II Trends and Developments in Export Credits
- Christopher Jarvis, Balázs Horváth, and Michael Kuhn
- Published Date:
- December 1995
This chapter examines recent trends and developments in officially supported export credits. The basic features of official support for export credits and the institutional arrangements for providing official export credit support, which differ widely from country to country, are summarized in Boxes 1 and 2.2Box 1 also contains background material on the basic principles underlying officially supported export credits, explanations of some of the key concepts used in the paper, and a description of the main instruments used by export credit agencies.
Share of Export Credits in Debt Financing
Officially supported export credits represent a large share in the external debt of developing countries and economies in transition, accounting for more than 20 percent of the $1.7 trillion in total external indebtedness to all creditors (Table 1).3 Official support for export credits has been the most important instrument of debt financing for developing countries by official bilateral creditors. Export credits outstanding represent 37 percent of the indebtedness of developing countries and economies in transition to all official creditors and thus exceed debt to multilateral creditors, including the IMF, by a significant margin. For the 20 main recipients of export credits, which include all major debtor countries, export credits account for nearly half of their debt to official creditors (Chart 1).
|All Developing Countries and Economies in Transition||Twenty Largest Recipients of Export Credits1|
|Shares (in percent)||Shares (in percent)|
|In billions of U.S. dollars||In total debt||In official debt||In billions of U.S. dollars||In total debt||In official debt|
|Banks and other||765||44.4||…||435||45.3||…|
|Of which: short-term||358||20.7||…||177||18.4||…|
|Total||1,731||100.0||…||960||100.0||…|Chart 1.Composition of Debt Owed to Official Creditors, 1992
Sources: OECD: and IMF staff estimates.
Official financing through export credits has been provided to a wide range of countries, but the portfolio of export credit agencies remains heavily concentrated:4 the ten largest recipients of export credits account for about 63 percent and the largest 20 for 87 percent of export credit agencies’ exposure (Chart 2). There have been significant shifts in relative exposure across countries and these are discussed in Chapter IV.
Chart 2.Twenty Main Recipients of Export Credits: Share in Agencies’ Portfolio
Sources: Berne Union; and IMF staff estimates.
Total exposure has also increased sharply in recent years, especially since 1989. Two trends underlie this rise in exposure. First, new export credit commitments have risen rapidly over the past years (Chart 3), driven in part by more aggressive export promotion as well as a resurgence of import demand by many developing countries. Second, there has been a substantial increase in agencies’ exposure in the form of arrears and unrecovered claims (resulting from payments of insurance claims, usually in the context of Paris Club reschedulings). This reflects the effect of continued large debt restructurings for countries that had been in debt difficulties for some time (notably Brazil, Egypt, and Poland) but also the more recent emergence of debt-servicing difficulties in the former Soviet Union, Algeria, and Iran. The impact of these factors on developments in total exposure is shown in Chart 4.5
Chart 3.Officially Supported Export Credits: New Commitments
Sources: Berne Union: and IMF staff estimates.
Chart 4.Export Credit Exposure1
Sources: Berne Union; and IMF staff estimates.
1This chart, as well as Charts 5 and 8 to 15, are based on the Berne Union’s quarterly survey covering some 40 developing countries and transition economies. Exposure in the form of unrecovered claims arises from nonpayment by a debtor that results in an export credit agency having to pay claims to an insured creditor. The nonpayment can result either from default by the debtor or from a rescheduling agreement between the debtor country and the creditor country; claims arising from both events are unrecovered claims until repaid. Exposure in the form of arrears arises where the debtor has failed to meet its obligations to the original creditor, but a claim has not yet been paid by the agency (usually because the claims-waiting period has not yet expired). In contrast to unrecovered claims, arrears still represent a contingent liability for the agency, rather than a liability that has already been realized.
Exposure in the form of commitments outstanding arises from insurance, guarantees, or direct loans provided by the agency, in cases where repayment of the loan has not yet fallen due. In the case of insurance and guarantees, this exposure represents a contingent liability. It should be noted that the exposure reported by agencies in this category includes insured interest falling due, so that the agency’s total exposure can be larger than the face value of the loan insured. In contrast, reported exposure in the form of unrecovered claims does not include an estimate of interest that will fall due on such claims before they are repaid. Therefore, this category understates the likely obligations of the debtor to the agency and the amount at risk for the agency. Where unrecovered claims are substantial, this understatement can be significant.
The distinction made here between medium- and long-term commitments outstanding and short-term commitments outstanding corresponds to the exposure figures reported to the Berne Union by individual agencies. Agencies have different definitions of short-term commitments, generally ranging from up to one year to up to two years. Thus, some debt in the one- to two-year maturity range may be reported in each of the categories. In practice, however, commitments in this maturity range are generally limited, so that anomalies resulting from the different definitions used by agencies are of limited significance.
Volume of New Export Credits
Background: The Contraction of Export Credits in the 1980s
The recent increase in the volume of new export credits has been particularly striking because it followed a precipitous decline in the overall level of export credit activity during the 1980s. New commitments of medium- and long-term export credits dropped sharply as most debtor countries responded to balance of payments difficulties by cutting back public sector investment programs that reduced the demand for the imports financed through officially supported export credits. In other countries, where demand for imports and associated new financing remained strong, agencies were often reluctant to extend new commitments because of doubts about countries’ ability to service new debt and often poor performance under rescheduling agreements. It also became evident that many of the low-income rescheduling countries were not creditworthy for large-scale support in the form of nonconcessional export credits.
Box 1.Fundamentals of Officially Supported Export Credits
The purpose of officially supported export credits is to facilitate and promote national exports. Export credit agencies achieve this goal either by providing export finance directly or, more frequently, by providing guarantees or insurance of privately financed transactions. Export credit agencies have also been the channel for export subsidies. At its heart, the business of export credit agencies is an insurance business, and much of the language of officially supported export credits is derived from the world of insurance.
Only a small part of world trade benefits from officially supported export credits. Generally, the financing risks associated with trade are taken either by the importer, by the exporter, or by private insurers or financial institutions that act as intermediaries between the two, for a fee. The need for officially supported export credits only arises when these actors are not prepared to cover all of the risks associated with an export credit at an acceptable price.
The rationale for official involvement is that there is some market failure in private export credit insurance. Some profitable transactions are too large for the private sector to insure. Official export credit agencies may also have at their disposal information, in particular about sovereign risk, that is not available to the private sector. Moreover, in cases where debt-servicing difficulties arise, export credit agencies act collectively in the Paris Club to adjust repayment terms to the needs of debtor countries, improving the prospects of ultimate repayment. All of these features may make it possible for official export credit agencies to provide cover without subsidy or loss on business that private sector insurers would not take because the risk of loss is too high or too difficult to predict or because the potential loss involved is too large. That said, export credit agencies have incurred very substantial cash flow deficits in recent years and some credits will never be recovered.
Form of Support
Export finance involves two basic types of risk:
the commercial risk of importers not able to raise sufficient local currency funds to acquire foreign exchange for payments; and
the political risk or “country risk” of exchange restrictions (“transfer risk”) or other unexpected government actions that prevent importers from making payments on a timely basis.
All agencies covered in this study have put in place systems to insure or provide guarantees against political risks, including transfer risk, and many also cover commercial risks; some also reinsure such risks taken by private institutions. Moreover, most provide at least one of three forms of “financing support”: direct credits, refinancing, or interest subsidies. Financing support can be given in conjunction with basic insurance and guarantee facilities.
Export credits are generally divided into short term (usually below one year), medium term (between one and five years), and long term (over five years). The maturities of export credits are closely linked to the type of exports. Short-term credits are provided for consumer goods and raw materials, medium-term credits for capital goods, and long-term credits for heavy investment goods, large projects, and civil works. Insurance can also cover preshipment risk, arising from the buyer’s failure to make the purchase as contracted, without provision of credits.
Export credits can take the form of suppliers’ credits (extended by the exporter) or buyers’ credits, where the exporter’s bank or other financial institution lends to the buyer (or his bank). Buyers’ credits often afford greater flexibility to importers, especially if extended in the form of a general line of credit covering a wide variety of goods from the exporting country.
Claims, Recoveries, and Premia
When a borrower fails to make payments on an insured loan, the overdue payments are shown on agencies’ accounts as arrears. If, after a claims-waiting period, usually of one or two months, payments still have not been made, the agency has to pay claims to the insured lender, from this point on, until the overdue payments are made, they appear in agencies’ accounts as unrecovered claims. This remains the case even if a rescheduling agreement is reached between the borrowing country and its official creditors in the Paris Club. When repayments are made, whether as part of a rescheduling agreement or through other means, they appear in agencies’ accounts as recoveries.
Much of the negative cash flow of agencies is accounted for by claims, with the remainder coming from interest on borrowings and from administrative expenses. Similarly, for most agencies, the main factor positively affecting cash flow is recoveries. However, agencies also generate substantial income from premia, the amounts paid by insured lenders as the price of the insurance. Premia are discussed further in Boxes 7 and 8.
Box 2.Institutional Framework of Officially Supported Export Credits
Export Credit Agencies and Their Governments
The relationships between export credit agencies and their governments are varied and often complex. An export credit agency can be a department within a ministry, an independent governmental agency, or even a private firm operating under instruction from, and for the account of, the government. Of the cases studied here, Austria, Germany, and the Netherlands conduct their export credit insurance programs through private companies (OeKB, Hermes, and NCM, respectively). The export credit agency of France (COFACE) has recently become private through privatization of some of its major shareholders. Short-term export credit insurance in the United Kingdom is also conducted through private companies (NCM-UK and Trade Indemnity).
In conducting officially supported export credit business, export credit agencies have varying but often high degrees of independence, and the extent of this independence appears to depend little on whether the agency is formally in the public or private sector. Even when they are governmental agencies, they often operate under charters or legislation that gives them clearly defined powers and responsibilities. However, all agencies that rely on financial support from governments are ultimately accountable to those governments, and all have “guardian authorities” who direct overall policies regarding official support, and who represent them in intergovernmental fora.
Relationships Between Export Credit Agencies
Export credit agencies are often rivals, competing to finance their countries’ exporters in profitable markets. But they are also often partners, both in cofinancing projects that involve exports from more than one country, and more generally in coordinating their policies on major issues and in exchanging information about borrowers. In the latter activity they have evolved some now well-established institutional arrangements. The most important of these operate through the OECD and the Berne Union.
The members of the Export Credit Group (ECG) of the OECD participate in the Arrangement on Guidelines for Officially Supported Export Credits (the Consensus), which provides an institutional framework for orderly export credit markets with the aim of preventing an export credit race where exporting countries compete on the basis of financing terms (Appendix III). It sets limits on the terms and conditions for export credits with a duration of two years or more. The most important conditions are
a cash payment of at least 15 percent of the value of the export contract;
repayments to be made at regular intervals, with maximum repayment terms of 5 years (8.5 years with prior notification) for relatively rich and 10 years for other countries;
minimum interest rates linked to market rates; and
minimum levels of concessionalily for “tied-aid” financing.
The Berne Union (The International Union of Credit and Investment Insurers) has established guidelines on short-term credits, but it operates more generally as a forum for the exchange of information on the export credit industry and on particular countries. It differs from the OECD in that, while guardian authorities are represented at OECD meetings, and usually take the lead in discussions, at the Berne Union the agencies alone are present. The Berne Union’s membership also includes a number of export credit agencies from countries outside the OECD.
Re-examination of Agencies’ Role
The continued low levels of export credit activity combined with persistent cash flow deficits led to calls for a re-examination of agencies’ approaches to export promotion and to closer scrutiny of the budgetary costs of their operations. These pressures intensified as the Paris Club moved toward concessions in reschedulings for the low-income countries, and agreed comprehensive debt restructurings in 1991 for Egypt and Poland (which involved a reduction by 50 percent in present value terms). While seen as exceptional, these agreements led to doubts about the ultimate recovery of rescheduled claims on sovereign debt. At the same time, budgetary strains in most industrial countries led to a declining willingness to subsidize exports, and this reduced the role of agencies as a channel for financial subsidies. Agencies, particularly in Europe, also faced increasing competition from private insurers on short-term business in the OECD markets, which accounted for a large part of their premium income.
In response to these pressures, agencies and their government authorities implemented a wide variety of measures—including restructurings and other institutional changes—aimed at increasing the effectiveness of agencies as instruments of export promotion while reducing costs and bringing greater transparency to their operations. Most agencies strengthened their approaches to assessing and managing risk, through improved country risk assessment procedures, the use of more market-related pricing, and other innovative approaches to export promotion (see Box 3 and also Chapter III), With new procedures and systems in place or in the process of implementation, many governments, which for a number of years had taken a restrictive stance on export credits, began to pursue export promotion more aggressively, often seeing export promotion as a tool to stimulate economic growth in the recession of the early 1990s.6
Rebound in the Volume of Export Credits
The more aggressive approach to export promotion coincided with and reinforced the recovery in demand for imports of capital goods by many developing countries. A number of creditor country governments also saw export credits as an important instrument in supporting the economies in transition, and significant amounts of export credits were extended to several countries in Eastern Europe and to the former Soviet Union. The combination of these factors led to a decisive reversal of the long decline in export credit activity. Berne Union data show that new export credit commitments of the agencies visited to developing countries and economies in transition increased from $24 billion in 1988 to $52 billion in 1990 and further to $69 billion in 1993. Within this overall increase in new commitments, there was also a marked increase in new commitments to low-income countries, although this mostly reflected substantial new commitments to some of the largest low-income countries, in particular China, India, and Indonesia. New export credit commitments in the period 1990–93 for some of the largest markets are shown in Chart 5. More generally, the overall increase in new commitments masks substantial variations among countries. Some countries attracted little new finance; others received substantial new flows.
Chart 5.New Export Credit Commitments in Selected Major Markets
Sources: Berne Union; and IMF staff estimates.
Financial Position of Export Credit Agencies
Net Cash Flow
Despite the recent 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.7Chart 6 shows the effect of income from premia and recoveries of previous claims and of new claims payments on the cash flow of the export credit agencies covered in this study during the years 1990–93. The picture that emerges differs little from the experience of the 1980s: new claims payments, averaging over $10 billion a year, have continued to exceed premium income and recoveries by a wide margin. While the experience of agencies has varied markedly, reflecting the different composition of their portfolios across recipient countries, most, though not all, agencies have continued to incur substantial cash flow deficits. Information from agencies indicates further large deficits in 1994.
Chart 6.Export Credit Agencies1: Premium Income, Recoveries, Claims, and Net Cash Flow
Sources: Export credit agencies visited; OECD; annual reports of export credit agencies: and IMF staff estimates.
1Agencies covered in study.
2These cash flow deficits are included, either ex ante or ex post and in some cases with some delay, in government expenditure.
Two divergent trends underlie these figures. On the positive side, a number of major debtor countries have begun to emerge from the Paris Club rescheduling process, and others are making payments on previously rescheduled debts while continuing to require reschedulings. As a result, recoveries on rescheduled debts have become the dominant source of income for most agencies. Agencies have also continued to generate substantial revenues from premium income on new business.
These positive effects on cash flow have been more than offset, however, by continued claims payments on export credits to other debtor countries. To some extent these reflect continuing claims resulting from cover decisions taken several years ago. But they also reflect the emergence of payments problems in some major debtor countries that had previously been considered good risks by export credit agencies. The substantial claims on credits extended to the former Soviet Union have dominated the cash flow position of agencies during the past two years, and claims payments increased further during 1994 as the result of the Paris Club rescheduling agreement with Algeria. Most agencies have also experienced large claims on credits extended to Iran during the past two years, though many of these have more recently refinanced these claims on a bilateral basis. All agencies have significant exposure in at least two of these three markets; some agencies noted that their recent claims payments had exceeded by a substantial margin the claims experienced at the height of the debt crisis.
Governments have responded to agencies’ continued cash flow deficits in a variety of ways. In several countries an attempt has been made to draw a clear line between the old and new business of the agency. Such approaches usually involved recognizing that the agency’s cash flow deficits on old business were unlikely to be fully recouped, making financial provision for these deficits to be covered by the government while putting in place more ambitious financial targets for the agency’s new business and more rigorous risk assessment procedures.8
Box 3.Changing Approaches to Export Promotion
Agencies differ considerably in the way they approach their general mandate to promote exports, and this is reflected in institutional arrangements.
Some governments see their agencies essentially as insurance agencies that decide, within an overall ceiling on the volume of their business, whether or not to underwrite export credit transactions presented by exporters or their banks. For these agencies, export credit activity is essentially driven by demand, and their governments have at times found it difficult to impose effective limits on the provision of export credit cover and thus effective budget constraints on the activities of agencies. Other governments have given their agencies a broader mandate and often a wider range of instruments to promote exports, but typically more tightly defined overall financial objectives.
The recent restructurings and reorganizations of agencies have generally aimed at placing agencies on a more commercial and independent footing. Governments have not abandoned the pursuit of other, essentially political, objectives through use of export credits, but most have adopted clearer definitions and separations of such “national interest business.”
An example of this general approach is EDC of Canada. Recent revisions of its mandate provide EDC with broad authority to engage in a wide range of transactions, including leases, equity investments, domestic financing and insurance activities, and borrowing operations in international capital markets. Transactions that EDC considers too risky to take on its own corporate account can be supported under the Government’s “Canada Account,” but only after the transaction has been rejected by EDC’s Board and under strict limits and following review by various government agencies. Subsidies for exports are limited to transactions on the account of the Government and are funded not from the general aid budget but from an account explicitly devoted to export promotion.
Agencies have also adopted a wider range of strategies to facilitate exports and deal with risk. These include
development of more effective instruments of export promotion, including more complex and sophisticated insurance and financing techniques, including escrow accounts:
more open information policies regarding country risks and cover opportunities:
efforts to facilitate exports of enterprises that have little or no experience with foreign buyers, and to assist established exporters in shifting business toward lower-risk markets;
discussions with borrowing countries for which cover opportunities are limited on their investment priorities and the most effective use of financing rather than providing cover on a first-come, first-served basis; and
strengthened capacity for in-house project appraisals and project financing packages (involving coverage for commercial risk).
These approaches have in common a focus on the quality of investments financed by officially supported export credits. They hold out the promise of improved repayment prospects together with the provision of support that is better tailored to the needs of both exporters and borrowing countries.
Some agencies use their risk assessment procedures as a guide to what should be the level of provisioning against potential future losses. For example, the risk assessment process is directly linked to provisioning in the systems of Canada, Sweden, the United Kingdom, and the United States. However, most agencies are opposed to linking country risk assessments to provisions for specific countries. Moreover, it should be noted that most agencies that are making provisions do so largely to provide their parliamentary and guardian authorities with a transparent picture of the quality of their total portfolio of lending and insurance. Agencies have not written down the face value of their claims, except in cases where debt concessions were agreed in the Paris Club. Finally, some agencies reject the need to make provisions for sovereign loans altogether (though they may hold reserves against commercial risk in their portfolio). The position of these agencies remains that all of their sovereign credits will ultimately be recovered (though some will be serviced at much lower interest rates in cases where they have participated in Paris Club debt- and debt-service-reduction operations), and they therefore see no justification for provisioning or for drawing a line between old and new business to evaluate financial performance. However, as discussed in Chapter III, below, even those agencies that have not formally separated old and new business have, in many cases, overhauled their system of risk assessment, tightened their approach to cover policies, and developed new approaches to facilitate exports and deal with risk (see also Box 3).