The World Bank’s global economic outlook for 2010 suggests that trade is recovering. Quarterly growth rates have moved into positive territory in recent months and world exports are expected to increase by 3.8% in 2010, rising to an increase of 6.9% in 2011.1 But the overall strength of the recovery and its durability will be dependent on the adequate supply of trade finance. And it is here that the official export credit agencies (ECAs) can play a leading role.
The financial crisis has severely reduced the availability of trade finance (the IMF recorded an 11% fall in 20092), brought about by the dual effects of insufficient credit supply and supply at prices temporarily too high to find favour with the export and import community. Essentially, this has reduced the volume of trade that can take place – even in the face of a spike in demand. This lag in the supply of trade finance is, of course, a classic element of the later phase of a recession, especially with respect to big-ticket capital goods exports. It is also a cue for the ECAs to step up their involvement in order to bridge that gap.
Bridging the Gap
Past recessions have, indeed, been a trigger for ECAs or other government-related or supported entities to step in and act as the insurer or guarantor of last resort. And this recession has been no different. However, while there have been efforts from the multilateral banks and agencies to stimulate the trade finance market, such as the Global Trade Liquidity Programme (GTLP), these are largely focused on short-term financing in emerging markets. With respect to longer-term support, however, exporters have had to rely on their national ECAs.
All major economies have an ECA linked directly or via a mandate to the national government. They can be private, state-owned or a mix of both, and work with a country’s corporates to offer insurance, financial guarantees or export financing on capital goods and equipment. Agency-backed financing entails bank-supplied loans to exporters being covered by the export credit agency on an insured or guaranteed basis. This gives the exporter a certainty of payment and the importer usually improved, or at least extended, payment terms.
Nordics Lead the Way
The Nordic ECAs have been among the global leaders in providing assistance to their exporting corporates, swiftly expanding risk appetites and providing new services. For example, the Swedish agency EKN decided in late 2008 to double its guarantees framework to the equivalent of US$4.4bn, leading to a surge in take-up from Swedish capital goods exporters.
Meanwhile, export-dependent Finland did not have the cushion of a devaluing currency enjoyed by non-eurozone economies such as Sweden and the UK, and Finnish exports were reported to have dropped by around 40% year-on-year in the first quarter of 2009. In response, Finnvera, the Finnish ECA, rapidly increased its limits on lending and introduced schemes to lend directly to ensure that established export projects remained on track.
Elsewhere, North American ECAs have also been stepping up. Canada’s federal government has implemented measures to allow its agency, EDC, to access higher levels of capital. This revised financing framework has seen a doubling of EDC’s authorised share capital limit to C$3bn (US$2.86bn) in order to give the government additional flexibility to increase investment when needed. Additionally, the agency has increased its contingent liability limit from C$30bn (US$28.6bn) to C$45bn (US$42.8bn), enhancing its ability to extend insurance and guarantees. The Export Import Bank (Ex-Im Bank) of the US has been similarly proactive, recently topping US$70bn in total credits outstanding – the highest level in the bank’s history.
Entering the Short-term Market
Yet the depth of this crisis has even brought about a hiatus in the short-term credit insurance market, which since the 1990s has been the exclusive preserve of the private sector. With private sector insurance capacity for emerging market exports severely constrained, ECAs have been under pressure to also provide short-term solutions for exporters.
To this end, the UK’s export credit agency, the Export Credit Guarantees Department (ECGD), has recently launched a letter of credit guarantee scheme to support UK exporters seeking short-term export finance. By sharing risk with the banks, ECGD has sought to increase the amount of short-term credit available at a time when the overall risk appetite of the trade finance market has not yet recovered to pre-crisis levels.
However, ECGD’s scheme does not cover exports to other EU countries, as to do so would require approval from the European Commission (EC). According to EC rules, ECAs cannot insure risks that private insurance companies are able to insure in a normal market situation.
Finnvera, however, was not to be perturbed. The Finnish ECA filed an application with the European Commission for temporary permission to guarantee short-term export transactions in EU member states and in other western industrialised countries, citing their ability to offset the market failure caused by the reduced capacity of private companies. Their efforts were vindicated and the EC granted them the right to do so until the end of 2010.
Are SMEs Receiving the Same Help?
Yet to assume that the answer to economic recovery lies solely in providing help to large corporations involved in big-ticket exports of capital goods would be unwise. Small and medium-sized enterprises (SMEs) are equally important as contributors to exports and providers of employment opportunities. Indeed, it is widely recognised that SMEs have been disproportionately affected by the plummeting external demand and increasing default risks in many developed country markets. In this context, taking measures to facilitate SMEs’ access to trade finance is arguably even more of a pressing concern.
This fact has not gone unnoticed. Finnvera, for example, has introduced financing products to assist smaller enterprises. These instruments – a counter-cyclical loan and a counter-cyclical guarantee – are designed for corporates that can prove ongoing profitability but are experiencing temporary difficulties due to the current climate.
Furthermore, Ex-Im Bank has raised the upper limit of its small business multi-buyer export credit insurance policy (from US$5m to US$7m in annual export credit sales) to increase corporates’ accessibility to credit. This has been well-received, setting a record of US$4.36bn in authorisations for small business exporters in 2009.
In addition, a number of other initiatives to strengthen support for SMEs have been launched by Ex-Im Bank, including opening up its working capital guarantee programme to indirect US exporters. Companies that produce goods or services that are sold to US companies and subsequently exported are now eligible to apply for working capital loans guaranteed by the bank.
Flexibility is Key
The speed with which the downturn struck demonstrates the need for export credit agencies to be nimble enough to quickly deliver benefits to their domestic corporates under changing market conditions. If they can adjust to these needs, 2010 might just be their year.
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