Chapter

III Recent Trends and Prospects

Author(s):
International Monetary Fund
Published Date:
January 1988
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The two previous Fund staff studies on officially supported export credits included quantitative information on trends in credits and cover that were derived variously from data compiled by the Creditor Reporting System of the OECD and by the Berne Union from its member agencies.10 Certain shortcomings in these data were noted at the time. In particular, it was believed that the stock data were understated because of the omission or late reporting of some rescheduled debts. Also, the data were not adjusted for changes in exchange rates and, therefore, did not permit even an approximate analysis of net flows during a time of sharp realignments in the exchange rates of the major creditor countries.

The staff of the OECD and the Secretariat of the Berne Union are aware of these problems, and the two organizations, individually and in cooperation with each other, are initiating a major effort to identify problems and inconsistencies in the data with a view to improving compliance with the reporting requirements by agencies and governments.11 The OECD also intends to develop the capacity to produce, in conjunction with the BIS, an exchange rate adjusted series on bank and trade-related nonbank external claims on developing countries.

In this context and working closely with staff of the OECD and the Secretariat of the Berne Union, the Fund staff took the opportunity afforded by its recent series of visits to review with each agency the coverage of its reporting, particularly of rescheduled credits, and to collect information on currency composition with respect both to the group of all developing countries and to the 14 countries discussed with each agency. The findings indicate severe limitations on using the data as presently reported to the OECD and the Berne Union. While the staff has attempted exchange rate adjustments based on the information provided by the agencies, those adjustments are rough, and severe problems remain; the methodology and its shortcomings are discussed in Appendix II.

Even though reliable data are not available, there is no doubt concerning the direction of trends. While their methods of measuring their activity may differ, agencies reported that new medium-term business with developing countries was off sharply. On the other hand, short-term cover for developing countries appeared to be holding up well and, in some cases, increasing.

Problems and Properties of Export Credit Statistics

Inconsistencies in the way rescheduled debts are reported by the agencies present a major problem. Most creditor countries include rescheduled export credits, including capitalized interest on those credits, in their reports to the OECD and the Berne Union. However, neither France nor the United Kingdom, which together account for about one fourth of officially supported export credits from the 11 agencies studied, include rescheduled credits in reports to the OECD Creditor Reporting System. Moreover, for the Berne Union data, rescheduled credits are not reported by the agencies of France, Japan, Spain, or the United Kingdom. These four countries account for 45 percent of officially supported credits from the 11 agencies studied. Not only do rescheduled credits drop out of the statistics reported by these countries, but also it would appear that nonrescheduled arrears often drop out as well. A further problem is that, in reporting rescheduled credits to the OECD, Japan, the Netherlands, Spain, and certain other countries not covered by the present study report only the amount initially rescheduled and do not report subsequent repayments. The full amounts originally rescheduled are thus carried forward from year to year in the reported statistics. Given that grace periods are just beginning to expire on most of the large volume of reschedulings concluded since 1982, this latter factor has probably not been important to date, but will pose serious problems in the future.

Regarding the currency composition of export credits, it is important to note that the currency in which the guarantee or insurance contract is denominated can be different from the currency in which the underlying export credit is denominated. In reporting to the OECD and the Berne Union, agencies—with one exception—report from the perspective of the currency in which the insurance contract is denominated, as that reflects their contingent liability and is the way they keep their books.

While all agencies are prepared to insure export credits denominated in foreign currency, until recently most agencies could only issue insurance or guarantees denominated in domestic currency. When a policy is issued in domestic currency covering a credit in foreign currency, the standard practice is to write into the contract an exchange rate that will serve as the basis for calculating any future claim payment. Reflecting its actual contingent liability, the agency will carry the guarantee/insurance on its books at that contract exchange rate—that is, the amount of the commitment is fixed in domestic currency regardless of any changes in the exchange rate between the domestic currency and the currency in which the underlying export credit is denominated.12 In reporting to the OECD and Berne Union, these fixed domestic currency amounts, calculated at a wide range of historical contract exchange rates, are first added together and then converted from domestic currency into U.S. dollars at current exchange rates. As an example, a US$100 credit insured in deutsche mark at a contract rate of DM 3 = US$1 would be carried on Hermes’s books as DM 300 and reported as the equivalent of US$150 if the current exchange rate were DM 2 = US$1. If that US$100 loan were repaid when the exchange rate was DM 2 = US$1, Germany’s reported outstanding export credits would decline by US$150. This is correct from the point of view of Hermes, since the repayment of that loan reduces its contingent liabilities by DM 300, which is currently equivalent to US$150. Although this is the correct accounting treatment from the point of view of the agency, it means that, without adjustment, these data cannot be used to measure either the stock of outstanding debt or net credit flows.

This problem is mitigated somewhat by the fact that three of the agencies that have traditionally covered a large volume of export credit contracts denominated in foreign currency (i.e., the agencies of Canada, Italy, and the United Kingdom) have also traditionally issued policies denominated in foreign currency.13 When the insurance policy is denominated in foreign currency, it is carried on the agency’s books and reported to the OECD and Berne Union at current exchange rates. Also, while EID/MITI only issues contracts denominated in yen, it provides the one exception to the standard practice described above; that is, for export credits denominated in U.S. dollars, EID/MITI reports to the OECD in terms of the underlying loan contract rather than the currency of the insurance contract. It would appear that the only cases where foreign currency denominated credits carried and reported at contract rates account for more than one fourth of agency exposure are the agencies of France, Spain, and Sweden. These are, however, important cases.

Given these problems, it is not possible to derive a series that will reflect the exchange rate adjusted flows of export credits. It is, however, possible to calculate an exchange rate adjusted series that shows the change in the agencies’ exposure from their own perspective. In other words, an insurance policy for DM 300 in cover would be treated as such regardless of the currency of the underlying loan. This would appear to be a reasonable indicator of the pace at which agencies are making credits and cover available. On this basis, and using the BIS/OECD data, agencies’ exchange rate adjusted exposure to developing countries (disbursed principal only, but including any capitalized interest) increased by US$15 billion, or 11 percent, in 1984; by US$800 million, or less than 1 percent, in 1985; and by US$4 billion, or less than 3 percent, in 1986. The exchange rate adjusted BIS/OECD data for the 14 countries included in the sample followed a similar pattern, while the exchange rate adjusted Berne Union series for these countries is essentially flat (Chart 2).14 It must be underscored, however, that these numbers understate the increase in outstanding officially supported export credits to developing countries by the amounts of rescheduled credits not reported. Data as reported by the BIS/OECD, that is, not adjusted for exchange rate movements, are provided in Table 3.

Chart 2.All Developing Countries and Fourteen Country Cases: Export Credit Exposure, 1982–861

(Exchange rate adjusted stocks; in billions of U.S. dollars)

1 Data do not represent net flows and should be used with caution in the light of explanations provided in Section III and in Appendix II. The concept “exchange rate adjusted stocks’’ is described at the end of Appendix II.

2 Total commitments, that is, both principal and interest on disbursed and undisbursed credits, including amounts in arrears when reported as unrecovered claims; excludes Colombia.

3 Disbursed principal only.

Table 3.Outstanding Stocks of Officially Supported Export Credits and Nonguaranteed Bank Credits, 1983–86

(In billions of U.S. dollars; current exchange rate basis)1

End-1983End-1984End-1985End-1986
All developing countries2
Officially supported export credits144.2146.6167.3191.1
Nonbank export credits394.795.4107.3126.7
Guaranteed bank credits449.551.260.064.4
Nonguaranteed bank credits5461.6458.7486.7500.2
By economic classification
Countries with debt-servicing problems2
Officially supported export credits66.764.973.888.6
Nonbank export credits337.937.142.756.0
Guaranteed bank credits428.827.831.132.6
Nonguaranteed bank credits5299.6295.8305.1308.4
Countries without debt-servicing problems2
Officially supported export credits62.167.475.584.1
Nonbank export credits344.848.152.156.7
Guaranteed bank credits417.319.323.427.4
Nonguaranteed bank credits5127.2129.3148.2157.0
Fifteen heavily indebted countries
Officially supported export credits39.440.246.156.3
Nonbank export credits321.521.425.532.5
Guaranteed bank credits417.918.820.623.8
Nonguaranteed bank credits5257.2255.2261.4263.5
By regional classification
Africa
Officially supported export credits32.431.237.242.2
Nonbank export credits318.916.619.321.4
Guaranteed bank credits413.514.617.920.8
Nonguaranteed bank credits549.846.349.951.7
Asia
Officially supported export credits28.733.135.938.6
Nonbank export credits320.624.626.227.9
Guaranteed bank credits48.18.59.710.7
Nonguaranteed bank credits583.687.498.5105.6
Europe
Officially supported export credits21.820.723.328.8
Nonbank export credits312.011.813.019.4
Guaranteed bank credits49.88.910.39.4
Nonguaranteed bank credits550.949.456.860.0
Middle East
Officially supported export credits34.033.739.543.2
Nonbank export credits327.426.530.034.2
Guaranteed bank credits46.67.29.59.0
Nonguaranteed bank credits548.447.147.147.8
Western Hemisphere
Officially supported export credits27.327.731.338.3
Nonbank export credits315.715.718.723.7
Guaranteed bank credits411.612.012.614.6
Nonguaranteed bank credits5228.8228.6234.2235.0
Memorandum item
SDRs per dollar (end period)0.9551.0200.9100.818
Source: Bank for International Settlements and Organization for Economic Cooperation and Development, Statistics on External Indebtedness: Bank and Trade-Related Nonbank External Claims on Individual Borrowing Countries and Territories (Basle and Paris, various issues).

The reported stock data are converted into U.S. dollars using the actual exchange rates prevailing at the end of each period. Changes in the stocks therefore reflect both new flows and valuation changes resulting from exchange rate movements between the dollar and other currencies.

In this table, country coverage is limited to Fund members and is in accordance with the Fund’s World Economic Outlook (WEO) definition of developing countries, excluding offshore banking centers. The classification of countries with and without debt-servicing problems also conforms to WEO definitions; in particular, the eight “capital exporting” developing countries are not included in either group. Elsewhere in this paper a broader definition of developing countries is employed.

Nonbank export credits include insured suppliers’ credits and credits extended directly by official export financing institutions. There is no published breakdown of nonbank credits into its two components.

Bank credits with creditor country official guarantee.

Total outstanding bank credits less amounts with creditor country official guarantees; the latter are included here as guaranteed bank credits under the heading of officially supported export credits.

Source: Bank for International Settlements and Organization for Economic Cooperation and Development, Statistics on External Indebtedness: Bank and Trade-Related Nonbank External Claims on Individual Borrowing Countries and Territories (Basle and Paris, various issues).

The reported stock data are converted into U.S. dollars using the actual exchange rates prevailing at the end of each period. Changes in the stocks therefore reflect both new flows and valuation changes resulting from exchange rate movements between the dollar and other currencies.

In this table, country coverage is limited to Fund members and is in accordance with the Fund’s World Economic Outlook (WEO) definition of developing countries, excluding offshore banking centers. The classification of countries with and without debt-servicing problems also conforms to WEO definitions; in particular, the eight “capital exporting” developing countries are not included in either group. Elsewhere in this paper a broader definition of developing countries is employed.

Nonbank export credits include insured suppliers’ credits and credits extended directly by official export financing institutions. There is no published breakdown of nonbank credits into its two components.

Bank credits with creditor country official guarantee.

Total outstanding bank credits less amounts with creditor country official guarantees; the latter are included here as guaranteed bank credits under the heading of officially supported export credits.

The staff has made its rough estimates of the effective changes in the agencies’ exposure, both for all developing countries and for the 14 case studies in Appendix I, based on consultations with the OECD External Debt Division, discussions with the agencies, and data on the currency composition of the agencies’ exposure gathered during the visits. The staff calculations do not pretend to be a substitute for the more in-depth efforts in this field being pursued by other institutions. Given the importance that officially supported export credits have in the context of external debt and financing problems, governments may find it useful to support and encourage the efforts that are presently under way in the OECD and Berne Union to improve the quality of these data.

Trends in Officially Supported Export Credits

In analyzing export credit developments, account must be taken of the long lags involved. For project financing, the lag between an agency’s offer of export credit insurance and the actual signing of a commitment is often one year or more, and disbursements normally take place over a period ranging from the second to fifth year after the commitment is signed. Therefore, the slowdown in disbursed credits indicated by the exchange rate adjusted BIS/OECD data for 1985 and 1986 would tend to reflect decisions taken about three years earlier. The Berne Union series, which includes both disbursed and undisbursed credits, provides an indicator of future flows. It is, therefore, important to note that, for the 13 sample countries for which data are available in both series (i.e., excluding Colombia) the BIS/OECD series rose by US$14 billion from end-1983 to end-1986 while the Berne Union series declined by US$1 billion, both on an exchange rate adjusted basis. While the two series are not strictly comparable because of differences in coverage, this would seem to imply a marked decline in the pipeline of undisbursed officially supported export credits.

In discussions with the agencies on developments in export credits over the last two years, several broad underlying trends emerged. First, agencies confirmed that new commitments on loans and guarantees are declining. This was reported in most of the cases. Only a few agencies said activity was going up or leveling off, and even here the result reflected certain exceptionally large transactions or the launching of special programs. Not only are new commitments decreasing, but agencies reported an even sharper decline in the rate of offers, implying that new commitments should be expected to decline even further in the future. Even those agencies that reported some growth in new commitments explained that their applications and offers had fallen way off. Some agencies reported that inquiries were picking up, but these were not yet being translated into new business. Agencies that had made such calculations reported that the ratio of commitments or insured shipments to exports had decreased or at most had remained constant in the recent past.

Anecdotal evidence was also telling. One agency was debating whether or not to effect a substantial reduction in staff. Another reported canceling some of the weekly meetings of its Board, as there were no applications to consider. One of the largest agencies reported that in 1986 it had approved only 13 applications for credit terms over five years compared with over 100 a year being approved in times of strong demand. Another large agency, which had earlier set up a special program for early cover resumption for certain countries that were undertaking adjustment efforts, reported that even under that special program business had been disappointing.

Second, while medium-term cover has fallen off, short-term cover to developing countries has been holding up well and for some agencies has been increasing. As a result, the share of short-term commitments in total business has increased sharply in certain agencies, with consequent implications for the maturity structure of the external debt of debtor countries. In certain cases, goods that normally would have obtained medium-term financing are now being financed short term, probably reflecting the more restrictive policies for medium-term cover.

Third, in terms of geographical distribution, the share of the OECD countries in new commitments has risen. This development reflects changes in the direction of trade and may also result from the efforts of some agencies to increase their business in better risk markets. For developing countries, the only regional market where some expansion was reported was Asia. Demand from oil exporting countries has fallen sharply, while new commitments to Latin America may have been affected by the very restrictive stance maintained at various times over 1985 and 1986 toward Argentina, Brazil, and Venezuela.

Reasons for Recent Decline in Activity

The marked tightening of export credit and cover policies in the period immediately following the emergence of widespread debt-servicing difficulties was certainly an important, and probably the primary, factor leading to the slowdown in disbursements over 1985 and 1986. However, the low level of new commitments and the sharp decline in applications and offers over the past two years, despite a progressive opening of agencies’ cover policy stance, would appear to reflect a decrease in demand. The weakness in demand has been general and, in fact, some of the more marked declines have been for countries where the agencies are quite open. Most developing countries, even those that have not had payments difficulties, have cut back sharply on the large, public sector projects for which export credit insurance has traditionally been sought. For some of those countries, cutbacks may have reflected a desire to limit the increase in external indebtedness; for others, a lack of complementary domestic resources for project investment and maintenance may have been the more important constraint. Given the very long lags from conception to application to commitment to disbursement on such projects, business was, until recently, sustained by projects initiated in the early 1980s or before. Most recently, demand has also been affected by the severe loss in terms of trade of developing countries, especially fuel exporting countries, many of which have responded by sharp reductions in investment spending.

The demand for official export credit cover may also have been affected by the decline in interest rates over 1985 and 1986. In an effort to limit competition among themselves in the provision of interest rate subsidies on export credits, 22 members of the OECD have established a Consensus Arrangement that sets out, inter alia, minimum interest rates on export credits that receive either direct official financing or interest subsidies.15 If their domestic interest rates are above those OECD Consensus rates, creditor governments will normally subsidize the credit down to the OECD Consensus rate. In most cases, a guarantee from the official export credit agency is a prerequisite for obtaining that subsidy. With the general decline in interest rates, the differential between market rates and Consensus minimum rates has been reduced and sometimes eliminated, thereby removing what might have been an important incentive to pay for official export credit insurance. Also, with the elimination of certain exchange controls in France in 1985, French banks are now permitted to extend loans in French francs to nonresidents without exchange control approval; previously, exchange control approval was extended automatically if there was a guarantee from the export credit agency. This, combined with the decline in interest rates, appears to have reduced banks’ demand for cover from the export credit agency.

In the context of weak demand, competition among agencies has intensified. Some agencies have adopted a very aggressive position in markets they consider desirable, and mixed credits have been used increasingly to win export contracts in countries that would not necessarily be major aid recipients. Since the concessional component of a mixed credit is generally reported as official development assistance, this would also tend to bias downward reported export credits.

Agency Finances

While the primary goal of export credit agencies is to promote national exports, they also generally operate within the instruction that their activities are to be self-supporting over time. Decisions on cover policy, premium rates, and other aspects of the agency’s operations are made by the agency and its governmental authorities with a view to both of these objectives. Developments in an agency’s financial position can, therefore, have an important impact on credit and cover policies.

Concerning export credit guarantees/insurance, the most straightforward way to analyze financial developments across agencies is the cash flow approach, that is, premium income, minus administrative costs and claims paid, plus recoveries; and this is the concept most frequently employed by the agencies themselves in exchanging information on their activities. The cash flow approach does not, of course, measure whether an agency is operating at a profit or a loss. Such an assessment would also require, inter alia, judgment as to future claims and recoveries.

For Germany and the Netherlands, where guarantee/ insurance operations are undertaken by private companies acting on behalf of the government, the cash flow deficit is charged directly against the national budget. In other countries, however, the export credit agency, whether it is a department within the government or a separate public entity, operates with a separate set of accounts. The agency may have paid-in capital, and it will usually have a reserve that reflects any accumulated surplus on past operations. It may also have authority to borrow from the government, from various public funds, or from the market to cover its cash needs. It will generally have its own set of operating accounts and a balance sheet. However, the accounting practices employed vary substantially from agency to agency and, in particular, sometimes lack transparency regarding the treatment of rescheduled obligations. It could, therefore, be misleading to compare or analyze developments in agencies’ financial positions on the basis of these accounts.

As the cash flow basis provides the most straightforward way to make comparisons across agencies with respect to their guarantee/insurance operations, this was the approach emphasized by most agencies in their discussions with the staff and it is the concept used here.16 Over the period 1983–85, every agency experienced a marked deterioration in its financial position as a result of large claims payments under rescheduling agreements, on unrescheduled arrears, and against commercial defaults.17 All agencies responded to that deterioration of their financial position by enacting increases in premiums. Nevertheless, the performance of premium income has been disappointing. With very few exceptions, agencies reported sustained—and in some cases very sharp—declines in premium income.

Agencies cited the drop in new commitments as the main reason for the weak performance of premium income, although shifts in the regional distribution and term structure of new commitments also played a role. In particular, the pattern of new commitments has shifted toward short-term cover, which carries a lower premium, and toward OECD and other markets that are classified in the lower risk premium categories. Another factor cited by some agencies was that their earlier premium increases were concentrated heavily in the highest risk premium categories, where policies were restrictive and the agencies were doing little new business. For agencies that did not report a decline in premium income, this in part reflected the use of a system that involved a greater lag between the issuing of a commitment and the payment of the premium than was the standard practice.

While premium income had declined, most agencies reported that claims payments were at least leveling off and recoveries had begun to rise, in part reflecting the expiration of grace periods on earlier reschedulings. The overall impact of these trends was, for most agencies, a stabilization in their deficits, and four agencies reported that their deficits were declining. Looking to the future, most agencies were anticipating a further decline in premium income because new offers had recently been falling off much faster than commitments. Although developments in certain large debtor countries could have a marked impact on claims payments, agencies generally expected claims payments to, at least, remain stable for a while and hopefully decline over time, since they did not see on the horizon any important new cases of payments difficulties. For countries that had already entered into the rescheduling process, claims payments might reasonably be expected to decline over time, reflecting both improved debtor performance and declining amounts of payments due on obligations that had not already been rescheduled. Nevertheless, for most agencies the key to whether their financial position deteriorated or improved would be the rate of recoveries under previous rescheduling agreements. While recent experience was a good sign, it was considered to be too early to judge whether a turning point had been reached. However, even with favorable developments, agency deficits are expected to remain large in absolute terms.

Prospects

Agencies’ views of prospects for new export credit and cover activity were mixed. A few agencies anticipated a recovery in demand for imports by developing countries in the next few years. In particular, with the firming of the oil price, demand is expected to recover in fuel exporting developing countries. Two agencies were already seeing some recovery.

However, most of the agencies shared the view that business will remain at about present levels and did not see, in general, a recovery in demand. For these agencies, the downward trend in new credits and cover continued in the first months of 1987. Given the substantial lags involved in export credits and the dramatic declines in applications and offers over 1985 and 1986, the volume of officially supported export credit flows could be expected to turn downward in the near future. But, given the stance of cover policies, project financing is available for reasonably creditworthy countries.

Agencies also noted that recent changes in the OECD Consensus rules (see Appendix III) could be expected to reinforce the distinction between aid and export credits.

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