Chapter

II Trends and Developments

Author(s):
International Monetary Fund
Published Date:
March 1990
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Following the onset of the debt crisis in the early 1980s, there was a precipitous decline in official support for export credits to developing countries. In part, this was a result of a reduced demand for imports, as governments responded to balance of payments difficulties by cutting back public sector investment programs. But it was also, in part, a consequence of export credit agencies moving to restrict the availability of insurance cover as more and more countries experienced debt service difficulties.2 The demand for export credits was reduced further in the mid-1980s when the sharp fall in export revenues led to a similar compression of imports in oil exporting countries.

The downward trend in new commitments appears to have ended in 1988. A number of the agencies covered by this study reported significant increases in offers (to provide export credit cover if an exporter wins a contract) and commitments, while others reported an increase in applications that had not yet been translated into offers. Most agencies cautioned that a small number of large transactions accounted for these increases, and that they could not be sure that the upswing would be sustained. Nonetheless, general sentiment indicated that the post-1982 decline had come to an end.

The limited statistics available on export credit commitments3 add weight to this qualitative conclusion; unpublished data compiled by the OECD indicate that total new commitments to provide medium- and long-term cover to developing countries in 1988 were $25.4 billion,4 8 percent higher than in 19875 (Table 1 and Chart 1). The growth was concentrated in long-term credits (repayment periods over five years), which grew by almost 80 percent over the same period (Chart 1).

Table 1.Flow of New Commitments of Officially Supported Medium- and Long-Term Export Credits, 1981–88, and the Stock of Short-Term Credits, 1984–881(In billions of SDRs)
Category I

(Largely

Industrial)

Countries
Category II

(Middle-Income

Developing)

Countries
Category III

(Low-Income

Developing)

Countries
Total of

Categories

II and III

(Developing)

Countries
Total
(Medium- and long-term credits with an initial term of over one year)
198170.2
198277.5
198363.1
198456.8
198511.824.110.534.647.12
198610.019.09.728.739.32
198712.416.27.323.536.42
19887.315.99.525.433.22
(Long-term credits with an initial term of over five years)
198118.2
198218.5
198313.0
19841.86.82.59.311.1
19851.04.82.57.38.3
19860.84.42.77.18.0
19871.82.81.74.56.3
19881.33.54.68.19.3
(Stock of short-term export credits, 1984–883)
198412.910.17.017.129.9
198515.912.06.818.834.8
198616.511.46.217.643.1
198717.310.45.015.432.8
198818.712.65.418.036.7
Source: OECD, Secretariat of the Export Credit Group.

The value of commitments includes principal and insured interest. The country categories correspond to the classification used by the OECD Consensus on Export Credits.

Includes unallocated credits, so total exceeds the sum of the categories.

Includes undisbursed lines of credit.

Source: OECD, Secretariat of the Export Credit Group.

The value of commitments includes principal and insured interest. The country categories correspond to the classification used by the OECD Consensus on Export Credits.

Includes unallocated credits, so total exceeds the sum of the categories.

Includes undisbursed lines of credit.

Chart 1.Commitments of Officially Supported Export Credits, 1981–881

(In billions of U.S. dollars)

Source: OECD.

1 Includes commitments to provide support for principal and future interest on export credits.

2 Officially supported export credits with a repayment period of over one year.

3 Officially supported export credits with a repayment period of over five years.

Most of the upturn in new commitments of medium- and long-term export credits between 1987 and 1988 is accounted for by the increase for low-income countries (30 percent), with middle-income countries recording little change and new commitments to industrial countries falling. Country-by-country data available on a global basis from the Berne Union6 indicate substantial variation among countries, with some countries in all regions receiving substantial new commitments. These data include commitments on both short-term and medium- and long-term transactions, and need to be interpreted with caution as flows to individual countries may be affected by the lumpy character of commitments on large projects. The annual flow of new commitments to 35 developing countries was equivalent to 10 percent (annual rate) of the end-1986 stock during the 27 months to end-September 1989. By and large, the countries that received the largest relative volume of new commitments were those that had managed to maintain orderly relations with their creditors. These countries are mainly those that have avoided rescheduling debts owed to official creditors during the 1980s, such as Algeria, China, the Republic of Hungary, India, Kenya, Saudi Arabia, Tunisia, and Venezuela. A few other countries, such as Chile, Mexico, Morocco, and Turkey, which have rescheduled in an orderly fashion, also received a large volume of commitments. For the most part, countries that have not maintained orderly relations, as shown by accumulating arrears under rescheduling agreements or on post-cutoff date debts, have received relatively few new commitments, and a high proportion of those appear to have been short term. A few such countries, such as Ecuador and Egypt, enjoyed a temporary surge of commitments following rescheduling agreements that later tapered off when they encountered new debt-servicing difficulties. A few countries that have maintained orderly relations with creditors, such as Colombia and Korea, received only small volumes of commitments; as agencies have largely been open for new business, the low volume reflects weak demand for cover, either because of low demand for external financing for imports or because lenders were prepared to extend credits without agency support.

Several agencies said that a significant part of the increase in their medium- and long-term business with developing countries was in the form of mixed credits.7 They noted that many of their exporters faced increasing competition from other suppliers who are supported by concessional financing, particularly in Asian markets, which has led to a proliferation of “matching” offers. The data available on mixed credits suggest that such credits are indeed on the upswing.8

Agencies also reported an increase in short-term business. The largest increases were to developing countries, reflecting both an increase in the volume of their imports and, possibly, greater use of such financing by countries that did not have access to medium-term credits. As may be seen from Chart 1 and Table 1, short-term exposure to developing countries increased by 16 percent in 1988, the first increase since 1985. Short-term cover for industrial countries also increased, partly in response to agency efforts to improve the quality of their portfolios through the use of whole turnover policies and more flexible pricing of insurance.

The capital flows associated with officially supported export credits are difficult to ascertain, as no data are available on disbursements or amortization, and BIS-OECD data on the stock of export credits suffer from methodological problems and major breaks in the series in 1985 and 1988.9 Moreover, no distinction is made between short-term and other credits. After allowing for the estimated impact of exchange rate changes and the break in the series, however, it appears that the stock of disbursed export credits was little changed in 1988, with declines in the stock of medium- and long-term credits offset by the increases in short-term business noted above.

An important related development has been the untied lending facility of the Export-Import Bank of Japan (EXIM Japan).10 Since 1987, such loans have been used to provide medium- and long-term financing in parallel with Fund arrangements and World Bank policy-based loans as part of Japan’s policy of recycling its financial resources to developing countries. In early 1989 a modification of the law governing the operations of EXIM Japan allowed the bank to support policies of privatization by making loans to recently privatized companies in developing countries.

Cover Policy

Cover policy—the terms and conditions under which export credit agencies are prepared to offer insurance for export credits or, in some cases, to provide financing themselves—determines the supply of officially supported export credits. Since the onset of the debt crisis, there has been a general trend toward more differentiated and nuanced responses to evidence of payments difficulties.11 The trend has continued in the last two years, with more agencies open for medium-term cover for more countries than at any time in the last several years, albeit often to a limited degree.

This trend has been reflected in a lesser reliance on quantitative controls on cover, which in their simplest form amount to an on-off decision. Instead there has been a growing emphasis on pricing mechanisms. This has mainly taken the form of relating the premium to the type and destination of the transaction, though it also includes mechanisms for varying the share of the risk borne by the exporters.

Despite the move to more flexible pricing, agencies continue to go off cover altogether in particularly difficult situations. Where the stance of policy, the country’s track record, and the external environment appeared to offer little prospect that a country would be in a position to service new loans on commercial terms, agencies would normally remain completely closed for medium- and long-term business or, possibly, open with very severe restrictions. Agencies would normally also go off cover if a country accumulated significant arrears on post-cutoff date loans (for countries that have had a Paris Club rescheduling) or on debt service in general for countries that have not.

Insurance Premiums

The trend toward a more differentiated premium structure that began with the 1983 crisis has continued. In recent years most agencies have come under domestic political pressure to put their operations on a more commercial footing. Accounting treatments have become more transparent and the magnitudes of cash flow deficits have become more apparent to both parliamentary supervisors and the public in general. Almost all agencies reported that in recent years they had raised premiums for cover for high-risk markets and lowered them for low-risk markets.12 At the same time, agencies have become increasingly flexible in the operation of their premium structures, adjusting them more quickly in response to current developments. This has permitted them to offer cover, at a price, for exports to countries facing difficult external payments prospects, while at the same time allowing them to compete more effectively for business in good markets.

Among major developments in this area in recent years was the U.S. Export-Import Bank’s adoption in 1987 of a differentiated premium structure in place of the previous uniform fee. This permitted the bank to attract business in the better markets, while enabling it to reopen cover for 20 countries for which it had previously been closed and to liberalize restrictions on cover for a further 33 countries. In early 1989 EID/MITI of Japan raised country premiums by 40 percent (on average), with the largest increases concentrated in the more difficult markets, and it, too, reopened cover for a number of countries. Most other agencies have also made greater use of flexible pricing, and as a result have been able to remain open for cover in circumstances in which they might otherwise have been closed for all medium- and long-term business.

Besides greater flexibility and differentiation in country premiums, there has also been greater differentiation among types of buyers. Most agencies now can adjust the premium to reflect the financial strength of individual buyers, and the quality of any supporting guarantees. As a result they are to some extent in a position to price each contract individually.

Only Hermes of Germany continues to charge the same premium for all countries. As a result, it operates more as an insurer of last resort for exports to high-risk markets.

Country and Transactions Limits

Limits on total exposure continue to be a feature of most agencies’ cover policy vis-à-vis at least some developing countries. Some agencies indicated that they retained these limits because they believed demand for cover was insufficiently responsive to its price within the range of feasible premiums. Increasingly, however, such limits are seen as a means of ensuring portfolio diversification. Most agencies reported that the ceilings operated flexibly; when exposure to a country approached the ceiling, a thorough review would be conducted. Such a review might confirm the ceiling; more often the ceiling would be raised, but the premium would be increased or other restrictions imposed. Agencies said that in practice ceilings were seldom binding on countries implementing Fund-supported adjustment programs.

A number of agencies also limit the size of individual transactions in riskier markets. This ensures some portfolio diversification for commercial risk and moderates the rate at which an exposure limit (if applicable) is utilized.

Other Instruments of Cover Policy

Other instruments of cover policy, such as reducing the percentage of cover13 and extending the period the exporter must wait before filing a claim, continue to be used, though to a lesser extent than in the past. A number of agencies indicated that reducing the percentage of cover could be a very effective device for limiting demand, but the growth of flexible premium differentiation has led some agencies to reduce their use of this instrument, employing it, if at all, only for the weakest markets. Most agencies reported that they made only limited use of an extended claims-waiting period to discourage demand for cover. Rather, this instrument was used in cases where payments tended to be late, but could be counted on to arrive eventually. A protracted waiting period in these cases prevented a proliferation of claims payments that would be quickly followed by recovery. Other agencies, however, commented that extending the waiting period could have a perverse effect on the promptness of payments; countries would realize that they could delay payments without agencies considering them to be in arrears, and thus this device could informally lengthen credit terms.

Cover for Short-Term Credits14

Most agencies said that they tried to remain open for cover for short-term business (including cover for sight transactions) even when they were closed for medium- and long-term cover. They cited three attractions of this type of business. First, countries that had lost access to other forms of financing would often continue to service these credits to preserve the flow of essential imports. Second, as the size of individual contracts was typically fairly small, it was comparatively easy for agencies to control their exposure. Third, except for a few particularly difficult cases, arrears on short-term claims have not been consolidated under Paris Club debt reschedulings.

Even more than with medium-term credit, agencies have responded to payments delays with a variety of techniques short of going off cover. Aside from increasing premiums or other adaptations of cover policy of the types described above, agencies might require additional security, such as (1) an irrevocable letter of credit from a domestic bank in the borrowing country, particularly one with secure access to foreign exchange overseas; (2) a guarantee from the government or central bank; and finally, short of going off cover altogether, (3) agencies might insist on a letter of credit confirmed by a bank in another country.

Some agencies covered by this study have recently begun to offer policies that enable commercial banks to insure some part of their business of providing confirmation of letters of credit. Agencies cover some proportion of the risks and insist on receiving a wide range of business, to avoid picking up a large part of banks’ least attractive risks. This allows agencies to promote exports through commercial banks’ extensive commercial contacts with exporters. Banks have found this type of business attractive, as insurance cover from an agency reduces the amount of provisioning required, which has been increasing for countries with debt-servicing problems.

Near-Term Prospects

Several agencies said that they expected the trend toward greater use of market-related instruments of cover policy to continue, with progressively less reliance being placed on “on/off’ decisions and other quantitative controls. The techniques of setting premiums will likely be refined as experience is gained with the new more market-oriented policies.

As regards the volume of new export credit commitments to developing countries, agencies thought that the sharp decline since the early 1980s had been reversed in 1988, but that it was too early to judge the strength of the upswing. But as agencies are now open for cover—at a price—for more countries than at any time since the early 1980s, the flow of new commitments will be responsive to the demand for new cover. With a protracted lag between commitments and actual disbursements on medium-term credits, however, agencies thought that it would be some time before the higher level of commitments was reflected in higher disbursements. The disbursed stock of medium- and long-term export credits may continue to fall over the near term, reflecting the previous low levels of new commitments. Agencies thought it likely, however, that this would be offset by a further increase in the volume of short-term business; they noted that the demand from developing countries had continued to be buoyant in the early part of 1989.

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