cover policies in the major export credit markets. It also includes a separate and more detailed section on cover policies for the economies in transition. Appendix I provides a glossary of terms commonly used in the area of export credits. Appendix II describes the available statistics on officially supported export credits, and discusses the major shortcomings of these series. Appendix III describes developments in, and the operations of, the OECD Consensus. Appendix IV examines agencies’ policies toward rescheduling countries.