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Turning uncertainties into opportunities
02CRE17022_Wave3_AD_Port_297x210_UK.indd 1 31/05/2018 16:43 Berne Union 2020
About ABOUT
Berne Union Publications Production Credits The Berne Union publishes a regular digital industry newsletter, and print periodicals in the Executive editor Spring and Autumn, as well as interim reports on Paul Heaney, Berne Union industry research and statistics. Contributing editor ‘The BUlletin’ is a bi-monthly newsletter digest Katharine Morton, TXF of news, views and statistics providing a window into the industry for business partners across the Production editor world of trade and export finance. John Smith, TXF Our print periodicals curate thought pieces and high-level commentary from industry Content planning leaders, presented alongside the Berne Union’s Vinco David, Berne Union data on new commitments, exposure, claims Paul Heaney, Berne Union and recoveries in export credit and investment Katharine Morton, TXF insurance. Dan Sheriff, TXF
Cover design About the Berne Union Constantina Christophide, TXF The International Union of Credit and Investment Insurers (Berne Union) is an international not-for- For advertising enquiries profit trade association, representing the global please contact export credit and investment insurance industry. Alex Sheriff, Senior Our mission is to actively facilitate cross-border Relationship Manager trade by supporting international acceptance [email protected] of sound principles in export credit and foreign investment. This is achieved by providing a forum for professional exchange, sharing of expertise and networking among members, as well as through Copyright © 2020 Berne Union. engagement in collaborative projects with other All rights reserved. No part of this publication may be reproduced, stakeholders from across the wider trade finance stored, or transmitted in any form industry. or by any medium without the prior Collectively, our members provide payment permission of the Berne Union. The views and opinions expressed risk protection for approximately 13% of world by independent authors and annual cross-border trade in goods and services contributors to this publication, (amounting to $2.5 trillion annually) and since the including advertisements, are the sole responsibility of the authors and do start of the global financial crisis in 2008, have not represent the views or opinions paid out more than $60 billion in claims. of the Berne Union.
International Union of Credit & Investment Insurers 1st Floor Thanet House 231-232 The Strand London WC2R 1DA United Kingdom
Tel: +44 (0)20 7841 1110 Fax: +44 (0)20 7430 0375 1 www.berneunion.org Berne Union 2020
Contents
1 Introduction Berne Union Who’s Who in 2020/21 6 Perspectives from the ECA Committee 22 Elected officials, secretariat and committees Robert Suter, ECA Committee Chair and Head of International Relations & Business Policy, SERV and The Presidents’ interview: Chain Reaction 13 Irene Gambelli, ECA Committee Vice Chair and Senior Michal Ron, Chief International Officer, SACE and 44th Advisor, International Relations, SACE President, Berne Union and Beatriz Reguero, COO State Account Business, CESCE and 43rd President, Berne Perspectives from the MLT Committee 27 Union Dominique Meessen, MLT Committee Chair and Head of Reinsurance, CREDENDO and Andrew Underwood, MLT Berne Union mission: Fast forward 2020 16 Committee Vice Chair and Chief Underwriting Officer – Vinco David, Secretary General, Berne Union Specialty, UK and Lloyd’s, AXA XL
Perspectives from the Short Term Committee 19 Perspectives from the Prague Club Committee 29 Julian Hudson, ST Committee Chair and Global Head Imaad Al-Harthy, PCC Committee Chair and General of Trade Credit, CHUBB and Arturs Karlsons, ST Manager Sales, CREDIT OMAN and Martina Jus, Committee Manager, Berne Union PCC Committee Vice Chair and Executive Director – International Affairs, Export Credit Insurance, EU Funds and Financial Instruments, HBOR
Berne Union data snapshot 2020H1 32
2 Mega trends Boost supply chain resilience through advanced TRADE capabilities 47 Stefan Schrauf, Operations and Supply Chain Europe Mega trends interrupted? 38 Partner, PwC Germany David Neckar, Client Director, Willis Towers Watson Financial Solutions; Beatriz Reguero, 43rd Berne Union Top geopolitics risks for 2021: Expect unique President and COO, State Account, CESCE; Gabriel Buck, turbulence 51 Managing Director, GKB Ventures; Jean-François Lambert, Dr Nicholas Redman, Director of Analysis, Oxford Founder and Managing Partner, Lambert Commodities; Analytica Rudolf Putz, Deputy Director Financial Institutions – Head Trade Facilitation Programme (TFP), EBRD WTO on the enhanced need for trade finance cooperation 54 The 2021 outlook: Climbing out of a deep hole 43 Marc Auboin, Counsellor at WTO Glen Hodgson, Chief Economist, International Financial Consulting Risk outlook 2021 56 John Lorié, Chief Economist, Atradius Credit Insurance Trade policy under the Biden administration 45 and Alexis Garatti, Head of Robert Kahn, Director of Global Strategy and Global Macroeconomics, Euler Hermes Macro, Eurasia Group
3 Market trends COVID-19 impact on the private credit insurance market 82 COVID-19 IMPACT Fabrizio Mazza, Managing Director, Global Public Agency Leader, Credit Specialties, Marsh JLT Specialty The COVID-19 stress test: Impact and response of and Abbey Sturrock, Senior Vice President, Deputy the export credit insurance industry 63 Global Public Agency Leader, Credit Specialties, Marsh Paul Heaney, Associate Director, Berne Union JLT Specialty
Credit insurance guarantee arrangements during Early lessons from managing the crisis: The need and the pandemic 71 feasibility of rethinking the public versus private model 87 Robert Nijhout, Executive Director, ICISA Jérôme Pezé, CEO and Founder, Tinubu Square
Trends in export credit insurance during times of crisis 73 ICIEC works its way through the pandemic 90 Jonathan Skovbro Steenberg, Economic Research Oussama Kaissi, CEO, ICIEC Analyst, Berne Union Managing credit risk post COVID-19: Remember the Crisis and recovery mode: How is the CPRI market five-‘C’s 93 2 responding to COVID-19? 78 Lillian Labbat, Global Head Credit & Political Risk, Zurich Sian Aspinall, Managing Director, BPL Global Insurance Berne Union 2020 CONTENTS 3 Market trends continued
Is COVID-19 the final blow to globalisation? 95 Corporate views: Staying match fit 114 Jean-François Lambert, Founder and Managing Partner, Andreas Back, Senior Manager, Financial Services, Lambert Commodities Wärtsilä
Counting the cost in the medium term CPRI market 97 Corporate views: Credit insurers, your exporters Julian Spiegel, Senior Reinsurance Underwriter, Credit, need you 116 Surety and Political Risk, Navigators, a brand of The David Avram, Trade & Export Finance Director at Fives Hartford
REGIONS CLAIMS Export Credit Developments at the OECD 118 Berne Union claims perspective 100 Silvia Gavorníková, Director International Relations, Laszlo Varnai, Associate Director, Berne Union EXIMBANKA SR and Chairperson of the ECG
Claims and recoveries in a disrupted market 103 A new deal for the OECD Arrangement? 120 David Chadwick, Partner, Kennedys and Naomi Vary, Pekka Karkovirta, Chairman, Participants to the Partner, RPC Arrangement on Officially Supported Export Credits and Vice President, International Relations, Finnvera How is COVID-19 affecting capital structures? 105 By Valerio Ranciaro, Director General, SACE SRV Developments in export finance in Latin America 122 Pedro Carriço, Founding partner of T|X|P Partners and ECA, Bureau of Experts FUTURE DEVELOPMENTS Building on the halal brand with ECI Islamic 125 Pandemic recovery calls for public/private Massimo Falcioni, CEO and Zishan Iqbal, Director of collaboration 107 Murabaha Solutions, Etihad Credit Insurance (ECI) Dan Riordan, President and Chief Underwriting Officer for Political Risk, Credit and Bond at AXA XL Venezuela: A Brief Update 127 David H Anderson, Principal, Anderson Risk Consultants Setting long term positive strategies for ECAs 111 Valentino Gallo, Founding Partner, Javalyn Partners Buyer information in Africa 130 Vinco David, Secretary General, Berne Union
4 Future trends
DIGITAL TRADE SUSTAINABILITY
Time to double down on trade digitisation? On Working towards a commitment to net zero 153 counting virtual beans 134 Astrid Bronswijk (Dutch Ministry of Finance), Ranya Katharine Morton, Head of Trade, Treasury & Risk, TXF Gabriel (EDC), Thomas Hale (Oxford University) and Andreas Klasen (Offenburg University) Digitalisation in trade: The situation report 138 John Bugeja, Managing Director at Trade Advisory Sustainability: A key part of our due diligence work 158 Network Kamil Zabielski, Head of Sustainability at GIEK
ECA support for software exports: An analysis 142 Harnessing Asia’s offshore winds 160 Didem Erdoğan, Project Loans and Trade Finance MeiYean Lim, Senior Underwriter for AXA XL’s Global Specialist at Turk Exim Political Risk
Legal perspectives on blockchain technologies for Does the Paris Agreement prevent EU ECAs from financing trade 146 supporting oil and gas projects? 163 Michael Morris, Partner, Clyde & Co, Dubai and Henri d’Ambrières, HDA Conseil Emma Fidler, Associate, Trade and Corporate Finance, Clyde & Co Blended insurance programmes in difficult times 170 Thomas Mahl and Franz Karmann, Managing Directors, Machine Learning explored: Can ECAs benefit? 149 SFR consulting Dr Simone Krummaker, Senior Lecturer at the Faculty of Actuarial Science and Insurance at Cass Business School and Professor Dr Mathias Bärtl at Offenberg University
5 Member Directory Berne Union Members 173 3
Berne Union 2020
Introduction1 Berne Union 2020
The Berne Union: Who’s Who in 2020/21
The Berne Union is led by the President, Vice President and Management Committee. The Management Committee meet at least four times per year to discuss the strategic direction of the association and provide guidance on operational issues.
The day to day business of the Berne Union is managed by a professional Secretariat, based in London, under the leadership of the Secretary General, Vinco David.
The Management Committee consists of:
n President n Vice President
n 4 Committee Chairs n 13 Member Organisations
The 13 Member Organisations are held as institutional positions. These are held by the two largest member organisations from each of the Short Term, Medium/Long Term and Investment Committees. The remaining seven members are put forward from among all four Committees on a voluntary, rotating, basis, also serving for two year terms.
Management Committee 2020/22 Institutional Members:
n AXA XL President: Michal Ron (SACE) n CREDENDO n ECGC Vice President: Christina Westholm-Schröder n EH GERMANY (SOVEREIGN) n EXIAR
Short Term Committee Chair: n EXIMBANKA SR Julian Hudson (CHUBB) n ICIEC
ECA Committee Chair: n KSURE Robert Suter (SERV) n MIGA
MLT Committee Chair: n PwC Dominique Meessen (CREDENDO) n SINOSURE
Prague Club Committee Chair: n TURK EXIM Imaad Al Harthy (CREDIT OMAN) n US EXIM
6 Berne Union 2020 INTRODUCTION
Elected Officials
PRESIDENT VICE PRESIDENT Michal Ron Christina Westholm-Schröder SACE Italy | Chief International Officer Sovereign Bermuda | Senior Vice President & Chief Underwriter With extensive experience in structured finance and Christina Westholm- export credit, Michal is the Schroder is Sovereign’s Chief Chief International Officer of Underwriter and Senior Vice SACE, holding responsibility President, with more than 30 for the Group’s International years of experience in the Relations, Overseas Network political risk insurance and Political Credit Recovery. industry. She is responsible She manages SACE’s active participation for all aspects of Sovereign’s transactional within the OECD and the EU, as well as the underwriting. Christina also leads Sovereign’s relationship with the peer group. Over the successful cooperation with multilaterals and past 10 years, she has steered the expansion ECAs. of SACE’s overseas network, supervising Prior to joining Sovereign, she was a international underwriting generated by the senior officer at the Multilateral Investment 12 offices abroad. Her responsibilities also Guarantee Agency (MIGA) in Washington, include all activities related to the Paris Club DC. She joined MIGA as one of the first and other political recoveries. employees and worked in several managerial From 2017 to September 2020 Michal capacities before assuming the role of Head served as the first Secretary General of the of Reinsurance. In her earlier career, she International Working Group (IWG). She is worked as a financial analyst and as a broker currently the Vice Chairman of the Board in Sweden and at Bank of America in New of Directors of the African Trade Insurance York. Christina has been active in the Berne Agency (ATI). Union representing Sovereign for a number Prior to working at SACE, she spent 10 of years. years at Mediocredito Centrale (Head of Oil, She has served on the BU’s Management Gas and Petrochemicals, Structured Finance) Committee since 2014, and previously held and seven years with HSBC. With a Business the positions as Chair of the Investment Studies, Risk Management and Finance BSc Committee and, before that, Chair of the Honours degree from City University Business Technical Panel. She has further served on School (London, renamed CAAS), Michal various working groups, including the Data has worked in investment banking in several and Outreach Task Forces. In addition to her European countries and has been invited to BU activities, Christina is also an Alternate speak in numerous conferences worldwide. Director on the Board of ATI (the African Trade Insurance Agency). Christina has a degree in international business from Stockholm School of Economics and Business Administration and an MBA in finance from New York University.
7 Berne Union 2020
ST COMMITTEE CHAIR MLT COMMITTEE CHAIR Julian Hudson Dominique Meessen CHUBB United Kingdom | Global Head of CREDENDO Belgium | Head of Reinsurance Trade Credit Dominique spent 25 years in Julian has 24 years’ Credendo ECA’s experience in political risk Underwriting and Account and credit insurance. He Management department commenced his career as an where he occupied different underwriter with Trade positions, including Indemnity (now Euler Group) management roles. in London before moving to In September 2018, Dominique joined Asia in 1999 to assume a regional broking Credendo’s Reinsurance department. He role with Jardine Lloyd Thompson in both is currently Head of Reinsurance and is Singapore and Hong Kong. responsible for both Outward and Inward Julian relocated to Singapore in January reinsurance activities in Credendo. Dominique 2007 where he joined ACE (now Chubb) has extensive experience in Credit and Political as the Regional Manager for Political Risk Risk insurance from an ECA perspective but & Credit business and established the Asia also from a private player perspective thanks practice. In July 2014, he moved back to to Credendo market activities. London in the capacity of Chief Development He has attended Berne Union meetings Officer, Political Risk & Credit within Chubb for almost 15 years. He was Chair of the Global Markets where, in addition to day- Technical Panel Meeting of the Investment to-day underwriting responsibilities, he was Insurance Committee in 2007 and 2008. involved with the promotion of new political Before joining Credendo, Dominique briefly risk and credit insurance products, the worked in a business law firm in Brussels. establishment of new overseas offices and Dominique holds a Master’s Degree in Law capabilities, and the provision of solutions for (LL.M.) from the Université Catholique de multinational companies. In November 2015, Louvain (Belgium). he was made Global Head of Trade Credit. Julian’s experience ranges from short-term trade transactions to medium-term specialty PC COMMITTEE CHAIR credit through to sovereign and sub-sovereign Imaad Al-Harthy non-payment risk, and protecting debt and Credit Oman | General Manager Sales equity flows into a variety of projects. Imaad AL-HARTHY is the General Manager Sales at ECA COMMITTEE CHAIR Oman’s national ECA: Credit Robert Suter Oman SAOC with 24 years SERV Switzerland | Head of International of experience in Relations & Business Policy underwriting, claims, After completing a Master’s recoveries, and various degree in International management positions. After completing a Affairs & Governance from BA (Hons) in Business Studies from the University of St. Gallen, Nottingham Trent University, UK in July 1995, Switzerland, Robert Suter Imaad joined Credit Oman and has been part joined the International of its development and evolution. He has Relations team at SERV and been involved with the Prague Club since has lead this growing team since 2014. It now 2001 and was part of the taskforce that includes International & Government concluded the integration of PCC with Berne Relations, Business Policy, Sustainability Union in 2016. Analysis and Bank & Country Risk Analysis. He has participated in international negotiations on Official Export Credit Support at the OECD and the IWG as a member of the Swiss delegation and represented SERV at various international conferences and forums, including the Berne 8 Union, for many years. Berne Union 2020
ST COMMITTEE VICE CHAIR has been an active member of Berne Union’s INTRODUCTION Sunil Joshi focus group on SMEs from 2014 to 2019 and ECGC India | Executive Director is currently involved in ongoing initiatives on data and digitalisation. Sunil joined ECGC in 1988 Before joining SACE, Irene worked six and over the past 32 years years for a business law firm in Rome. She has had comprehensive holds a Masters’ degree in Political Sciences experience in both the short from the University of Rome, Italy, and term and medium- and long a postgraduate certificate in Advanced term business of ECGC. Marketing and Business Communication from He has led client ISM Rome. interaction teams on the ground and has also spearheaded design and development of product, policy, and procedures of both MLT COMMITTEE VICE CHAIR its short term and medium- and long term Andrew Underwood business. He has worked extensively in claims AXA XL | Chief Underwriting Officer – arising from export credit insurance cover Specialty, UK and Lloyd’s extended to banks, which also constitutes the largest segment of ECGC’s short term Andrew Underwood is Chief business. Underwriting Officer, As head of the International Relations Speciality Insurance, UK and Department he has handled ECGC’s Lloyds at AXA XL. Before interactions at bilateral and multilateral joining AXA XL, Andrew was forums. He has been a panellist at several a partner at Hiscox, holding international conferences and has published progressively more senior articles on international trade and credit roles in London and New York. He has 30 insurance. Sunil holds a Masters’ Degree in years’ experience in specialty insurance and Physics. reinsurance, namely political risk, trade credit and bond, crisis management, cyber, media and entertainment, and mergers & ECA COMMITTEE VICE CHAIR acquisitions. Irene Gambelli He is ACII qualified, a past Chair of the SACE Italy| Senior Advisor for International Lloyd’s Market Association Political Risks, Relations Credit and Financial Contingencies Panel and the current chair of the International Irene Gambelli is an Underwriting Association Political Risk International Relations Insurance Committee. He is also a regular specialist at SACE, the Italian speaker at industry conferences and is a Export Credit Agency, passionate contributor on regulatory matters, looking after company’s particularly those affecting Insurers and relationship with foreign Financial Institutions. He first began working ECAs, MDBs and other with the Berne Union in 2008. international institutions, and representing Italy’s position within the OECD and EU, including negotiations and working groups on policy-related issues and topics that steer export credit business. She has been with SACE since 2006, spending three years in the underwriting area and additional four years coordinating the business strategy and origination activities of SACE’s overseas network in major emerging and developed economies. Within the Berne Union, from 2014 to 2016, she assisted the former President and Vice President in developing key reforms and initiatives aimed at fostering organisational improvement and visibility worldwide. She 9 Berne Union 2020
PC COMMITTEE VICE CHAIR of Finance. He holds an MA in political Martina Jus science and international relations and a HBOR Croatia | Executive Director – BA in economics and Italian language and International Affairs, Export Credit Insurance, literature from the Free Reformed University EU Funds and Financial Instruments of Amsterdam.
Martina Jus joined the Croatian Bank for ASSOCIATE DIRECTOR Reconstruction and Laszlo Varnai Development (HBOR) in Coordination of the MLT Committee 2005 as a legal counsel, following her admission to Laszlo joined the Secretariat the State Bar. She has in June 2015, to advise it on worked in several capacities at HBOR since legal matters and to support then, including a management board the Committees (primarily position. Currently she is the Head of Division the ST Committee) and for International Affairs, Export Credit Specialist Meetings. Since Insurance, EU Funds and Financial April 2017, Laszlo has been Instruments. She has been particularly supporting the MLT Committee and the data invested in the development of new products development project. and positioning of HBOR on the international He gained focused experience in policy market. Martina also served as a member of analysis as he worked for EXIM Hungary the Management Board of the Croatian for more than five years, leading the ECA’s Agency for Small and Medium Enterprises international relations (OECD, EU and (HAMAG) from 2012 to 2014. Martina holds a Berne Union) and ensuring compliance with Master’s Degree in Law from the University WTO, OECD and EU regulations, as well as of Zagreb (Croatia). international sanctions. Laszlo graduated in law from Peter Pazmany University, holds a DipHE in Law of England and Wales and the European Union from the University of Cambridge, and Secretariat a diploma of economic diplomacy from the Károli Gáspár University in Hungary. SECRETARY GENERAL Vinco David Overall leadership of the Secretariat ASSOCIATE DIRECTOR Paul Heaney Vinco David was appointed Strategic Communications Berne Union Secretary General in March 2017. Prior Paul joined the Secretariat in to this, he has served as a July 2016 and manages all Management Committee aspects of strategic Member and as the Chair of communications and the Investment Insurance outreach. He is responsible Committee. A Dutch national, he has over 30 for developing the key years’ experience in various aspects of credit messages of the association and investment insurance, including more and building relationships with industry than 20 with leading international credit partners and media, as well as overseeing insurer Atradius, in diverse management research and publications. roles across strategy, product development, He has almost a decade of experience economic research, project finance, working in communications, media and marketing, underwriting and claims. publishing relating to the trade finance and Before joining the Berne Union as export credit insurance industry. Secretary General, Vinco David served as He holds a Masters in Philosophy from a Management Team Member of Atradius King’s College London, and a BA from Trinity Dutch State Business, the Export Credit College, Dublin. Agency of the Netherlands. Prior to this he has held positions at the Berne Union 10 Secretariat and the Netherlands Ministry Berne Union 2020
EVENT LOGISTICS AND OFFICE MANAGER ST COMMITTEE MANAGER INTRODUCTION Nicole Cherry Artūrs Karlsons Logistics, Business Administration and Coordination of the ST Committee Member Support Arturs has over 10 years of Nicole joined the Secretariat experience in the field of in July 2016 and is export credit insurance, responsible for all meeting mainly with a focus on short and office logistics. In this term business. role she works closely with Originally from Latvia, he Berne Union member hosts previously led the export and external suppliers, credit insurance/guarantee division of the coordinating preparation for General and Latvian ECA, ALTUM. Prior to this he worked Specialist Meetings across the world. She at the Ministry of Economics of Latvia with also manages office operations, finance and the WTO and export promotion matters accounts and is the first port of call for all and was a project lead for the launch of the member support and assistance. export guarantee programme provided by Nicole has a degree from Roehampton the Latvian ECA. University and has spent six years working He holds degrees in Finance and Political in Tanzania on various charity and not-for- Science from BA School of Business profit projects as well as gaining corporate and Finance and the University of Latvia experience working as the assistant to the respectively. CEO of East Africa’s largest company.
ECONOMIC RESEARCH ANALYST ASSOCIATE DIRECTOR Jonathan Skovbro Steenberg Eve Hall Research and Economic Analysis Coordination of the Prague Club Committee Jonathan joined the Eve joined the Berne Union Secretariat in November Secretariat team in October 2020 with the primary 2017 with responsibility for responsibility to produce managing the Prague Club research-based industry Committee, a dedicated output for members and forum for credit insurance other stakeholders. companies from new and He has previously worked as an Economist emerging markets. for the Danish Resolution Authority for She has nearly 20 years of experience in financial institutions as well as holding corporate finance, business development and student positions in the Ministry of Finance in investor relations. Eve held several positions Denmark and the Trade Council in the Danish at various GE media businesses in New York, Embassy in Malaysia. Hong Kong and London. More recently, she Jonathan holds a BA and an MA delivered management consulting projects in Economics from the University of for both young and mature organisations. Copenhagen, while also having attended Eve holds an MBA in Finance from LSE, Peking University, KU Leuven and Nova Bentley Graduate School of Business in School of Business and Finance through his Massachusetts, US. studies.
11 Berne Union 2020
Berne Union Committees
The Berne Union’s committees are the fundamental organisational structures through which Members join and participate in the activities of the association. They are also the primary structure for coordinating interaction and information exchange between Members (including in relation to business data).
In October 2020 Berne Union Members voted to adjust the structure of the Committees to better reflect the underlying nature of the export credit and investment insurance industry. Specifically, the adjustment recognises the substantial participation of private insurance in medium and long-term export credit business, through the creation of a new ‘MLT’ committee, open to the participation of all insurers of MLT credit and political risks who satisfy the relevant business thresholds.
There are four committees:
ST: Short Term Committee ECA: Export Credit Agency The Short Term (ST) Committee engages Committee on all matters relating to short term export The Export Credit Agency (ECA) Committee credit insurance: i.e. insurance of cross- engages on all matters relating to national border credit and political risks with a export credit support provided by official prepayment term of 12 months or less. ECAs, including business strategy, policy, Participants include public and private international cooperation and all other insurers. matters falling under ECAs’ mandates. The ST Committee is led by the Chair Participation is limited to institutions Julian Hudson (CHUBB) and Vice Chair holding mandates from their governments Sunil Joshi (ECGC India) with the support of for credit insurance activities in support of Arturs Karlsons at the Secretariat. national exports. The ECA Committee is led by the Chair Robert Suter (SERV Switzerland) and Vice MLT: Medium/Long-Term Committee Chair Irene Gambelli (SACE Italy). The Medium/Long-Term (MLT) Committee engages on all matters relating to MLT export credit, political risk (PRI) and investment PC: Prague Club Committee insurance. This includes insurance cover for The Prague Club (PC) Committee addresses exports with repayment terms greater than the particular issues faced by smaller scale 12 months against commercial and political or newly established members of the risks, and foreign investments (debt and international export credit and investment equity) against political risk. insurance community, who often have a local Participants include public and private or regional market focus. insurers. It provides Members with information The MLT Committee is led by the Chair and education resources and assists nascent Dominique Meessen (CREDENDO Belgium) export credit organisations with sourcing and Vice Chair Andrew Underwood (AXA technical support as they proceed through XL) with the support of Laszlo Varnai at the their establishment and development stage. Secretariat. Participants include a diverse mix of mainly public agencies as well as newly establishing ECAs. The PC Committee is led by the Chair Imaad Al-Harthy (CREDIT OMAN) and Vice Chair Martina Jus (HBOR Croatia) with the 12 support of Eve Hall at the Secretariat. Berne Union 2020
The Presidents’ INTRODUCTION interview: Chain reaction
The US elections were not the only Presidential event of 2020 and on 23 October we welcomed SACE’s Michal Ron as the 44th President of the Berne Union, taking over the position from Beatriz Reguero of CESCE, who has served since October 2018.
In a year where everything has changed, we asked both Beatriz and Michal to share their views and hopes on where the industry and the Berne Union is heading.
Beatriz, when you began your term as President two years ago you can’t have envisaged something like ‘the year 2020’. How do you think the industry has coped with such an unforeseen and catastrophic situation? Beatriz Reguero (BR): COVID-19 has had a profound impact across the entire globe and affected almost every aspect of private Beatriz Reguero Michal Ron life, public policy, business and trade. While the ultimate economic cost remains to be seen, there is little doubt that the effects of this crisis will continue to challenge all our Our industry is well accustomed to countries for at least the next few years. managing uncertainty. In fact, this is The crisis has severely affected the really the essence of our business. On this business of many of our clients; constrictions occasion, however, we are facing more than on trade and international travel have uncertainty. There will be ‘reconstruction’ impacted everything from just-in-time supply efforts in many countries and we can expect chains to long term projects and pipelines. to see different trade policy reactions. Even so, the industry reacted quickly and has Here, we must be vigilant against further fared remarkably well, managing to avoid imbalances in the international playing field. significant losses in the first phase while protecting clients and partners, from SMEs to And Michal, you now hold the reins of the large corporates and banks. Berne Union. What do you think will be (or ECAs and credit insurers are fortified by should be) the priorities of our industry inherently robust governance standards in during the recovery period, in order to underwriting, product offering and pricing ‘build back better’ to a more stable post- which allow for swift adjustments under COVID world? changing circumstances such as these. Michal Ron (MR): I believe that one Moreover, a sustained period of positive lesson to be learned from this crisis is that cashflows have prepared our systems and governments, businesses and financial companies to withstand potential claims and institutions acting alone cannot fully indemnifications, should the situation change and adequately address systemic global as the crisis continues with second and third challenges. The post-COVID recovery must surges already occurring in several countries necessarily pass through a more integrated 13 around the globe. international cooperation and it will be Berne Union 2020
critical to prioritise new and more sustainable impression is that the increased levels of ways of doing business, in order to reduce cooperation and engagement of the last inequalities and mitigate the negative effects years have helped to enhance the collective of the deregulatory race to the bottom which profile of our industry and appeal of export has fed protectionism and other ‘lose-lose’ credit insurance as an instrument our clients economic strategies over recent years. and governments turn to in these times. Export credit agencies were more involved in the immediate response to the Michal, how do you envisage the crisis, mainly providing support to domestic industry will adapt to this retreat from companies (especially SMEs) in accessing multilateralism and what role can the Berne emergency liquidity. In future months, we will Union play? further enhance cooperation between public MR: Due to the current protectionist and private sectors, and create institutional tendencies and international political platforms for sharing information, common instability, the risk of a return to market initiatives and projects of mutual interest. fragmentation is palpable. During my three- We will necessarily invest in those aspects year experience as Secretary General of that proved to be the best tools to confront the International Working Group on Export the current difficult environment, such as Credits (IWG)1, I personally witnessed how digitalisation, innovation and sustainable political tensions may lead to the polarisation business practices. of the debate and jeopardise efforts to focus In parallel, and in order to regain an on common goals. equilibrium between ECAs and private sector In this regard, the Berne Union remains insurers and lenders, we will need to ensure an extraordinary example of multilateralism a gradual reduction of implicit and explicit and inclusiveness, in sharp contrast to subsidies that were temporarily introduced the surrounding geopolitical context. to deal with the emergency – but that may Berne Union Members constantly engage impact negatively on global trade in the in sharing information, experiences and longer term. practices and this remains a unique and precious feature to be preserved and further COVID-19 is of course not the only challenge encouraged. Discussions within our technical we are facing at present. Beatriz, which Committees can positively contribute of the developments you have observed to the improvement of the global level during your Presidency do you think will playing field and the abandonment of the have the most significant long-term impact outdated distinction between ‘advanced’ and on our industry? ‘emerging’ economies. In addition, taking BR: The forces which will do most to into consideration the viewpoint of recipient shape our industry in the coming years countries (i.e. importers), may also help in have been evident for some time now: better reflecting the present economic reality. banking regulation, technological change, environmental sustainability, and political The Berne Union itself has changed quite ideology in respect of globalisation. Added considerably during the past couple of to this, the last few years have witnessed years. What are your proudest achievements an increase in geopolitical tensions, and a during your term Beatriz? And what are surge of local conflicts. The COVID-19 crisis your plans for the future, Michal? will amplify some of these trends but will BR: The majority of goals during my probably not change their fundamental term have related to the consolidation of nature. various developments already started by my From the perspective of an ECA, this predecessor: improvement of data quality crisis has nicely demonstrated that past and reporting, and advancing our outreach experience can really help us prepare better efforts, among others. In these areas, we have for the future. Lessons learned from the made fantastic progress and I am grateful for previous crisis have ensured that we were colleagues in the Task Forces and Management ready to quickly deploy a full set of support Committee whose efforts have helped to instruments and financing – tools which have drive this work. Beyond this, I would also proven crucial for our clients in protecting like to highlight as a particularly remarkable their liquidity even as the first shocks of this achievement, the restructuring of the Berne crisis were being felt. As regards the Berne Union Committees, completed just last month. 14 Union, my personal – and professional – The Berne Union has always been unique Berne Union 2020
dialogue between the Members, as well INTRODUCTION Michal Ron: Export Credit as broadening our external relations with and Investment Insurance international financial institutions and formal/ informal groups of increasing relevance for remains one of the most our industry. powerful tools to promote cross-border trade and A final question for Michal. As you begin your presidency in a rather tumultuous economic development, environment, what do you see as the especially in a difficult defining conditions of the export credit and investment insurance industry today, which environment, since credit will continue to make the industry relevant insurance products have a in the years to come? strong stabilising function. MR: Export Credit and Investment Insurance remains one of the most powerful tools to promote cross-border trade and in its heterogeneity between public and economic development, especially in a private sector insurers of both ST and MLT difficult environment, since credit insurance risks. While years ago there was almost products have a strong stabilising function. no overlap between the activities of the At a time when the global economy and different groups of members, over time, political scenarios are characterised by it has become increasingly obvious that increasing volatility and uncertainty, credit the divide within our committees between insurance providers continue to evolve and public and private aspects of medium and rapidly adapt their strategies, products and long term business was inefficient, and lead services. The use of insurance is no longer to a loss of information. The new structure limited to the mitigation of risks, but rather provides a formal forum for broad discussion a more ‘rounded’ vehicle used to support among private and public insurers on all global expansion, optimise debt financing common issues, while maintaining a separate and optimise stakeholder value. exchange for ECAs on issues specific to their New patterns for international competition government mandates. go beyond the traditional ECAs’ rules on This decision is the result of an open and ‘national versus foreign content’ and these rich discussion on the strategy of the Berne have triggered a growing urge to seek Union and I am particularly proud that it has new risk-sharing models with other market become a reality during my mandate. players. Still, perhaps my proudest achievement This includes increasing cooperation, of all – if we can call it that – is the great co-insurance and reinsurance agreements number of Berne Union colleagues I have between ECAs in different countries, as well worked alongside these past two years who I as between ECAs and private market players can now call friends. or multilateral institutions. It is evident to MR: My Vice President, Christina many of us that there is a well-earned and Westholm Schroder and I have outlined justifiable niche for ECAs, successfully together a Presidential Platform which stepping up to complement the prevailing envisages several ambitious goals. capacity from the private sector. A closer I am particularly fond of two objectives. partnership between ECAs and private First, fostering multilateralism and leveraging sector providers remains, in my opinion, the diversity of the Berne Union membership essential in order to ensure that every avenue group. It is crucial to identify together of potential support is being explored. n innovative solutions aimed at supporting exporters and financing banks in the Note current difficult economic context. Second, 1 Established in 2012 subsequent to a joint initiative improving sustainability in our business of the US and China, the IWG is an international practices. Export credit support will no doubt forum with the aim of negotiating a set of common rules on Export Credits to be shared by both OECD play a critical role in encouraging innovation and emerging countries such as Brazil, China, India, in environmentally friendly technologies Russia and South Africa, which are not part of the and facilitating the transition towards a OECD Arrangement. Eighteen countries (including the European Union which represents 28 member more climate-neutral global economy. My states) participate in the IWG with delegates from contribution will entail promoting open their Ministries, ECAs and Eximbanks. 15 Berne Union 2020
The Berne Union: Fast forward 2020
By Vinco David, Secretary General, Berne Union
Now that news about the impact of and topics such as claims response to the COVID-19 pandemic is hitting and recoveries, the headlines so frequently, we could almost blockchain, country forget that there have also been several other risk, investment noteworthy developments in the export insurance, etc. credit and investment insurance industry. Although this is not a As the global trade association for the perfect substitute for industry, the Berne Union is the organisation in-person meetings, par excellence where all developments are and many of us shared and come together. look forward to the Credit and investment insurers, and Vinco David moment that we hence the Berne Union, are moving fast in can meet again in a business environment that is also moving person, we have also learned to appreciate fast. This article will focus on how the Berne the effectiveness of online meetings. It Union is changing in this environment. The is expected that, after the pandemic, following developments are highlighted: online meetings will continue to be hosted l The enhanced exchange of information alongside live events. One of the great between insurers/Berne Union members advantages of online events is a much lower l Closer cooperation between the private threshold to participate. Indeed, there were market and ECAs over 400 registrations at our online Annual l Cooperation with stakeholders in the General Meeting in October 2020, while in- wider industry person AGMs usually attract about half this l The growing importance of business data number. l Digitalisation In addition, we have started several l Regulation internal projects to further improve the l And, of course, the COVID-19 pandemic exchange of information via our website. One project is to create a knowledge library, Enhancing the exchange of information or, simply put: a wiki solution to search between Berne Union members all digital documents. There is a wealth of One of the key objectives of the Berne Union information on many topics on our website. is the exchange of information and expertise The knowledge library is destined to make between its member organisations. This this information more easily accessible. information ranges from the very micro level, A second project is to enhance the such as individual buyers’ creditworthiness, exchange of information on the Berne up to the macro level, such as the impact of Union discussion forums through improved global trade tensions on insurers’ business or website functionality. And a third project is to product offering, and everything in between. upgrade the exchange by members of their This exchange takes place in general country risk policy. and specialist meetings, through regular reporting channels online and through our Closer cooperation between the online discussion forums. private market and ECAs The COVID-19 pandemic has considerably Over the past 20 years, cooperation between accelerated this trend towards more ECAs and private insurers has gradually information exchange online that already increased. This has been largely in the area existed. All meetings are currently held of reinsurance, in particular ECAs reinsuring online, aided by the rapid development part of their business in the private market. of digital platforms for meetings. Several A number of private insurers have developed 16 online specialist meetings were held on appetite and have created capacity for Berne Union 2020
increasingly longer tenors for single risk INTRODUCTION ECA business, allowing ECAs to reinsure Data is the new oil, this business with tenors even beyond 10 some people say; it fuels years. This cooperation has turned out to be mutually beneficial: ECAs can thus expand the modern economy. their capacity, while private insurers tap an This is not only true for additional source of income, diversifying their tech giants, but also for portfolios at the same time. The Berne Union has moved along with our industry. For buyer this market development. Over the last few underwriting, country risk years there has been an increasing number of meetings where ECAs, private insurers and assessment, exposure multilaterals jointly discussed a wide range of management or strategic topics related to medium/long term credit and choices, for example, good, investment insurance. In 2021 this cooperation will be further strengthened by the launch of a reliable data is essential. joint committee for this business. The COVID-19 pandemic has also seen a flow of reinsurance going the other way financing of projects with economic and around: ECAs providing private insurers developmental impact. We see much with reinsurance, especially for short term scope for closer cooperation to try to business. This cooperation has also been fill part of the development finance gap, facilitated by the frequent exchange of estimated to be $2.5 trillion. information between our public and private members in dedicated COVID-19 sessions, The growing importance of forum discussions and member surveys. business data Data is the new oil, some people say; it Cooperation with stakeholders in the fuels the modern economy. This is not wider industry only true for tech giants, but also for our Some 80-90% of all cross-border trade industry. For buyer underwriting, country benefits from some form of finance or risk assessment, exposure management or insurance. Often both are needed to make a strategic choices, for example, good, reliable transaction possible. Information exchange data is essential. The Berne Union collects between stakeholders and alignment of a large amount of business data from its 84 finance and insurance are thus essential member organisations. This data includes elements for these cross-border trade new commitments, outstanding exposure, transactions. The Berne Union and other claims and recoveries, split by business bodies have taken the initiative for this line (short term credit, medium/long term information exchange. Periodic meetings credit and investment insurance, and direct to keep each other informed and anticipate lending), obligor country and type of buyer. developments have been held with: Since 2019 we have expanded this reporting l The ICC Banking Commission. This of business lines to include working capital, commission focuses on medium/long term bonding and a few other lines. We have export finance covered by ECAs. One of also added data by industry sector covered, the main topics has been bank regulation ranging from commodities to infrastructure. for ECA covered loans. Another major The first results of this expanded data topic has been sustainable finance. reporting were published in 2020, providing l FCI and ICISA. FCI is the global association even richer insight. These data and reports for the factoring industry. ICISA is the are much valued by our members and other (private) credit insurance and surety stakeholders, such as banks, the media association. and academic researchers. The latest full l Development finance institutions (DFIs). year report is available via berneunion.org/ The Berne Union has hosted several annual DataReports. events dedicated to the so-called Capacity Sharing Marketplace. We have set up this Digitalisation marketplace for the purpose of better Technology not only allows for wider use of connecting the full spectrum of public and data, it also impacts profoundly on the way private institutions involved in international we conduct our business. Especially in the 17 Berne Union 2020
area of short-term whole-turnover business, several European authorities explaining the digitalisation has taken hold. In addition, importance of credit insurance in combatting for various lines of credit insurance, digital the impact of the COVID-19 pandemic on platforms have been developed over the trade. We have also drafted a brochure past few years, providing a faster and more and flyer for the benefit of regulators and extended service. The COVID-19 pandemic policymakers to have a better understanding has accelerated this process of digitalisation of our industry. even further. So far, digitalisation by credit insurers has been to a large extend The COVID-19 pandemic standalone, for example, not yet very COVID-19 has figured many times already linked to other services for exporters, such in this article. It has considerably affected as finance, logistics or digital document our business in 2020 and will continue handling. The next phase is expected doing so in 2021. So far, the market has to include links between these different responded robustly to the challenge. services, to eventually create a one-stop- Members individually, and through shop environment for exporters. Artificial cooperation between private insurers, ECAs intelligence (AI) will play an increasing and governments, have largely maintained role in this, for example for assessing capacity for export credit insurance. They creditworthiness. By organising webinars and have also been able to avoid losses for workshops on digitalisation, the Berne Union exporters by allowing payment extensions supports members in their development. and debt restructuring of their buyers. In addition, the pandemic has been a driver Regulation for product innovation, such as for working Another crucial factor impacting on credit capital cover, and technology innovation. insurance is financial regulation. This Compared to the previous crisis – the global regulation affects private insurers, ECAs financial crisis of 2008-2009 – the response and banks financing cross-border trade in of both private insurers and ECAs has been different ways. Bank regulation is important much faster and more effective. We appear for Berne Union members’ business, as to have learned from the previous crisis. banks financing cross-border trade are But the crisis is still there. We expect a major clients of public and private insurers. significant rise in claims at the end of 2020 Regulators increasingly recognise credit and throughout 2021, certainly if government insurance as a risk mitigant for banks, thus schemes to support companies are being reducing their capital and provisioning phased out. Any phasing out should be done requirements. But this recognition is cautiously, to avoid disruption. not always aligned between regulators. The Berne Union has assisted its members Sometimes this leads to discrepancies or in the response to the pandemic by setting unintended consequences. Therefore, as up various channels for the exchange of already mentioned under cooperation with information and expertise. This included other stakeholders, bank regulation has member surveys, an online discussion forum, frequently appeared on the agenda over the webinars and discussions at online meetings. past few years. The Berne Union has set up a Reports on Berne Union members’ response dedicated Legal and Regulatory Task Force to the pandemic can be downloaded from to advise on a policy for regulatory issues. our website. The Berne Union’s role towards regulators In conclusion, 2020 has been an eventful has been defined as raising awareness about year for all of us, dominated by COVID-19. the importance of credit insurance for trade The industry at large is in good shape and trade finance. In April 2020, jointly with to withstand the crisis, to offer capacity, other trade associations, we sent letters to support exporters and to pay claims. n
The Berne Union has assisted its members in the response to the pandemic by setting up various channels for the exchange of information and expertise. This included member surveys, an online discussion 18 forum, webinars and discussions at online meetings. Berne Union 2020
Perspectives from the INTRODUCTION Short Term Committee
By Julian Hudson, ST Committee Chair and Global Head of Trade Credit, CHUBB and Arturs Karlsons, ST Committee Manager, Berne Union
Overview: A year like no other our industry. Increased Julian Hudson: “There has never been a year insolvencies, weakening quite like this one. Just about every aspect of balance sheets, our professional and personal lives have been uncertain economic impacted but while it is easy to focus on the outlook, repayment negative aspects of the past few months plans, reschedulings there are many positives to draw from as and refinancing risk well. are things we are all The UK officially went into lockdown on grappling with today. 23 March 2020. Prime Minister Boris Johnson Of course, not every Julian Hudson was accurate with his opening remarks that, sector or company is “The coronavirus is the biggest threat this the same with many country has faced for decades – and this experiencing growth country is not alone.” Whether or not this turns and demand like never out to be the biggest threat to our industry is before. Making credit still to be determined but if it is not the biggest decisions in times like then it is certainly one of the biggest. this is not easy but it is Looking at recent member data we have what we are tasked to already witnessed a 7% decline in overall do and we will all learn commitments. While this may have been as we work through expected, nevertheless it is still the largest this and we will emerge drop in commitments since the end of 2014. Arturs Karlsons stronger and better Further, claims have increased by 4.8% equipped as individuals compared to the same period in 2019 although and as an industry. experience varies significantly from member to As a global membership bound together member. For example, our ECA members have by the support of global trade, the past few experienced increased claims compared to first months have been very challenging for us all half of last year but for our private members it and will continue to be so for the foreseeable is the opposite. future. Staying up to date with current Forecasts suggest a rocky road ahead for trends during this period will be crucial for all
Forecasts suggest a rocky road ahead for our industry. Increased insolvencies, weakening balance sheets, uncertain economic outlook, repayment plans, rescheduling’s and refinancing risk are things we are all grappling with today. Of course, not every sector or company is the same with many experiencing growth and demand like never before. 19 Berne Union 2020
Life – a better work-life balance, be it As a global membership spending time with the family, a better working bound together by the environment, not working to a fixed nine to five routine or simply not waking up to an alarm. support of global trade, Play – getting fit for the first time, the past few months have rediscovering a love for exercise, time to cook been very challenging for real food or discovering the beauty of holidays in your own country. us all and will continue to In all your work, life and play I wish you be so for the foreseeable a happy, productive and above all safe year ahead and I look forward to seeing you in future. Staying up to date person in 2021.” with current trends during this period will be crucial Impact on ST business Arturs Karlsons: “The first half of 2020 has for all members changed our lives in previously unpredicted ways. When it comes to ST business, one thing that was predictable with relative certainty was that this period will strongly members and, with this in mind, I have set the impact the export credit insurance objective to provide relevant regular content industry as many Berne Union members for Short Term (ST) Committee members. As will experience a decline in commitments always, if you have any suggestions for topics compared to the end of first half of 2019. or would like to share your experience with The only question pending was the degree members then please contact either myself or of severity. On aggregate the drop in the secretariat. commitments has been by 7.1%. Falls of We will remember this period in our history such magnitude (more than 7% compared not just for the challenges but for the positives to the previous reporting period) were seen that have come and which will continue to in 2008-2009 during the global financial come, for years to come: crisis (GFC) and at the end of 2014 with the Work – increased use of technology, feeling significant drop in global commodity prices. closer to our colleagues and webinars instead How the trend will continue for 2021 of meetings and conferences. remains highly uncertain. On balance, the
WTO forecast on global trade for 2020 ($ trillion)
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20 Source: WTO, BU Berne Union 2020
current outlook is not very promising as the INTRODUCTION continuous impact of COVID-19, unresolved Another important trade tensions and slowing economic indication is the change in growth, will continue to impact members of the Berne Union, especially with obvious volume of claims. For this volatility of our industry from fluctuations variable the change has not in global merchandise trade. Some insight been that significant with a can be provided by the WTO’s forecast on global trade for 2020. As at June 2020, WTO reported 4.8% increase in predicted that the fall in global trade volumes the first six months of 2020 would be slightly above 12%. Considering the strong correlation, Berne Union members’ ST compared to the same business could take a similar trajectory, but period in 2019. Despite the there are multiple factors that will determine increase it is still less than the exact angle of that trajectory. For example, there are factors that could when comparing the first ensure a relatively stable level of commitments half of 2019 to the same as various governments have recognised the crucial role of export credit insurance period in 2018. which ensures liquidity for many corporates. Many support schemes were introduced with an aim to keep credit insurance available also important to consider that ‘claims paid’ even with the growing global environment as a measure in previous crises has had a of insolvency risks. Results and potential longer time deviation. Therefore, the reported future developments in cooperating with business results for the whole of 2020 will give governments have been discussed within the a clearer view of the actual impact on claims. ST Committee and it will continue to follow all As far as the regional split in the changes developments. in claims is concerned, the most significant Another important indication is the change increase (if weighted by proportion of total in volume of claims. For this variable the claims) compared to the same period in change has not been that significant with a 2019 has been in claims to North America reported 4.8% increase in the first six months (up by 53% or by $65 million). For some, of 2020 compared to the same period in maybe unexpectedly, aggregate claims for 2019. Despite the increase it is still less than transactions to Europe as a destination have when comparing the first half of 2019 to the declined by 14%. Whether this trend will remain same period in 2018. Having said that, it is for the whole of 2020 is yet to be seen.” n
Change in claims by regional division sorted by claims volumes
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Source: BU 21 Berne Union 2020
Perspectives from the ECA Committee
By Robert Suter, ECA Committee Chair and Head of International Relations & Business Policy, SERV and Irene Gambelli, ECA Committee Vice Chair and Senior Advisor, International Relations, SACE
Impact of the COVID-19 crisis on ECAs capital programmes The COVID-19 crisis has led the global – for example, lifting economy into a recession of historic thresholds for support proportions, which – in contrast to the in terms of company global financial crisis – is rooted in the real size, increased economy. While companies around the percentage of cover, world have gradually restarted production, link to single export the context in which they operate remains contracts, etc. – and extremely challenging, and an increase in changed conditions corporate insolvencies and bankruptcies may for short-term cover. Robert Suter still lie ahead. Managing their Before COVID-19, ECAs already existing portfolio has offered a number of important tools also become a very that allow exporters to conclude and important activity finance transactions even under difficult for ECAs. They are circumstances. Due to some differences in proactively prolonging their pre-crisis toolboxes and a considerable or restructuring degree of variation in their portfolios, the transactions, ensuring measures implemented by ECAs in response that potential losses to the COVID-19 crisis have been quite remain minimal diverse. In any case, they reflect a significant where the long- adaptation to the current situation. Irene Gambelli term prospects The large majority of ECAs have reacted of a borrower are to the very practical implications of the intact. Some ECAs which are particularly crisis by extending deadlines, flexibly exposed to hard-hit sectors have agreed to adjusting terms and conditions and fast- broad debt rescheduling and restructuring, tracking decisions. Some ECAs have also specifically in the passenger air travel and considerably broadened their existing cruise shipping sectors. On the asset side, offering by removing restrictions while many ECAs are also involved in the Debt remaining within the boundaries of their Service Suspension Initiative (DSSI) for mandate. This includes changes to working developing countries.
The H1 2020 results reported by major Berne Union ECAs still show a rather contained decrease in overall new business compared to the same period of the previous year ($134 billion versus $141 billion), and no increase in total claims paid. 22 Berne Union 2020
In addition, due to their know-how and $7.3 billion to $13.6 billion), while domestic INTRODUCTION experience in underwriting risk under great support reached a peak of $29 billion (+34% uncertainty, some governments have employed compared to H1 2019). The bulk of this is ECAs to implement emergency programmes working capital support, amounting to $24 that go beyond the ‘supporting cross-border billion. In some cases, these figures include trade and investment’ mandate in order to the various COVID-19-related programmes ensure liquidity in the broader economy. that have been implemented by ECAs on behalf of their governments. However, it is Overall new business of ECA important to note that some ECAs manage Committee members these programmes under a separate account, The H1 2020 results reported by major Berne so the actual figures are likely much higher. Union ECAs still show a rather contained Therefore, although medium-long-term decrease in overall new business compared (MLT) and short-term (ST) export credit to the same period of the previous year support still remains the core business of the ($134 billion versus $141 billion), and no ECA industry, the crisis has accelerated the increase in total claims paid. With specific gradual but steady shift of ECA activities regard to new transactions approved in the towards the domestic market seen in recent first semester of this year, the inevitable years. decline in the traditional ECA cover (-18% for short-term and medium-long-term export Note credit support on single contracts1, and -24% 1 Such data do not include new trade credit cover provided by ECAs by means of revolving on political risk insurance policies) was to a whole-turnover policies, as this information is certain extent compensated by a remarkable only collected at year-end. However, data on growth in other, less traditional business aggregated credit limits granted by Berne Union ECA-Committee Members in the first semester lines, including domestic and untied support. of 2020 show a slight increase year-over-year In more detail, support for cross-border (from $398 billion to $434 billion), in line with an transactions not directly linked to specific increasing demand for short-term trade credit and the additional flexibilities introduced by regulators exports almost doubled year-over-year (from in Europe.
OverviewOverview of ECAs’ of ECAs’ overall overall business business
Total New Commitments by business line Domestic Business: new commitments by product [2019 H1 / 2020 H1 – USD billions] [2019 H1 / 2020 H1 – USD billions]
160 35 140.8 133.6 140 30 20.9 Aid and other 120 28.8 5.0 7.3 25 Domestic support 21.2 100 13.6 20 Other cross-border 2.6 80 16.2 support Internationalisation Investment insurance Working Capital 49.5 15 60 41.2 MLT export credits 23.8 10 40 18.3 ST export credits
20 41.9 5 33.6
0 0 2019 H1 2020 H1 2019 H1 2020 H1
1
Source: Berne Union
23 Berne Union 2020
MLT export credit Looking at the claims situation in H1 2020, In the area of MLT export credit support, ECA-Committee Members have not registered despite the year-over-year decrease (-17%) any increase in arrears on their commitments of new commitments underwritten by the (i.e. amounts which are overdue for payment ECA-Committee Members in H1 2020, there but for which claims have not been paid) nor were no major changes in terms of sectors in actual indemnifications. However, current and geographies. The main sector for ECA- data does not yet reflect the full extent of backed transactions remains transportation the COVID-19 economic disruption. Taking (including aircraft, shipping, railway and a closer look at the dynamics of arrears automotive), followed by infrastructure, and claims during and after the 2008/2009 energy, manufacturing, natural resources and global financial crisis sheds some light on renewable energy. In terms of geographical this observation. The time series shows that areas and obligors, the largest new a significant rise of reported arrears in H1 commitments were in the East Asia-Pacific 2009 was followed by a peak in commercial region (mostly corporate and project risk), claims only in H2 2009, i.e. a full year after followed by the Middle East and North Africa the Lehman Brothers’ bankruptcy. This (predominantly sovereign and other public demonstrates how long it takes for claims obligors) and North America (almost entirely to show in business data due to the claims corporate risk). The only geographies that waiting period and the assessment of the registered an increase compared to the claim application after an obligor misses a same period of the previous year are North payment and before an actual indemnification America (over half of it in the transportation is made. Should the current crisis indeed sector) and Sub-Saharan Africa. evolve in a similar way to the global financial The steady growth in importance of crisis and create similar cumulative effects, a Sub-Saharan Africa, and to some extent rise in claims paid by ECAs might therefore of North America, is also confirmed by be expected starting from H1 2021. Although Member ECAs’ exposure data for MLT export the extent to which ECAs will have to absorb credit transactions. Overall, the outstanding losses will only become visible in the coming commitments before reinsurance amount to months, the well-known long-term thinking $618 billion as of June 2020. Exposure in MENA and pragmatic problem solving that our has also grown significantly but has been on a industry has demonstrated in the past will declining trend since H1 2018 – as are East Asia certainly help to reduce the negative impact Pacific, Latin America and Caribbean, Russia of COVID-19 on global trade and contribute to and CIS and to a lesser extent also Europe. the economic recovery.
Focus on MLT Export Credit Activities Focus on MLT Export Credit Activities New Commitments
YoY Change of New MekkoMekk Distributiono Distribution of oNewfNew Commitments by Sector CommitmentsCommitments byby Region Region and and Obligor Obligor S. AsiaS. As ia [2020 H1 – % Total] [2019 H1 / 2020 H1 – USD billions] [2020 H1 – % Total] LATAMLAT AM Russia&CISRussia&C IS OtherOt her 60 EastE APACast AP AC MENAMENA N.AmericaN.Ame r i c a EuropeEurop e SSAfrica SSAfr i ca 100 100 5 5 49.5 Renewable 12 12 14 14 13 90 50 Energy 90 15 2.6 15 11 32 32 Natural 80 11 10 10 5.1 41.2 80 45 resources 45 40 4.9 1.8 Unspec.Uns pec. 70 14 2.4 Manufacturing 70 14 54 54 3.7 Projects 7.9 Projects 60 60 11 11 61 30 4.4 Nonspecific 61 CorporatesCorpor ates 50 50 5.7 5.0 65 65 96 96 91 91 Banks Energy Banks 66 66 26 4.5 5.3 40 40 26 5 5 20 3 O.PublicO.Pu blic 3 Infrastructure 30 63 63 9.6 8.4 30 55 SovereignSovere ign 55 4 134 13 10 20 20 Other/Multiple 35 35 9.2 10.3 21 10 10 21 14 14 13 6 6 0 Transportation 13 4 4 2019-H1 2020-H1 0 0 0 0 10 10 20 20 30 30 40 40 50 50 60 60 70 70 80 80 90 90 100 100 2
Source: Berne Union 24 Berne Union 2020 INTRODUCTION Focus on MLT Export Credit Activities Focus on MLT Export Credit Activities Commitments Outstanding
Overall change Regional exposure change 2015-2020 [USD billions] 2019 H1: 634bn USD 2020 H1: 618bn USD 120
100
80
60
40
20
0 MENA SSAfrica Europe East APAC North America LATAM and Russia and CIS South Asia Other Caribbean
2015-H1 2016-H1 2017-H1 2018-H1 2019-H1 2020-H1
4 Source: Berne Union
FocusFocus on MLT on MLTExport Export Credit ActivitiesCredit Activities Arrears and Claims
YoY Change in Claims and Arrears [2008 H1 – 2010 H1 and 2018 H1 – 2020 H1, USD billions]
8
7.8 7.7 7 7.5 7.4 7.2 6.7 6
5 5.5 5.2 4.9 5.0 4
3
2 1.7 1.5 1 1.0 1.0 0.9 1.0 0.3 0.3 0.3 0.5 0.3 0.4 0.6 0.6 0.5 0 0.2 0.2 0.3 0.1 0.1 2008-H1 2008-H2 2009-H1 2009-H2 2010-H1 2018-H1 2018-H2 2019-H1 2019-H2 2020-H1
Claims Paid, Political Claims Paid, Commercial Arrears 5
Source: Berne Union
25 Berne Union 2020
Outlook: Macro concerns, a shift to executing the export finance business is domestic support and sustainability here to stay. This affects ECAs’ mandates focus and strategies but naturally also those of The macro uncertainty of the environment companies and banks. Estimating the overall in which ECAs operate remains a major sustainability of a transaction, creating a best concern. A second wave of rising COVID-19 practice for measuring it and also setting infection rates has already led to a tightening policy to promote projects that improve of sanitary measures in Europe and other overall sustainability and limit support for regions, creating economic uncertainty unsustainable projects will be a focus for a about future demand and – as we have large part of the export finance community. seen in the first wave – supply. The risk of A positive long-term outcome of the a rise in protectionism, government-led COVID-19 crisis would be a renewed onshoring of certain industries and general appreciation for a well-functioning and inward-looking focus of countries remains sensibly governed international trade system. very real. Companies and even governments ECAs are a key component of that, especially are reconsidering large investments, a in times of crisis, and possess enormous development which impacts the demand for capacity to deliver a positive impact. ECAs export financing. will also remain open to new partnerships Worryingly, some of our members have and cooperation in pursuit of fulfilling their already seen a more selective approach mandates, and the Berne Union supports this of banks in financing transactions, mostly through initiatives like the ‘Capacity Sharing affecting sectors and countries that have Marketplace’. The changes in our environment been hit hardest by the current crisis. will also require ECAs to become more However, the demand for ECA-financing flexible and to rethink some of the long- will probably remain stable, as it is precisely standing rules of our business. Governments the function of ECAs to maintain capacity are already working towards a new under high uncertainty and thus to minimise consensus on standards and best practices disruptions to trade and investment during in supporting trade. However, it is not only a crisis. This is a challenging proposition the rules which need modernising but also though, which needs to be carried out in line the way ECAs connect to their partners and with certain principles, in order not to cause process transactions – digitalisation remains long-term damage to the export finance of critical importance. The Berne Union, system and to avoid resorting to subsidies. and in this context specifically the ECA In the coming months and years, we could Committee, has historically played a vital role see a further shift towards the less traditional in creating transparency, fostering common business lines like domestic support. The role understanding and building on each other’s of ECAs and how they employ their capacity experiences and will continue to do so in the to promote trade and investment (and future. n also which kind of trade and investment) has been evolving for some time and this Endnote: The ECA Committee development is likely to gain additional The ECA Committee of the Berne Union is currently momentum from this crisis. Another trend composed of 34 Export Credit Agencies worldwide, that is expected to continue is that policy namely (in alphabetical order): ASHRA, ATRADIUS DSB, BANCOMEXT, BPIFRANCE, CESCE, COSEC, goals outside the traditional sphere of ‘jobs CREDENDO, ECGC, ECIC SA, EDC, EXPORT FINANCE and exports’ become core pillars of ECAs’ AUSTRALIA, EGAP, EULER HERMES GOVERNMENT, mandates – the most prominent being EKF, EKN, EXIAR, EXIM HUNGARY, EXIMBANKA SR, FINNVERA, GIEK, K-SURE, KUKE, MEXIM, NEXI, ODL, sustainability. The promotion of climate OEKB, SACE, SERV, SID BANKA, SINOSURE, TEBC, and SDG finance and good governance in TURK EXIMBANK, UKEF, US EXIMBANK.
The extent to which ECAs will have to absorb losses will only become visible in the coming months, but the well-known long-term thinking and pragmatic problem solving of our industry will certainly help to reduce the negative impact of COVID-19 on global trade and 26 contribute to the economic recovery. Berne Union 2020
Perspectives from the INTRODUCTION MLT Committee
By Dominique Meessen, MLT Committee Chair and Head of Reinsurance, CREDENDO and Andrew Underwood, MLT Committee Vice Chair and Chief Underwriting Officer – Specialty, UK and Lloyd’s, AXA XL
Global overview and theoretical total The COVID-19 pandemic and related per-risk capacity has containment measures have pushed the remained stable at world’s economy into a very deep and around $3.2 billion for synchronised recession. It is the first time public obligor risks that both advanced and emerging market and $2.3 billion for economies have been in recession since private obligors. the Great Depression of 1930. There is still Insurers and their a lot of uncertainty related to the duration clients are mutually of the pandemic. The recent and relatively dependent upon Dominique Meessen quick resurgence of COVID-19 infections in one another, and countries where the virus was under control during challenging is worrying as it highlights that containment times communication and (voluntary) restraining measures are and collaboration likely to remain in place (or at least to be are more essential periodically reinstalled) for a longer period than ever. Those than initially thought. The COVID-19-related clients – whether uncertainty and measures have had a large financial institutions, impact on firms’ productivity, consumer exporters or traders demand, supply chains, global trade, – are reviewing remittances, tourism, commodity prices, and adjusting investments and global financial conditions. Andrew Underwood their insurance In this dire environment, what can we requirements and say about medium-long term credit and the private market must respond. When we investment risks? First of all, we must show look back at 2020, new business may be humility and acknowledge that the impact higher than some scenarios predicted. In part of COVID-19 on the medium to long-term is this is because of the necessity of certain uncertain and that it will depend to a large projects (development objectives do not extent on how the crisis will develop further. go away in a crisis, and unfortunately may However, if we look at the recent months, be exacerbated), and in part because the we should appreciate the proactivity and market is looking beyond the news headlines determination shown by the governments to the merits of each transaction. Supporting and MLAs in implementing strong relief and good transactions in difficult sectors/ support measures as well as the goodwill countries is business as usual. shown by the private insurance market in the Despite the turbulence, the market has search for solutions, which has contributed continued to see demand for sustainability to the resilience observed until now. related transactions. These have been received positively, starting with renewables MLT credit in the private market projects such as wind and solar, and now the The private market has remained resilient interest has opened up to the wider subject throughout 2020, having established itself as of Environmental, Social and Governance a complimentary provider of non-payment (ESG) related transactions. We have seen insurance products as well as continuing to both public and private markets step up in support public agency partners with their 2020, whether directly COVID-19 related or goals. With more than 60 active private more traditional support for the healthcare 27 market insurers, there is depth and diversity, sector generally. And there is increased Berne Union 2020
demand for non-traditional structures, One clear attention point for the sector helping clients to manage an overall portfolio is the expectation of upcoming discussions as well as single risk. between insureds and insurers with respect One of the silver linings has been the to the eligibility of future claims under PRI increasing use of electronic placement – the covers. As a reminder, PRI is limited to a list of capability has existed to some degree for a specific political risks. This has always meant while but remote working has accelerated that there can be (sometimes complex) wider adoption. This is a welcome discussions between the insured and the development allowing insurers to run their insurer about whether a specific event falls businesses more efficiently, and in turn this within the insurance policy scope or not. In benefits their clients. the context of the current crisis, investors While the full amplitude of this crisis can suffer significant consequences from won’t be known for some time, the private the extraordinary and unprecedented health market remains open and active. Claims protection measures taken by governments frequency and severity will vary from one in response to COVID-19, including the sector to another, but the market stands imposing of broad economic shutdowns ready to serve its clients as it has done in and the interference in investors’ property previous crises. Claims activity to date has rights. In particular, can such measures been relatively muted, but there has been taken by governments meet the test of the pre-emptive action around waiver requests definition of the ‘expropriation risk’ under and restructurings in response to the change Investment Insurance policies when we know in circumstances. that such definition commonly excludes ‘Losses caused by any measures or actions Investment Insurance and Political that constitute bona fide non-discriminatory Risk Insurance measures of general application of a kind Actually, Investment Insurance and Political that governments normally take in the public Risk Insurance (PRI) are relatively small interest for such purposes as ensuring public niches when compared to the Trade Credit safety, protecting the environment, regulating and Export/Structured Credit insurance economic activities…’? It will be a case-by- markets. This is true both for private insurers case approach but it could in the end lead to and government owned agencies (with a some insureds questioning the actual added few exceptions). However, since their cover value of the cover they purchased. scope is focused upon political risks, it is On the other hand, it looks like PRI as a worthwhile looking at the current status and specific product still has a clear future. There the future. are different reasons to state that. Some Regarding new business produced in MLT Committee members have already 2020, MLT Committee members have had experienced a significant increase in cover mixed experiences ranging from a strong inquiries, indicating a positive outlook for increase to a strong decrease. There is no the investment plans post-COVID-19. The trend to be noticed in that respect but those risk awareness of corporates, SMEs and who experienced a decrease believe that it is commercial banks has increased overall and more a postponement. Corporates especially this does definitely include political risks (‘pure have just postponed, rather than cancelled, political risks’ as well as sovereign credit risks). some of their investments abroad, among Last, but not least, we expect an increase in others, in very large-scale projects. With infrastructure investments as a consequence respect to claims and losses: there have been of stimulus and recovery measures to be taken only very few claims paid and for limited at government, MLA and DFI levels, which in amounts. There is some pre-claims activity turn could lead to a higher demand for PRI but it seems only to be related to COVID-19 when such infrastructure projects are made in in a limited way. emerging countries. n
We expect an increase in infrastructure investments as a consequence of stimulus and recovery measures to be taken at government, MLA and DFI levels, which in turn could lead to a higher demand for PRI when such 28 infrastructure projects are made in emerging countries. Berne Union 2020
Perspectives from INTRODUCTION the Prague Club Committee
By Imaad Al-Harthy, PCC Committee Chair and General Manager Sales, CREDIT OMAN and Martina Jus, PCC Committee Vice Chair and Executive Director – International Affairs, Export Credit Insurance, EU Funds and Financial Instruments, HBOR
The members of the Prague Club Committee risk, a special portfolio (PCC) are navigating their way through has been created with the changing economic landscape. The a ‘strategic export’ degree to which the COVID-19 crisis has characteristic. impacted economies varies according to Moreover, SEP the precautionary measures put in place, as has rescheduled well as the regional and government-driven due dates and support packages available. Our members extended payment are responding by supporting the sectors periods for export that are strategic or have been particularly finance. However, hit, diversifying and modifying product lines, Imaad Al-Harthy even despite these all while addressing the gaps left by the measures, SEP export private market. Here is a flavour of some activity dropped responses from emerging ECAs: due to a decline in world demand and Saudi perspectives the precautionary Khalid Alhusain, Director of Credit Insurance measures taken by & Guarantee Department, Saudi Export governments. Program, The Saudi Fund for Development Despite the says: “Since the onset of the crisis, the numerous economic Government of the Kingdom of Saudi Arabia stimuli provided by has developed several economic stimuli, Martina Jus governments, they especially for SMEs. These measures have can be characterised helped Saudi companies to sustain and as individual local programmes with limited maintain production volumes alongside effects on international trade. It is crucial reducing operating costs. for countries to work together to create During the crisis, the Saudi Export quick and efficient solutions contributing Program (SEP) played an important role to facilitating movement of world trade and in promoting and sustaining the position rapidly eliminating obstacles. In this context, of Saudi exporters in international markets under the chairmanship of the Kingdom of through following a policy that sustains, as Saudi Arabia, the G20 Trade and Investment much as possible, the credit covers issued Ministers have released short and long- by SEP to Saudi exporters. In addition, SEP term guidelines aimed at promoting trade, managed to restructure covers and extend operating logistics networks, supporting exposure coverage in order to keep pace SMEs, creating stability for global supply with the varying size of demand in global chains and strengthening foreign investment markets. Furthermore, SEP, in view of the aimed at stimulating economic growth. importance of making liquidity accessible Moreover, under its Presidency of the for exporters, has amended indemnifications G20, the Kingdom initiated the ‘Riyadh period to be flexible and premium payments Initiative for the Development of the World have been postponed, so easing the finance Trade Organization’ with the aim to help the gaps for exporters. In addition, to bear higher world economy flourish, regain trust in the 29 Berne Union 2020
multi-party trade system and ensure equal In order to enable the approval of more opportunities for all.” favourable loans and insurance premiums that are several times lower, it was necessary Croatia perspectives to ask for the approval of the European Tamara Perko, President of the Management Commission. In early April 2020, the EC Board, HBOR says: “The challenges of the approved HBOR’s proposed schemes, thus global pandemic faced by the Croatian providing insurance of around €800 million economy in 2020 have affected the activities on favourable terms and conditions and of HBOR as an export credit agency but loan approvals of €1 billion, i.e. a total of €1.8 also as a development bank. Croatia is a billion. member of the EU, but with a relatively One of the first measures of the small economy in the world context and a Government of the Republic of Croatia after significant share of the service sector in its the outbreak of the crisis was to change GDP (for example, revenues from tourism the umbrella act, by which the mandate in 2019 accounted for one-fifth of GDP). of HBOR as an ECA has been extended. In addition to the impact of the pandemic This created a framework, under which on the tourism sector, Croatian industrial the range of businesses eligible for credit production has been significantly affected insurance has been extended, irrespective of by the lockdown and reduced demand and the loan purpose: whether working capital consumption in neighbouring countries that loans, pre-export financing or liquidity are the most important export markets such loans. This intervention made it possible as, for example, Italy which accounted for for entrepreneurs with realised income 14% of Croatia’s total exports in 2019. from exports in the previous year and for To mitigate the negative consequences of exporters’ suppliers to apply for loan funds in the COVID–19 pandemic, at the end of March, their banks with HBOR support. By changes HBOR started implementing new measures in the loan insurance programme, support to preserve the level of economic activity, was also provided to the tourism sector as the liquidity of economic entities, and most one of the most affected by the crisis. importantly, to preserve jobs. With an objective of supporting also other Within the framework of activities of branches of the economy, such as the wood HBOR as a development bank, HBOR processing industry, which has suffered a introduced measures related to a moratorium significant decrease in revenues due to a on existing liabilities (for certain groups decrease in customer orders, HBOR has of entrepreneurs up to 16 months), adjusted its programme of insuring pre-export the introduction of new liquidity loan finance loans for the purpose of enabling programmes, directly or via commercial borrowers to raise new funds they need for banks, whereby the funds from HBOR’s current operations at lower funding costs. sources are approved at an interest rate Intending to enable easier and simpler from as low as 0%. As an ECA, HBOR has approval of loans, HBOR has introduced a introduced new insurance models and liquidity loan portfolio insurance programme adjusted existing ones to facilitate the – COVID-19 providing 50% cover, and up to approval of commercial banks’ loans. 90% cover of approved loan and interest has
“It is crucial for countries to work together to create quick and efficient solutions contributing to facilitating movement of world trade and rapidly eliminating obstacles. In this context, under the chairmanship of the Kingdom of Saudi Arabia, the G20 Trade and Investment Ministers have released short and long- term guidelines aimed at promoting trade, operating logistics networks, supporting SMEs, creating stability for global supply chains and strengthening foreign 30 investment aimed at stimulating economic growth.” Berne Union 2020
These measures and our efforts INTRODUCTION “Aiming to support a part throughout 2020 are the result of HBOR's of the economy comprised flexibility and fast adjustment to new circumstances in the light of a role that of small entrepreneurs, by becomes even more important in times of amending the programme crisis. Going forward, HBOR will continue for insuring short-term to offer services to entrepreneurs, large, medium-sized and small ones and to fill in receivables for SMEs market gaps with an objective of preserving with annual export the sustainable development of the Croatian revenues of up to €2 economy.” million, HBOR created a Egypt perspectives framework for approving Mohamed Azzam, Managing Director, EGE, Export Credit Guarantee Company insured amounts three of Egypt says. “The anxiety fuelled by the times higher than had media regarding COVID-19 and the varying government responses that followed have been possible before the caused thematic shifts in global trade flows, pandemic outbreak” closing markets and opening others. The sudden withdrawal of cover from the private market has deepened the market gap and created opportunities for smaller ECAs been made possible by amendments to the to play a key role to seize new entry points programme introduced at the end of the year. created by the crisis. The reinsurance market, This is an innovative product, for which banks although it has been busy licking its wounds, have shown great interest, because they can is looking for fresh premiums to normalize its easily include approved loans into the secured loss ratios. portfolio under pre-defined criteria. Without an end in sight, the economic Due to the increased demand for the patterns of many economies will be insurance of short-term export receivables, determined by their reaction to a second HBOR also encountered an increase wave. Debt laden stimulus packages are not in interest in insuring temporarily non- an option for many already highly indebted marketable risks among both current developing countries. Many have already and new clients. This is the result of decided to weather the storm without another increased awareness about the insurance of lockdown. They simply can’t afford it!” receivables, but also of the lack of supply in the private market due to the pandemic Agility of operations is key in markets in which Croatian exporters also Many PCC members acknowledge the need operate. In the first six months of 2020, to supplement government level measures the insured amounts increased by three in order to improve export activities. They times compared to the same previous year are prioritising, innovating new products, period for temporarily non-marketable risks. and putting extra efforts into digitalisation HBOR can implement this type of insurance of operations. Agility of operations remains because the EC declared all marketable risks a competitive advantage for smaller ECAs in temporarily non-marketable through the these difficult times. Short-term Export-credit Communication, Adds Alhusain, “The crisis revealed that it thus enabling the intervention of state would be imperative to invest in technology insurers in the short-term insurance market in many fields to create a sustained world until mid-2021. economy. SEP found it necessary to invest Aiming to support a part of the economy in automation and minimise the reliance comprised of small entrepreneurs, by on humans in production processes. Also, amending the programme for insuring short- E-commerce has become a fait accompli term receivables for SMEs with annual export and necessary to maintain world trade. It revenues of up to €2 million, HBOR created would require more investment in digital a framework for approving insured amounts infrastructure that contributes to facilitating three times higher than had been possible electronic conclusion and authentication of before the pandemic outbreak. commercial contracts.” n 31 Berne Union 2020
Berne Union Data Snapshot 2020H1
Berne Union Totals ST: Short-Term ExportCredit MLT: MediumtoLong-Term Export Credit Note: Allfiguresare in USD billions, unless otherwise stated. PRI: Political RiskInsurance OCB: Other Cross-Border Insurance New commitments by business line Total exposure by business line 2,000 3,000 1,800 1,600 2,500 1,400 2,000 1,200 1,000 1,500 800 600 1,000 400 500 200 - -
2017- 2017- 2018- 2018- 2019- 2019- 2020- 2017- 2017- 2018- 2018- 2019- 2019- 2020- H1 H2 H1 H2 H1 H2 H1 H1 H2 H1 H2 H1 H2 H1
ST MLT PRI OCB ST MLT PRI OCB
Claims paid by business line Recoveries by business line 4.5 1.8 4.0 1.6 3.5 1.4 3.0 1.2 2.5 1.0 2.0 0.8 1.5 0.6 1.0 0.4 0.5 0.2 - 0.0 2017- 2017- 2018- 2018- 2019- 2019- 2020- 2017- 2017- 2018- 2018- 2019- 2019- 2020- H1 H2 H1 H2 H1 H2 H1 H1 H2 H1 H2 H1 H2 H1
ST MLT PRI OCB ST MLT PRI OCB
Private and Public member’s share of new Private and Public members’ share of new commitments commitments by business line in 2020-H1 1% 3,000 100% 2% 5% 3% 90% 10% 2,500 80% 2,000 50% 50% 50% 49% 49% 52% 70% 58% 1,500 60% 47% 50% 93% 1,000 40% 50% 50% 50% 51% 51% 48% 500 42% 30% 20% 37% - 10% 2017- 2017- 2018- 2018- 2019- 2019- 2020- 0% 32 H1 H2 H1 H2 H1 H2 H1 Private Public Public Private ST MLT PRI OCB Berne Union 2020 INTRODUCTION
Short-Term Export Credit Insurance
ST commitments by activity ST claims paid by risk type 2,000 2.0 1,800 1.8 1,600 1.6 1,400 1.4 1,200 1.2 1,000 1.0 800 0.8 600 0.6 400 0.4 200 0.2 - - 2017- 2017- 2018- 2018- 2019- 2019- 2020- 2017- 2017- 2018- 2018- 2019- 2019- 2020- H1 H2 H1 H2 H1 H2 H1 H1 H2 H1 H2 H1 H2 H1 Unspecified Political Commercial Revolving Loans Single Transaction
ST recoveriesby risk type Private and Public members’ share of ST commitments 0.6 100% 90% 0.5 80% 0.4 70% 60% 0.3 50% 40% 0.2 30% 0.1 20% 10% - 0% 2017- 2017- 2018- 2018- 2019- 2019- 2020- 2017- 2017- 2018- 2018- 2019- 2019- 2020- H1 H2 H1 H2 H1 H2 H1 H1 H2 H1 H2 H1 H2 H1
Unspecified Political Commercial Public Private
Private and Public members’ regional share Private and Public members’ regional of ST commitments in 2020-H1 share of ST claims paidin 2020-H1 0.40 900 0.35 800 0.30 700 0.25 17% 3% 600 0.20 500 3% 2% 2% 43% 0.15 400 0.10 15% 300 12% 12% 9% 12% 200 9% 0.05 9% 100 - 7% 9% 5% - 5% 3%
Public Private Public Private 33 Berne Union 2020
Top countries for claims paid Top countries for commitments
United Germany United China States 7% States 7% 13% 12% United France Arab 5% Emirates United Rest 6% Rest Kingdom 4% 47% Cuba 53% 6% Italy Nextfive 4% Nextfive 15% 16% Germany 5%
Medium and Long-Term Export Credit Insurance
New MLT commitments by obligor MLT exposure (insurance and lending) 100 900 90 800 80 700 70 600 60 500 50 40 400 30 300 20 200 10 100 - - 2017- 2017- 2018- 2018- 2019- 2019- 2020- 2017- 2017- 2018- 2018- 2019- 2019- 2020- H1 H2 H1 H2 H1 H2 H1 H1 H2 H1 H2 H1 H2 H1 Sovereign Other Public Banks Insurance Lending Corporates Projects Unspecified
New MLT claims paid by risk type New MLT recoveries by risk type 2.5 1.4
1.2 2.0 1.0
1.5 0.8
1.0 0.6 0.4 0.5 0.2
- - 2017- 2017- 2018- 2018- 2019- 2019- 2020- 2017- 2017- 2018- 2018- 2019- 2019- 2020- H1 H2 H1 H2 H1 H2 H1 H1 H2 H1 H2 H1 H2 H1
Commercial Political Lending Political CommercialLending 34 Berne Union 2020 INTRODUCTION Public and Private members’ share of MLT Public and Private members’ share of new new commitments commitments by obligor in 2020-H1 800 100% 9% 9% 700 9% 9% 90% 7% 6% 6% 80% 600 70% 500 60% 400 50% 91% 91% 91% 91% 300 93% 94% 94% 40% 30% 200 20% 100 10% - 0% 2017- 2017- 2018- 2018- 2019- 2019- 2020- Public Private H1 H2 H1 H2 H1 H2 H1 Sovereign Other Public Banks Public Private Corporates Projects Unspecified
Private and Public members’ regional share Private and Public members’ regional share of MLT exposure in 2020-H1 of MLT claims paid in 2020-H1 140 0.50 0.45 120 0.40 100 0.35 0.30 80 0.25 60 0.20 0.15 40 0.10 20 0.05 - -
Public Private Public Private
Sector split ofMLT newcommitments Top countries for MLT claims paid
100% Bermuda 80% 10% Brazil 60% 10% Rest 39% 40% Peru 9%
20% Nextfive Russia 0% 20% 7% 2019-H1 2019-H2 2020-H1 Turkey Energy Infrastructure 5% Manufacturing Natural resources Nonspecific Other/Multiple Renewable Energy Transportation 35 Berne Union 2020
Political Risk Insurance
Maximumlimit ofliability and New PRI claims paidby risk type New Cover Provided, PRI 180 45 0.30 175 40 0.25 170 35 165 30 0.20 160 25 155 20 0.15 150 15 0.10 145 10 140 5 0.05 135 - - 2017- 2017- 2018- 2018- 2019- 2019- 2020- H1 H2 H1 H2 H1 H2 H1 Political Violence Transfer Expropriation Breach of Contract Maximumlimit New business (rhs. axis) Unspecified
New PRI recoveries byrisk type Sector split of PRI maximumlimit of liability 100% 0.040 80% 0.035 0.030 60% 0.025 40% 0.020
0.015 20% 0.010 0% 0.005 2019- H1 2019- H2 2020- H1 - 2017- 2017- 2018- 2018- 2019- 2019- 2020- Energy Infrastructure H1 H2 H1 H2 H1 H2 H1 Manufacturing Natural resources Political Violence Transfer Nonspecific Other/Multiple Expropriation Breach of Contract Renewable Energy Transportation Unspecified
Private and Public members’ regional share Top countries for new PRI cover of PRI exposure in 2020-H1 for 2020-H1 7 6 5 Kazakhstan 4 Rest 25% 3 28% 2 Pakistan 1 10% - Nextfive 15%
Viet nam 8% Turkey 36 6% Public Private Indonesia 8% Berne Union 2020
Mega2 trends Berne Union 2020
Mega trends interrupted?
Where do we stand, and where are we going? These are questions at the heart of forecasts for this year’s Berne Union Yearbook. COVID-19 wasn’t the kind of crisis any of us had predicted.
Earlier this year, before the pandemic government crisis measures sustaining our reached Europe, Berne Union published an economies. article ‘mega trends and trade’1. It showed The most surprising change in my the central predictions for 2020, and forecasts for 2020 is that they haven’t beyond, of a panel of experts who had met changed. We are still having to grapple with at Berne Union in London in December. the climate change issues I highlighted: they Those conclusions still make interesting have been made more evident by wildfires reading, but what’s fundamentally changed? in Australia, Russia and the US. We still We asked the same participants what’s feel the growth of Environmental, Social changed with their forecasts and how? And and Governance issues. ECAs are playing what’s not changed? Their answers may increased roles in encouraging renewables chime with your views, surprise you, or and promoting responsible business challenge you. practices. On a day-to-day business level, it’s a similar ‘surprise’. Much of our company’s David Neckar, Client CPRI business has continued without massive Director, Willis Towers discontinuity, despite some slowing down on Watson Financial both the clients’ and the insurers’ sides as Solutions, London decision-making processes are adapted to “When we met in reflect the changed risk picture as well as the December 2019 to new virtual business environment. celebrate the Berne Union’s Attempting to forecast unexpected 85th anniversary, a global positives or negatives over the coming pandemic was not even mentioned. Instead five years must surely be dependent upon our forecasts looked at what climate change the discovery of an effective vaccine, or and new digital technologies would bring, at combination of vaccines. This will not threats of populism and the weaponization produce automatic positives: managing its of international trade. production and distribution will produce Although it seems to have been a long difficult social, political and economic time since the COVID-19 virus took hold this trade-offs, national and international. The year, we are in fact only a few months into squabbling over the supply of masks and this strange new world. We are still in early PPE in the early months of COVID-19 is an post traumatic shock, with the adrenalin of example of the tensions and political risks
The most surprising change in my forecasts for 2020 is that they haven’t changed. We are still having to grapple with the climate change issues I highlighted: they have been made more evident by wildfires in Australia, Russia and the US. We still feel the growth of Environmental, Social and Governance issues. ECAs are playing increased roles in encouraging renewables and 38 promoting responsible business practices. Berne Union 2020
that can emerge. A surprise negative could rapidly. Environmental sustainability be reactions in developed countries to the strategies are still there, maybe with a lower MEGA TRENDS hierarchy of access to medications igniting pressure in the very short term but a growing latent tensions in ordered and law-abiding urgency for the medium term. Last but not societies as we saw with the Black Lives least, the positive economic framework we Matter movement. were experiencing and expecting to continue A forecast one can make with confidence has been torn up. Let´s see what the final is the continuing growth in demand for riot impact on trade looks like but my guess is and civil commotion insurance, exacerbated that negative elements will clearly overcome by property insurers now excluding these the positive ones. risks from baseline cover. Unexpected positives over the coming five What is the most surprising change in your years are hard to find, given the dangerous forecast for 2020? mix of economic downturn and political The COVID-19 virus has not changed the polarisation, which makes it difficult to see underlying themes, but it has forced us how long-term global issues can be equitably to work on them while absorbing the and responsibly tackled. The populism that need, in our case, to implement a support we talked about in December last year is package for Spanish exporters which has driving reactions against global initiatives resulted in the largest ever number of new and international cooperation. Let’s hope transactions in a year. This has required that the Berne Union can counter those intense coordination and team effort pressures by showing the benefits of 86 within our company while at the same time years of international cooperation.” orchestrating new ways of working, from home and without the physical exchange of documents with our clients. Beatriz Reguero, Personally I think the most surprising outgoing Berne Union change, aside from the very obvious shock of President and Chief living a reality that has been thus far the stuff Operating Officer, of movies, has been going from a situation State Account, CESCE where we operated with agendas, forecasts, How have your forecasts that gave us relative visibility as to what we changed – have they been were going to be doing and where we were torn up or pushed down going to be in a few months to moving to a the road? ‘one day or a week at a time’ mode. “Obviously 2020 will go down in history as the year a virus disrupted everything. From What hasn’t changed or is the least the way we do business to the way with surprising? interact with each other. In an industry based Again, we’ve (CESCE´s team has) managed on international mobility, of people and to step up to what was has been requested goods, COVID-19-related restrictions have of us! (I couldn’t help myself on this one!) had many impacts. From physical disruptions Very much on this line, one probably to trade chains and financial relationships to unsurprising thing is how fast governments political ramifications and intensification of can act when there is a common nationalist and protectionist trends already understanding of a need, be it refinancing visible before it. sovereign debt for the most vulnerable As regards the mega trends in trade we economies, proposing flexibility under the talked about in December, I expect a push Arrangement, the EU rules, etc. The private forward on changes coming from technology sector is of course usually praised for its and on political and social polarisation with ability to respond quickly to changes in bilateralism and protectionism growing needs and market trends, and I think we saw
We expect that ECAs will go to greater lengths to support domestic companies, so we anticipate that the famous level playing field will finally, openly, become a thing of the past if nothing is done about 39 international regulation.” Berne Union 2020
that immediately when, in the first months Gabriel Buck, of the year, major deals in the shipping and Managing Director, aviation industries were restructured almost GKB Ventures overnight. How have your forecasts changed – have they been Any unexpected positive forecasts for the torn up or pushed down next five years? the road? I’m not sure how to respond to this. “Our forecasts have neither Turbulent times always bode well for our been torn up nor pushed down the road. In business, but this time the economic impact fact we are experiencing our most successful of the pandemic is so widespread that it is year to date. In the past 12 months we have difficult to foresee what the consequences successfully closed $500 million of projects will be. Additionally, we have already in Africa. That may be small by the standards experienced how the pandemic can reappear of major banks, but as a small boutique we any time and how difficult it is to predict or are delighted to see our clients grow their contain it. export orders by this amount. We expect that at some point during GKB Ventures is an employee-owned, the next year we’ll start seeing all major fully independent advisory firm specialising economies consolidating a path of recovery, in export finance in Africa. Thus we are very although it is early to predict how the focused and are comfortable in managing different ‘rhythms’ that each region takes will what may seem to others a very high affect the geopolitical balances. geographic concentration risk. This is a market In line with recent trends we foresee an we know well and can manage this risk. This intensification of governments’ efforts to is what we do. Helped, no doubt by having 50 support their exporters in more creative years of combined experience in this field. This ways, making it even more evident that year has been a good year, our focus has paid agreements like the OECD Arrangement off and we are positive for the future. need to adapt to new ways of doing business and of supporting it. Maybe the one positive surprise might be an actual change in the Arrangement. I have two predictions The impact of the pandemic on international supply chains may result which I am fairly confident in opportunities for countries that are on. First is that Africa will geographically well placed to serve as continue to be a growth production and logistic hubs for Europe, the US, and other economies, re-channelling market. Second is that the production currently coming out of China. OECD CIRR will keep low
Any unexpected negatives for the next for at least two to three five years? years, and potentially for I would say that the negatives for the next the next five years. five years are all more or less expected now. With varying degrees of uncertainty and pessimism/optimism, we will see the impact of What has been the most surprising change COVID-19 on all regions, and remain expectant in your forecast for 2020? to see how activity (investment, tenders, etc.) Two things have surprised us. First, is how recovers and the kind of opportunities that our quickly the African markets adapted to companies can access. We will also see how COVID-19 and how they embraced the sustainable the levels of indebtedness, public technology to increase dialogue and levels of and private, incurred to support companies communication. As a direct result, the period and national economies are. to structure and position a project all the We expect that ECAs will go to greater way to close got shorter. lengths to support domestic companies, so Zoom/Microsoft Teams teleconferencing, we anticipate that the famous level playing and just higher levels of interconnectivity, field will finally, openly, become a thing of the improved things dramatically. We initially past if nothing is done about international thought that the inability to travel and meet 40 regulation.” would hinder projects. Quite the opposite Berne Union 2020
has happened. In one example, we were some extent this is already happening and I able to have weekly update calls with the fear this may be accelerated in the next five MEGA TRENDS Director General of the Ministry of Finance years. This is not good news for the industry on a weekly basis. Pre COVID-19 each one as a whole. Whilst any gap will undoubtedly of those face to face meetings may have be filled by new banks or other financial taken three or four weeks to schedule and institutions, it is important that the skillset in consumed three or four days in travel time. the market remains. To lose this will have a The second surprising thing has been negative impact for the market as a whole. the divergence between bank funding costs (which have increased) and the OECD CIRR rate (which has decreased to an all-time Jean-François low). We didn’t expect this and we certainly Lambert, Founder and didn’t expect this to happen so quickly. It Managing Partner, was the speed of change in the early months Lambert Commodities of the pandemic that surprised us. That was What been the most good news for borrowers who are seeking surprising change in your long term ECA financing using the OECD forecast for 2020 as a CIRR rate. This drop in the CIRR was, to result of the pandemic? some extent, a factor as to why many more What hasn’t changed or is the least projects closed so quickly. surprising? More than a game changer, the pandemic What hasn’t changed or is the least will act as a catalyst. The backdrop remains surprising in your forecasts? one marked by geopolitical and economic Least surprising is the number of banks polarisation, shortening of supply chains still focusing solely on the large ($250 where possible, re-onshoring/regionalisation million plus) deals. I am concerned for the of trade and manufacturing processes, industry as a whole that so many institutions energy transition and ESG awareness from are solely focused on this segment of the consumers to investors to financiers. The market. I can understand this strategy when pandemic and the economic shock will simply the ECA market was dominated by large oil accelerate these trends, not challenge them. and gas, shipping and aviation transactions. The fact that travelling is no longer the But now? Some banks are adjusting their norm but has become the exception will business models to reflect the ‘new normal’. make consumers even more aware of the Others are not. need to keep buffers (food stocks, strategic production ) closer to them and therefore Any unexpected positive forecasts for the will hasten de-globalisation when feasible. next five years? The world will re-globalise around clusters Five years is a long time in a fast changing (geographies and common value sharing market. What is key is the ability to spot – environmental awareness, democratic changes and adapt accordingly. I have two processes etc). predictions which I am fairly confident on. This will affect production, consumption, First is that Africa will continue to be a investment and of course finance. All regions growth market. Second is that the OECD will not move at the same pace (think ESG CIRR will keep low for at least two to three and decarbonisation where Europe will years, and potentially for the next five years. accelerate post COVID-19, therefore faster The unexpected consequence of COVID-19 is than China or the US for that matter). the huge economic stimulus represented by the level of new debt issued by G7 countries. Are there any unexpected positives in your This in turn is lowering yields which directly forecasts for the next five years? translates into a lower CIRR rate. Those ECAs The next two to three years will be marked that offer the OECD CIRR will do very well by economic stress, tensions and turmoil, going forward. which are inevitable as paradigms shift. Transportation and tourism will need to re- Any unexpected negatives for the next invent themselves. All companies will have five years? to go green to warrant stakeholders support. I fear that some banks may pull out of the Consumers are saving more than they are ECA market altogether, or at the very least consuming but I believe in three to five withdraw to a very small market segment. To years from now, we will see the emergence 41 Berne Union 2020
of a new economic order with a renewed the South China Sea, Turkey’s ambitions, dynamism if COVID-19 has been tamed and India – China/India-Pakistan (a proxy war by the population is vaccinated. China). Inflation? Secular stagnation? In a polarised world these could trigger unrest and What about any unexpected negatives for exacerbate geopolitical tensions. n the next five years? Geopolitical tensions could derail recovery and Note push it out by several years – these include 1 https://www.berneunion.org/Articles/Details/489/ January-BUlletin-Mega-Trends-and-Trade
COVID-19 creates record demand for EBRD’s trade facilitation facilities
Rudolf Putz Deputy trade finance procedures and processes. Director Financial At present, there are more than 120 issuing Institutions - Head banks within the TFP across 30 economies Trade Facilitation where the EBRD invests, working with Programme (TFP) at over 800 confirming banks and their EBRD subsidiaries throughout the world. Global pandemic crisis response under EBRD’s Record business volume in excess of €2 Trade Facilitation Programme (TFP) billion financed in January-August 2020 The EBRD’s Trade Facilitation Programme The COVID-19 crisis has resulted in a surge (TFP) was developed to promote and of demand for support from the TFP. facilitate international trade to, from Between January and August 2020, the and within central and Eastern Europe, TFP has already supported the financing the Commonwealth of Independent of a new record volume of foreign trade in States (CIS) and the southern and excess of €2 billion. eastern Mediterranean (SEMED) region. Under the TFP, guarantees are provided What is the outlook for 2021? to international commercial banks In view of the state of the market, the (confirming banks) thereby covering the TFP is in increasing demand. Due to its political and commercial payment risk of strong effect in sustaining local economies transactions undertaken by issuing banks through supporting international trade, in the economies where the EBRD invests. the TFP is a prime instrument to respond Since 1999, the TFP has facilitated more to the crisis situation in the regions. than 26,000 foreign trade transactions The EBRD will play an important role worth more than €22 billion and trained in providing trade finance facilities to more than 9,000 partner bank staff on banks which cannot get sufficient funding and risk cover from foreign commercial banks, export credit agencies and private In view of the state of insurance underwriters. It is also the EBRD’s experience that the market, the TFP is TFP demand peaks after the crisis, as in increasing demand. economies rebound but the availability of Due to its strong effect commercial trade finance remains subdued. As countries restore their supply chains in sustaining local post COVID-19 and business and consumer economies through confidence returns, the TFP expects to see the demand to continue in many areas for supporting international quite some time, particularly for consumer trade, the TFP is a prime goods, clothing, pharmaceuticals, medical instrument to respond to equipment and food commodities. This is in part due to commercial banks being the crisis situation in the more reticent to finance transactions 42 regions. without EBRD support. Berne Union 2020
The 2021 outlook: Climbing MEGA TRENDS out of a deep hole
By Glen Hodgson, Chief Economist, International Financial Consulting Ltd
We will remember 2020 as the most full economic recovery. demanding year in a generation, even The global more dramatic than the 2008-2009 global recession has had financial crisis (GFC). The pandemic-induced severe financial and shutdown plunged the global economy into debt management a deep hole. Many countries were hit with impacts. The G20 a rapid contraction in GDP of 20% or more has called for debt in March to May, and a doubling or more service suspension in unemployment – followed by a quick for heavily indebted partial rebound, but also the risk of recurring low-income countries pandemic waves and related targeted Glen Hodgson and the unlocking shutdowns. of new funding to developing countries The IMF is projecting global growth to at unprecedented speed. Given the depth contract by 4.4% for all of 2020. The euro of the contraction, further economic area will see a much deeper contraction of scarring should be expected. Impacts 8.3%, reflecting a sharper downturn. The US include continued elevated unemployment, economy is projected to shrink by 4.2% and higher business failures, weak and delayed Asian advanced economies are facing a more investment, turbulent oil and other moderate contraction, thanks to a more commodity markets, and the likelihood of lag contained pandemic. effects. Emerging markets and developing economies are expected to contract 2021 outlook collectively by 5.7% in 2020. Many face Global growth in 2021 is projected by the IMF difficult prospects due to the continuing to recover to 5.2%. This outlook is based on spread of the pandemic, creating pressures expectations of persistent social distancing, on their fragile healthcare systems, severe other measures to contain the pandemic shocks to sectors such as tourism and oil and address its public health consequences, production, and dependence on external and continued significant fiscal, monetary finance. and structural policy intervention. Early widespread vaccine availability could boost An uncertain and risky business the outlook, and a delay would be a drag on environment growth. The business operating environment has In advanced economies, output growth become more uncertain. An uneven rebound is projected to strengthen to 3.9%, with is to be anticipated across countries and inflation remaining low. The eurozone will sectors, with the possibility of a ‘K-shaped’ have a bounce-back of 5.2% and the US and recovery – a healthy rebound in some Asian advanced economies are projected to countries, but setbacks in others where the grow by 3% to 3.5%. However, the collective pandemic is not well contained. Forecasters GDP of advanced economies at the end of are making frequent major revisions to keep 2021 will still be 2% below year-end 2019. up with developments. In emerging markets and developing Pandemic management is of course economies, collective growth of 5% in 2021 is the dominant risk factor, which can only projected, with inflation declining modestly be mitigated with an effective and widely to under 5%. The rebound will not be available vaccine. While there has been some sufficient to regain end-2019 level of activity promising news on vaccines, widespread by the end of 2021. China’s recovery will be global distribution will be still required for a much stronger than most other countries, 43 Berne Union 2020
with the IMF projecting growth of about 10% a robust recovery until an effective COVID-19 over 2020-2021 (1.9% in 2020 and 8.2% in vaccine is widely available. 2021). China was the first economy to face Foreign direct investment is a key driver a shutdown, and it rebounded faster than of global value chains and has increasingly expected thanks to strong policy support been flowing to emerging markets. However, and resilient exports. By contrast, India’s GDP the pandemic has been a shock to investor contracted much more severely, by 10.3%, confidence and a quick rebound in FDI but is expected to rebound by 8.8% in 2021. should not be expected. Most developing regions – the Middle East, North Africa, Central Asia, Sub-Saharan Implications for Berne Union Africa and Latin America – are expected by members the IMF to recover and grow by around 3% in The projected recovery in output and 2021, with wide differences among countries trade in 2021 is a positive sign, but the in each region. recovery is taking place within a turbulent The shock to tourism and the oil sector operating environment. A combination of has hit many developing countries hard, but a solid economic and trade recovery, weak those with more diversified economies are international investment, and heightened better positioned for a stronger rebound. risks will define BU business activity. In ASEAN members are projected to experience this environment, as claims rise due to the a robust recovery of 6.2%, as they are closely economic slump in 2020, it is reasonable to integrated into Chinese manufacturing expect demand for credit and political risk supply chains and their performance will be insurance cover to be robust. BU members closely affected by developments in China. will in turn be expected by their clients to Sovereign debt levels are increasing use their capacity for risk management and significantly. Sovereign debt in emerging innovation to support the business recovery. markets and developing economies is Many public sector BU members have projected to rise by over 10 percentage already been pressed by their governing points to 65% of GDP by the end of 2021, authorities to step in and address market although low interest rates should contain gaps highlighted by the pandemic. Debt debt service. Yield curves (which show management challenges and the call for debt interest rates across different maturities) service suspension in heavily indebted low- quickly dropped and flattened in most income countries, plus new capital flows, are currencies and are expected to increase only an added complication for BU members. modestly at longer maturities in 2021. There are also important medium-term implications to consider. Pursuing SDGs Trade and investment and Agenda 2030 has been thrust into the Global trade was once the cutting edge of spotlight as a renewed priority, creating the global economy, but since the GFC, trade opportunities and raising expectations for growth has averaged only 2% annually. Due sustainable lending and risk management to the pandemic-induced shutdown, global practices. In addition, and as we saw after trade volumes will contract by 9.2% in 2020 the GFC, it will take time before the global according to the WTO – a decline similar economy fully recovers and is performing at to that experienced during the GFC. Global its potential, most likely beyond 2025. trade volumes are expected to rebound by Moreover, climate risk will need to be fully 7.2% in 2021. factored into BU members’ risk and portfolio The WTO projects regional export management practices, addressing both volumes to recover and grow in 2021 by the impact of climate change itself and the 5.4% for South America, 5.7% for Asia, 6.1% transition to a low-carbon global economy for Africa, the Middle East and CIS member now well under way. The COVID-19 pandemic countries, 8.7% for Europe, and 10.7% for revealed how unprepared most nations North America. For the medium term, the and institutions were to manage system- IMF is projecting global trade volumes to wide risks, and climate change poses a grow by around 4% on average. comparable risk management challenge over Notwithstanding the more positive the long term. projected trade environment, the trade The bottom line? The global economy outlook is difficult for tourism-dependent is now climbing out of a deep hole. Berne economies and uncertain for oil exporting Union members will have a central role to 44 nations. Travel and tourism are unlikely to see play in making the recovery happen. n Berne Union 2020
Trade policy under the MEGA TRENDS Biden administration
Robert Kahn, Director of Global Strategy and Global Macro at Eurasia Group, offers a brief survey of key international, regional, and bilateral issues for the new administration.
When it comes to trade policy, you can’t where the Trump go home again. The pursuit of freer, more administration has open trade that anchored economic policy been a source of since the Second World War reached its disruption. A more zenith even before the election of President consistent, multilateral Trump, and the COVID-19 pandemic has US approach will make only intensified pressure on the US to the most difference in adopt more protectionist policies toward shaping the future of China and other major trading partners. the WTO and devising Backlash to globalisation manifested itself a global approach to Robert Kahn in bipartisan opposition to the Trans Pacific digital taxes. Partnership (TPP) in 2016, which led to Since China first entered the WTO, the US, President Trump’s removing the US from the Europe, and Asia have expressed growing TPP and subsequent US withdrawal from concerns over its ability to use loopholes its traditional leadership role in multilateral in global trade rules to advance its model institutions such as the World Trade of state capitalism. While Trump took a Organization (WTO). unilateral approach to addressing China- Still, elections matter. President Biden driven global market distortions, Biden is is unlikely to return to robust trade likely to enlist US allies to form a stronger liberalisation, which has reached its political front against Beijing. A key objective of that and practical limits, but he will aim to effort will be revamping the WTO. reassert US leadership in the multilateral Electing the WTO’s next chief will be order, continue efforts to bolster domestic the first step to re-establishing the global manufacturing in strategic sectors, and seek trade watchdog’s relevance. A new director opportunities to strengthen the role of labour general will be expected to resolve the and environmental considerations in existing current gridlock over the appellate body, trade arrangements. push members to deliver on long-running Ongoing US free trade agreement talks, and enact a reform agenda to make (FTA) negotiations with Brazil and Kenya the WTO more relevant in the fast-evolving, are unlikely to become congressionally largely digital, and more complex 21st- ratified FTAs given the likelihood that Trade Century economy. A more up-to-date set of Promotion Authority (TPA) will expire rules will act as an important firewall against without being extended in mid-2021. A the resurgent protectionist instincts many bilateral agreement with the UK will hinge countries are exhibiting. on the terms and conditions of the UK’s The EU expects Biden to end a US trade relationship with the EU. Trade policy blockade on appointments to the appellate authority and influence are likely to be body, the organisation’s top adjudicator, more broadly distributed across the Biden which has lacked a quorum to issue rulings administration than they have been under since December 2019 – meaning that the the Trump administration, which saw a WTO cannot enforce decisions it renders centralisation of authority under US Trade on trade disputes. Despite longstanding Representative Robert Lighthizer. US complaints over the appellate body’s overreach – complaints that some other Biden’s international agenda WTO members also express – the new The Biden administration will bring US administration will likely seek to resolve the 45 leadership to bear on key international issues stalemate with a broad-based agenda for Berne Union 2020
WTO reform that broaches subsidies, state- But ending a trade war does not mean owned enterprises, and technology transfer. reviving the Transatlantic Trade and Biden will likely fold these initiatives into Investment Partnership launched under a broader campaign against China, aiming President Obama – for which there is no to counter the perception that Beijing has appetite in either the US or the EU. While been able to cheat the spirit of the rules- Washington and Brussels will not rule out based multilateral system, if not the letter. mini-deals to further trade liberalisation, they That campaign will include efforts both to are more likely to focus on strengthening heighten scrutiny of the ways in which China common ground in other domains, including uses its policy banks and to boost the US cybersecurity and climate change. The Ex-Im Bank and the Development Finance US is likely to engage early on –and find Corporation as counterweights. challenges in – the EU’s plan for border Washington’s stance on digital taxes is carbon adjustment, which is expected to likely to follow a similar path. US partners be made public in greater detail by mid- will likely be open to extending an end-of- 2021. The US would seek to ensure that year deadline for negotiations aimed at the EU’s methodology for calculating establishing a global digital tax regime under carbon intensity is applied uniformly across the auspices of the OECD. That heightened imported products, and that US exporters in willingness will likely translate into additional jurisdictions with robust climate policies are deferrals and/or promises by countries credited and not exposed to possible ‘double such as France that have already adopted taxation.’ digital services taxes to reimburse excess tax Meanwhile, the US will continue working payments, ultimately paving the way for a towards an FTA with the UK. Washington global regime after tough negotiations well will chart the course of discussions, and the into 2021. UK will want to build on negotiations during the Trump administration by enticing Biden Key regional and bilateral issues with sweeteners on climate, the environment, US-EU trade relations stand to receive an and labour standards. Still, implementing immediate political boost, even if some of an FTA will remain challenging – especially the underlying tensions continue to prove as TPA will expire in June 2021, removing challenging to resolve. The resurrection of the chances of a fast-track approval in robust transatlantic ties will help both parties Congress and subjecting the agreement to form a more coherent front in countering amendments and the Senate filibuster (if it China, both via better coordination of survives). domestic efforts and joint initiatives globally. Trade negotiations with Brazil will likely But trade irritants including the long-running be slowed or paused, not only due to the aircraft subsidies battle at the WTO will unlikely renewal of TPA in 2021, but also persist, and efforts to deepen commercial due to greater confrontation by a Biden ties will remain difficult. administration over Amazon deforestation Biden could make quick and easy progress and other environmental concerns. by unequivocally removing the threat of Finally, while further trade escalation with auto tariffs and ending Trump’s steel and China will be unlikely in the first year of the aluminium tariffs. The EU would respond by Biden administration, substantial tariff relief lifting countermeasures and withdrawing its will remain gradual – and potentially elusive WTO complaint against those US tariffs. – given likely US demands for concessions Digital tax discussions will get a new lease from Beijing on market access, intellectual on life under Biden. Biden is likely to continue property reform, and state subsidies for using Section 301 probes in instances where private industry that Chinese leaders would US companies are being unfairly targeted, be unlikely to make. n but he is just as likely to register a complaint with a functioning WTO. His senior foreign Eurasia Group is a leading global political policy adviser Antony Blinken has pledged to risk advisory firm. Founded in 1998, end the ‘artificial trade war’ with the EU, and corporates and investors come to Eurasia Biden will not continue Trump’s tendency to Group for political risk analysis when use Section 232 and 301 authority to justify they are seeking to understand global tariffs as a punishment of first resort against and country-specific political dynamics, policies or developments that he deems anticipate market movements, maximise 46 undesirable. returns and manage risks. Berne Union 2020
Boost supply chain MEGA TRENDS resilience through advanced capabilities
By Stefan Schrauf, Operations and Supply Chain Europe Partner, PwC Germany
The COVID-19 pandemic has created a build overall resilience. huge amount of uncertainty, but one thing How can companies is becoming clear: it’s time for companies get there? to take a new look at their supply chain priorities. First things first In the past, cost has been the primary COVID-19 has had driver behind many companies’ efforts to immediate impacts on improve or digitise their supply chain. And supply chains. Across though cutting costs is still important, some industries, companies companies are now optimising their supply have faced major Stefan Schrauf chain from a holistic perspective to improve shocks on both the return on capital employed (ROCE), (see supply and demand side. Demand volatility Figure 1). has significantly increased, and numerous Supply chain setups should be driven not companies have faced unprecedented just by cutting costs, but also by enabling drop-offs in demand. Some companies are sales and getting the most out of assets, to adjusting their supplier base and looking to
Figure 1
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most of these capabilities, companies can Some companies are develop a supply chain ecosystem that’s adjusting their supplier both autonomous and integrated – so they can respond with speed and agility to base and looking to challenges as they arise. implement multi-sourcing strategies. Others are Advanced capabilities are critical to making supply chains resilient considering greater Advanced supply chain capabilities draw regionalisation and near- on technology, but developing them can require much more than choosing a software shoring of supply chain solution. It also requires empowering activities. people to use the applications chosen and redesigning processes in order to take advantage of them. A recent PwC report, Connected and autonomous supply chain ecosystems 2025, took a closer look at implement multi-sourcing strategies. Others how companies with the most highly are considering greater regionalisation and advanced supply chain capabilities – the near-shoring of supply chain activities. For ‘Digital Champions’ – use those capabilities example, companies with a manufacturing to improve supply chain performance and footprint in Europe are shifting their supply overcome key supply chain challenges. It base towards European suppliers. According examined those capabilities that are critical to an analysis by PwC, companies have been to managing supply chains when a crisis hits, reassessing make-versus-buy decisions, and to ramping back up once it eases. and adjusting capacity by up to 20%. Still The report discussed a number of others have developed new go-to-market key capabilities, including supply chain approaches and used different channels to transparency, closed-loop integrated reach customers. planning and execution, dynamic All of these changes mean that the time is segmentation and smart logistics – all right for companies to take a closer look at of which are turbocharged by artificial the overall supply chain strategy and make intelligence (AI). their supply chains both resilient and cost- effective. To do that, companies should focus Greater supply chain transparency on optimising their footprint and enhance can help companies better identify their financial and cost resilience. And they and proactively manage risks should draw on the power of advanced Having a 360-degree view of supply chains supply chain capabilities. By making the – not just within their own organisation but
Figure 2
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ahead when it comes to this area. A full 62% Advanced supply of the group had implemented supply chain MEGA TRENDS chain capabilities transparency (see Figure 2). Enhancing supply chain transparency draw on technology, gives organisations increased visibility over but developing them inventory and capacity, making it easier to can require much identify and manage risks and respond to events, including sharp drops in demand more than choosing a or raw materials bottlenecks. Companies software solution. It also can manage stock levels more precisely, as information on the arrival of raw materials, requires empowering components of production lines, or finished people to use the goods in warehouses is constantly updated. applications chosen and That’s especially critical for businesses operating in multiple countries, which could redesigning processes in be facing varied operational restrictions. order to take advantage Another aspect of supply chain transparency is near-real-time visibility of them. over logistics flows, which helps companies manage unique challenges. For example, track-and-trace capabilities help attract customers and strengthen existing relationships by making it possible to along the entire value chain, from suppliers estimate arrival times and continually update through to customers – can give companies them based on near-real-time information, a competitive advantage during turbulent and to provide proactive alerts that keep times and times of relative calm. PwC’s customers aware of shipment status (see report showed that Digital Champions are far Figure 3).
Figure 3
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Cash flows are tight, and some companies may be tempted to cut their investments in the development of advanced supply chain capabilities. But that is likely the wrong approach. These investments can pay off, not just in lowering supply chain costs, but in increasing overall resilience.
AI turbocharges transparency Stay the course to be ready to ramp up Transparency can be significantly accelerated As governments ease the restrictions they by the use of AI. In the PwC survey report, had put in place to combat the spread 43% of Digital Champions indicated of COVID-19, transparency becomes they were making use of AI to generate increasingly important. Companies will need transparency (see Figure 4). to be flexible with their suppliers and make By detecting relevant patterns in the vast sure they can meet rising demand. amount of data flowing from the supply Cash flows are tight, and some companies chain, AI can help supply chain managers may be tempted to cut their investments in improve visibility into key metrics and better the development of advanced supply chain understand the complex workings of their capabilities. But that is likely the wrong supply chain. This could be the first step on approach. These investments can pay off, the way to an autonomous supply chain that not just in lowering supply chain costs, but in is resilient to shocks. increasing overall resilience. AI-powered supply chain transparency To learn more about other advanced solutions can help companies more supply chain capabilities that can help proactively identify and manage supply chain companies take their supply chain to the risks, such as supply shortages, shipment next level, take a look at PwC’s Connected delays or the financial risks of supply chain and autonomous supply chain ecosystems partners. By simulating different options 2025 report1. n to address potential threats (for example, selecting an alternative supplier, rerouting shipments), companies gain a better Note understanding of their potential impact on 1 https://www.pwc.com/digitalsupplychain service levels, lead times and costs. That makes it possible to take proactive measures that will minimise risks to the supply chain.
Figure 4
50 Berne Union 2020
Top geopolitics risks MEGA TRENDS for 2021: Expect unique turbulence
By Dr Nicholas Redman, Director of Analysis, Oxford Analytica
The top geopolitical risks for 2021 centre on considered for full COVID-19, namely the search for a vaccine, licensing will have the challenge of inoculating hundreds of to demonstrate at millions of people, and the difficulties of least 50% reduction economic activity in the pandemic. Add in in disease in the test the prospect of a parting of ways between group and safety data the US and China over 5G, with both spanning at least one countries vying for the mantle of the world’s year, shown in 3,000 leading tech power, and the next year will be vaccinated persons. one of unique turbulence. Most early-roll-out Dr Nicholas Redman In less than a year, there have been 43 vaccines will probably million cases of COVID-19 globally and over be licensed under types of EUAs. 1.1 million people have died. At the end of Less than ideal efficacy for first vaccines October 2020, a dozen vaccines were in may be considered, and indeed this is likely. advanced trials globally, with initial results They will still be useful, as they would lower expected before the year-end. This created mortality – even if they do not stop the the prospect that one or a few might be spread of infection – though some social approved, manufactured and released in distancing measures are likely to persist. the first quarter of 2021. Because they are Beyond the scientific hurdle of intended to be given to huge numbers developing a good vaccine, its fast and of healthy people, rather than far smaller efficient distribution on a global scale numbers of sick people, the testing and requires unprecedented cooperation approvals process is usually lengthy and among manufacturers, governments, cargo exhaustive. The urgency of finding a COVID-19 operators and ground workers. No vaccine vaccine has led to an unprecedented surge in has previously been administered worldwide research and development, partly in an effort at maximum capacity and in minimum time, to shorten what would usually be a timeline of making this one of the biggest diplomatic several years. and logistical challenges encountered by any immunisation programme. The vaccine race India, China and Europe have the largest For regulatory bodies, safety is non- capacity to produce vaccines. In 2019, negotiable. Underscoring this, the US Food the Coalition for Epidemic Preparedness and Drug Administration (FDA) strengthened Innovations (CEPI) was set up to work on its guidelines on COVID-19 vaccines in vaccines for five priority diseases and also October. It now requires trials to have two for emerging threats such as COVID-19. A months of safety data on at least half of CEPI survey of production capacity involving their Phase III study participants after a 113 manufacturers from 30 countries found second dose of vaccination (if it is a two- that two to four billion doses of a COVID-19 dose regime) before applicants can seek an vaccine could be supplied by the end of 2021 Emergency Use Authorisation (EUA). Most (catering for 20% of the world population) adverse events occur within two to three without compromising other pipelines. months after immunisation. Historically, access to vaccines and The FDA has also specified that a vaccine therapeutics has not been equitable. 51 Berne Union 2020
International access to smallpox and polio at home and abroad was quickly followed vaccines, as well as HIV drugs, followed only by a demand shock, as consumers retreated after high-income countries had procured due to a combination of lockdowns, sufficient supplies. This could happen again unemployment and caution over what the with SARS-CoV-2, the virus that causes future held. The impact varied considerably COVID-19. The Bill and Melinda Gates across the US, with those states heavily Foundation estimates1 that while 33% of reliant on hospitality and tourism bearing the COVID-19 deaths can be averted by selling brunt. Manufacturing centres suffered too. vaccines to high-income countries, this Forecasts for the third quarter see GDP number becomes 61% with equitable access. rising by 30% or more, largely but not wholly The transportation and delivery of restoring the lost output. Manufacturing vaccines, most of which require cold storage has recovered unevenly, while consumer or freezer support, will be a major hurdle. sentiment remains fragile and vulnerable to The International Air Transport Association a winter wave of infection, further layoffs estimates that 8,000 cargo aircraft will be and constraints on government financial needed to supply a single dose of a vaccine and social support. The regional Federal for the world’s population. However, it is the Reserve banks already report that the vaccine’s journey beyond the aircraft that is pace of recovery in tourism and retailing most vulnerable in areas without a reliable is slowing. That suggests the states most power supply. heavily dependent on accommodation and The WHO estimates that more than 50% food services will take longer to recover. of the world’s vaccines go to waste for this Along with uncertainties about the long- reason. This is something the world cannot term impacts of increased digitalisation, afford with the COVID-19 vaccine in short from remote working to e-commerce and supply and where the nature and stability of online services, this clouds the outlook for the vaccine will be extremely important. commercial construction and real estate. The The level of vaccine dose needed to elicit agricultural sector faces an extended period an immune sufficient to prevent severe of low prices and so too does the energy disease or contracting COVID-19 is not yet sector. known. This also means it is unclear whether The key question for the US economy, one or two doses of a vaccine are needed and for many economies around the world, – twin doses have been eliciting stronger is whether they will suffer a relapse in the immune responses and may be needed for fourth quarter of 2020 and the first quarter older people whose immune systems are of 2021, as COVID-19 case numbers and weaker. fatalities rise in many places. Already in To eradicate the virus completely, very October there were signs that economic high levels of induced population immunity recovery and employment were slowing are needed (over 70%), depending on the as the virus resurged. Add in the end of efficacy of a vaccine and other interventions. furlough schemes in many parts of Western If the vaccine in use has sub-optimal efficacy, Europe, and it is entirely possible that this coverage threshold may be even the V-shaped recovery could become a higher. This has long-term repercussions for W-shaped one. Some businesses have health, and also disproportionately affects adjusted to operating in a COVID-19 economies. environment but many cannot, or at least are only able to operate at greatly Economic challenges reduced capacity. The loss of demand, The IMF projected a loss of $11 trillion and uncertainties as to how much of it is from the global economy in 2020-21 and permanent, further darken the picture. In $28 trillion over the period 2020-25, even most of the world, if not all of it, economic with the $18 trillion invested to tackle the activity will take place under the cloud of pandemic. Other metrics on economics COVID-19 for all of 2021 and into 2022. from the Institute for Health Metrics and Evaluation show that extreme poverty has The tech divide in telephony gone up by 7%, with 68 million people The year 2020 started with a truce of pushed below the poverty line this year. sorts in the trade war between the US and In the US, GDP fell by 31.4% in the second China, as the two countries signed a ‘phase quarter of 2020, compared with the first one’ agreement that removed some of the 52 quarter. The supply shock of closed factories tariffs that had been applied in tit-for-tat Berne Union 2020
equipment or software. The world now stands Only three businesses are able to deliver MEGA TRENDS on the verge of a ‘tech end-to-end software solutions needed for advanced chip production: US-based separation’ between its Cadence and Synopsys, and Germany’s two leading powers. If Mentor Graphics, which operates in the there is a parting of the US and therefore also falls under these restrictions. Huawei systems run older ways, two separate sets of versions of their design tools. If these cannot standards and two distinct be updated or supported, their efficacy will soon diminish. technology spheres could Companies in certain areas of develop in time. manufacturing tools are the sole providers of indispensable components. Of these, KLA- Tencor, Applied Materials and Lam Research exchanges over 2019. However, already the are US-based. Given these bottlenecks, dispute had developed a more disturbing the latest US measure effectively makes it aspect: for while the trade war began as an impossible for Huawei to acquire the chips it effort to reduce the large US trade deficit needs to manufacture its products. and to revive blue-collar jobs there, it soon Huawei sought to stockpile as many acquired a technological facet. Parts of the components as possible before the ban US establishment worried that China was took effect. It might run out of smartphone positioned to steal a march in rolling out 5G components in early 2021, but could have telephony at home and abroad, which would enough components for 5G base stations to help the country to become richer, to get a last through 2021 and sometime beyond. head-start on other emerging technologies Thus far, China’s response has been and to set 5G standards globally. And in the muted. Possibly it is hoping for a change vanguard of this were companies that had of administration in the US, and a chance been built partly on stolen US intellectual to ease the stranglehold on Huawei. property. The company still needs US technology. To slow China down, in May 2019 the Moreover, if the company, and by extension Trump administration banned US companies China, are not able to deliver 5G at home and from shipping components and technology abroad as planned, setting standards along to Huawei, and imposed licensing obligations the way, it will deal a blow to China’s hopes for semiconductor manufacturers using to become the world’s leading nation in AI, US equipment or software to produce robotics and autonomous systems in the Huawei-designed chips. Huawei was able mid-2030s. to withstand these measures by purchasing US policymakers might calculate they generic components instead of custom- can stop Huawei in its tracks, but if Beijing designed chips or routing purchases becomes convinced that no deal is possible, through third parties and third countries. It it will direct huge resources into breaking even reported sales growth, albeit driven free of the limitations and US dependencies largely by the Chinese domestic market. To that until now it has accepted. provide long-term solutions, Huawei had The world now stands on the verge of a invested in alternative options, including ‘tech separation’ between its two leading powerful chipsets able to replace imported powers. If there is a parting of the ways, US components. Huawei’s Kunpeng chip, for two separate sets of standards and two instance, is slated to take over the role of distinct technology spheres could develop in Intel-sourced components. time. Few countries would be able to avoid The US also stepped up the pressure making a choice between one or the other. on allies to bar Huawei from their 5G The implications of that would resonate well infrastructure, with limited success. Then beyond 2021, and quite possibly long after in August 2020 it announced that it would COVID-19 has been reduced to a manageable ban the sale to Huawei of all semiconductor problem by the development and rollout of chips using US equipment or software. vaccines to billions of people globally. n This targeted the greatest vulnerability in Huawei’s plan, because the new measures Note prohibited the sale to Huawei of all 1 https://www.gatesfoundation.org/goalkeepers/ 53 chips manufactured worldwide using US report/2020-report/#CollaborativeResponse Berne Union 2020
WTO on the enhanced need for trade finance cooperation
Marc Auboin, Counsellor at WTO, examines the phases of the global response to what is proving to be a crisis that has very different features to others and highlights the need for accelerated cooperation in financing trade.
Since the beginning of the COVID-19 crisis, both a supply and the World Trade Organization (WTO) has demand shock, than been working with its partners, a high-level it was a decade ago. group of experts in trade finance (private In the first phase of banks, export credit agencies and multilateral this crisis, successive development institutions), to monitor the regional lockdowns market situation and alert public authorities have resulted in on rising trade finance shortages. Based on significant operational the experience gained in previous crises, challenges. governments and international institutions Legal documents have intervened in various ways. Marc Auboin necessary to process The ‘structural’ shortfall of trade finance trade finance has been estimated to stand at around transactions (customs documents, invoices, $1.5 trillion in recent years, mainly in bills of lading) have either been delayed developing countries, according to the Asian or not transmitted at all. These difficulties Development Bank’s (ADB) trade finance have come on top of the challenges of gap study. This shortfall, measuring the moving goods physically. Interim solutions excess global demand for trade finance, is have worked in some countries, with the the outcome of a combination of factors: increased use of scanned documents and macroeconomic (low savings that could be e-documents (such as e-bills of lading). turned into loans in developing countries), Certainly, the digitization of documents has financial (the developing state of the financial been given a boost during this period. All in sector), and international (the reduction all, the trade finance industry has ‘coped’, in the number of correspondent banking despite all prevailing physical and procedural relationships since 2009-10). difficulties, and it managed to sustain the Previous economic and financial crises, flow of essential medical equipment and such as the 1997-99 crisis of emerging foods essential during this period, around the economies in Asia, Latin America and Central first semester of the year. Europe, and later the global financial crisis of As operational issues were gradually 2008-9, taught that existing shortfalls widen resolved, liquidity issues and the when the perception of risk increases well deterioration of credit risk came to the beyond its actual level. International banks forefront of concerns about trade finance. thus ‘re-shore’ lending, focusing on ‘safer’ Significant liquidity shortfalls emerged customers. While this has already happened in the poorest countries. In Africa, the since the beginning of the COVID-19 crisis, tightening of liquidity was immediate as this crisis is like no other. several international and regional banks had either cut their funding lines to African The differences this time around financial institutions for trade transactions Present difficulties do not originally come or increased its cost. In other developing from the financial sector, which is much countries, including in Latin America, 54 better equipped and prepared to sustain Northern Africa and Central Europe, liquidity Berne Union 2020
also dried up, notably in US dollars. extent of claims and ‘losses’ would not be Financial institutions also showed realized immediately. MEGA TRENDS increased risk aversion as overall credit risk Multilateral development banks (MDBs) deteriorated. With the health crisis persisting, had also been in the ‘field’ from day one, banks had been expecting increased filling some of the gaps left by a withdrawing payment failures from counterparties, financial system. The International Finance beyond sectors initially impacted by the Corporation had received support from lockdowns (airlines, aeronautics, tourism, and its Board of Directors on its trade finance to some extent the automotive sector). It program, which was integral to the World quickly appeared that one-off extensions of Bank Group crisis response, in supporting the the terms of payment by creditors would be imports and exports of essential goods and sufficient to alleviate this crisis. commodities of the poorest countries. Demand In many developing countries, sovereign for IFC trade finance facilities had increased by risk deteriorated along with corporate risk, 110% since the start of the crisis. The African resulting in increased caution by international Development Bank supported local banks banks to engage in cross-border trade in their requests to have letters of credit finance. Importers’ banks in poor and even endorsed internationally. Supply chain finance middle-income countries could not find programs of the ADB, the EBRD and the IFC counterparties for financing many types of were in very high demand, reflecting the effort goods, ranging from energy commodities to preserve the export capacity of developing to consumer goods. Domestically, the high countries in their countries of operation. The demand for large banks’ balance sheets also Islamic Trade Finance Corporation also worked explains the greater reluctance to engage in through local financial institutions to support cross-border trade operations. SMEs across its membership. Requests for multilateral banks’ facilities have come from Public sector support over 80 countries, showing the global extent of Public authorities took on the challenge of the problem. supporting markets. As in previous crises, the The trade finance situation is expected to first challenge is to channel liquidity and credit remain challenging in the months to come, guarantees to SMEs, as smaller companies as demand for traded goods picks up, while are the most ‘cash-sensitive’ in supply chains. country and corporate risk continues to In many countries, central banks provided be weak in many countries and defaults of very large amounts of liquidity to the financial payment materialise. system and government-sponsored schemes such as (trade) loan extension, repayment WTO highlighting the need for trade holidays, undertakings and credit guarantee finance cooperation schemes have offered significant relief to Against this background, the Director- smaller and large companies, particularly General of the WTO raised the profile of those on the main routes of trade. The Federal trade finance as one of the many pressing Reserve revived 14 swap agreements with issues requiring international support and central banks around the world, in order to cooperation. On July 1, 2020 he issued a provide US dollar liquidity. joint statement with six other heads of Credit insurance schemes have also been multilateral development banks, pledging helpful in supporting receivables finance and greater coordination in providing support to other forms of finance used in supply chain trade finance markets, particularly towards trade, notably by SMEs, thereby avoiding developing countries. a collapse of supply chains. As described In parallel, the Director-General has by the Berne Union, a significant response pledged to work with the private sector (the from insurers of export credit, resulted in International Chamber of Commerce and the supporting traders – through flexibility B20) to the same aim of pooling resources and relaxation of terms for policyholders and support to trade finance markets. The (exporters), increased capacity through presence of public actors in markets is visible, new direct cover and reinsurance by and it provides for a stabilizing effect of public insurers, support for export finance markets. The situation will continue to be (including working capital), deferred monitored carefully by the WTO through the payments schedules, extended repayment expert group on trade finance, which remains periods, and waivers of some interest and a very useful forum of dialogue between all the fees. However, this meant in part that the full parties involved in supporting trade finance. n 55 Berne Union 2020
Risk Outlook 2021
The chief economist of Atradius and the head of macroeconomics for Euler Hermes give their view of the top five risks facing global trade in 2021.
John Lorié, Chief restaurant hits GDP, but hardly global trade. Economist, Atradius As opposed to the GFC, the current crisis Credit Insurance has clear winners, such as IT products and Global trade resilience services as a result of working from home during the COVID-19 crisis: and the much higher demand for medical Will it last? equipment and drugs. These are largely When COVID-19 knocked traded merchandise. on the door in the early Moreover, this time governments and spring, hopes for global merchandise central banks have intervened much earlier trade were depressed. At that point, our in the crisis than during the GFC, and entire estimates were of a contraction in the range sectors as well as households are receiving of 15%-30% in 2020. That was based on the support rather than just the financial sector. experience in the Global Financial Crisis This cushions demand fallout resulting from (GFC) when global trade contracted 13%, the high level of uncertainty in this crisis. while GDP contracted by ‘only’ 0.1%. This That lower impact on demand helps alleviate time global GDP was forecast to shrink by pressure on imports. But, like the GFC, the 5%, so such a deep contraction in global role of China is crucial. It is the only major trade in 2020 could even be considered an economy that is forecast to grow in 2020. optimistic forecast. But now, more than six After stringent public health measures during months since the global COVID-19 outbreak the early spring, the country has embarked began, matters look better. The damage to on a fairly steep recovery path, boosted by global trade in 2020 is now expected to be government stimulus, predominantly on the much milder with a 10% decrease compared supply side: public investments, support to 2019, followed by a rebound of 7.5% in for state owned enterprises and liquidity 2021 as the global economy recovers. provisioning via the banking system. While Several factors have contributed to the consumption growth is still muted, exports relative resilience of global merchandise have soared. Finally, unlike during the GFC, trade. The GFC was a crisis in the financial financing of trade has remained in place, system that spilled over to the real economy. supported by governments that have given The COVID-19 crisis is caused by lockdowns export credit agencies more leeway. and travel restrictions that particularly affect While these factors support global trade, the services sector (especially hospitality, the path for 2021 is fraught with risks, entertainment and tourism). These service predominantly, though not limited to, the sectors are a substantial part of GDP, downside. The answer to the question of but the merchandise trade component is whether the resilience of global trade lasts relatively small. Not going to the cinema or a depends on the following five factors.
The GFC was a crisis in the financial system that spilled over to the real economy. The COVID-19 crisis is caused by lockdowns and travel restrictions that particularly affect the services sector (especially hospitality, 56 entertainment and tourism). Berne Union 2020
First, the main risk is a second wave of especially those of governments, this may coronavirus infections that would result in result in higher finance costs at the very MEGA TRENDS renewed lockdowns globally. As restrictions least. Like in the GFC, trade finance may then are lifted and social interactions increase, the be disproportionally negatively affected. transmission rate has been picking up again. Fourth, protectionism, especially the Should this trend continue, governments resumption of the trade war between China reimpose the kind of restrictions that and the US, is a risk to trade recovery. depressed economic activity during the first Protectionism has been on the rise since the wave of COVID-19. This would further raise GFC, and 2020 confirms this trend thus far, the level of uncertainty in the economy, again albeit at a slightly slower pace than during depressing consumption and investment 2019. Harmful trade practices have outpaced by households and firms. Trade would be liberalisations by roughly three-to-one in negatively affected. This risk is increasing 2020, somewhat lower than the four-to-one in some European countries that suffer ratio last year. While this drags on global from new COVID-19 outbreaks, threatening trade, protectionism in general is a gradual, to push their economies into a double dip though harmful, process. The trade war recession. between China and the US is another matter. Second, national governments may not Currently the average level of US tariffs on get their policies right. The recovery hinges Chinese imports is seven times higher than in on support from national governments. 2017, with each round of tariff levy negatively During the lockdowns in the early spring impacting bilateral trade. Due to the ‘Phase of 2020, governments were generous to One’ deal that the US administration struck prevent a complete meltdown of the global earlier in the year, a truce exists. But the economy. This was necessary, but not resumption of tariff levying between the US sufficient. During the recovery phase of and China (and potential extension to the the crisis, governments should continue to EU) still hangs over the trade environment, provide support. But their support should independent of the result of the US strike the right balance between keeping up presidential election. The uncertainty that household income on the one hand, while comes with it is negatively affecting the maintaining the incentives to switch jobs if trade environment. needed. Governments should also help viable Fifth, to end on a high note, there is a firms, rather than zombies, through the crisis conceivable upside scenario for global trade and thus allow the Schumpeterian creative in which recovery is more rapid. This is only destruction process vital for economic possible should the four aforementioned development, and global trade. downside risks not materialise. In this upside Third, central banks, and especially the scenario, scientific advances facilitate a Federal Reserve and the European Central faster easing of public health restrictions. As Bank, have a critical task to keep the world a result, social distancing measures can be awash with money and finance costs low. relaxed earlier than expected in 2021. The Premature tightening may lead to financial swifter return to normal fosters increased unrest, falling equity prices, financial flows confidence and spending among consumers, away from emerging economies and US as well as businesses. This allows for a more dollar appreciation. Against the backdrop robust pace of economic recovery in 2021, of higher debt levels around the globe, with a clear positive impact on trade as well.
To end on a high note, there is a conceivable upside scenario for global trade in which recovery is more rapid. This is only possible should the four aforementioned downside risks not materialise. In this upside scenario, scientific advances facilitate a faster easing of public health restrictions. As a result, social distancing measures can be relaxed earlier than expected in 2021. 57 Berne Union 2020
Alexis Garatti, Head of into the overall economic system, making Macroeconomics, the identification of fragile actors a more Euler Hermes challenging issue. Credit insurers to play a key l Mechanisms of credit guarantees and very role in combating a credit rapid interventions of states and central crunch during COVID-19 banks to support demand temporarily The importance of smoothed the impact of the crisis. For the intercompany credit first time in economic history, help from According to a recent study by the Bank governments impacted the real side of the for International Settlements (BIS1), trade economy before the full materialisation of finance accounts for 20% of global GDP, a recession. a value close to that of corporate bond l Finally, as the crisis has affected all sectors financing, while bank loans to these without discrimination, risk diversification companies represent three times that has become impossible. Companies’ amount. Trade payables and receivables interlocking chains of receivables and represent core elements of working capital payables can no longer rely on the and intercompany financing. They have a key multiplicity of interconnections and on the position in the smooth functioning of global protection of credit insurers to absorb the supply chains. However, the COVID-19 crisis default of any isolated ailing trade partner. has undermined intercompany credit or trade credit through four main channels: Credit insurers and governments l This crisis has primarily taken place on the decided to share the risk real side of the economy rather than within The COVID-19 crisis has highlighted the banks or the financial system, as it was central role credit insurers can play in the case during the GFC of 2008-2009. financing the economy, both locally and The abrupt interruption of all economic internationally. They traditionally offer activity due to COVID-19 lockdowns, protection to companies via trade credit and their possible reoccurrence in the insurance (ensuring the compensation of context of a second wave, led to a a commercial debt in the event of non- fundamental disruption in the relationship payment by a customer), debt collection between customers and suppliers in the (services to help policyholders recover usually natural adjustment of payables outstanding debts from late or defaulting and receivables. Despite huge liquidity debtors) and information (providing insights injections and strong support mechanisms on creditworthiness and business, as well from governments, B2B liquidity is likely to as country risk analysis). However, in the have experienced a significant shock. current crisis, credit insurers cannot assume l The crisis has primarily affected service all the costs of this kind of systemically activities due to lockdowns, and thus non-diversifiable shock alone. This is the has had a greater impact on smaller reason why they have pre-emptively asked companies, which traditionally already governments to share the risk. Several risk- face higher difficulties in accessing sharing mechanisms between states and liquidity. Instead of a core-periphery credit insurers helped avoid a credit crunch transmission of the crisis, we have had a scenario, alongside large liquidity injections periphery-core transmission of the shock and credit-guarantee mechanisms.
Mechanisms of credit guarantees and very rapid interventions of states and central banks to support demand temporarily smoothed the impact of the crisis. For the first time in economic history, help from governments impacted the real side of the economy before the full materialisation of a recession. 58 Berne Union 2020
Were these joint interventions between the growth of credit to the private sector (households and companies) and the effective? MEGA TRENDS The evolution of working capital is difficult growth of deposits of these private actors. to measure, along with that of trade credit The non-deposited part of credit circulates in general. In order to capture the most in the economy and serves as a support of recent evolution of intercompany credit, intercompany or trade credit. By contrast, we built a proxy calculating the spread the more this spread increases, the more
TableTable 1: Risk 1: Risk-sharing-sharing mechanisms involving mechanisms involvingstates and credit insurers states and credit insurers
Country Mechanism Guarantee End date
France State guarantee (global • Loss coverage rate: 75% (relay CAP), 95% approach) (State CAP+), 100% (state CAP)
• Envelope: €15 billion (€10 billion for the
internal market + €5 billion for exports) Additional coverage on a case-by-case basis
Italy State Guarantee (to • Envelope: €2 billion Dec credit insurers • Loss coverage rate : 90% 2020 established in Italy)
Belgium Reinsurance/quota • Envelope : €903 millions Dec share • Increasing loss coverage rate with 2020 disbursements/premiums ratio
Portugal Additional coverage • Loss coverage rate : 100% (with Dec indemnities paid directly by the 2020 government)
Canada Additional coverage • Loss coverage rate : 100% up to US$ 100 No time (global approach) million limits for exports,
Domestic coverage until Dec 2021
UK Reinsurance agreement • Loss coverage rate : 90% below GBP 1 Dec (global approach) billion and 100% between GBP 1 billion 2020 and 30 billion Germany State guarantee (global • Loss coverage rate: 90% up to €5 billion ; Dec approach for German 100% between €5 billion and €30 billion 2020 credit insurer)
Norway Reinsurance agreement • Envelope : NOK20 billion and a maximum Dec of 35% of each insurer’s total coverage 2020 volume in 2020 • Loss coverage rate: 90% up to NOK1.8 billion; 100% above NOK1.8 billion Netherlands State guarantee (global • Loss coverage rate: 90% up to €1 billion; Dec approach, for credit 100% between €1 billion and €12 billion 2020 insurers established in • Envelope: €12 billion the Netherlands)
New Additional coverage (on • Surplus of 100% of guarantee and No time Zealand a case-by-case basis) premiums for the state limits
Sources: Local public authorities, Euler Hermes 59 Sources: Local public authorities, Euler Hermes Berne Union 2020
companies reduce their precautionary liquidity pool, which means that they do not During the subprime crisis, experience, or fear experiencing, payment doubts about the weakest difficulties, late payments and other payment defaults. Interestingly, Figure 1 shows that link in the banking system there is a close link between this proxy and led to a freezing of the trade credit as measured by the BIS. money market. In today’s Looking at this indicator, we can see that trade credit is not likely picking up crisis, generalised doubts despite powerful mechanisms to guarantee about the solvency of and support corporate credit in general, as well as massive liquidity injections. As companies has triggered a of now, credit granted by banks does not freezing of intercompany really finance trade, but rather inflates the credit. Euler Hermes pool of cash that companies are holding as precautionary savings. During the subprime indeed believes that the crisis, doubts about the weakest link in the number of corporate banking system led to a freezing of the money market. In today’s crisis, generalised failures at the global level doubts about the solvency of companies could rise by around +31% has triggered a freezing of intercompany by the end of 2021. credit. Euler Hermes indeed believes that the number of corporate failures at the global level could rise by around +31% by the end of 2021. previous forecast). This is equivalent to $4 In this context, we expect a yearly trillion of trade losses. In 2021, global trade contraction of trade in goods and services of in volume terms should grow +7%, and in -13% (compared to -11% in 2009) in volume value terms it could grow by +13%, finally terms. The recent depreciation of the US recovering all its losses by early 2022. n dollar should alleviate the negative price effect of the oil and commodity price shock Note in H1, bringing the trade contraction in dollar 1 BIS Bulletin, N° 24, Trade credit, trade finance, and the COVID-19 Crisis, Frédéric Boissay, Nikhil Patel value terms to -16% this year (vs. -20% in our and Hyun Song Shin
Figure 1. Global trade credit and proxy (%, y/y)
Global trade credit (%, y/y, LHS) Spread credit versus deposits in the US (%, y/y, RHS) Spread credit versus deposits in Europe (%, y/y, RHS) 40 0.10
30 0.05
20 0.00
10 -0.05
0 -0.10
-10 -0.15
-20 -0.20 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 60 Sources: Euler Hermes, Allianz Research
Berne Union 2020
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The COVID-19 stress test: MARKET TRENDS Impact and response of the export credit insurance industry
Summary analysis of the Berne Union’s COVID-19 Impact Surveys
By Paul Heaney, Associate Director, Berne Union
Although ours is a niche industry, not widely The industry understood outside of specialist circles, its response has been objectives are relatively simple: to provide comprehensive direct and indirect support for cross- and remarkably border trade through a combination of risk quick mitigation (increasing business confidence) The speed of response and credit enhancement (access to liquidity) across the export tools. credit insurance The distinctive features of the COVID-19 industry, from both pandemic – sudden onset, global but public and private disparate impact, prolonged but uncertain Paul Heaney institutions has been duration and non-financial origin – are quite remarkable. uniquely challenging to these objectives, At the time of our first survey, in late especially when applied to the highly- March, 74% of respondents had already integrated and complex global value chains implemented new mitigation measures, and which have become so prevalent in the a further 21% indicated they were in the last decades. process of implementing this. Six months The crisis has undermined both the later, by September, 94% (including 100% financing and performance of international of public Members) reported details of at trade, delivering a double blow with least some COVID-19 support measures simultaneous impacts on buyers, exporters implemented. Even those Members who and counterparties as well as insurers reported no changes in the specific areas themselves. addressed by this survey, still indicated The Berne Union has been monitoring increased vigilance, risk management and the impact of, and response to, the crisis communication processes.1 through a series of Member Surveys, the The response measures introduced by most recent of which was completed in late different institutions are highly specific to September 2020. the circumstances of the individual insurer We asked Members how the pandemic and the profile of their business. Even so, has impacted their business, what specific these can be characterised as targeting the measures they have introduced in response following four broad areas: and their expectations for the future, both 1. Supporting policyholders – including in terms of the immediate impact (e.g. everything from reduced fees and waivers to claims) and the bigger picture and structural flexible adjustments, lightened requirements, changes to the industry. This article expedited processes and non-financial summarises the main findings from support and advice 63 these reports. 2. Maintaining trade capacity – with Berne Union 2020
increased limits, greater percentage cover, crisis; maintaining access to finance and and top-up or reinsurance of the private liquidity for exporters and supporting the insurance market most vulnerable sectors. 3. Ensuring liquidity – through new In many (although not all) cases, ECAs products and extended facilities to provide have been a conduit for some part of their and/or enable bank lending for working government’s wider COVID-19 response capital and cashflow, combined with adjusted packages. The response measures reach well eligibility requirements to ensure access for beyond pure export support and show a those in need deep understanding of the holistic challenges 4. Protecting industries – with targeted facing clients. support, payment holidays and broad debt rescheduling for the most vulnerable Almost all Berne Union Members industries or obligors (in the case of the have introduced measures in direct Paris Club Debt Service Suspension Initiative support of policyholders (DSSI)). The majority of these measures are Figure 1 shows a summary of support administrative adjustments designed to measures by broad category. either speed up the processes of the insurer These measures have proven effective in (credit approvals, claims handling), or reduce their main objectives: Slowing or preventing the burden on the insured (deadlines and huge defaults in the immediate wake of the documentation requirements). A sizable portion of ECAs offer direct relief in form of premium and fee concessions, but the Figure 1 overall thrust of these measures is ‘flexibility’. Flexibility between insurer and insured, SummarySummary of ofCOVID COVID Support Support Measures Measures Introduced Introduced but most importantly flexibility between By ECA and Multilateral Membersof the Berne Union insured and buyers, allowing the proactive By ECA and Multilateral Membersof the Berne Union risk management of all parties to prevent unnecessary contagion and escalation of Introduced support measures 100% credit risks. Introduced support measures 100% Figure 2 provides a breakdown of Support for policyholders 97% Support for policyholders 97% measures in support of policyholders. Increased capacity 64% Some of the ‘other’ soft measures Increased capacity 64% introduced include crisis support, assistance Cover of 'marketable' risks Cover of 'marketable' risks 61%61% identifying new, free access to collections Increased % cover support, etc. Increased % cover 59%59% Targeting of Measures Targeting of Measures 48%48% Public/Private cooperation is critical to maintaining trade capacity IntroducedIntroduced new new Products Products 38%38% One of the great strengths of the export 0%0% 20% 20% 40% 40% 60% 60% 80% 80% 100% 100% credit insurance industry (as well as the Berne Union) is the complementary role of public and private sector. Although these two spheres of the Figure 2 industry are driven by very different imperatives, they operate in a mutually 97%97% introduced introduced support support measures measures for for policyholders policyholders beneficial symbiosis to increase capacity, EasingEasing administration administration and and providing providing flexibility flexibility diversify risks, apply data and reach clients. In medium and long-term business, one of
45 45 the principal developments over the past 20
40 40 years has been the increasing participation 40 40 35 35 of private insurers, who have increased their 30 30 appetite for these risks, alongside ECAs and 29 29 29 29 25 25 behind them in the form of reinsurance.2 20 20 23 23 22 22 Due to their public mandates, it is natural 15 15 that ECAs are at the centre of the COVID-19 10 10 response measures we are discussing 9 9 5 5 here, but it is also worth remembering the 0 0 64 DeadlineDeadline extensions extensions Flexibility Flexibility to adjust to adjustFast trackFast approvals track approvalsSpecialSpecial claims handling claims handling Premium Premium / fee / fee Other Other significant role private insurers continue terms terms processprocess concessionsconcessions Berne Union 2020
to play in maintaining cover and capacity Targeted measures for SMEs and MARKET TRENDS during the crisis. vulnerable sectors A good example is the (partial) transfer Some form of targeting in the support of so-called ‘marketable’ risks from private measures introduced is mentioned by 48% of to public sector, following the rapid survey respondents. Of these, 79% indicated deterioration of short term credit risks special facilities for SMEs. This is not to the in developed markets as the pandemic exclusion of other clients (some ECAs also unfolded. In the European Union, this is introduced schemes specifically for large formalised by the Commission’s Temporary Framework3 for State aid measures, in which 91% of EU ECAs indicate participation. But Figure 3 ECAs from countries outside the EU also report temporary interventions with a total of 61% of Reported New Temporary Cover of 61% of all ECAs surveyed reporting provision ‘Marketable’ Risks or Private Sector Top -up of new temporary cover for ‘marketable’ Includes all public institutions taking risks ordinarily covered risks, ordinarily covered by the private by the private insurance market insurance market. The precise mechanisms vary from country to country, with most ECAs 25 providing cover directly to exporters, and a smaller proportion through reinsurance of 20 the private market (see Figure 3). 9 EU ECAs Other public New products focus on providing 15 liquidity 14 In the first phase of the crisis, the biggest risk has been compression of cashflow as 10 firms struggle with a combination of logistic Number of institutions 4 disruptions, reduced demand and tightening 5 finances. For many exporters the challenge 5 2 is as much in financing their domestic supply 2 and production cycle as their final exports. 0 This is reflected in the new products or Direct cover Reinsurance Both programmes introduced by 37% of ECAs during the crisis, the majority of which relate Figure 4 to working capital and other instruments designed to provide immediate cashflow support, including inventory finance and 37% Introduced New Products Largely for Working Capital / Liquidty facilities bridge loans, as well as risk mitigation Largely for Working Capital/Liquidity facilities against demand volatility through e.g. pre- shipment cover/order-cancellation (see 14 Figure 4). Of course, domestic support for export is 12 not entirely new, and an increasing number 12 of ECAs were already providing these 10 products before the pandemic. Nonetheless,
Berne Union data shows a notable +50% 8 increase in new commitments during the first 4 half of 2020, relative to the previous year. 6 7 A full 69% of survey respondents note Number of institutions at least some degree of tightening appetite 4 from financing banks, and in many cases it is 4 these who are the direct beneficiaries of the 2 new products, with ECAs providing insurance or guarantees in respect of working 0 capital, liquidity loans, or securitisation for Ins / G'tee of Direct provision of Other new products working capital / working capital / commercial banks as well as other public liquidity loan liquidity loan lenders. 65 Berne Union 2020
corporates) but rather reflects consideration Figure 5 of the different requirements of different 48% indicate some kind of targeted measures client groups. Changes to definitions used 48% indicate some kind of targeted measures in eligibility criteria – ‘SME’ or ‘exporter’, The vast majority (79%) mention SMEs. Other targets include: The vast majority (79%) mention SMEs. Other targets include: for example – have also been used to allow Vulnerable and essential sectors / high national content / new clients Vulnerable and essential sectors / high national content / new clients greater flexibility in support. Some Members indicated no requirement for targeting due to the relatively homogeneous makeup of their exporters in any case (i.e. often largely SMEs, for smaller 52% 48%48% 52% countries). Beyond this, some are targeting sectors especially vulnerable to COVID-19 impact (tourism, construction, retail automotive), while others mention industries core to national interest, support for health infrastructure and supply (PPE equipment) somesome form form of of targeting targeting nono targeting targeting or where national content is high. ‘New clients’ are also mentioned (see Figure 5). Figure 6 Members are maintaining capacity as 64%64% inc increasedreased capacity capacity for for at at least least one one line line well as a sensible risk underwriting LargelyLargely for for cross-border cross-border activities activities Aside from filling gaps with new products and market intervention, Berne Union Members have also increased capacity 2020 within their ordinary product suite – 64% of 1818 survey respondents increased capacity and 1818 1616 59% increased their maximum percentage of cover for at least one product or overall 1414 1414 business line (see Figures 6 and 7). 1212 1313 The peculiar circumstances of this crisis 1010 entail that, to some extent, the normal rules of credit and country risk no longer apply. 88 ECAs need to direct capacity to supporting 66 viable risks, while continuing to exercise 44 prudent underwriting. This is reflected in the survey data by 22 3 3 reports from the majority of Members that 00 they are reducing limits for individual sectors, Overall Cross-border Domestic Direct Overall Cross-border Domestic Direct countries and counterparties, even while capacitycapacity specificspecific specificspecific LendingLending specificspecific increasing risk appetite overall (see Figures 8-11).
Figure 7 Demand for cover is increasing and 59% increased maxium cover percentage utilisation of products with COVID- For at least some products 19-specific measures accounts for a significant proportion of overall business A full 77% of Berne Union Members report at 51% least some increase in demand for cover. The majority is for short term credit and working capital products – in line with Members’ 8% increased provision in these areas. MLT and PRI business is relatively stable in forward pipelines, but with many projects delayed or for any / all products no increase on hold this will develop slowly. just for some specific products Of those reporting an increase in demand, 66 100% 80% indicate a notable increase from new
change in change in Overall Capacity Individual Sector Limits
16 18 16 14 15 14 17 12 12 14 10 10 8 8 6 6 9 4 4 5 2 2 4 0 0 decrease maintain increase decrease maintain increase
change in change in Individual Country Limits Individual Counterparty Limits
12 14 10 11 12 13 10 8 9 8 6 6 88 4 6 4 2 2 0 0 decrease maintain increase decrease maintain increase 5959% increased% increased maxium maxium cover cover percentage percentage ForFor at least at least some some products products 5959% increased% increased maxium maxium cover cover percentage percentage ForFor at least at least some some products products
51%51%
51%51%
8%8%
8%8% for anyfor any / all / products all products no increaseno increase Berne Union 2020 forjust anyforjust for /any all some for / products some all specific products specific products products no increaseno increase 100%100% justjust for some for some specific specific products products 100%100%
Figure 8 Figure 9 MARKET TRENDS changchange ine in changechange in in OverallOverall Capacity Capacity IndividualIndividual Sector Sector Limits Limits changchange ine in changechange in in 16 16 Overall18 Overall18 Capacity Capacity IndividualIndividual Sector Sector Limits Limits 16 16 14 14 15 17 17 16 16 15 1814 1814 12 12 12 1612 16 14 14 1410 1410 15 10 10 17 17 15 14 14 12 8 128 12 8 128 9 9 14 14 10 6 106 10 6 106 8 84 8 4 84 4 5 6 6 5 6 2 62 9 9 2 2 4 4 0 4 0 4 4 0 40 decreasedecrease maintain maintain increase increase 5 5 2 2 2 2 decreasedecrease maintain maintain increase4 increase4 0 0 0 0 decreasedecrease maintain maintain increase increase decreasedecrease maintain maintain increase increase changechange in in changechange in in FigureIndividual 10Individual Country Country Limits Limits FigureIndividualIndividual 11 Counterparty Counterparty Limits Limits changechange in in changechange in in Individual12Individual12 Country Country Limits Limits Individual14Individual14 Counterparty Counterparty Limits Limits 10 10 12 12 13 12 12 11 11 14 14 13 10 8 8 10 10 10 9 9 12 12 8 8 13 13 6 6 11 11 10 10 8 8 6 6 8888 4 9 9 6 6 4 8 8 6 6 4 4 2 2 6 6 8888 4 4 6 6 2 2 0 0 4 4 0 0 2 2 decreasedecrease maintain maintain increase increase 2 2 decreasedecrease maintain maintain increase increase 0 0 0 0 decreasedecrease maintain maintain increase increase decreasedecrease maintain maintain increase increase
clients. However, increased demand is issued, limits agreed or offers approved, not necessarily leading to higher absolute since introduction. Absolute volumes vary volumes of business, since some applications considerably depending on the size of the do not meet criteria and large amounts are for ECA and their benchmark levels of business. small ticket transactions (see Figures 12-14). When asked which measures have seen Claims due to COVID-19 have not greatest utilisation, Members responded made a significant impact so far in a variety of ways, which can broadly be – these are likely to materialise grouped as: through the first half of 2021 and l relating to a specific product line or facility beyond l relating to payment deferral, extension or A small number, 4% (three institutions), do restructuring not expect to see a notable increase in claims l relating to ‘passive measures’ in paid due to COVID-19 at all. The remainder support of policyholders including: (96%) have either already seen some degree changes to percentage cover offered, of increase (70%) or expect to see one (26%) flexible administrative deadlines and (see Figure 16). documentation requirements, fee waivers The limited claims activity in the first half and fast tracking. of the year5 is in part a feature of the natural While there may have been differing time lag in the claims cycle from default to interpretations of the question, this gives indemnification, but it is not unreasonable to some general insight into those measures conclude that the various support measures which have been most apparently successful introduced by ECAs, and governments more in the eyes of Members (see Figure 15). widely, have also played a role in preventing Regarding new products or COVID-19 an early avalanche of claims. response facilities, specifically, Members who Members do note an upward trend of reported on indicated volumes of utilisation notifications of potential claims, overdue indicated some $43 billion in policies debts and pre-claims situations, especially 67 Berne Union 2020
within short term business and primarily from Only the most vulnerable industries sectors worst affected by lockdowns (e.g. have seen broad debt restructuring service, tourism and suppliers to these). A sizable minority of responding Members Overall, the consensus is that while claims (15/69) report conducting some degree of are coming, these will only really become relatively broad (industry-wide) restructuring. visible in early 2021 as the cycle takes time This includes debt holidays for shipping, to play out – particularly while support aerospace, tourism and offshore oil and gas measures remain in place to defer this. In the sectors (see Figure 17). meantime, the current flow of protracted Many are participating in the Paris Club defaults will likely reach a peak around the Debt Service Suspension Initiative (DSSI) end of 2020. and some have received applications from sovereign debtors in relation to this. Geographically, Members indicate clusters of rescheduling across Africa (including Figure 12 Angola, Nigeria, Uganda, Zambia), Latin America (Argentina) and the Middle East 77% of Berne Union Members report (Lebanon, UAE). at least some increase in demand for cover The majority of Members are still handling rescheduling requests on a case by case Change in demand basis, with the overall message that they are 77% of Berne Union Members report supportive of this process and indication that at least some increase in demand for cover all relevant applications are being approved. 20% It is too early to assess the final 77% of Berne UnionChange Me in demandmbers reportGeneral increase 3% impact of COVID-19 on credit at least some increase in demand forGeneral cover decline Flat insurance claims, not least because it 20% is still too early to know how quickly 77% Change in demand the pandemic itself will come under General increase 3% control General decline Although claims are low at present, credit 20% Flat Products driving increases extensions and structuring are high, and the 77% industry does expect to see a spike in losses 3% 7% GeneralST credit increase specifically due to COVID-19. Insurers are increasing their Figure 137% General decline Flatworking capital claims provisioning accordingly. 9% specifically Products driving40% increases Some Members note that their current 77% cross-border credit products generally risk assessment places the expected impact 11% 7% ST credit specifically domestic products of COVID-19 lower than initial expectations, 7% generally working capital when the pandemic began. Others project a 9% Products driving increasesspecifiMLTcally credit 26% 40% specifically more cautious outlook given the continuing cross-border credit uncertainty. 7% STprodu creditcts specifically generally 11% 7% domestic products The top two risks concerning Members at New clients workinggenerally capital present are already a reality (see Figure 18): 9% specifically 40% MLT credit 1. increased corporate insolvencies 26% cross-borderspecifically credit 20% products generally 2. wide economic recession 11% domestic products The only question is how much and how generally New clients deep? MLT crediyest 26% specificallyno Finally, it is worth noting that although Figure 1420% most companies currently facing difficulties are likely to reference the impact of New client80%s COVID-19, this is not always the determining yes factor. Some sectors were struggling even no 20% before the crisis – e.g. oil and gas, airlines – and the more precarious economic 80% yes environment will continue to expose and no pressure these underlying weaknesses regardless of the course of the pandemic. 68 80% At least USD 43 bn in policies / limits issued and offers approved At least USD 43 bn in policies / limits issued and offersWh approvedich Measures have seen greatest utilisation?
Which Measures have seen greatest utilisation? 7% 9% 7% 9% 55% 30%
55% Berne Union 2020 30%
Product line or facility Passive support measure Related to deferral or extension All measures equally
Figure 15 FigureProduct 16 line or facility Passive support measure MARKET TRENDS Related to deferral or extension All measures equally At least USD 43 bn in policies / limits issued COVID Claims Experience and offers approved Relative to usual expectations COVID Claims Experience 4% Which Measures have seen greatest utilisation? Relative to usual expectations 13% 4% 26% no increase yet 4% 13% 26% 7% 13% 4% small increase beyond 26% 9% expecno increasetations yet 13% 26% significant increase beyonsmall increased expectations beyond expectations no notable increase 57% 55% expecsignificantted at increase all 30% beyond expectations no notable increase 57% expected at all 57%
57% Product line or facility Passive support measure Related to deferral or extension All measures equally
COVIDMore thanClaims half Experience of the support have far-reaching consequences for our Relativemeasures to usual have expectations a duration of 12 industry. Asked how they believe the industry months or less 4% may change in future, Members focused We asked Members to give13% an4% indication on a combination of pre-existing trends, 26% of theno increase approximate yet general timeframe for extrapolated, combined with developments 13% 26% expiration of temporary support measures more specific to COVID-19. small increase beyond We are likely to see a structural reduction introduced.expectations Respondingsignificant increase in September, 42% of in global trade for some time, as both industry Membersbeyond expectations indicated that these are set to and government adjust their commercial, expireno notable by the increase end of 2020, and57% another 18% economic and risk outlook. This may mean expected at all that measures will last until around mid-2021. we continue to see an increase in domestic Only 10% reported temporary measures with a activity among Berne Union Members. 57% duration longer than one year (see Figure 19). There will be a hardening of the private The extension of the EU’s Temporary insurance market and, some Members feel, Framework for State Aid for an additional an overall reduction in risk appetite from the six months, to June 20216 will likely change private sector. This would result in reduced these timelines, and we will likely see and more expensive reinsurance capacity further extensions, not only for measures in and potentially a larger role for ECAs relative relation to ‘marketable risks’. Nonetheless, to private insurers, but also vis-à-vis banks managing the transition away from special as they (ECAs) are required to become more support measures will be an important proactive as originators. policy decision for ECAs and governments, Other Members offer a different especially while high uncertainty remains. interpretation, whereby a general tightening of the market could drive further public and How might the industry change in private cooperation, and an increase in risk the long run? sharing as demand consolidates towards a The economic and political shifts induced smaller number of larger clients’ high-value by the COVID-19 pandemic will certainly projects.
The economic and political shifts induced by the COVID-19 pandemic will certainly have far-reaching consequences for our industry. Asked how they believe the industry may change in future, Members focused on a combination of pre-existing trends, extrapolated, 69 combined with developments more specific to COVID-19. Berne Union 2020
Risk underwriting and pricing is likely Figure 17 to become more nuanced following the experience of the crisis and the industry may Notable rescheduling activity due to COVID adopt new models. A prolonged recession % of members indicating broad restructuring of certain sectors could also increase country risk in a number Notable rescheduling activity due to COVID of regions. % of members indicating broad restructuring of certain sectors Operational changes necessitated by • Shipping • DSSI countries lockdowns are likely to remain, and the 59% digitalisation of both internal processes • Aerospace • Africa 41% and client interaction will become standard. • Shipping • DSSI countries • Tourism • LatAm Fully digital contracts will quickly usher in 59% • Aerospace • Africa new precedents in legal enforcement and 41% • Oil & Gas • Middle East • Tourism • LatAm recovery disciplines. yes no From a wider perspective, the crisis could • Oil & Gas • Middle East potentially provide momentum and incentive for governments and private companies to yes no put sustainability at the top of their agenda.
FigureMacro 18 Risks Conclusion Of most concern for the future The COVID-19 pandemic has placed a spotlight on our industry, and with that RankMacro Concer Risksn Rank Dist comes an important opportunity to Of most concern for the future 1 Increased corporate demonstrate not only resilience, but also insolvencies Rank Concern Rank Dist value. 2 Wide economic The response of Berne Union Members 1 recessionIncreased corporate has so far proven to be highly effective insolvencies 3 Increased political / in their objective to support clients and 2 country riskWide economic maintain capacity for trade finance. 4 Reducedrecession investment This success highlights the unique value activities of our industry in its role as a countercyclical, 3 Increased political / demand-driven support instrument and also 5 Supply chaincountry risk the effectiveness of a long-term perspective 4 disruptionReduced investment activities and public/private symbiosis in providing lasting stability. n 5 Supply chain disruption Notes 1 The most recent survey closed for responses on 15 September. Quoted results are based on the responses of 69 Member organisations, 59 public (ECA/multilateral) and 10 private insurers. Note that percentage responses relating to COVID-19 support Figure 19 measures are calculated within the public cohort only. 2 In 2020 H1, ECAs’ portfolio of outward reinsured MLT commitments rose to $106 billion. Some $27 Expiration of temporary support measures billon of this is reinsured by other ECAs, leaving As reportedin September 2020 $80 billion, of which a significant portion is reinsured by the private CPRI (re)insurance market 3 https://ec.europa.eu/competition/state_aid/what_ 45% is_new/sa_covid19_temporary-framework.pdf 4 Berne Union Members’ reported new commitments 40% until the end of 2020, or for domestic products in support of exporters 42% 35% less increased from $24 billion in 2019 H1 to $36 billion approximately 1 year (until in 2020 H1. 30% mid-2021) 5 Confirmed by Berne Union data for 2020 H1 which 25% shows no year on year increase in claims paid: indefinite / open ended https://bublob.blob.core.windows.net/assets/ 20% documents/events/Media/BU%20Docs/Press%20 no general timeframe for Releases/092020%20Press%20Release.pdf 15% 18% 15% 15% expiration of measures 6 https://ec.europa.eu/commission/presscorner/ 10% longer than 1 year (beyond detail/en/ip_20_1872 10% 5% mid-2021) 70 0% Berne Union 2020
Credit insurance MARKET TRENDS guarantee arrangements during the pandemic
By Robert Nijhout, Executive Director, ICISA
Insurance, as a product and a service, is schemes to ensure intended specifically to protect individuals, continued access to businesses, property, and investments private trade credit (among other things) against loss or insurance. damage. This is never truer than during Private insurers crises when insurance is often the first point acting prudently in in helping people and economies to recover response to a sudden and rebuild. While the circumstances of the increased risk of pandemic are both novel and unprecedented, insolvency or payment large-scale events with multiple impacts are delays in the market, Robert Nijhout certainly not new to the sector. and in line with For private trade credit insurers (as with regulatory requirements to appropriately other insurers), managing business through manage their risks, would normally be the peaks and troughs of economic cycles expected to reduce the amount of cover or significant events is something with available. Governments in a number of which they are familiar and for which they markets have sought to provide a guarantee are prepared. Through Solvency II in the EU to private trade credit insurers, improving and similar advanced, risk-based regimes the risk outlook and thus enabling them to elsewhere around the world, the private trade maintain these exposures. credit insurance market is well-regulated, It is important to emphasise that schemes robust and resilient. have not been introduced due to concerns Private players must carefully balance about the financial stability of the private the demands of the market for increased market. Indeed, the schemes do not benefit protection during times of crisis with the insurers, per se, nor are they required to need to manage their business prudently address some form of disfunction in the in the face of more pronounced risk. For market. The schemes focus on insured risks existing policyholders, insurers of all types and are set up and run for the benefit of have a duty of care and the nature of trade commercial businesses that need trade credit credit insurance means that ICISA members insurance for their continued functioning are engaging closely with clients throughout during difficult times. While certainly this time to monitor events and respond welcomed by private trade credit insurers, where necessary and appropriate. there are also significant challenges and We have also seen the significant value of administrative burdens attached to operating trade credit insurance during the pandemic within these schemes. This presents a – both from private markets and from ECAs – challenge of both cost and resource in keeping trade flowing within and between management for participating insurers. economies at a time of significant strain The guarantee schemes that have been on cash flow and liquidity for commercial introduced vary significantly in scale and traders. Indeed, it was the risk that these applicability from country to country, but services may become more restricted in most have tended to be structured as a response to increased risk that triggered reinsurance arrangement with the state governments in a number of countries – accepting a certain percentage of the 71 particularly within the EU – to introduce risk insured by private players in return Berne Union 2020
for a certain percentage of premium. This winding down of certain measures in the structure is different to arrangements that coming months and whether this leads to were seen during the 2008-09 financial increased insolvencies or other scenarios in crisis, which tended to function either as which credit insurance claims increase. ‘top-up’ cover, or as cover from an alternative State credit insurance guarantees are insurer. Instead, current arrangements mostly set to expire at the end of 2020, provide a backstop to existing cover, although the European Commission which also reduces the need for policies recently extended the applicability of the to be withdrawn and then reapplied, temporary framework under which they which can lead to significant disruption to and other measures were introduced by policyholders. EU member states until later in 20211. Given While schemes of different varieties the uncertainty about how trade credit have been set up in a number of important insurance claims may develop following markets – such as Germany, France, the UK, the removal of some of the additional Canada, Netherlands and Belgium – many protections mentioned above, discussions more have not introduced specific measures between governments and the private trade relating to the availability of trade credit credit insurance sector in those markets insurance. However, most countries have where guarantees exist are expected. In brought in wider measures aimed at helping the European context, once agreement key parts of their economies weather the on an extension is reached, it will be for difficult months of lockdown and resulting member states to propose these to the disruption that it has brought to a number European Commission, which will once again of sectors. Most of these measures aim at review arrangements under the temporary preventing insolvencies or otherwise limiting framework from the perspective of their the stress on companies that under normal eligibility under EU state aid rules. circumstances (or even normal crises) The wider economic impact of the would not go bust, such as through low pandemic remains a significant ‘known interest loans, equity boosts or payment unknown’ at this time, as does the question holidays. Indeed some countries have of how long tailed the disruption might be. amended insolvency legislation to delay This is particularly the case when it comes declarations, while others have simply seen to trade credit insurance and the businesses legal processes slow due to lower capacity in and commerce which trade credit insurance courts related to pandemic restrictions. protects. While those issues must be For that reason, when evaluating the monitored and managed carefully, important trade credit insurance schemes where they lessons have been learned and the key role are in place, it is important to consider the that trade credit insurance plays in keeping interaction of those other measures, which economies function has been made clear. have reduced the occurrence of insolvencies Private players have been challenged by the – one of the key risks against which trade circumstances, but markets remain open for credit insurers (and therefore the credit business and insurers are working closely insurance guarantee schemes) cover – on the with policyholders, as well as key partners schemes themselves. Given the combination in governments and ECAs, to meet the of effects, it is perhaps no surprise that particular issues that such an unprecedented the volume of claims seen within the credit scenario gives rise to. n insurance schemes is lower than would otherwise have been expected. It will also Note be important to monitor the impact of the 1 https://ec.europa.eu/commission/presscorner/ detail/en/ip_20_1872
It is important to emphasise that schemes have not been introduced due to concerns about the financial stability of the private market. Indeed, the schemes do not benefit insurers, per se, nor are they required to 72 address some form of disfunction in the market. Berne Union 2020
Trends in export MARKET TRENDS credit insurance during times of crisis
By Jonathan Skovbro Steenberg, Economic Research Analyst, Berne Union
In early 2020, the spread of COVID-19 it is particularly reached a worldwide level, and it became interesting to delve increasingly clear that this was, in fact, a into the behaviour pandemic unlike any seen for decades. One and development by one, countries closed down their borders of trade and export and cut production, and what began as a credit commitments, health crisis quickly became the start of an as well as the claims of economic one. And now as countries are companies. once again introducing lockdowns or other measures that limit the economy, it is crucial Export credit to examine previous crises’ tendencies Jonathan Skovbro during previous Steenberg within the export credit industry and what to crises expect looking forward. The EU is a highly The EU was the first region to experience developed economic region, indeed the a pan-continental epidemic, causing an market for private participants, by far, makes economic crisis across the region. In the up the largest share of commitments of second quarter of 2020, the EU experienced export credit. Private market participants a decrease in GDP of 11.9%, a drop roughly are primarily focused on short-term three times steeper than the largest fall commitments (repayments within a year), during the Global Financial Crisis (GFC) of while commitments by public sector 2008. The GFC had dire consequences for participants are typically medium and long- growth, but even worse consequences for term, that are mainly used for infrastructure trade which fell from 81% to 71% of GDP in projects or capital equipment. This is evident the EU in 2009 alone. in Figure 1. The GFC affected the EU particularly Private market participants’ commitments badly as the initial crisis caused the are far more sensitive to financial turmoil, subsequent European Debt Crisis, which as shown in the overall fall in commitments peaked in 2011-2012 but, for some EU from the first half of 2008 to the first half of countries, continued until as late as 2015. 2010 which are primarily due to a decrease in While examining this prolonged crisis, commitments by private market participants.
Private market participants’ commitments are far more sensitive to financial turmoil, as shown in the overall fall in commitments from the first half of 2008 to the first half of 2010 which are primarily due to a decrease in commitments by private market participants. 73 Berne Union 2020
Public sector participants’ short-term European, whereas the European Debt Crisis commitments also experienced a significant was far more focused on specific countries, fall from the first half of 2008 to the first half particularly in Southern Europe. of 2009 but not in the same magnitude as Figure 3 displays the regional contribution private market participants. to growth of private market participants’ For insurance of medium to long term and commitments. From the latter half of 2008 to PRI, commitments and claims overall appear the first half of 2010, commitments fell across comparatively less correlated to financial every region in Europe, followed by a year and economic turmoil, and as such, the of growth across the region. In the latter half rest of this report will focus on short-term of 2011 and first half of 2012, commitments commitments. again experienced a general decrease in the As can be seen in Figure 2, both private region, but in this period Southern Europe and public sector market participants saw a relatively larger fall in commitments. experienced increasing claims as a share of Southern Europe’s short-term commitments commitments during the periods of financial fell by 19% from early 2011 to the latter half turmoil. However, while increasing claims of 2012 while they increased in the rest of seemed to indicate a fall in commitments the region by 3%. Indeed, Southern Europe’s from private market participants during share of overall commitments fell from 24% the GFC, the fall in commitments was to 20%. not as severe during the worst years of Figure 4 shows the regional the European Debt Crisis. A significant contribution to growth of public sector difference between the two periods is that market participants’ commitments which the consequences of the GFC was pan- demonstrates a very different picture.
Figure 1 – Export credit insurance commitments in US$ billion, 2005-2016
700 600 500 400 300 200 100 0 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Export credit (short term) Export credit (MLT) Investment/ PRI Gen. Cross-border ECA Private
Note: Shaded areas are periods of financial crisis. Source: Berne Union.
Figure 2 – Claims as a share of export credit insurance short-term commitments in percent, 2005-2016
0.6% 0.14%
0.5% 0.12% 0.10% 0.4% 0.08% 0.3% 0.06% 0.2% 0.04% 0.1% 0.02% 0.0% 0.00% H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ECA Private (rhs. axis)
74 Note: Shaded areas are periods of financial crisis. Source: Berne Union. Berne Union 2020
In addition to having fewer periods of In times of financial and economic turmoil, MARKET TRENDS decreasing commitments, short-term claims for short-term commitment increase. commitments to Southern Europe have, Private market participants’ commitments except for 2011, continuously contributed to tend to decrease as claims increase. the increase of commitments. From early Contrastingly, public participants seem more 2008 to the latter half of 2012, short-term unaffected by the turmoil and may, in fact, commitments to Southern Europe by public increase their share due to a lower private sector market participants increased by 54% presence, in what appears to be a reverse while short-term commitments by private crowding-out effect. This tendency is almost market participants fell by 41%. certainly caused by governments wanting to From these figures, one can conclude stimulate growth in times of turmoil, while that the commitments of private market private market participants are responding to participants decrease in countries market conditions. experiencing financial and economic turmoil. However, it seems that public participants’ COVID-19 and the consequences commitments are less correlated with this In mid-September, Berne Union released a and they are actively stepping in when preliminary report on the business activities private market participants are reducing their of its members for the first half of 2020 presence in a market. and found that new commitments had
Figure 3 – Annual contribution to growth in private market participants’ short- term commitments by region, 2007-12
20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2007 2008 2009 2010 2011 2012 Eastern Europe Northern Europe Southern Europe Western Europe Total commitments
Note: Shaded areas are periods of financial crisis. Source: Berne Union.
Figure 4 – Annual contribution to growth in public sector market participants’ short-term commitments by region, 2007-12
30% 25% 20% 15% 10% 5% 0% -5% -10% -15% H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2007 2008 2009 2010 2011 2012 Eastern Europe Northern Europe Southern Europe Western Europe Total commitments
Note: Shaded areas are periods of financial crisis. Source: Berne Union 75 Berne Union 2020
contracted, while the expected increase in already reporting a noticeable increase in claims had not been realised. In fact, the data payment deferrals and pre-claim situations, showed that claims had fallen compared to as reported by the Berne Union in October. the first half of 2019. Generally, seeing a slower response of Focusing again on developments in increasing claims is not dissimilar to previous Europe, claims as a share of short-term crises where greater surges happened later, commitments fell in the first half of 2020 in period T+1. The GFC, in particular, saw an compared with the preceding period. insignificant increase in the initial period of The September report from Berne Union the crisis, but grew to almost three times the pre-crisis level after a year (period T+2). The difference in the scale of rising claims As fiscal support is between the GFC and the European Debt slowly phased out by Crisis is partly due to the different extents of the crises, but also to the changing governments and the geographical composition of the private number of corporate market participants’ short-term exposure. insolvencies start As previously mentioned, the private market participants’ short-term commitments had increasing, claims are already slowly been decreasing in Southern expected to start rising, as Europe compared to the rest of Europe, a trend that has been continuing. seen in previous crises. The following figures show the change in short-term commitments from the previous emphasised that the main reason that period on a biannual basis from the initial claims are not increasing is because of period of a crisis and the following three fiscal support from governments and periods. quick responses from lenders and insurers In the first half of 2020, private market in restructuring deals. The figures below participants’ short-term commitments show the disconnect between the current experienced an overall fall of 8% compared development in claims compared to previous to the previous period, representing a greater crises. fall than experienced during the European As fiscal support is slowly phased out by Debt Crisis but smaller than during the initial governments and the number of corporate periods of the GFC (see Figure 7). insolvencies start increasing, claims are Looking at the subsequent periods, the expected to start rising, as seen in previous dynamics of the previous crises diverge. crises. Most Berne Union members expect During the GFC private market participants’ to see an increase in early 2021 as they are short-term commitments continued to fall
Figure 5 (Private) and 6 (Public) – Claims as a share of short-term commitments in per cent in crises
0.14% 0.60%
0.12% 0.50%
0.10% 0.40% 0.08% 0.30% 0.06% 0.20% 0.04%
0.02% 0.10%
0.00% 0.00% T-1 T T+1 T+2 T+3 T-1 T T+1 T+2 T+3 GFC European Debt Crisis GFC European Debt Crisis Covid-19 Crisis Covid-19 Crisis
76 Note: T is 2008Q2 for GFC, 2011Q2 for European Debt Crisis and 2020Q1 for COVID-19 Crisis. Berne Union 2020
for the following three periods, while the MARKET TRENDS development was slightly more favourable Initial stimulus packages during the European Debt Crisis where the and commitments from fall subdued in the following period and even increased in period T+2. Predicting national governments and the development of private market the EU is an indication participants’ short-term commitments will that there will be a larger be dependent on whether the crisis gets the same pan-European grip on economies focus on expansive that was seen during the GFC. There fiscal support this time are arguments for and against this. The pandemic is global by nature and hence compared to the austerity also pan-European, however the effects measures that defined the of the disease are affecting countries to period following the GFC. differing degrees, and some economies have been shown to be more vulnerable than others. Several southern European countries, those whose economies rely more periods. This is especially so during the GFC on agriculture, production, and tourism, have where G20 countries agreed to ensure the been hit harder by the virus, on top of their availability of trade finance for $250 billion economies being more susceptible to it. in 2009-2010 at the G20 Summit in London. Public sector participants’ short-term The future development of public sector commitments increased slightly in the first participants’ short-term commitments will half of 2020, unlike the previously mentioned depend on the financial strength of countries crises. This is predominantly due to the and the will of governments to support trade quick response by national governments in future while economies recover from the and the European Commission to bridge pandemic. Initial stimulus packages and market gaps, so European ECAs have been commitments from national governments able to extend cover of short-term risk, and the EU is an indication that there will be as highlighted in the publication by Berne a larger focus on expansive fiscal support Union, Export Credit Industry response to this time compared to the austerity measures n COVID-19 Pandemic1. In previous crises, that defined the period following the GFC. governments have been slower or more Note hesitant to respond, which is why the 1 https://www.berneunion.org/Articles/Details/506/ increase in public sector participants’ Robust-response-to-the-COVID-19-pandemic-from- short-term commitments came in later the-export-credit-insurance-industr
Figure 7 (Private) and 8 (Public) – Biannual change from previous period in short-term commitments in crises
10% 25%
20% 5% 15% 0% 10%
-5% 5%
0% -10% -5% -15% -10%
-20% -15% T T+1 T+2 T+3 T T+1 T+2 T+3 GFC European Debt Crisis Covid-19 Crisis GFC European Debt Crisis Covid-19 Crisis
77 Note: T is 2008Q2/Q1 for GFC, 2011Q2/Q1 for European Debt Crisis and 2020Q1/2019Q4 for COVID-19 Crisis. Berne Union 2020
Crisis and recovery mode: How is the CPRI market responding to COVID-19?
While the final price tag of COVID-19 claims is yet to be determined, the impact on capacity, appetite, pricing and terms in the structured trade credit and political risk insurance (CPRI) market is already being felt. Sian Aspinall, Managing Director at BPL Global, takes stock of the effects on the insurance class, and assesses the risks and opportunities in the longer term
The COVID-19 pandemic continues to cast the ramifications be on a thick cloud over the global economy and the long-term growth we are still yet to see the final shape of the prospects for CPRI? insurance industry as it emerges from the Despite crisis. Although widely anticipated, we’ve encountering not yet seen the expected deluge of claims serious disruptions in the CPRI market. In fact, whether these approximately every claims will arrive in the form of deluge – or if decade – the 2008 it will be more of a wave or a ripple – is not global financial crisis, yet clear either. What we do know, however, for instance – CPRI has is that the pandemic’s effects on global trade Sian Aspinall grown consistently. and liquidity are changing CPRI dynamics. We’ve identified several trends and potential Importantly, it is not just the effects of opportunities brought about specifically by COVID-19 that have blown winds of change this pandemic which we expect will dictate in our market of late. The onset of the the continued evolution of the market. pandemic coinciding with the hardening of the market as it entered a new phase of the Current supply and demand volatility insurance cycle, alongside low commodity Generally speaking, the market saw prices, have worked to further shift CPRI reduced demand for CPRI in the first three supply and demand trends. months of the pandemic, with a 20% drop So, in the short term, how have the events in BPL enquiry levels compared to the of the past year caused insurers to redefine same period in 2019. Since then, however, their appetite? And looking further into the demand has recovered, with BPL’s enquiry future, will insurers fundamentally change flow at a similar level to that observed in their operations as a result? And what will 2019. However, it is clear the composition
Importantly, it is not just the effects of COVID-19 that have blown winds of change in our market of late. The onset of the pandemic coinciding with the hardening of the market as it entered a new phase of the insurance cycle, alongside low commodity prices, have worked to 78 further shift CPRI supply and demand trends. Berne Union 2020
split has changed. A tighter secondary it is necessary to dig deeper. We have MARKET TRENDS loan market and more conservative credit experienced a notable divergence between committees are likely to be behind the insurer appetite and client demand at the rebound in bank enquiries, which have, in transaction level. For the 12 months through fact, increased by 20% in each of the last to February 2020, BPL Global obtained three months. Conversely, demand from non-binding indications (NBI) on 69% of traders and exporters has reduced, reflecting all enquiries submitted to the market. This overall contractions in global trade volumes figure declined to 50% or less in each month resulting from the current climate. On the from March onwards with only moderate supply side, we expect the Covid-19 crisis will improvements seen recently. have a short-term but moderate impact on CPRI is unlikely to benefit from the CPRI capacity. This is particularly the case for capital inflows that investors are currently non-traditional risks and transactions with pouring into some other insurance classes. longer tenors. Additionally, resultant claim Though CPRI premiums on average are patterns and volumes, as yet undetermined, approximately 20% higher than pre- crisis will no doubt result in further refinement. levels, these rate hikes are not as steep as To analyse the true picture, though, experienced elsewhere in the insurance
Enquiries in 2019 vs 2020 Enquiries in 2019 vs 2020
Year 2019 2020
250 239 240
225 224 215 214 212 205 201 200 191 191 186 187 182 182
162 163 164
150
100
50
0 January February March April May June July August September
Enquiries in 2019 vs 2020 for Commodity Traders, Exporters and Investors Enquiries in 2019 vs 2020 for Commodity Traders, Exporters and Investors
Year 2019 2020
122 120
104
100 94 94 93 92 87
80 73 71 70 69 64 62 61 60 56 51 50 48
40
20
0 79 January February March April May June July August September Berne Union 2020
sector. What’s more, unlike insurers in other asset classes and transactions. classes, those operating in our market are, There is opportunity for the private to a certain extent, constrained by margins insurance sector to step up, for instance, in the banking market – which are mostly to insure direct lending to banks domiciled beyond their control. in emerging economies – and particularly those with narrow domestic financial Impact on insurer operations markets. Such activity will complement the The recent economic volatility has prompted recently increased funding support issued some CPRI insurers to change tack. Although by development finance institutions and current signs are positive, with Convex multilateral lenders, helping to alleviate bank and HDI Specialty confidently entering the liquidity issues and sustain their ability to market, several underwriters have scaled finance local exporters and projects. back their CPRI offerings and another has In fact, following crises, the CPRI market pulled out entirely. has historically allocated significant capacity Over the next 24 months, the number to cover bank-to-bank loans to help facilitate of insurers may well decline further due to both a regional and global recovery. We some exiting the class. That may also occur expect the market to do so again, attracted due to mergers and acquisitions (M&A). More by the relatively wide margins on bank often than not, M&As result in strong, well- obligors with which insurers are already resourced teams with the deep expertise familiar. required to take the market into new and We can also pinpoint other opportunities profitable areas. In a market such as CPRI, arising from the efforts to revive economies this depth of expertise is as important as from the pandemic disruption. For example, the number of active players as it drives government stimulus packages in both innovation. developed and emerging countries have And while in the first few months of the brought about a crop of quality public- crisis we saw insurers naturally pushing for private partnership projects. In addition to higher pricing and better terms, this may not such new developments, there is likely to be every client’s market experience. During be a backlog of projects that were paused disruptions, CPRI insurers have tended given the pandemic, supply chain issues and to be more inclined to stand by existing volatile commodity prices that are primed for clients with whom they have built long-term, revival when markets stabilise. trusted relationships. Such clients stand in a CPRI insurers have sought to invest good position to quickly mobilise insurance the necessary time and resources into capacity and continue to attract more understanding Project Finance for some competitive premium rates than others. years now, and they know that default rates in the asset class are typically low, with Could COVID-19 recovery plans structuring helping to mitigate identifiable represent a silver lining? risks. Therefore, the market can offer Certainly, this is not the first crisis that the a meaningful amount of capacity and CPRI market has had to contend with and accommodate the long tenors required historically it has emerged post crisis with a for project finance with US and Canadian stronger, more sophisticated offering. Indeed, infrastructure projects including toll roads, the industry is not one to ‘waste a crisis’ and geothermal power and Liquified Natural just as it has done in the past, it is already Gas facilities currently garnering particular showing signs of adapting in order to open support from insurers. opportunities across a more diverse pool of Another niche within the project finance
The recent economic volatility has prompted some CPRI insurers to change tack. Although current signs are positive, with Convex and HDI Specialty confidently entering the market, several underwriters have scaled back their CPRI offerings and another has pulled 80 out entirely. Berne Union 2020
arena shows promise: sustainable finance. As MARKET TRENDS we understand it, capacity may be opening For the CPRI market, up in the CPRI market for renewable energy sustainable finance also projects, given the enormous levels of climate-aligned investment needed across represents an avenue for the globe for governments to achieve their diversification from its Nationally Determined Contributions under traditional mainstay of Oil the Paris Agreement. Aside from this very apparent need, & Gas in the longer term. there are several other reasons as to why The CPRI market is heavily sustainable finance may take off in the post COVID-19 CPRI market. According to exposed to these markets Moody’s, green project finance bank loans via both banks and major tend to have an even lower default risk rate traders, which are also key than their vanilla counterparts – attracting insurers looking to recalibrate their loss ratios CPRI clients. in the face of COVID-19 claims. Another driver is the Environmental, Social, and Governance (ESG) mandates CPRI insurers to expand their lending of major banks. European banks – which relationships, such as through ‘capital call form a key client base of the CPRI market facilities’. When a fund makes an investment, – are concertedly building their portfolios such loans provide short-term financing of green projects to meet environmental on a revolving basis until the receipt of objectives and incoming regulations. There investors’ capital contributions towards that are instances of some even applying a investment. The loans are then repaid with Green Weighting Factor to RWA analysis on the investors’ capital contributions. transactions. Of course, where these banks To avoid credit concentration issues, go, the insurers follow – and we expect the particularly given the recent growth in fund latter will provide significant support for such sizes, major lenders have turned to credit initiatives. insurers to share this risk. For credit insurers, It’s not just banks which have ESG the appeal lies in the strong security and mandates to fulfil, after all, insurers are short risk duration of capital call facilities, also under their own obligations to cover and with rising commitment fee pricing and quality risks with a sustainability feature. funding rates, insurance premium levels are Incorporating ESG ratings into asset-side acceptable for both insurers and lenders. investment decisions is not new among CPRI Credit insurers are also favouring secondary providers, but how exactly they do so in their fund loans due to their low loan-to-value underwriting has not been explicit. Recently, ratio. however, several insurers have publicly Insurer appetite also seems particularly disclosed their approaches for factoring healthy for repos and hedges (including FX, in ESG ratings when writing business and interest rate, commodity price). Derivatives including sustainability-related indicators represent an opportunity for some insurers within their country ratings. to underwrite structures that offer an For the CPRI market, sustainable finance improved recovery rate and strong pricing also represents an avenue for diversification on strong obligors which they would not from its traditional mainstay of Oil & Gas in usually cover. We expect this niche to grow the longer term. The CPRI market is heavily in response to demand from obligors that exposed to these markets via both banks want enhanced risk management and those and major traders, which are also key CPRI banks that can secure significant RWA clients. savings through insuring some of their mark- to-market exposure. Tapping areas of promise This year is proving to be wrought with Other areas remain robust and attractive challenges for every industry, and CPRI will for CPRI providers as lenders focus on continue to feel the reverberations on all enhancing risk mitigation strategies, such as fronts. But with appetite and demand trends private equity. As mentioned, lender credit evolving and broadening, perhaps we could committees are currently taking a more see more opportunities for growth and conservative stance which is incentivising recovery in the near future. n 81 Berne Union 2020
COVID-19 impact on the private credit insurance market
By Fabrizio Mazza, Managing Director, Global Public Agency Leader, Credit Specialties, Marsh JLT Specialty and Abbey Sturrock, Senior Vice President, Deputy Global Public Agency Leader, Credit Specialties, Marsh JLT Specialty
This has been an extraordinary year. The the Debt Service COVID-19 pandemic has led to the largest Suspension Initiative global economic contraction since the (DSSI), have acted to Second World War, which has prompted freeze principal and governments and central banks to engage interest payments, in an unprecedented and often loosely in respect of official coordinated monetary and fiscal response, bilateral lending, to a leading to a significant expansion of the number of emerging public balance sheet. market government Furthermore, on the back of the borrowers that experience matured during the global Fabrizio Mazza formally requested the financial crisis, the importance of short term support. Meanwhile, trade credit insurance for the economy was some regulators recognised. It allowed government top-up have postponed and reinsurance schemes for private trade the implementation credit insurers to be created quickly as a of certain Basel III way to minimise the disruption to the credit standards, in an effort insurance supply chain. to support ongoing At the same time, public agencies – which lending during the we define as multilateral development crisis. banks (MDBs), developmental financial These measures institutions (DFIs), and export credit represent significant Abbey Sturrock agencies (ECAs) – have responded to the risk moderating crisis both by mobilising their own resources, factors that have already delayed the full and channelling government funds into their impact, and may significantly reduce future domestic economies to provide counter- impact, of the crisis on the real economy, and cyclical support. with it on the private (re)insurance market. Yet, the response has not only been As we slowly move from the first phase fiscal. Governments of the G201, through of reaction to a second phase of recovery,
On the back of the experience matured during the global financial crisis, the importance of short term trade credit insurance for the economy was recognised. It allowed government top-up and reinsurance schemes for private trade credit insurers to be created quickly as 82 a way to minimise the disruption to the credit insurance supply chain. Berne Union 2020
we begin to assess the pandemic’s impact MARKET TRENDS on the private credit insurance industry, and A general deterioration of what we expect going forward, particularly the credit book in recent with respect to the interface between the public and private sector, which has been years, triggered by the one of the leading themes of recent years end of the commodity (public-private cooperation). super cycle, had already Marsh JLT Specialty expects a generalised increase in credit risk, political risk, and begun to affect the performance challenges to foreign investors appetite of private credit and overseas lenders, but particularly in countries that were either very dependent (re)insurers, with pockets on certain sectors (for example, tourism), or of the market hardening certain commodities (such as hydrocarbons), (sub-investment grade which have been hit hard by the COVID-19 pandemic. private obligors). We base these assumptions on credit rating data, which indicate a rapid increase in the risk of default through 2020 and particularly as they accumulate with this 2021. We therefore expect an associated year’s losses from the storm and wildfire significant increase in claims for credit seasons. insurers due to loan defaults, and a linked COVID-19 losses will take a long time increase in exposure to performance surety to assess, yet at the top-end of analysts’ bonds being called, following a deterioration estimates, once added to catastrophe in companies’ ability to perform contractual losses, they could make 2020 the highest obligations. yearly loss for the insurance market to date. So far, however, the data gathered by Guy Complex questions for private Carpenter paints a less severe scenario with (re) insurers H1 2020 total losses incurred amounting to These circumstances raise complex questions $43 billion, including $25 billion of COVID-19 for private (re)insurers in managing current related losses3. Yet with further claims risk, expected losses, future risk appetite, accumulating in the second half of the year, and risk pricing. The natural tendency in such a total industry loss of around $100 billion circumstances would be for (re)insurers to now seems realistic. This would include use more caution when considering the risks incurred COVID-19 losses together with and an upward adjustment in the cost of risk, catastrophe losses in the year to date, and as reflected in higher premium rates. This is average catastrophe losses, based upon not a new trend. A general deterioration of historical experience, that may reasonably the credit book in recent years, triggered occur through the remainder of the year. by the end of the commodity super cycle, This figure, while not making 2020 a record- had already begun to affect the appetite of breaking year, will still make it the fourth private credit (re)insurers, with pockets of year in history when total losses reach $100 the market hardening (sub-investment grade billion. private obligors). However, the combination If capital were to leave the reinsurance and of these pre-existing trends and expected retro markets as a consequence of the 2020 COVID-19 losses in 2020, has accelerated losses (following very high 2017 losses, and a more generalised market adjustment, not insignificant periods in 2018 and 2019), affecting (re)insurers’ appetite and pricing the impact on the direct insurance market alike. would be more severe and more sustained. When considering COVID-19’s effects The alternative capital market4, which now on the private credit insurance market, we represents approximately 20% of the total cannot avoid looking at the wider industry. retro capital base, could be particularly The impact of COVID-19-related losses on volatile as it is more mobile than traditional the property and casualty market – which reinsurance capital. Changes in the broader cannot be modelled and is therefore unlikely (re)insurance and retro insurance markets to have been priced in last year’s treaty may therefore trigger top-down pressure for renewal season – could be significant to the private credit insurers in 2021 and beyond, to 2 reinsurance and retrocession (retro) market , reconsider coverage and pricing in addition 83 Berne Union 2020
to the changing market conditions caused private credit insurance market. Yet, it will by the increase in credit risk due to the undoubtedly have some lasting effects on pandemic crisis. appetite and the cost of risk. This will affect Drilling down to expected credit insurance all clients, but particularly public agencies, losses arising from COVID-19, analysts which have increasingly contributed to the have published a considerable range of growth of public-private partnerships in estimates, between $8 billion and $60 recent years. billion over a two-year horizon5. While the We can in fact observe that, while the risk environment is constantly changing – deteriorating risk environment is pushing influenced by the continuing impact of the many private credit insurers to strategically risk-moderating factors listed earlier, among pursue a ‘flight to quality’ via enhanced other things, which if withdrawn may result partnership with public agencies, given the in significant higher claims to the insurance perceived benefits of working with such market – the current range of claims institutions in terms of lower loss ratios and estimates is thought to be comfortably higher potential recoveries, certain new within the capital capability of the private limitations are becoming apparent. (re)insurance market. The most significant is the emergence This is because most large international of a pricing gap. As risk premiums increase insurers and reinsurers are capitalised in in the commercial market, we do not accordance with the Solvency II regulation. see a corresponding improvement in the This has considerably strengthened premium rates offered by public agencies, underwriter security and capital structures particularly ECAs. In fact, constrained by since the global financial crisis. Encouragingly, OECD Consensus Arrangement guidelines while there are expectations of steady (applicable to ‘officially supported’ ECAs), growth throughout 2021, actual global claims and bound by their mandate to support their to private credit insurers arising from the countries’ exporters in international tenders lockdown have been relatively low. Marsh JLT against aggressive bidders – often from Specialty, drawing comparisons with data ECAs outside the Arrangement – ECAs are gathered during the global financial crisis, increasingly pushed to offer borrowers the estimates private credit insurance losses most aggressive financing package possible (across trade credit, political risk, structured (especially when it comes to sovereign credit, and surety) for the two-year horizon to borrowers). be between $20 billion and $45 billion. This Yet, these same aggressive conditions level of loss would clearly be very significant, cause some ECAs to find it more and more but is a moderate catastrophe exposure in challenging to attract buyers for the risks wider insurance market terms6. Moreover, new they intend to share with the private market. business opportunities are growing (such as This is compounded by the fact that the in the private equity space), and premium main growth for ECAs in recent years has rates have risen in light of changes in the been in regions with a comparatively higher risk environment. This should act to reduce risk profile, such as sub-Saharan Africa, as a impact. result of the significant opportunities arising in government-guaranteed infrastructure COVID-19 not major threat to private financing. However, the reduced quality of credit insurance borrowers means that certain ECAs only As such, we believe that COVID-19 is have a limited internal capacity allocated for unlikely to represent a major threat to the these projects and credit quality internally.
As such, we believe that COVID-19 is unlikely to represent a major threat to the private credit insurance market. Yet, it will undoubtedly have some lasting effects on appetite and the cost of risk. This will affect all clients, but particularly public agencies, which have increasingly contributed to the growth of public-private 84 partnerships in recent years. Berne Union 2020
This results in an increased need for private insurers will observe with interest the MARKET TRENDS market reinsurance as a way to bridge the performance of public agencies in respect of gap, mitigate excessive concentrations, claims brought to the (re)insurance market, and ultimately avoid breaching internal risk and eventual recoveries. The outcome could guidelines. either strengthen the case for partnership, However, the private (re)insurance market giving substance to the assumption that has also been insuring the same sub-Saharan supporting public agencies provides a halo Africa risks for many years; supporting a effect for private (re)insurers, or dampen the large number of exporters, traders, and excitement and lead private (re)insurers to banks financing trade and investment in be more cautious when supporting public the continent. Therefore, the remaining agencies business, and more selective of pool of capacity in this region available for their partners going forward. ECA reinsurance – particularly at the OECD For public agencies, who have come to Consensus pricing levels – is becoming rely on the private market’s steady support, shallow and constrained. Given that Africa it has become more important than ever to has seen a further deterioration of the credit work alongside an experienced intermediary, metrics for most borrowers, we can infer who is able to understand the evolving that ECA demand for increased reinsurance market dynamics and can provide guidance needs will only continue, likely leading to a on how best to attract (re)insurance capacity widening gap between this level of demand under these new conditions – structuring and what the private reinsurance market is solutions that not only meet their internal able to absorb at current pricing conditions. requirements, but also private (re)insurers’ It is not only ECAs who are facing commercial requirements. n mounting challenges. Other public agencies such as MDBs and DFIs, while less or unconstrained by rigid OECD Consensus Notes Arrangement guidelines, have also found 1 The Group of Twenty, or the G20, is a forum for international economic cooperation bringing pricing and capacity limitations when together leaders of both developed and developing seeking to mobilise private capital. We countries from every continent?. For further see in this case a growing gulf between information: https://g20.org/en/Pages/home.aspx.? 2 The retrocession (retro) market is where reinsurers MDBs’ requirements, with a mandate purchase reinsurance. to lend countercyclically to challenging 3 Reported losses of approximately 150 publicly borrowers at highly competitive rates, and traded groups in the insurance industry. US mutual groups do not publish catastrophe losses estimates. those of private market insurers that, while Guy Carpenter is a reinsurance broker, a Marsh & still keen to support, often find such rates McLennan company (NYSE:MMC) not commercially viable in the current risk 4 The alternative capital market is made up of hedge funds, mutual funds, pension funds, and other environment, even behind an MDB. institutional investors, which provide reinsurance That said, overall appetite for public- and retro capital via a variety of instruments such private partnership remains strong. However, as insurance linked securities (ILS). 5 References include but are not limited to: UBS the current situation is putting a strain on Global Research ‘COVID the biggest insured loss this model. The defaults that will inevitably ever?’ 24 April 2020 and Morgan Stanley ‘(Trade) occur in the next couple of years will also Credit where Credit’s Due’, 5 May 2020. 6 The insurance market’s average yearly catastrophe represent a litmus test, as private market losses are in the region of $60 billion.
For public agencies, who have come to rely on the private market’s steady support, it has become more important than ever to work alongside an experienced intermediary, who is able to understand the evolving market dynamics and can provide guidance on how best to attract (re)insurance capacity under these new conditions – structuring solutions that not only meet their internal requirements, but also private (re) 85 insurers’ commercial requirements. PARIS LONDON MONTREAL NEW YORK ORLANDO SINGAPORE
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2020_BerneUnion_AD.indd 1 31/08/2020 10:38 Berne Union 2020
Early lessons from managing MARKET TRENDS the crisis: The need and feasibility of rethinking the public versus private model
By Jérôme Pezé, CEO and Founder, Tinubu Square
There are lessons to be learned for many in Yet, when there is the trade industry as we reflect on recent a global economic events. In normal times, both domestic and crisis, it is inevitable foreign trade experience ups and downs. that unique risks are Therefore it is always advisable for small and presented to credit medium-sized enterprises to have credit insurers as assessing insurance to help them grow their businesses risk becomes a fast- safely. For trade credit insurers who provide moving target. When such support to businesses and make a a company needs strong contribution to trade, the risks that credit from a supplier, are transferred to them fluctuate as well. Jérôme Pezé there is a strain The financial crisis in 2008 caused a huge on capacity which disruption to the trade sector and today creates a pro-cyclical effect on the company. COVID-19 is having an even more drastic Additionally, a company is squeezed when impact. We have seen a worldwide response credit insurers withdraw their cover, which to try and manage the crisis for the trade reduces the credit risk protection for the industry. Here we consider changes that may company and for its suppliers, and also come from the involvement of governments squeezes the company using factoring or and the long-ranging implications, which other financial arrangements. The more the may include rethinking models for the future company becomes at risk, the more fragile of the trade credit insurance industry. its economic stability becomes, all of which accelerates the initial crisis. Impact of the crisis both on trade There is also the further impact when and the trade credit insurance delays and timing issues on the part of industry credit insurers interrupts an economic Trade credit insurers are the providers of risk upturn. The company is then at an even coverage that is adjusted as a normal part of greater disadvantage. In effect, once the credit monitoring. Generally, this is positive. initial disruption in the normal credit insurer
The financial crisis in 2008 caused a huge disruption to the trade sector and today COVID-19 is having an even more drastic impact. We have seen a worldwide response to try and manage the crisis for the trade industry. 87 Berne Union 2020
business model occurs, other changes occur. coverage and for businesses to stay alive. Now that some months have passed, Governments step in with support we are learning that the level of claims All of this disruption occurred both in the and anticipated credit insurance losses are global financial crisis of 2008 and in the drastically lower than expected. In other current COVID-19 crisis. As a result of the words, the insurers might not have needed instability, governments provided massive the assistance, or needed as much. In turn, emergency support schemes to companies those government schemes turned out to be that allowed for cash facilities, subsidised financially very profitable for governments, employment costs and delayed tax while largely under-utilised by businesses. payments. The point here is that it was difficult to In the spring, as a result of COVID-19, assess the real impact of the COVID-19- trade credit insurers were afraid they would induced economic crisis on businesses. be unable to pay huge losses to businesses. We must also consider the effect of some Fearing the worst, major private insurers took governments’ sizable actions which serve to the urgent initiative to ask for government benefit individuals and corporations for the support. Out of their concern for the pro- long term, through tax rebates and delays, cyclical effect of short-term credit insurance social subsidies, financial, treasury support, and to reduce a possible worsening impact loans and guarantees. of a delayed rebound from the crisis, governments answered insurers’ concerns. Questions to consider for the future: They stepped in to cover the anticipated The reach of governments credit insurer losses and implemented It is prudent to expect that governments massive reinsurance schemes, with insurers and credit insurers will reflect on how agreeing to the governments’ requests for recent events might reshape the future. For the premiums to go to them. In some cases, example, how do these events change the it was anticipated that the claims could be 10 business model of credit insurers and will times greater than the premiums. governments continue to provide assistance? It was very difficult for governments Globalisation is here to stay, and trade to estimate what the actual losses would is becoming more and more volatile. be or to what extent their massive Companies have to rethink how they control support schemes would contain company supply chains. While some countries have insolvencies. In most countries where undergone mass digitalisation of businesses, such programs were implemented, the there are those still evolving countries that expectation was for massive – potentially have more challenging structures within never before experienced – levels of claims. which to work. Economic situations could In effect, trade credit insurers had transferred become so uncertain that there is a need their losses to the government. to implement a sustainable model for governments to take on a more permanent Effect of government support role. This is a complicated picture, yet one There is no question that government that presents many options. support to the trade credit industry was The current global crisis and the response and is very important. Government actions to it, as well as what we are learning now will allowed insurers to continue to provide necessarily mean that some governments
All of this disruption occurred both in the global financial crisis of 2008 and in the current COVID-19 crisis. As a result of the instability, governments provided massive emergency support schemes to companies that allowed for cash facilities, subsidised employment costs and delayed tax payments. 88 Berne Union 2020
models, pricing structure, value proposition, MARKET TRENDS It is prudent to expect and the compatibility of any future changes. that governments and Reconsidering the role of ECAs? credit insurers will reflect Another possibility is to reconsider the on how recent events future role of Export Credit Agencies (ECAs). might reshape the future. Traditionally, ECAs have a limited role, yet it could be expanded. Governments might For example, how do promote ECAs as having a direct role for these events change temporary periods during times of crisis, with terms and conditions to be locally defined. the business model of Or, that role could extend beyond the case credit insurers and will of global crises to support other scenarios, governments continue to such as when trade sectors undergo a major restructuring. provide assistance? If such a new role were assigned to ECAs, would they be capable to fill it? Several ECAs have gone, or are already going will consider different options for the through, digital transformation to be more respective roles of the private and public flexible, more reactive, more cost effective, sectors in short-term credit insurance and and to provide a high standard of customer the framework in which they operate. The experience, sometimes doing better than the mission of trade credit insurance has always private sector. Yet, others are way behind. been essentially as a private market. Any Finally, we can raise the question of involvement of the public sector would the feasibility of a hybrid solution where involve big changes. the public and private sectors could team Governments may expect that helping up to provide a joint sustainable and trade credit insurance is a new normal. Trade efficient solution for the mutual interests credit insurers may believe there is a need of companies. Indeed, notably in markets for governments to provide capacity when where the private sector is well-developed, the private sector is unable to. These ideas often with very few dominant players, change the existing model and may force the several significant obstacles appear, such industry to address the parameters as to how as conflicting agendas and issues relating far the public sector can go. to transparency, operating mode, and local Governments could decide to play a role in business practices. implementing regulations that force private insurers to strengthen their solvency ratios Promoting a discussion to better support their mission on their own. Serving as an independent partner of This would mean credit insurers would then both ECAs and private insurers around theoretically eliminate government support the world, I offer these views to promote a in times of crisis, because they would be discussion between the trade industry and better prepared to respond. Governments its constituents. It is in times of crisis, such could set limits on cover withdrawals and as the one we are still enduring, that we can credit during crisis. This raises concerns often learn the most valuable information to for the prevailing credit insurance business help plan for the future. n
Governments may expect that helping trade credit insurance is a new normal. Trade credit insurers may believe there is a need for governments to provide capacity when the private sector is unable to. These ideas change the existing model and may force the industry to address the parameters as to how far the public sector can go. 89 Berne Union 2020
ICIEC works its way through the pandemic
By Oussama Kaissi, CEO, ICIEC
The COVID-19 pandemic has caused A decrease in output a multitude of economic shocks. is also projected, Once lockdowns became enforced by with the International governments globally, demand for goods and Monetary Fund services drastically decreased across various expecting a 4.9% sectors. This low demand then translated contraction in global into businesses reducing their productive GDP for 2020. capacity. Mass lockdown measures have also Though these prevented many citizens from working at numbers do imply full efficiency, if they are able to work at all, a major rollback to Oussama Kaissi stifling incomes and business productivity the global economy, in the process. These shocks on both they don’t signal a complete collapse. the supply and demand components of Many governments have made progress to the economy are leading to a significant flatten the curve of their rates of infection, reduction in exports and overall trade flow reduce the pressure on health care systems, – which in turn is reducing government and move towards regular operations with revenue. guidelines. With economies opening back Most analysts are predicting the COVID-19 up, there is light at the end of the tunnel. The pandemic will lead to a recession deeper ultimate impact will depend on the longevity than the 2008-09 global financial crisis. and severity of the pandemic. UNCTAD estimates that world merchandise trade is set to plummet by at least 20% in Pandemic protectionism 2020. Foreign direct investment (FDI) is also One of the major implications of the projected to decline sharply, with UNCTAD pandemic on global trade is the increase in estimating a 40% decrease in FDI for 2020. protectionism and geopolitical instability.
Projected decline in economic indicators for 2020 (%)
90 Source: UN Conference on Trade and Development (UNCTAD), June 2020 Berne Union 2020
The pandemic has exposed how fragile credit insurance is designed as a risk- MARKET TRENDS existing supply chains are – particularly when mitigation tool to support trade through it comes to politically sensitive products challenging environments. Private insurers such as food and healthcare supplies. In reducing or pulling credit limits due to the revealing these fragilities, many nations increased risk leave scores of businesses became reluctant to share their resources significantly exposed. In this context it is and are taking a more protectionist approach no surprise that the demand for trade to trade. This effect was particularly credit and investment insurance increases pronounced in the healthcare sector. The dramatically during times of economic World Bank reported that by July 2020, 91 downturn or difficulty. countries had implemented a total of 187 According to an OECD survey conducted export controls on medicines and medical in May, ECAs are undertaking various new supplies since the beginning of 2020, with initiatives and restructuring current facilities most having done so at the height of the to ensure that their clients survive these pandemic. Major producers such as the difficult times. These measures include United States, Britain, and China are included increasing flexibility to the terms and in this list. Additionally, 32 countries have conditions of official support (largely for imposed 48 export controls on agriculture existing transactions), enhanced facilities and and food products since the beginning cover for working capital, and in some cases of 2020. Such protectionism can have ECAs’ statutory limits have been increased. disastrous implications for countries that By maintaining, and hopefully expanding, the heavily rely on imports for necessities. This availability of trade credit insurance solutions is especially true for those in the ‘Global to businesses in need, the global economy South’ with already strained healthcare can deter unnecessary defaults due to short- infrastructure and supply chains. term conditions and avoid grinding to a halt. Addressing this protectionism calls for forging deeper regional trade and investment ICIEC’s response ties. Islamic Corporation for the Insurance Thanks to its strong performance in recent of Investment and Export Credit (ICIEC)’s years, ICIEC is well positioned to take on mission and vision is to promote trade and these challenges. That being said, it is cooperation among member countries, taking a balanced and strategic approach to making its role in forging relationships and business going forward. ICIEC is committed expanding intra-Organisation of Islamic to continue support for member countries Cooperation (OIC) trade relations more in combatting COVID-19, while also being important than ever. proactive in maintaining its own portfolio viability. The ECA environment As part of the IsDB Group’s efforts to While the impact on global trade and combat the pandemic, ICIEC’s commitment investment flow is unavoidable, it is essential of $150 million is being used to provide that institutions with the mandate and insurance for critical transactions, including means to stabilize the trade ecosystem for the import of emergency medical kits step in to do so. There is ample opportunity and food supplies. Over $100 million has for government-backed institutions and already been allocated to support short-term multilateral export credit and investment trade transactions for the import of medical insurance providers, such as ICIEC, to equipment, essential foods and energy support relief efforts. commodities. This has benefited numerous The unfavorable conditions for global member countries, including Tunisia, Burkina trade are only worsened by a tightened Faso, Mauritania, Senegal, Cameroon, UAE, export credit insurance market. In itself, Oman, Jordan, Egypt and Pakistan.
ICIEC is taking a balanced and strategic approach to business going forward. ICIEC is committed to continue support for member countries in combatting COVID-19, while also being proactive in maintaining its own 91 portfolio viability. Berne Union 2020
“ICIEC’s commitment of $150 million is being used to provide insurance for critical While the impact transactions, including for the import of on global trade and emergency medical kits and food supplies.” There is also a great need for investment flow is infrastructure development – especially unavoidable, it is essential in terms of healthcare for ICIEC’s least that institutions with developed member countries. ICIEC is covering projects that help to build the mandate and means infrastructure, especially in the health sector. to stabilize the trade For example, it provided €143 million cover for the construction of two new hospitals ecosystem step in to and five new medical units in five pre-existing do so. hospitals in the West African Republic of Côte d’Ivoire. ICIEC also extended $2.3 million in coverage toward purchasing state of the art medical equipment for hospitals across Punjab, Pakistan. ICIEC is country economies are expected to take targeting immediate efforts that address more time to recover from the pandemic urgent demands – such as pharmaceuticals, than their developed country peers. healthcare supplies and agricultural ICIEC is also prioritizing projects with the commodities. most significant developmental impact. For For a long-term recovery, a boost to example, it recently provided €50 million international trade will be a key part of cover to expand 4G telecommunications the world’s economic restart. This implies coverage across Indonesia. Social distancing critical access to insurance cover and credit, and quarantine measures have led to meaning ECAs will have plenty of business isolation for many citizens and the need for opportunity in the months ahead. However, stronger telecommunications systems is we would be foolish to underestimate apparent. The project was prioritized as it the impact of this crisis on all financial ensures that 90% of Indonesia’s population, institutions, including ECAs. In the case of including those in rural areas, can enjoy ICIEC, despite the fact that markets in which better coverage. we operate have been significantly impacted Lastly, ICIEC’s ongoing commitment to the by the pandemic, claim rates are currently UN’s Sustainable Development Goals (SDGs) stable and ICIEC’s insurance business is stronger than ever. What better time to remains well capitalized. However, it is implement transformational solutions and entirely within reason to anticipate that claim create a better life for all member country rates will increase in coming months. The citizens? The SDGs are a foundational focus ultimate impact will depend on the longevity for the ICIEC, and they are intertwined and severity of the pandemic. with all aspects of the organisation. This commitment is clear both through the Looking ahead impact of the projects ICIEC insures, as well In addition to its immediate commitments as how the SDG focus is immersed in all the to fighting the pandemic, ICIEC remains initiatives the organisation undertakes. This committed to its strategic long-term goals. work continues unabated, as eventually This includes working alongside member the pandemic will subside, and our gaze countries to set their individual development will return to the many challenges and agendas back on track. Given the significant opportunities that will shape our world in gaps in underlying conditions, developing decades to come. n
In addition to its immediate commitments to fighting the pandemic, ICIEC remains committed to its strategic long-term goals. This includes working alongside member countries to set their individual development 92 agendas back on track. Berne Union 2020
Managing credit MARKET TRENDS risk post COVID-19: Remember the five-‘C’s
By Lillian Labbat, Global Head Credit & Political Risk, Zurich Insurance
When the coronavirus pandemic hit, the all left to ponder these impact, both human and economic, was felt difficult questions. in almost every corner of the world. Financial institutions, both insurance companies Determining safe and banks, have worked hard to support zones customers through this unprecedented crisis The first thing many by extending financings and coverages to evaluators of credit help bridge the gaps in liquidity. What has risk did to tackle the become clear is that financial institutions issue of identifying have needed to rethink how they evaluate ‘safe zones’ was to risk, both credit and country risk. This view of Lillian Labbat divide industries into exposure to risk is something that is forever three groups: red, changed. orange and green. All the industries that The global economy has faced were severely impacted by the pandemic, recessionary pressures in 2020 and will such as aviation, shipping, tourism and retail, continue to feel the impact into 2021 as were classified as red. There were those pressure on gross domestic product in industries significantly impacted, such as many developed and developing countries oil and gas, automotive, commodities and continues. Those of us who consider construction, which received an orange ourselves experts in credit risk have had classification, while everyone hoped for a to look at risk in new ways. How solid is an turnaround in prices and demand. Then there investment-grade rating from a credit agency were those in the green category, which that was provided pre-COVID-19? Do 2019 seemed relatively safe, such as healthcare, financial statements provide a true picture of power, telecommunications and consumer. the company in 2020? How are lockdowns But what we quickly found was that this impacting supply chains? What impact was unreliable and too simplistic a measure will ongoing travel restrictions have on of risk. In fact, in almost every sector, it was international projects if international workers possible to identify companies in a position cannot access work sites? Is the inability of a of strength versus those with weaker supplier to follow through on a contract due fundamentals. Looking at sectors is only one to lockdowns truly a force majeure? We are variable and yet we need many more.
The global economy has faced recessionary pressures in 2020 and will continue to feel the impact into 2021 as pressure on gross domestic product in many developed and developing countries continues. Those of us who consider ourselves experts in credit risk have had to look at risk in new ways. 93 Berne Union 2020
The ability to have access to reliable data was one of the biggest challenges facing The ability to have access providers of credit in 2020. It was crucial to to reliable data was one have a view of a company’s operations and liquidity at the end of the second quarter of the biggest challenges to truly assess a company’s resiliency. Many facing providers of companies who are facing serious impacts credit in 2020. It was to their business today had limited access to cash and high debt on their balance sheet crucial to have a view of pre-COVID, with little room to manoeuvre a company’s operations following a changed demand for their product or service. Those companies who and liquidity at the end are faring better are those with a diversified of the second quarter to product mix who are experiencing growing truly assess a company’s demand for some products which are offsetting declines in others. Also, the resiliency. ability to quickly convert to online services in some sectors is crucial to survival. Those companies with access to liquidity and restructurings. One can take comfort in low interest payments are able to handle witnessing the international safety net depressed revenues and increased costs thrown around countries in need. But what is without a significant impact on the health of unprecedented in this crisis is the number of their balance sheet. countries needing support. This is different Rating agencies also responded to the from an International Monetary Fund rescue need for better access to data, attempting plan for a single country, such as Argentina to update their assessments and corporate earlier this year or in previous years. The ratings throughout 2020. Essentially, 2019 challenge going into 2021 is determining how financials and corporate ratings were of much more support will be needed and if little value. Obtaining interim figures and an there is a point where private creditors will updated ratings outlook is key to evaluating need to face country rescheduling. credit. When I think back on my credit training days, I recall instructors stressing the five Multiple countries feeling the strain ‘Cs’ of credit: character, capacity, condition, In cross-border credit insurance and trade capital and collateral. I have touched upon finance, an additional element that comes the financial and quantitative elements that into play when evaluating credit risk is the one must rely upon when evaluating credit. country of risk. A large portion of single- But anyone who has been in the credit situation credit risk in the credit insurance world for many years will tell you not to world involves credit to developing countries. underestimate the importance of the first of Countries dependent on oil revenues or the five ‘Cs’, namely, character. Knowing with tourism were the first to feel the strain. The whom you are doing business and having a response of the international community to good history with business partners is key such crises is something that is difficult to to making good decisions. The ability of a predict when evaluating credit but is quite company to successfully steer through rough impactful on the outcome. For example, the waters and to make the right decisions on G-20 debt relief program and the response people, costs and strategy is often what of multilateral institutions prevented many defines a company as resilient, no matter the private creditors from having to face difficult sector or the geography. n
But anyone who has been in the credit world for many years will tell you not to underestimate the importance of the first of the five ‘Cs’, namely, character. Knowing with whom you are doing business and having a good history with business partners is 94 key to making good decisions. Berne Union 2020
Is COVID-19 the final MARKET TRENDS blow to globalisation?
By Jean-François Lambert, Founder and Managing Partner, Lambert Commodities
In December 2019, near the Huanan Seafood and this is for a few Wholesale Market in Wuhan, a city of 11 reasons. million people in the Hubei province of China, Before the 27 people were infected by an unknown pandemic reached type of viral pneumonia. Unfortunately, every shore like a we know the rest of the story all too well. slow but relentless Several lies and a lot of denial later, the tsunami, the world world was engulfed into a major pandemic was already facing with, so far, over a million deaths. For the profound shocks first time in modern history, despite cutting which were altering edge technology and science, the most Jean-François Lambert its course. These were developed countries in the world opted essentially triggered for the most archaic response to a health by the political and economic consequences threat: lockdown. Consciously, across of the 2008 financial crisis. Globalisation was Europe, Americas, and in many parts of Asia, already under attack, particularly in western economic engines have been literally shut democracies, where populations believed down. that it had brought unfair competition from More than 10 months after the Wuhan the developing world and very little benefit incident, we are faced with the most to them. daunting task: re-igniting economies, while The polarisation between the two largest COVID-19 has not been ringfenced. Few economies, the US and China, was reshaping doubt that with the brightest minds at work the world order, with trade increasingly around the world, entrusted with almost weaponised. Where possible, supply unlimited resources, we will be able to chains were being overhauled to factor in overcome the pandemic. A matter of months geopolitical risks. Thanks to technology, re- or a matter of years is the question, not onshoring and concentration around safer whether we will prevail. We will, but when? regional clusters were already being seriously And in the meantime, how much economic considered. damage will have occurred? How long will it More fundamentally, awareness about take to be ‘back to normal’? energy transition was spreading across the world and the 2016 Paris Accord epitomised What does ‘normal’ mean? global concern about climate change and ‘Back to normal’ is probably what most actions necessary to be undertaken at the people aspire to. But what is ‘normal’ and earliest opportunity. In effect, the world was is it realistic to believe that we can resume already on a path of deep change. our pre-COVID-19 life as if the pandemic How will COVID-19 affect these dynamics? and its consequences were only a blip in the It is unlikely that globalisation finds sudden course of history? That might not be feasible supporters in western countries, even if
The pandemic will merely act as a catalyst, probably accelerating the transition which found its roots in the 95 2008 crisis. Berne Union 2020
international collaboration is the surest around these increasingly polarised blocks and most effective way to fight a global and this, where feasible, calls for shorter pandemic. Will the rivalry between the two supply chains, those less likely to venture juggernauts abate, even after the leadership beyond potentially dangerous regional situation in the US is resolved? Probably not boundaries. as one of the very few points of consensus across the political spectrum in the US, and Re-industrialisation to an extent Europe, is the view that China’s As the world partially de-globalises, demand ambitions are increasingly threatening the will grow for strategic supply to be at reach world order. rather than depending upon long and more hazardous supply chains. Call for re- Acceleration of supply chain onshoring (think 5G) will be more prevalent restructuring in our economies. This will be encouraged Far from being held back, the restructuring by governments and fostered thanks to of supply chains is likely to be accelerated the rapid development of technologies by the pandemic. Panic hoarding in the such as 3D printing and robotics inter consuming countries disrupted the just- alia. Renewable energy sources will also in-time management which had prevailed be developed where possible (solar, wind, among supply chain managers and a and soon hydrogen). The prevalent trend growing concern about over-dependency whereby western economies have been on staples and strategic products is likely largely dependent upon services will not be to trigger a broad review of supply versus overturned anytime soon, but a peak might demand management in-country. have been reached (tourism, entertainment, The strong undercurrents running before even global financial services?) and industrial COVID-19 even appeared in Wuhan will not value-added could gain traction again in subside. The pandemic will merely act as a several developed countries. catalyst, probably accelerating the transition which found its roots in the 2008 crisis. Acceleration of the energy transition Even if the actual timing for a full recovery With lockdowns, populations have cannot be scheduled until the pandemic fight rediscovered a pollution-free environment is won, five key trends will probably help and awareness about hazardous emissions shape a post-pandemic world in the long run. has grown. Renewables and circular economies are seen both as a way to do Politics 1 – Economy 0 what is right, but also to lower dependency Many governments in western democracies on energy supply. Every company, however have been criticised for their management small, wherever positioned on whatever of the health crisis and are likely to face supply chain, is clearly expected to come up harsh reactions in forthcoming elections. with a convincing plan to get greener. Before As economies struggle to get back in long, investors and banks will no longer shape, voters will call for more control and be in position to support any party who protection. Free market dynamics are likely does not display a clear ESG strategy with to be affected with more protectionist deliverables. measures. Closer trade, unless it is strategic Polarisation What about trade in this context? It will The US’s inward-looking stance found its adapt to new realities. Within the main roots many years before the inauguration of blocks, it will keep thriving, and probably the Trump administration. Under Chairman be facilitated by technology (Internet of Xi, China has made no secret of its ambitions things, document digitalisation, decentralised and is unlikely to change course in the next ledgers) allowing more efficient control decade. Europe is now more aware than it and monitoring and therefore financing. A has ever been that it needs an international large portion of trade will remain dependent strategy to try to counterbalance two players on long haul transportation, notably for currently trapped in a dangerous rivalry. strategic commodities. However, the trade Many other countries or regions display gap, notably involving low income countries similar behaviour (Brexit, India vs China, is likely to widen further, as risk appetite Brazil, Turkey). Economic dynamics and trade further dwindles amid more challenging 96 flows are likely to reorganise themselves geopolitics. n Berne Union 2020
Counting the cost MARKET TRENDS in the medium term CPRI market
By Julian Spiegel, Senior Reinsurance Underwriter, Credit, Surety and Political Risk, Navigators, a brand of The Hartford
Going into 2020, there was a general CPRI industry, on the expectation of a mild recession and – in other hand, reduced line with those expectations – credit (re) capacity much insurance markets were beginning to harden. more significantly in The very long economic cycle, which had the early weeks of started in the wake of the Global Financial the crisis. With the Crisis (GFC), was perceived to be drawing to exception of business a close. With the escalation of COVID-19 into relating to strong a worldwide pandemic in March and with counterparties and many regions heading into an unprecedented transactions, there economic downturn in Q2 2020, the outlook Julian Spiegel was very little new for the credit insurance industry quickly CPRI business being and drastically deteriorated. In terms written for some weeks. In the absence of of profitability and claims expectations, widespread losses, CPRI market capacity the credit insurance industry reached its started to come back, however without yet lowest point around May. The GFC had regaining its pre COVID-19 levels. been the industry’s largest loss event so far and forecasts for the current crisis were CPRI exposure to commodities expecting claims levels even in excess of The CPRI market has significant exposure those losses. to transactions involving commodities It took some time for the credit insurance and to projects located in commodity industry to appreciate the very strong exporting countries. Commodity markets impact of governmental countermeasures have shown high levels of volatility over which came much more swiftly and broadly the last months. This is particularly true than during the GFC. Most government for the energy markets which account for interventions took place in mature markets an important portion of the CPRI market and some were specifically targeted at premium. The emergence of COVID-19 as a the credit insurance industry, including global pandemic coincided with the ongoing temporary reinsurance programmes and a Russian-Saudi oil war and – as a result – oil broadening of ECA mandates into domestic prices suffered an historic collapse in the first markets. With its stronger focus on emerging weeks of the crisis. A combination of sharp market business, the Credit and Political production cuts and a pickup in consumption Risk Insurance (CPRI) industry was initially led to a partial recovery of oil prices in perceived to benefit less directly from Q3 2020. Going into a renewed round of governmental interventions than the short lockdowns, pressure is building up again term credit insurance industry (which is on oil prices and times remain challenging mainly active in mature markets). As a result, for the CPRI industry and its clients at least the market capacity for short term credit through the winter. insurance could be maintained at much With the exception of some significant more stable levels than during the GFC. The CPRI market losses in Singapore and Dubai 97 Berne Union 2020
however, there has not yet been a widespread counting of receivables. The emergence increase in CPRI claims. Berne Union members of fraud-related credit losses per se is not have even reported fewer medium term unusual in an economic downturn. Houses credit claims in H1 2020 than in H1 2019. The of cards that could persist in a more benign relatively benign credit claims environment economic environment tend to fall apart in a can probably be explained with the help crisis. On a global level, fraud related credit of the following observations. Firstly, some losses will probably remain a low frequency- claims might have already occurred but have high severity issue for the CPRI markets. not yet materialised due to extended waiting While actual claims remain at manageable periods and suspended insolvency regimes. levels, CPRI underwriters report very high With the reinstatements of insolvency regimes levels of claims mitigation activities including and with waiting periods coming to their end, payment deferrals and temporary covenant those claims could start appearing relatively breaches. With the strong support of shortly. Secondly, some claims are being ECAs and in accordance with banks (the temporarily postponed with the help of short- main buyer group of CPRI) a multitude term liquidity infusions but will occur when of measures are being taken to prevent government interventions draw to a close. short-term liquidity issues from turning Those claims will likely materialise in Q1 or into avoidable insolvencies. On the flip side, Q2 of 2021. Thirdly, some claims will not just government measures have significantly have been postponed but will also have been increased corporate debt levels. In the US, avoided. Companies with viable business so-called zombie companies that are not models that have been facing only temporary able to pay down the principals of their liquidity issues will emerge from the crisis with debts anymore, have reached a long-term higher debt loads but structurally sound. The high, according to the Leuthold Group. Even total effect of governmental interventions will with global economic growth forecasted at most likely include a temporary shift of some 4.6% in 2021, Euler Hermes predicts a sharp credit losses from 2020 into 2021 but also a 31% increase in global insolvencies in 2021 reduction of the overall credit market losses. compared to 2019. Contrary to initial expectations, not only The sovereign space faces similar issues. does the short term credit insurance market According to the IIF, the pandemic has seem to have benefitted from governmental pushed global debt-to-GDP levels to a new interventions but also the CPRI market. record. For some emerging markets with Government interventions have indirectly a strong reliance on commodity exports supported commodity markets by propping and limited FX reserves this can lead to up western demand. Some governmental a combination of debt restructurings, measures were specifically targeted at highly multilateral bail outs, import stops and exposed industries like aviation and cruise. To currency controls. Ongoing sovereign those industries, the CPRI market has non- restructurings include Zambia, Ecuador, negligible credit exposures via facultative ECA Lebanon, Belize, Suriname and Argentina. reinsurance, aviation finance and ship finance. Potentially ensuing social spending cuts will also increase the risk of social tension The wake of fraud scandals and political violence, according to Shailesh So far, the only significant market losses Kumar, The Hartford’s Head of Country, during the crisis took place in Singapore and Credit and Economic Research.. Dubai, where a number of companies had With soaring debt levels for corporates to file for insolvency in the wake of highly and sovereigns and a likely increase in publicised fraud scandals. Most of those corporate insolvencies in 2021, CPRI claims insolvencies have related to traders that activity is expected to pick up in 2021. The have been accused of hiding significant debt emergence of CPRI claims is anticipated to levels behind opaque corporate structures be partially offset by a continued hardening and sometimes with the help of double of the CPRI market. Banks are trying to
CPRI market will likely emerge from the crisis with a book of business that has improved in terms of quality of risks, and that has higher pricing, shorter tenors and 98 stronger structures than going into the crisis. Berne Union 2020
1 renewals against the backdrop of an MARKET TRENDS Trade routes and FDI accelerating surge in COVID-19 cases during flows will be impacted the winter months and a potential double-dip recession in Europe. Given the hardening of and the CPRI industry the overall reinsurance market, the hardening will prove its worth by of the underlying CPRI market and the supporting its clients persistent high level of uncertainty going into 2021, there will likely be further increases through these exciting in CPRI reinsurance prices at the January 1 times. As the economist renewals.
Joseph Schumpeter put it, Outlook for 2021 and beyond “at the heart of capitalism Most forecasters are cautiously optimistic is creative destruction.” that the development of vaccines will bolster the global economy next year and will lead to solid growth levels in the manage their aggregates and have expanded medium term. At the time of writing this their demand for the CPRI product. With article, this optimism is being supported by CPRI market capacity still below pre the positive news coming from Pfizer and COVID-19 levels, the market can be more Moderna. In the absence of inflation, the selective in terms of new business. As a Fed and other central banks seem to be result, the CPRI market will likely emerge willing to maintain their policies of cheap from the crisis with a book of business that money into the foreseeable future. Many has improved in terms of quality of risks, and companies will be able to work off their post that has higher pricing, shorter tenors and COVID-19 debt levels in this environment stronger structures than going into the crisis. of economic growth and low interest rates. Some companies however will not be able to CPRI reinsurance sustain those debt levels and there could be CPRI reinsurance is a niche market within the an increase in CPRI claims in 2021, hopefully overall reinsurance market. A hardening of at manageable levels for the CPRI industry. the overall reinsurance market typically also This base case is exposed to significant leads to a hardening of the CPRI reinsurance downside risks including further waves of market. According to Moody’s and Fitch, COVID-19 in 2021 and longer procurement the overall reinsurance market has been times for a COVID-19 vaccine. There are also hardening since January 1, 2020 renewals and risks unrelated to COVID-19 that seem to is expected to continue on that path into 2021. have temporarily faded into the background The anticipated increase in reinsurance pricing but that have not gone away. There is no will likely not be sufficient to compensate for clarity on the repercussions of a potentially the increase in pandemic-related reinsurance hard Brexit. The future relationship between losses and for the negative impact that the US and China remains unclear with low interest rates have on the asset sides a new president-elect in the US and the of reinsurers’ balance sheets. As a result, recent signing of the RCEP trade agreement. the upward pressure on reinsurance pricing Ongoing disputes at the Sino-Indian border will likely persist in the medium term. This and in the South China Sea could escalate puts upward pricing pressure also on CPRI into further political violence, to name just a reinsurance which is competing against other few risks. reinsurance lines for capacity. In the longer term, the pandemic could In line with many reinsurance lines, have an enduring impact on the global January 1 is the most important renewal economy including on business travel and date for CPRI reinsurance treaties. Since the the disentanglement of supply chains, the beginning of the crisis, most CPRI reinsurers continuing departure from multilateralism have maintained their through-the-cycle and on the ongoing energy transition. perspective and have not significantly Trade routes and FDI flows will be impacted shifted reinsurance capacity away from the and the CPRI industry will prove its worth CPRI market. As a result, CPRI reinsurance by supporting its clients through these capacity has been much more stable over exiting times. As the Austrian economist the last months than during the GFC. This Schumpeter has put it, “at the heart of strategy will be put to the test at the January capitalism is creative destruction.” n 99 Berne Union 2020
Berne Union claims perspective
By Laszlo Varnai, Associate Director, Berne Union
Unexpected, unpredictable and full of For many twists and turns, 2020 is not the year companies, the anyone anticipated. Although the dominant primary issues were headline for the year has, of course, been the not wholly financial. COVID-19 pandemic and resulting economic For example, these recession – induced in part by the necessary include physical public health measures in response – this inability to operate has not been the only major development effectively (if at relevant to claims for export credit or all), staff shortages political risk insurance. due to health/self- Laszlo Varnai Trade volumes were already in decline isolation, supply through the course of 2019 as businesses chain disruptions and reduced demand and grappled with an increasingly unpredictable decreased revenues, as well as pressure from macro environment and deepening trade creditors. Because of this, financial measures conflict between some of the world’s largest (including credit insurance and new working economies. The oil price war between capital products) are only part of the path to Russia and Saudi Arabia, coinciding with recovery.2 Nonetheless, broad government an acceleration of the COVID-19 impact, in interventions (in the form of providing March, only served to highlight weaknesses options and capacity for credit extensions in some countries, industries and companies. and rescheduling) have been highly effective The emergence of several high-profile fraud in preventing or at least delaying sector wide cases among commodity traders is a prime disruptions (especially in transportation and example of a crisis exposing underlying retail) – even if these could not save some problems. major companies that were already walking The COVID-19 crisis itself is relatively on a tightrope.3 unique from the perspective of both political/ In the long run, political expediency and credit risk management and public policy. practical necessity are required to strike a It is neither a classic political peril, nor a fine balance between consideration of public directly financial disruption and the risks are health and protection of the economy (as highly correlated in general. As such, it has well as government balance sheets). Many demanded a completely different response of the financial support programmes are from government and industry. temporary in nature and as these expire From a claims perspective, things have it is likely the insolvency rates will start not turned out as badly as many predicted to rise as we head through Q4 2020 and during the original shock reports in the 2021. Ultimately, global trade levels are only Spring. As a counterbalance to the health projected to return to pre-crisis levels by and safety measures imposed, and learning 2023.4 form the global financial crisis (GFC) a Governments have not only focused on decade ago, swift government actions were their domestic economic stability. There able to provide solutions for both individuals is also a trend of increasing public debt- and businesses (with over 40 million to-GDP ratios in low and middle-income estimated furloughed employees in 2020), countries, and at least half of the poorest as well as the credit insurance industry (for countries are at high risk of debt distress, or example, states’ reinsurance programmes), are already in debt distress, with estimated resulting in an unexpected, lower rate of official bilateral debt service payments alone insolvency (Q2 2020 versus Q2 2019) on a in these countries totalling almost $14 billion 100 global scale, after all.1 in 2020. In response to the increasing risk of Berne Union 2020
non-payment, the most developed creditor business’ and two specific members. These MARKET TRENDS countries (G20) signed the Debt Service observations do not immediately indicate Suspension Initiative in April 2020, offering any systemic crisis, especially considering a temporary suspension of government-to- the typically ‘lumpy’ nature of MLT claims government debt payments to 73 countries5 activity. (44 had signed up by 17 November 2020), Even if the current crisis were to also inviting commercial creditors to significantly raise the volume of commercial participate on comparable terms. In addition, claims, we are still a long distance from from April through September 2020, the exceeding previous peaks. At the same time, World Bank also committed $14.8 billion in the introduction of the DSSI has reduced the financing for participating debtor countries, probability of claims arising from sovereign of which $5.4 billion was in the form of non-payment, at least from that cohort of grants.6 lowest income and highly indebted countries. As we can see from the above, governments Considering the above, it is premature have reacted swiftly and firmly to prevent to make any conclusions on the final claims rising claims, which has had an undisputable trends of 2020, as most of our members are positive impact on our industry, too. either still processing the claims submitted From the Berne Union’s perspective, we up to November, or awaiting the potential also observed a softer impact than initially loss notifications. With the effective anticipated through the lens of our members’ government measures in place and their data. The chart on the left indicates that the delaying effect on insolvencies, the claims overall level of claims paid in 2020 H1 ($3.6 levels of 2020 and 2021 will probably show a billion) was only slightly higher than the dome-shaped curve, rather than a sharp blip. recent reporting periods, but did not show For more detailed data on claims paid by signs of systemic shock, yet. our members, please check the Committees’ In 2020, so far, claims have not risen to business trends report and the general the level of the GFC, when, in 2009 H2, ST business overview provided by the Berne claims rose by 42% to $1.4 billion and MLT Union. n claims increased by 250% to $2.4 billion, almost entirely due to commercial claims. Notes The data is independently confirmed by our 1 https://www.pwc.com/gx/en/deals/assets/global- latest member survey, which recorded that restructuring-trends-2020.pdf page six only 13% of our responding members report 2 https://worldfinancialreview.com/how-covid-19- trading-pressures-impacts-corporate-insolvency- significantly higher than expected claims levels levels. 3 For specific examples, please see the Berne Union Looking at the toll of the first few months, 2020 H1 ECA business trends report 4 https://www.eulerhermes.co.uk/newsroom/covid- it is visible that the private insurance 19-to-drive-43percent-rise-in-uk-insolvencies.html business has paid significantly fewer claims 5 https://www.worldbank.org/en/topic/debt/brief/ than the ECAs (bar chart on the right), while covid-19-debt-service-suspension-initiative 6 https://www.worldbank.org/en/news/ the growing levels of ECA-paid claims were factsheet/2020/05/11/debt-relief-and-covid-19- mainly attributed to ‘Other cross-border coronavirus
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KFWI-4-19-0017-01_Ipex_Leitmotiv_GTRGlobalTradeReview_ET23-04_210x297_pdLitho.indd 1 23.01.19 09:26 Berne Union 2020
Claims and recoveries MARKET TRENDS in a disrupted market
By David Chadwick, Partner, Kennedys and Naomi Vary, Partner, RPC
As is now increasingly evident, COVID-19 cause for default. has caused widespread disruption across However, over time all parts of the supply chain. Reductions this dynamic will in demand, goods shortages, price change. fluctuations, disrupted orders caused Some European by safety restrictions, import and export authorities have restrictions, and bankruptcy of suppliers are offered help to their all challenges currently facing buyers and domestic trade credit suppliers globally. Those who operate across insurance markets by long international supply chains have been raising their insurers’ David Chadwick particularly affected by the pandemic. loss absorbing Difficulties in recovering payments in capacities through a world where COVID-19 has impacted guarantees backed by almost every industry has meant that many public funds. France businesses have turned to finding ways out has introduced a €10 of their contractual obligations due to lack of billion programme funds, or by seeking to rely on force majeure which will reimburse provisions or the frustration doctrine. insurers for payments As delayed and failed payments become made to suppliers increasingly likely, organisations will whose buyers become heavily reliant on their trade credit have defaulted, insurance policies to keep them afloat. In this Naomi Vary with an extra €2 unprecedented situation, we may also see billion for exports. new problems arise with certain credit risk Credit insurers in Germany will pay €500 mitigation products such as trade receivables million of the first €5 billion in claims, with asset backed securities (ABS) and reverse the government reimbursing them for a factoring. further €25 billion, in exchange for 65% of their 2020 premiums. However, some Preparing for an increase in claims countries are coping well despite having no Given the above, trade credit insurers should government assistance. be (and indeed are) preparing for an increase With traditional lenders tightening their in claims by policyholders in the coming purse strings, suppliers are looking to non- months. Although it is hoped that banks private sources of financing short-term trade, will support debtors through these difficult and official export credits for longer projects. times by avoiding automatic loan default As they did in response to the 2008 global triggers and by demonstrating lenience financial crisis, governments are having to regarding losses, insurers are uniquely placed look to Export Credit Agencies (ECAs) to as an essential support for companies and meet the demand for finance and to ensure the economy in general. At present it might that supply chains are maintained. Some be more accurate to say that COVID-19 ECAs have responded by offering assistance pressures are preventing already stressed with flexible terms and programmes trading situations from resolving themselves developed specifically in response to rather than COVID-19 itself being the main COVID-19. 103 Berne Union 2020
CIGA in the UK by the buyer, the monitor (in the case of It is currently moot as to whether COVID-19 a moratorium), or the court, the insured is the main cause of corporate/trading will be required to continue shipments. distress or just one factor. In the UK, the This provision applies to a wide array of level to which financial distress caused insolvency processes and could create by COVID-19 can be separated from ‘non- an obvious tension with stop shipments COVID’ related financial distress impacts provisions in a trade credit policy. In whether a company can take advantage of theory the buyer is required to pay for all some of the measures prescribed by the goods delivered during the moratorium, Government in an attempt to mitigate the so if this is the relevant insolvency economic effects of the pandemic. The process this should at least mean that the Corporate Governance and Insolvency Act continued trading should not increase 2020 (CIGA) introduces various measures exposure, but practical operation may see intended to protect distressed companies. a different effect. These include a new form of director-led l More widely, any other provision in the moratorium, in which the company is granted contract enabling the insured to cease a payment holiday in respect of certain debts supply or terminate the contract for and continues to trade under the supervision any reason (such as non-payment) also of a monitor. Although the original text of loses effect if the right arose before the CIGA made it a condition of the moratorium insolvency process commenced but that the monitor considers it likely to result had not been exercised by that time. in the rescue of the company as a going It is possible that rather than saving concern, this has now been amended. The companies this provision could hasten monitor is now required to consider that the their demise as it may lead suppliers to moratorium is likely to result in the rescue be less forgiving with regard to payment of the company or that this would be the delays, for fear of losing their remedy case “if not for any worsening of the financial should the buyer enter into a moratorium position of the company for reasons relating or other insolvency process. That said, to coronavirus.” It remains to be seen how to the extent the contract provides for the monitors deal with this decision in termination in the event of non-payment, practice. and goods supplied during the insolvency Certain provisions of CIGA may be of period are not paid for, the supplier retains interest to trade credit insurers providing the right to terminate on that basis, if not cover to an insured dealing with a buyer that by reason of circumstances arising before takes advantage of the CIGA protections: the insolvency process commenced. l The distressed company is granted a l In keeping with protective legislation in payment holiday over its ‘pre-moratorium many other jurisdictions, CIGA prevents debts’. The terminology is deceptive, creditors from commencing insolvency as certain debts arising during the proceedings, or pursuing legal action, moratorium are also termed ‘pre- against debtors taking advantage of the moratorium debts’ and are excused from CIGA protection. payment. These include debts where the The above protections focus on the relevant obligation – such as delivery distressed buyer, with obligations for debt of the goods – was performed before deferral and continued supply passed up the the moratorium, but where the date of supply chain, to a company that may well payment arises during the moratorium. have trade credit insurers standing alongside. In other words, the company does not Discussions are already underway as to how have to pay for goods delivered on credit the CIGA moratorium will interact with the before the moratorium, if the credit period trade credit provisions, and lawyers in this expires after the moratorium commences. area expect some debate on these issues The company can, however, dispose of as the economic impacts of the pandemic these goods during the moratorium if this continue to be felt. is in the ordinary course of its business. What is clear is that globally, governments l Any provision in the insured’s contract are taking steps to provide a degree of with the buyer that enables the insured to support (either financial or legislative) to cease supply or terminate the contract by companies in these difficult times. Trade reason of the buyer’s insolvency no longer credit insurers need to take advantage of 104 has effect; unless granted a dispensation these wherever possible. n Berne Union 2020
How is COVID-19 MARKET TRENDS affecting capital structures?
By Valerio Ranciaro, Director General, SACE SRV
Financial structure refers to the combination increased drastically of debt and equity that a company uses to and it is now showing finance its operations. It is the structure of signs of distress. the company’s finances. During a downturn, Many models have been developed to highly levered firms identify the specific benefits and costs of are at greater risk of using debt (i.e. the tax effects and the costs becoming insolvent of financial distress) and equity. However, the than their less-levered greatest contribution remains the ‘trade- peers are, since they off theory’ by Modigliani-Miller and their must continue to make Valerio Ranciaro followers. A company decides on the amount interest payments of debt and equity that should finance its on their outstanding debt even when their investments by balancing the relevant costs business may have slowed down. and benefits. The measures adopted worldwide in Debt is cheaper than equity and the order to contain the spread of COVID-19 relevant fiscal benefits are important. are resulting in significant operational Even the most cash-rich companies in the disruption for many companies: staff under world (e.g. Microsoft, Apple and Amazon, quarantine, weakening supply chains, scarcity to name a few) are generally better off of inventories and sudden reductions in with debt than without. With low costs of demand from customers. These disruptions borrowing since 2018, an increasing number are creating serious issues for companies of companies are taking advantage of across a wide range of sectors. cheap money. Nevertheless, at a certain Businesses in various sectors have been level, the tax benefit of the debt is balanced forced to temporarily close due to increased by the increased costs linked to a greater occupational safety and health measures, probability of default or possible financial or due to other business disruptions. Some distress. sectors have decided to terminate business Over the last 10-15 years, the proportion altogether as a result of changed consumer of debt to equity (‘leverage’) has been behaviour. significantly increasing, especially in Therefore, there is a shock on the offer companies subject to takeovers by side, a shock on the demand side and a institutional investors, like investment looming uncertainty in general: a very funds. Sovereign debt as well, especially dangerous trifecta. These shocks will trigger in the emerging and developing countries, a significant increase in insolvencies and,
There is a shock on the offer side, a shock on the demand side and a looming uncertainty in general: a very dangerous trifecta. These shocks will trigger a significant increase in insolvencies and, hence, the need for restructurings. 105 Berne Union 2020
hence, the need for restructurings. Companies restructure for a variety of Businesses in various reasons, including in response to business sectors have been downturns. Companies now need to revisit their business models, assess the impact of forced to temporarily COVID-19 on short-term objectives while close due to increased keeping an eye on long-term performance. occupational safety As companies understand the impacts on their businesses, timely measures need to be and health measures, or identified and rapidly implemented to ensure due to other business their viability, while managing stakeholders and planning for the future. disruptions. Some sectors have decided to terminate Steps in the restructuring process business altogether The steps in the restructuring process involve: as a result of changed 1. Due diligence, both legal and financial. consumer behaviour. Legal due diligence usually takes into account consideration of the underlying credit documents of each creditor and the 4. Negotiation and implementation, legal constraints of the legal regime in the the final part of the process where the debtor’s jurisdiction. The purpose of financial preparatory analysis from the preceding due diligence is to gain a full understanding steps is converted into an operable of the current financial and organisational restructuring agreement. positions, future cash flow position, strengths Throughout these four steps, the and weaknesses stakeholders’ management (working with 2. Standstill, a commonly employed management, the Board and external technique to provide sufficient time to all stakeholders to help navigate the company stakeholders to assess the position of the through the restructuring) is of paramount business, the legal rights and to determine importance. a restructuring strategy, without additional The restructuring process is a lengthy pressures being created by precipitous and demanding mechanism that enables an creditor action. During this stabilisation exchange of reliable information upon which phase, due diligence and assessment for a debtor and its creditors can then design a organisational change will occur restructuring plan. As the ongoing pandemic 3. Development of a restructuring plan, is accelerating structural changes in many namely the development of a financial sectors, restructuring a stressed or distressed and organisational strategy to address the capital structure will need to pace itself to causes of the corporate crisis. A sustainable the new, faster rhythms. n restructuring can only be achieved if the elements giving rise to the crisis are resolved. A contingency plan will also need to be Valerio Ranciaro is also co-author of: devised, in case of any unforeseen situation Innovation in financial restructuring: Focus which may jeopardise the execution of the on signals, processes and tools published by restructuring plan Virtus Interpress.
The restructuring process is a lengthy and demanding mechanism that enables an exchange of reliable information upon which a debtor and its creditors can then design a restructuring plan. As the ongoing pandemic is accelerating structural changes in many sectors, restructuring a stressed or distressed capital structure will 106 need to pace itself to the new, faster rhythms. Berne Union 2020
Pandemic recovery MARKET TRENDS calls for public/private collaboration
Dan Riordan, President and Chief Underwriting Officer for Political Risk, Credit and Bond at AXA XL examines the need and opportunities for collaboration between government and business to build for a future beyond the pandemic.
A major lesson in 2020 so far is that the a global drop in public and private sectors need each other employment due to to keep economies moving. In addition to business closures and claiming hundreds of thousands of lives, the social distancing. coronavirus pandemic has inflicted financial l Trade costs: shocks around the world. As governments COVID-19 has raised and businesses begin the process of the cost of imports recovery, they have many opportunities to and exports due collaborate, rebuild and invest for future to various factors, growth. including increased Dan Riordan COVID-19 has caused the deepest global inspections, reduced recession in decades, and the World Bank hours of operation, route closures, and higher forecasts the global economy will shrink by transport expenses. 5.2% in 2020. By comparison, real GDP in l Tourism: International travel and tourism 2019 grew by 2.4%. That is a stunning drop, have dropped sharply. To put this into and it’s even steeper in advanced economies, perspective, international air passenger as the pandemic disrupted supply and traffic has fallen nearly 89% in 2020, demand, trade and finance. Behind those according to the TSA screenings. The numbers is an enormous human cost, with International Air Transport Association millions of people out of work and many also says 2020 will be the worst year forced into poverty. Recovery will take a long financially in the history of aviation. time, but that timeframe can be shortened if l Services: Populations in quarantine have governments and the private sector combine shifted away from purchasing services their strengths. that require close human interaction, such A recent World Bank analysis identified as mass transportation, restaurants and four shocks to global value chains from recreational activities. Instead, they are COVID-19: consuming more goods, which can be l Employment: The pandemic has caused delivered to people’s homes.
Some governments are encouraging private institutions and banks to step up and support the rebuilding of critical infrastructure. This is a process of ‘crowding in’ private-sector organizations to balance and supplement public financing with private capital. 107 Berne Union 2020
Crowding in the private sector The table shown, offers a sampling of A range of organizations, from government new or expanded programs to aid economic agencies, to international banks, multilateral recovery. While the challenges from the agencies and development financing pandemic are numerous, the diversity of groups, are trying to determine what’s next such programs is a positive sign that shows after COVID-19. Some governments are a great deal of opportunity for public/private encouraging private institutions and banks to partnerships. step up and support the rebuilding of critical infrastructure. This is a process of ‘crowding ‘Build it back better’ in’ private-sector organizations to balance A rallying cry that can stabilize economies and supplement public financing with private and support businesses to put people capital. back to work is ‘Build it back better.’ This
Global GDP growth Figure 1.1.1.B. Global GDP growth Percent
12 GDP growth Per capita GDP growth
6
0 1885 1886 1887 1888 1889 1890 -6 1891 1892 1893 1894 1895 -12 1896 1897 1871 1901 1931 1961 1991 2021 1898 1899 1900 Source: Bolt et al. (2018); Kose, Sugawara, and Terrones (2019, 2020); World Bank.
Note: DataSource: for 2020-21 Bolt et al. (2018); are forecasts.Kose, Sugawara, Shaded and Terrones areas (2019, refer 2020); toWorld global Bank. recessions. Note: Data for 2020-21 are forecasts. Shaded areas refer to global recessions. Return to Read Me
Unemployment rate Figure 1.1.2.E. Unemployment rate Percent 8
6
4 1975, 1982, 1991
2009
2020 2 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4
Source: International Monetary Fund; Kose, Sugawara, and Terrones (2019, 2020); World Bank. Note: Year Source:“t” denotes International the Monetary year ofFund; global Kose, Sugawara, recessions and Terrones (shaded (2019, in 2020); light World gray). Bank. The darker shaded area refers to the Note: Year “t” denotes the year of global recessions (shaded in light gray). The darker shaded area refers to the range of the three 108 range of theglobal three recessions—1975, global recessions—1975, 1982, and 1991—with 1982,available and data. 1991—withUnemployment availablerates for 2020-21 data. are basedUnemployment on forecasts by the rates for 2020-21 are based onInternational forecasts Monetary by theFund Internationalin April 2020. Monetary Fund in April 2020. Return to Read Me Berne Union 2020
A rallying cry that can stabilize economies and MARKET TRENDS support businesses to put people back to work is ‘Build it back better.’ This philosophy, which we fully endorse at AXA XL, should inspire investment in critical industries such as transportation, energy, health care and financial services.
philosophy, which we fully endorse at AXA All in all, AXA XL is committed to help our XL, should inspire investment in critical clients exchange uncertainty for certainty by industries such as transportation, energy, offering the coverage to invest and conduct health care and financial services. cross-border trade with confidence. Although investments entail risks The shocks from the COVID-19 everywhere, not just in emerging and pandemic make clear that the risks to developing markets, there also are tools critical infrastructure sectors are sizable. to mitigate those risks. Political risk, credit At the same time, those same sectors also and bond solutions offer ways to protect represent opportunities for the public and investors, balance portfolios, achieve capital private sectors to work together and make a relief and ensure that projects are completed. difference. A bigger risk, frankly, is to remain Understanding complex risks and on the sidelines. n providing innovative solutions is in AXA XL’s DNA – from our underwriters to our risk analysts, we look to find solutions Dan Riordan is President and Chief among the challenges. We therefore take Underwriting Officer for Political Risk, pride in sharing our expertise on every Credit and Bond at AXA XL and is based in project for which we provide financial Washington, DC. Before joining AXA XL, he support. We are eager to partner with held various senior executive roles in political governments, development agencies and risk, specialty and global corporate property financial institutions on strategic projects, and casualty insurance. He has had a long to accelerate global economic recovery and association with the Berne Union, serving as drive growth into the future. president from 2013 to 2015.
TSA passenger traffic Figure 1.4.B. TSA passenger traffic Travelers per day, millions
3 2020 2019
2
21-Mar 1
28-Mar 0
4-Apr 7-Mar
2-May 9-May 11-Apr 11-Apr 18-Apr 25-Apr 14-Mar 21-Mar 28-Mar 16-May 23-May 28-May
4-Apr Source: Transportation Security Administration; World Bank. Note: TSA = Transportation Security Administration. Figure shows a 7-day moving average. Last observation is May 28, 2020.Source: Transportation Security Administration; World Bank. 109 Note: TSA = Transportation Security Administration. Figure shows a 7-day moving average. Last observation is May 28, 2020. Berne Union 2020
Selected New or Enhanced Programs Agency due to COVID-19 World Bank • Real Sector Crisis Response Facility (IFC) • Global Trade Finance Program (IFC) • Working Capital Solutions Program (IFC) • Combined Global Trade Liquidity and the Critical Commodities Finance Programs (IFC) • Health Emergency Preparedness and Response Multi-Donor Fund (HEPRF) • COVID-19 Fast-Track Facility (IFC & MIGA) • Managed Co-Lending Portfolio Program (MCPP) (IFC) US EXIM Bank • Working Capital Guarantee Program • Medium-Term Single-Buyer Insurance Policies Issued to Exporters or Financial Institutions • Bridge Financing Program • Pre-Delivery / Pre-Export Financing Program • Supply Chain Financing Guarantee Program European Bank for Solidarity Package Reconstruction and • Trade Facilitation Program Development • Vital Infrastructure Support Program Asian Development Bank • $20 Billion COVID-19 Pandemic Response Package • COVID-19 Active Response and Expenditure Support Program • Supply Chain Finance Program • Asia Pacific Disaster Response Fund (APDRF) Finnvera • Finnvera Guarantee • Start Guarantee • SME Guarantee US Development Finance Corporation • Rapid Response Liquidity Facility Export Development Canada • Business Credit Availability Program (BCAP) Inter-American Development Bank • Sustainable Development Bonds • Contingent Credit Facility for Natural Disaster Emergencies (CCF)
110 Berne Union 2020
Setting long term MARKET TRENDS positive strategies for ECAs
By Valentino Gallo, Founding Partner, Javalyn Partners
The COVID-19 crisis has accelerated the for international redefinition of the international trade contractors to win landscape which had already been underway business in foreign for a few years due to the combined effects markets. As a result, of the implementation of climate change the competitive policies, the advancement of technological environment innovation, and the spread of protectionist facing international policies and trade sanctions around the contractors has world. These forces and their complex become much tougher interconnections are reshaping cross-border and proactive support trade and global supply-chain flows, with Valentino Gallo from the export credit long term ramifications for the strategies of agencies can become the export credit agencies. a critical differentiating advantage. With the move from relief measures to mitigate the effects of the pandemic on Favourable considerations exports, to the post-emergency phase There are, however, some more favourable focused on stimulus, the strategic priorities considerations which temper the adverse of ECAs have shifted to initiatives aimed scenario depicted above and can help at helping exporters secure new business. ECAs to set the direction of their long term This is proving challenging because major strategies: capital investments in sectors that drove i) Governments and corporations around the growth of ECA activity over the last few the world are pledging to be carbon-neutral years, in particular cruise lines, airlines and and to the implementation of transition energy, are being cancelled or postponed strategies to zero emissions. The transition due to corporate financial distress in the to a zero-emissions economy is already travel industry and the prices of oil and other having an impact on global capital spending commodities that are affecting the energy across multiple sectors. Redefining the way sector. In addition, in the specific case of people live at its foundation (from housing exports, the introduction of protectionist to nutrition, work, mobility, education, measures such as the increase of local healthcare) will require gigantic investments content requirements in a growing number in the construction, upgrade and retrofitting of countries, are making it more difficult of the infrastructure that supports the
Under the current very uncertain scenario, it may be mutually helpful for ECAs and exporters to have a broader, strategic dialogue, with an eye to the future. 111 Berne Union 2020
activities of businesses and consumers alike. are resilience and national security concerns Investments in renewable energy, electric and with long supply chains. These trends are hydrogen fuelled transportation, smart grid, expected to be particularly pronounced for hydrogen power, nuclear power, biofuels, high-tech sectors and industries for which waste management, clean water and energy is a key input and will require major sanitation will take a central place in export capital investments. finance activities in the years to come. The capital spending and investment ii) The pandemic has also highlighted landscape is still so volatile and complex several vulnerabilities in the way businesses, that even the most solid and best organised governments and consumers are connected exporters are struggling to build a solid to one another and operate in an increasingly pipeline of new contracts. The problem digitised society. The new buzzword is is more acute for projects in developing resilience. Through the lockdown and countries and large transactions that require remote-working digital infrastructure has all hands on deck negotiations with dozens shown its importance as never before, but of counterparties, which are difficult to be also its weaknesses. The broader the usage conducted effectively on a remote basis. of artificial intelligence and machine learning, Travel restrictions are affecting installation the further the growth of online services works and testing due to the inability of for consumers (for example, education, specialised professionals to reach project telemedicine, wellness, home security, sites. The disruptions caused by COVID-19 financial investments) and businesses (for have been so pervasive that most businesses example, remote working, blockchain, are reassessing their plans and developing cryptocurrencies, data-driven remote new business origination strategies. ECAs diagnostics, digitised trade finance, collateral are no exception and are going through the surveillance) will require major capital same reassessment process. spending in telecom/digital infrastructure globally (including submarine cables, Call for national strategic reviews by 5G networks, data-centres, towers and global ECAs geospatial technology). Under normal circumstances the interaction iii) For many years, jobs and investments between ECAs and exporters is mostly associated with manufacturing activities transaction-specific and deal focused. have moved from developed market Business-reviews between ECAs and economies to emerging markets. More exporters are more the exception than the recently there have been hints of a reversal norm and are often triggered by the need of the trend, with many businesses having to address specific and urgent issues. Under implemented or announced plans to shift the current very uncertain scenario, it may at least a portion of their supply chain to be mutually helpful for ECAs and exporters developed countries. Some reasons are to have a broader, strategic dialogue, with an financial. Tariffs are obvious, but automation, eye to the future. robotics, and the reduction of energy costs ECAs, leveraging their institutional in some regions have materially reduced the role and organisational capabilities, can labour and production cost gap that made promote and lead a strategic review of their the original outsourcing so attractive. On sponsoring countries’ long-term national the non-financial side, ESG concerns of high export prospects. The review can be framed carbon footprints are a growing factor, as within the broader economic initiatives
Participation in the review should be extended to a wide spectrum of businesses and institutions beyond traditional users of ECA support. Such participants would complement and give valuable inputs that could help to identify the export opportunities of the future and a new breed of clients for the ECAs, on both the 112 exporter and importer side. Berne Union 2020
that many governments have recently that could help to identify the export MARKET TRENDS launched to make the post pandemic opportunities of the future and a new breed recovery strong, durable, sustainable, and of clients for the ECAs, on both the exporter inclusive. Exporters should be encouraged and importer side. The list of participants to participate in the dialogue. Given the may include representatives from the awareness across the business community following organisations: i) Corporations in highly innovative/high growth sectors, e.g. the circular economy, renewable energy, plant-based nutrition, The capital spending and water treatment, telecommunications and space, biotechnology/biomedical investment landscape ii) Technology companies, including start- is still so volatile and ups, operating in these high growth sectors and those in the fields of trade finance complex that even the fintech, robotics and artificial intelligence most solid and best iii) Non-bank supply chain finance organised exporters are providers iv) Local institutional investors engaged struggling to build a solid in infrastructure, ESG, sustainability and pipeline of new contracts. impact-investing v) Banks and law firms active in export and project finance. These entities benefit from strong international networks and have about the unprecedented challenges that a vested interest in collaborating with ECAs each national economy is facing, as well as vi) Other national agencies active in trade the correlation between the ECA mission and and investment promotion the Sustainable Development Goals and ESG vii) Development finance institutions policies embraced by the corporate world, it viii) Microfinance networks is very likely that an ECA-led initiative would A strategic review would identify a be welcomed and would motivate businesses shortlist of priority clients and opportunities, to join the call for action. existing and prospective. Climate-change, The results of these strategic reviews digitisation and resilience should be the can become the pillar of ECAs’ long- central components of the discussion term business plans and provide valuable with priority clients. As such, two related information for their preparation. The reviews questions could help to identify many should be designed with the dual goal of opportunities: identifying both immediate and long term 1) What is your climate change strategy opportunities. Immediate opportunities and what are the investments you will be are likely to be identified in the sectors of making as part of it? traditional strength for national exports. 2) What are your digital and resilience Longer term areas of focus should also strategies and what are the investments you target business in new sectors with high intend to make? growth potential. Exporters and ECAs would then have Participation in the review should be the opportunity to respond to clients with extended to a wide spectrum of businesses valuable solutions, including effective and institutions beyond traditional users equipment and service solutions and an of ECA support. Such participants would attractive export credit financing package to complement and give valuable inputs complement the offering. n
A strategic review would identify a shortlist of priority clients and opportunities, existing and prospective. Climate-change, digitisation and resilience should be the central components of the discussion with priority clients. 113 Berne Union 2020
Corporate Views Staying match fit
If ECAs and companies had an athlete’s mindset, the future could be even better, argues Andreas Back, Senior Manager, Financial Services, Wärtsilä
Wärtsilä is a global leader in smart young and otherwise technologies and complete lifecycle solutions healthy athlete can for the marine and energy markets. By always draw comfort emphasising sustainable innovation, total that there are many efficiency and data analytics, Wärtsilä competitions ahead maximises the environmental and economic if only the mindset is performance of the vessels and power plants right. of its customers. In 2019, Wärtsilä’s net sales Having the right totalled €5.2 billion with approximately mindset is equally 19,000 employees. The company has important in the Andreas Back operations in over 200 locations in more business world. The than 80 countries around the world. Andreas pandemic can be regarded as a serious Back, Senior Manager, Financial Services injury, and many corporates’ 2020 season at Wärtsilä, gives his unique take on the was spoiled due to the virus. Now the sustainable power sector for exporters in the question is what do forthcoming seasons post COVID-19 world. It’s a question of the have to offer? right mindset, and forward-thinking ECAs Looking at the energy market, it is quite will be vital. safe to claim that the virus has speeded up l Customer finance may become decisive as the energy transition from traditional thermal investors hesitate forms of generation to renewables. In the l Post-COVID-19 energy landscape is yet to ideal future, our planet’s energy generation be shaped, but massive upheaval might be will be based on renewables as base load, around the corner with fast and flexible generation or battery l A holistic view is desirable, and financiers storage providing peaking power, stability must not forget energy security matters and back-up. As a consequence, many manufacturing Post-match roundup companies are forced to modify their “Injuries of various seriousness form part product range to meet the shift in demand. of many athletes’ careers. Unfortunate Coal and large combined cycle gas turbine events will happen to everyone involved in plants are being replaced with solar and professional sports, and the most regrettable wind, whereas battery storage and flexible of them occur whilst preparing for a major natural gas, synthetic gas or even hydrogen sporting occasion. Although injuries can will serve the peaks and stabilise the grid. temporarily spoil a season, or even a dream, Investment decisions will be taken not only there is always the day after tomorrow, and a based on underlying technology and revenue
ECAs should have the capability to support societies so that they can enjoy a secure and stable power supply 114 based on an optimal mix of generation types. Berne Union 2020
streams, but also on the holistic fit of the of generation types. This means extending MARKET TRENDS investment in the energy system. loans and guarantees not purely based on renewables’ merits (with traditional risk Changing role of ECAs in a assessment not forgotten), but also on the sustainably-powered future applicability of the solution in the market or The crisis has highlighted the changing role energy mix. of financial institutions and the growing importance of adaptability in ECA-backed Critical role of ECAs financial solutions. As major capex-driven The traditional definition of the mandate of investments are being transformed into a an ECA is not to compete with private sector more scattered landscape of wind and solar lenders, but rather provide financing for PV farms, the market for critical additions transactions that would otherwise not take from an energy security perspective will place because commercial lenders are either grow as well. Forty to 50 years ago, the unable or unwilling to accept the political or financial community was focusing on large commercial risks inherent in the deal. Going base-loaded coal or nuclear plants, as they forward, in order to achieve sustainable and were capital intensive and contributed to economically sound energy markets, the nice fees and margins. mandate should acknowledge that ECAs The upcoming massive investments in have a role to fill in investments that may be renewables may snow-blind traditional critical for the people, but do not necessarily financiers and investors just as was the fall under the renewables category. This case back in the day. This could lead to particularly concerns the battery storage huge opportunities for the insurance sector, as the OECD Consensus is a bit vague market. Although it is sensible to embrace with regards to battery storage and where renewables as the new base load of the the asset should belong. Going forward it world, they are volatile by their nature, would be advisable to define the role of and achieving an optimal generation mix, energy storage, and it would make sense to avoiding immense overinvestments and include it in the renewables’ framework. costs, requires active participation by the This market gap has to be filled if the insurance market. Therefore, it is of utmost transition to a less carbon intensive world importance to stress the role of balancing can be successful. Having said this, one power in a renewables-intense system. should also remember the tremendous This is where the ECAs in particular will developments occurring in the field of have a central role to play. New players are synthetic gas and hydrogen. In the future, popping up in the capital markets, many power security may well be achieved in an of whom are focusing on sustainable and economically sustainable way using proven green financing. Insurance companies and technologies operated on carbon neutral pension funds are also in the game, and the fuel. large multilaterals are claiming their share. Athletes that have been plagued with There will be ample liquidity for renewable injury do often return more motivated and investments as supporting green initiatives is determined to show the world that they’re trendy, and rightly so. still in the game. There are even cases where It might not be as appealing to look setbacks have blossomed into world records. beyond the individual investment and form There is no doubt that we as corporates can an opinion on the energy system as a whole. do the same, but it will require flexible and ECAs should have the capability to support agile partners and a deep understanding of societies so that they can enjoy a secure and market dynamics. The good old times are stable power supply based on an optimal mix gone, but the future will be even brighter.” n
The OECD Consensus is a bit vague with regards to battery storage and where the asset should belong. Going forward it would be advisable to define the role of energy storage, and it would make sense to include it in the renewables’ framework. 115 Berne Union 2020
Corporate Views Credit insurers, your exporters need you What do exporters need in this crisis? An impassioned call to action for credit insurers to exporters, from an exporter. David Avram, Trade & Export Finance Director at Fives sets out the case.
Fives is an industrial engineering group, continue to support which among other things, designs and our activities, use the supplies machines, process equipment, and different supports production lines. In 2019 it had close to €2 set up by different billion in sales across 30 countries and is a governments as significant user of export finance. much as possible. We One of the strength of Fives is its large exporters need you! geographical exposure allowing it to take advantage of diverse regions to develop Contract security its activities. And 2019 was strong for the and compliance company in Europe, in France, in US and in David Avram One last word about Japan – which was a compensation for some contract security slowdown in some emerging economies. outside of the trade finance area: when In terms of the finance Fives offered business is more difficult and competition corporate clients before the crisis, it mostly is enhanced, more than ever we need to be worked with Bpifrance (about 80% of its fully aligned with our compliance policies. It contracts). But it also has worked with SACE, is not because we need to fight harder to win UKEF and CESCE (where its plants are an order that we should feel authorized to installed). The majority of financing was in deviate from these rules. the form of buyer credits, and a few supplier That being said, let’s focus on how our credits with ECAs. Quite often, it had the export finance activities have evolved during opportunity to propose using political risk the past months. While I was even recently insurance in the private market. working on contracts for amounts of several dozens of millions of euros, I am now also How is the 200-year old company active on the smallest opportunities, let’s say being affected by the current crisis below €20 million. That means that, to work and what will happen next? on our deals, banks will have to review their “We have reasons to be optimistic for the policies and accept to work on smaller tickets. Fives group despite a difficult year due to In France we have had the chance to take the COVID-19 crisis. Thanks to a diversified advantage of an offer from Bpifrance which portfolio of activities and to its large can finance ‘small’ export finance contracts. geographical footprint Fives is in a position That will be very useful for us for our coming to reduce the impact of the crisis on its level deals, but we hope that we will also be able of activity. to give business to French commercial banks. In this very challenging environment, the Just a word on export credit insurance trade and export finance areas are taking an activity: today we need to be more even more important role. Indeed, securing competitive than ever and the French export our sales when almost all economic studies credit agency has a role to play to help announce a strong increase in company reach this objective. In recent weeks we failures in the coming months is more have had the chance, to obtain support on a mandatory than ever! complicated but strategic deal from Bpifrance. On this subject we are working with several They need to continue to invest time in key players. For one of them, the credit understanding our needs and probably, in the 116 insurers, I want to send the following message: coming months, to accept to support some please consider the specificities of the period, deals with different risk profiles.” n
Berne Union 2020
Export Credit Developments at the OECD
Silvia Gavorníková, Director International Relations, EXIMBANKA SR and Chairperson of the Working Party on Export Credits and Credit Guarantees (ECG) reflects on the main good governance issues relevant to official export credits in respect of environmental and social due diligence, anti-corruption and debt sustainability.
Rising importance of official support participation of China, for sustainability in exports Nigeria, South Africa, There are unprecedented challenges facing alongside Brazil, the whole export finance ecosystem, Bulgaria, Kazakhstan, including those who provide official support Romania, Russia to exporters. Beside the impact of the and Ukraine at our COVID-19 pandemic, the sustainability events. Outreach dimension of cross-border trade keeps activities with civil increasing in importance. Topics such as society organisations climate change mitigation, sustainable and industry or Silvia Gavorníková development and transparency have become private and public some of the key points of interest and financial institutions have provided a unique discussion for governments, academics, opportunity to familiarise ourselves with businesses, industry, civil society and the different frameworks, opinions, approaches, general public alike. practices and standards employed in the Export Credit Agencies of governments respective fields. But most importantly they gathered under the multilateral OECD forum, are helping us to strengthen cooperation where officially supported export credits built on shared values and principles. disciplines are created, implemented and Business practices nowadays justify this monitored, do not only want to keep pace approach, since the globalised export finance with current developments but rather to field and project complexity is increasingly engage actively, streamlining responsible bringing together stakeholders from different business conduct and good governance countries, industries and institutions. values throughout their activities. The essence of the Working Party on Export Reflections on the continuous Credits and Credit Guarantees (ECG) mission commitment to deter bribery is three OECD Council Recommendations, The revision of the Recommendation of the covering the main good governance issues Council on Bribery and Officially Supported relevant to the area of official export credits Export Credits, which was adopted in 2019, in respect of environmental and social due fostered transparency of due diligence diligence, anti-corruption measures, and debt policies by considering various relevant sustainability. parties involved in export credit transactions and broadened its scope on domestic public Complex challenges and officials and private sector bribery, where opportunities amid pandemic prohibited under the national laws of OECD The COVID-19 pandemic has affected members. As 2020 marked the first year of our work as well. Despite this, current the revised Recommendation being in force, developments, reflected in our work are the initial phase of the implementation has a balance of challenge and opportunity. been launched in the form of a members’ Technological advances and the need to shift survey. This exercise reconfirmed the regular meetings online have given us the continuous commitment of governments opportunity reach out to more non-OECD to take appropriate measures to deter 118 counterparts. We were encouraged by the bribery in export transactions, explained Berne Union 2020
measures put in place and shared the overall transition of economies to more green MARKET TRENDS implementation experience. As a result, an and environmentally sustainable models. informal technical expert panel has been Emphasis is put on the assessment of climate established to take work forward. Moreover, related impacts of ECAs’ portfolios, as an in the short term we are planning to organise essential part of a sound and ambitious a workshop for bribery experts aiming to climate strategy. build a body of experience by considering best practices, relevant international Transparent and sustainable support developments and the evolving business for the developing world environment. As OECD member states are major providers of officially supported export credits, ECG Sustainability from an environmental, members are aware that all activities have social and human rights perspective to be pursued in a responsible manner with Sustainability of the official support of respect to the development needs and exports from an environmental, social capabilities of developing countries. The and human rights perspective and related aim is to help ensure that lower income initiatives for minimising possible negative countries do not run up unsustainable impacts keeps playing a role of the utmost external debts that might impact their ability importance within the ECG agenda. A to alleviate poverty and improve the lives of level playing field in terms of a common vulnerable communities. We acknowledge approach to addressing the potential that the COVID-19 pandemic and oil crisis adverse environmental and social (E&S) pose yet another challenge for developing impacts of projects had been guided by the countries, as their revenues are often Recommendation on Common Approaches closely linked to global demand. Therefore, on the Environmental and Officially ECG regularly invites representatives of Supported Export Credits. This document, the International Monetary Fund and the adopted by the OECD Council, serves as a World Bank to its meetings to inform framework for ECAs, setting requirements members of current developments regarding and benchmarking of E&S performance of developing countries and debt policies of transactions against established international both institutions which are being reviewed standards. regularly. We believe that sharing knowledge, Technical experts, responsible for experience and data is crucial for ECG assessment of transactions sustainability members in order to improve their own from a good governance perspective, are strategies to provide responsible support gathered in dedicated subgroup of E&S to developing countries, ensuring that their Practitioners. The increasing number of external debts do not grow extensively. This large projects worldwide is resulting in a commitment was also supported by the more frequent and necessary cooperation transposition of the Recommendation of the of private and public institutions as well Council on Sustainable Lending Practices as national and multinational financial and Officially Supported Export Credits into institutions from different countries and the OECD legal instrument. with different mandates. In order to improve The continuing efforts of governments cooperation in terms of administrative to deliver sustainable finance has also been procedures and cost efficiency, ECG annually reflected in the renewal of the mandate brings together experts from a broad of the ECG in 2019 for another five years, range of financial institutions, including endorsing the work on finding the best multilateral development banks as well as responsible, sustainable and transparent Equator Principle financial institutions, to support for all business activities. The Good share experiences and discuss coordination Governance Export Credits Instruments, the from a technical perspective and further so called Green Book1, has been recently convergence of standards employed. issued and includes up to date wording of The role of export finance stakeholders the instruments mentioned above. n in climate change mitigation efforts is a central element of general discussions. There are ongoing experience sharing Note discussions under the auspices of the ECG 1 https://www.oecd.org/trade/topics/export-credits/ documents/Good-governance-export-credits- and its expert subgroups with the aim of instruments-2020-web.pdf supporting ECAs’ efforts in terms of gradual 119 Berne Union 2020
A new deal for the OECD Arrangement?
Pekka Karkovirta, Chairman of the Participants to the Arrangement on Officially Supported Export Credits and Vice President, International Relations, Finnvera takes a look at the future of the OECD Arrangement as it, arguably, faces a mid-life crisis. How will the jigsaw pieces fit together?
“After around 40 years of existence, the as a compromise Arrangement on Officially Supported Export text between the Credits has become middle-aged and Participants. It is not suddenly appears to be asking itself, “What always very clear, and is this all about, what is my life, why has it may not always everything changed around me, where am I meet the needs of going to?” markets, exporters, In recent years, we have seen a buyers or projects. continuous build-up of pressure towards the Would it be time to Arrangement. Banking market regulation, have a fresh look? blending of various public financing Pekka Karkovirta During its 40 sources in a transaction, renewed ECA years of life, new business models and competition with non- negotiated texts have been added piece Arrangement financing – all this has changed by piece to the Arrangement. Clearly, in the game. Arguably, the biggest export credit the first years, outright subsidies were provider in the world is not a Participant. removed such as the matrix of fixed interest Just add COVID-19 and heightened pressure, rates not based on markets (and the same practically in all countries, to support rates for all currencies!), and later, major companies and exports with various improvements were made. These included: measures taken by governments. the introduction of rules on premiums, tied The Arrangement of today is a document aid rules, various sector understandings of around 150 pages long, and is relatively such as for nuclear power plants, aircraft, difficult to read. It has been written by railways, coal-fired electricity generation, professional export credit negotiators climate change mitigation, project finance,
120 Berne Union 2020
etc. This piecemeal approach has now been maximum repayment period established as in MARKET TRENDS questioned. Could we have simpler, more the current Arrangement. straightforward rules and in consequence Fourthly, it is of no surprise that climate leave it for financial professionals in ECAs to issues are on the table both in a restrictive underwrite relevant tenor, repayment profile, mode, like for coal-fired electricity generation down payment, local cost support, etc, projects, as well as an incentivising mode for each transaction? As many banks have like for climate change mitigation projects. opted out of export finance or reduced these How can a comprehensive and logical services and ECAs are offering increasingly ‘climate approach’ be written? So far, mainly more funded solutions or providing direct longer tenors are allowed for specified credits, there is no doubt ECAs are today the climate friendly transactions. Obviously, real professionals in this business and can this leaves other ‘green’ transactions provide the necessary financial engineering. without this specific support. With overall longer tenors possibly for all, how should Five challenges ahead for the new green transactions be incentivised? The thinking issue of reduced premiums may be in The first challenge is maintaining the conflict with the issue of self-sustainability objective of a level playing field. This and subsidisation. The question remains is even more important today as new what is the collective level of ambition of instruments, programmes and schemes of Participants to the climate issue? public finance emerge. The raison d’être Fifthly, public financing outside the of basically neutralising competition on Arrangement rules has really changed publicly supported financial terms has not the game. How could Participants to the disappeared. Arrangement negotiate rules for other Secondly, a fundamental pillar of sound sources of public finance, for example underwriting, extreme flexibility may lead development finance, that may compete to excessive financial terms offered. After with ECA financing? Clearly, a whole-of- all, ECAs are government policy tools, and government approach is a must for entering policy based interests could override sound any such discussion, and the question to be underwriting in specific situations. For asked is whether these programmes cause a example, it is relatively difficult to shorten trade diversion. To be able to even to analyse tenor in an industry once an ECA offers, say, the situation, transparency is of paramount 20 years of repayment terms. The ECA and importance. the others following would actually establish Understanding that the Arrangement will the ‘market standard’. The dangers of a race remain the only global agreement governing to the bottom and crowding out private export credits, the task ahead is a balancing markets do exist. act of finding compromise between various Thirdly is the use of correct levels of angles: competition, underwriting flexibilities, premiums. At least, a look at premium levels reasonable pricing, climate, blended for longer tenors would be considered if financing, etc. It is a jigsaw puzzle of fitting and when longer tenors were allowed with together pieces of concepts, government renewed flexibility. What levels would be policies, real life exports, various players the right ones considering market pricing, and increasing political attention. ECAs and credit risk and self-sustainability and export credits have become at the forefront being relatively ‘prohibitive’ in excessively of government instruments supporting our long tenors? The other option is to have a economies.” n
The first challenge is maintaining the objective of a level playing field. This is even more important today as new instruments, programmes and schemes of public finance emerge. The raison d’être of basically neutralising competition on publicly supported financial terms has not disappeared. 121 Berne Union 2020
Developments in export finance in Latin America
By Pedro Carriço, Founding partner of T|X|P Partners and ECA, Bureau of Experts
The last half-decade has not been easy America is a region for Latin American economies, especially accustomed to crises when compared to the recent past when it of all sorts, but it seemed they could do no wrong. Although had been left largely there is an ongoing structural shift in global untouched by previous growth towards developing countries, the pandemics of recent region has not been able to consistently take memory and was advantage of emerging opportunities. This is unprepared to deal in part due to the uncertainties of the current with such a novel global trade environment, with sudden policy situation. The human moves and protective measures implemented Pedro Carriço and economic costs of by key players on a recurring basis, and the dithering or ill-suited action have piled upon relatively low prices of the commodities that existing problems, aggravating the demands still represent a major share of the region’s on future policy making. exports. The region’s inability to adapt to OECD and Berne Union surveys have an evolving world is also a result of internal clearly shown that countries with ECAs political turbulence arising from corruption reacted quickly by leveraging capacity scandals, social inequality, and institutional for support, expanding working capital fragility. programs, creating new facilities, and Most countries in the region had been increasing flexibility of terms and conditions moving forward in their processes of of their traditional products. The emphasis addressing important internal issues and of the policy response has been on rescuing adapting to the new realities of the world, SMEs, the hardest hit and least-prepared albeit in fits and starts. As such, the year segment of the fabric of any economy. Most 2020 was supposed to provide some Latin American countries, however, lack the relieving tailwinds, with a slight acceleration availability of cemented instruments to deal of local economies in a context of improving with the trade and export finance challenges world GDP growth. There were, as always, of our pandemic world. Consequently, crisis visible yet unalarming headwinds on the response has been slower, smaller and less horizon. That is, until COVID-19. Latin far-reaching.
Latin America is a region accustomed to crises of all sorts, but it had been left largely untouched by previous pandemics of recent memory and was unprepared to deal with such a novel situation. 122 Berne Union 2020
Trade difficulties exacerbated of this restructured export scheme, but the MARKET TRENDS In normal conditions, the region was already degree of success also depends on FX and facing a difficult trade environment. The trade policy reforms as well as changes in year 2019 saw a decline in exports of 7% central bank and tax regulations. year on year in South America and 11% in the Caribbean, due mainly to lower Colombia commodity prices and lower demand from In Colombia, exports have stagnated China. Intra-regional trade suffered with at around 15% of GDP since the 1980s. sluggish growth in the larger economies of Bancóldex, the Colombian export-import Argentina, Brazil, and Mexico. The lockdowns bank, was folded into Grupo Bicentenario brought on by the pandemic worldwide have in late 2019, a conglomerate of financial worsened last year’s setback by increasing entities with state participation. The bank competition in regional and external markets has continued its support to exporting firms, as industrial powers with excess product now bolstered by multilaterals, but with little seek alternative buyers. Adding insult to apparent innovation. At state level, a set of injury, global risk aversion exacerbated measures to promote internationalisation of the financing difficulties faced by Latin Colombian companies has been reinforced American exporters, especially SMEs, while this year. With the participation of the FNG advanced economies’ firms could find some (Fondo Nacional de Garantías), another assistance in emergency programs to sustain Grupo Bicentenario institution, SMEs can get production and seduce buyers. assistance to find new markets and increase There have been noteworthy competitiveness while gaining access to developments in the region to make up guarantees for investment in fixed assets for policy shortcomings in the area of used in export production. export promotion. Changes have involved the creation or reorientation of existing Mexico structures, from development banks to Mexico is another example of multilateral guarantee funds, as well as the mobilisation engagement to boost export support. Unlike of resources from multilateral institutions. A in Colombia, where the focus has been in few examples to illustrate the measures taken smaller firms, the Mexican authorities also in the region include: turned their eyes to strategic industries with long supply chains and strong international Argentina linkages. A recent US$200 million credit The Argentine development bank BICE line from CAF to Bancomext was set up (Banco de Inversión y Comercio Exterior) to support exporting firms in the steel and has gained renewed importance. Although automotive industries. macro financial conditions provide limited room for injection of resources, the bank Brazil seems to be shifting its focus to greater Colombia was not the only country caught support of manufactured exports. In an in the middle of a restructuring of its official effort to recover the loss of thousands of export support scheme when the pandemic exporting firms recorded since 2009, BICE hit. In Brazil, the export credit finance has created working capital and pre-export apparatus has suffered from various budget finance lines for manufacturing SMEs with restrictions, organisational restructuring, extended tenors and low fixed interest rates. policy reorientation, and procedural A small financial sector and reduced access uncertainty for the last two years. At the to external funding are hurdles on the path same time, engineering service companies
The lockdowns brought on by the pandemic worldwide have worsened last year’s setback by increasing competition in regional and external markets as industrial powers with excess product seek alternative buyers. 123 Berne Union 2020
in normal times, and pandemic restrictions, If the countries in the with associated hardships, have only pushed region are intent on back the deadline for the setup of a new model while throwing into question many of climbing the value-added the accepted assumptions in the process. ladder, they must offer Furthermore, in the roster of measures a suite of dependable announced by Brazilian authorities to help companies wrestle with the current financing instruments to economic crisis, there are no policies attend to the needs of directed specifically at assisting firms with their exporting difficulties. Although the their exporting industries, instruments for official support still exist, it in good and bad times. has been challenging for responsible officials to put them to work in a context of policy transition and intense budgetary restrictions. The apparent stronger-than-expected recovery from pandemic lockdowns, lost access to official support because of although obviously positive for the economy, questionable methods used to win contracts may only make the financing gap more in certain countries, leaving capital goods evident, as lenders allocate funds to hot suppliers orphaned by large projects domestic infrastructure sectors, such as that mobilised demand from extensive water utilities, natural gas and housing, to the supply chains. As a result, manufactured detriment of MLT export transactions. exports, which should have benefited from continuous BRL depreciation, fell 7% and 15% Some silver linings? in the eight months to August in 2019 and Nevertheless, the COVID-19 crisis has – as 2020, respectively. a silver lining in a fog of destruction – The focus at the state companies involved highlighted to Latin American authorities the in export support has shifted to privatisation importance of having tools at their disposal efforts in varying degrees, with Banco that can fill financing gaps in times of sudden do Brasil/Proex less affected while ABGF market withdrawal. If the countries in the is being wound down altogether. At the region are intent on climbing the value- national development bank BNDES, which added ladder, they must offer a suite of historically finances about 90% of long- dependable financing instruments to attend term exports, internal reorganisation has to the needs of their exporting industries, in eliminated the export finance department good and bad times. n and redistributed staff as export specialists into other sectoral areas. In the meantime, the government has created inter-ministerial Pedro Carriço is Founding Partner of working groups to redesign the model of T|X|P Partners and ECA | Bureau of Experts, official export finance support, taking into providers of solutions for Trade, eXport, account private sector stakeholder inputs. PPP, Project, and Agency finance in Latin Such an effort is a time consuming enterprise America.
In Brazil, the export credit finance apparatus has suffered from various budget restrictions, organisational restructuring, policy reorientation, and procedural uncertainty for the last two years. At the same time, engineering service companies lost access to official support because of questionable methods used to win contracts in certain countries, leaving capital goods suppliers orphaned by large projects that 124 mobilised demand from extensive supply chains. Berne Union 2020
Building on the halal MARKET TRENDS brand with ECI Islamic
Etihad Credit Insurance (ECI) has launched its Islamic Finance suite of products in the eye of the COVID-19 crisis. It’s part of the agency’s drive to narrow the trade finance gap and tap into the potential of the halal market globally. ECI’s CEO, Massimo Falcioni, and Zishan Iqbal, Director of Murabaha Solutions, spoke to Katharine Morton, Head of Trade, Treasury & Risk at TXF about the agency’s plan and the products.
ECI Islamic, a Shariah-compliant trade with the Dubai credit and export finance insurance suite Islamic Economy of products, was launched by Etihad Credit Development Centre Insurance (ECI) at the end of October. ECI (DIEDC) to develop its is the UAE Federal export credit company offering and the suite which is mandated to increase diversification of ECI Islamic products in non-oil trade. UAE is playing an increasing has been signed off role in world trade, and specifically in halal as Shariah-compliant trade worldwide. ECI may be a new player, by Dar Al Sharia, a established a full century after the first Dubai consultancy export credit agency (ECGD in 1917, currently Massimo Falcioni firm consisting of UKEF), but it has the unique potential professionals with to develop trade financed according to expertise in Sharia, Shariah law. law, banking and “As ECI stays true to its mandate of finance. The portfolio supporting the UAE’s non-oil sector in line is re-insured by the with the vision of the wise leaders, ECI Islamic Corporation Islamic offers Shariah-compliant trade credit, for the Insurance finance and investment solutions in order of Investment and to provide Islamic businesses a competitive Export Credit (a swing in the international market,” says member of the Zishan Iqbal, Director of Murabaha Solutions Zishan Iqbal Islamic Development at ECI. Bank) which is the ECI Islamic is designed to boost the only agency to offer such services for the UAE’s halal export industry and to push its member countries of the Organisation of strong position as a global leader in the fast- Islamic Cooperation. growing Islamic economy and ECI is one of ECI Islamic aims to address the needs of the first sovereign export credit agencies in four customer segments: banks, investors, the Middle East to offer Shariah-compliant large corporates and SMEs. Export credit export credit insurance and guarantee solutions offered under the ECI Islamic solutions. banner include trade credit insurance (which This aspect of ‘Etihad’ (togetherness, includes whole turnover policy, single risk cooperation) is the financial dimension of the short term policy, and single risk long expanding consumer Muslim halal culture term policy), Letter of Credit confirmation which has broadened beyond the food sector insurance, Islamic export finance, foreign into the pharmaceutical and lifestyle industries. investment insurance, and surety bonding. Specifically, through its use of Shariah compliant financial mechanisms and products, Risk sharing at the heart ECI aims to be recognised as the leading At the heart of ECI Islamic is the concept of innovative world class ECA in the Middle risk sharing – rather than risk transfers – and East and throughout the world where Islamic transparently sharing the surplus generated companies trade and their banks operate. in the future. There are two separate funds 125 ECI has worked in partnership associated with the products – one a Berne Union 2020
pooled policy holder fund, and the other a ECI has increased financial and insurance shareholder fund. guarantees without increasing fees. It has Banks globally will be able to use the more than 1600 revolving credit guarantees product. At the outset, ECI Islamic is of US$1.2 billion equivalent to support the targeting Islamic banks, and conventional non-oil economy. During tough times, its banks that have Shariah-compliant products commitment has increased, he says. Prior through dedicated windows. “We are not to the crisis (in August 2019), ECI launched limiting ourselves and we are willing to specific support to SMEs in the form of an collaborate with banks that have Shariah- online solution ‘SME Protect’ which provides compliant solutions,” says Iqbal. simple to access support via an OTC product helping businesses broaden their Collaboration with other ECAs on understanding of trade credit solutions and Islamic solutions? providing guarantees to receivables so SMEs Does ECI plan to help other ECAs access can provide credit to clients without financial the Islamic finance market? ECI has already loss. been partnering with multiple ECAs – including SACE, UKEF and Sinosure and is Encouraging investment through in discussion with other leading ECAs, Iqbal flexibility says. “The aim is that if a transaction meets ECI is flexible on local content requirements, the eligibility criteria of the ECAs concerned, adds Iqbal. “If you look at some global ECAs’ ECI can issue cover based on Islamic and eligibility criteria, some are quite strict, Shariah principles and our partners can stand wanting 100% and some only want 20%. at our back and reinsure us,” he adds. “We Given the dynamics here on the ground in have that capability and our proposition is UAE, we can be more flexible. [UAE has] a end-to-end Islamic.” lot of re-exports and a lot of companies use us as a hub for Asia and Africa in particular. Benefiting from the trusted We are [happy] to look at each transaction ‘halal brand’ and at how it contributes to the GDP of UAE, According to ECI the global halal industry it can go down as far as 10% as long as it is has gained substantial traction over recent exported and re-exported from UAE.” years. The Pew Research Centre estimates ECI is also providing support to incoming that by 2050, the number of Muslims projects, particularly in renewable energy, worldwide will grow from today’s 1.7 billion to waste management and greenfield projects. 2.76 billion, comprising 29.7% of the world’s While not a member of the OECD, the OECD population. Arrangement will sometimes provide a good Their growing number has also resulted in template basis for ECI to use, although it will growing halal and Islamic faith-inspired ethical also be flexible on this. consumption needs. In the 2019 State of the Meanwhile, Falcioni remains optimistic Global Islamic Economy Report released amid the looming synchronised global by US-based research and advisory firm recession. He argues that in these DinarStandard, the halal spending of Muslims unprecedented times, the past is not always reached $2.2 trillion in 2018, spread across the a good guide as macroeconomic forecasts food, pharmaceutical and lifestyle sectors. The are based on models that will have inputs report also projected this number to increase skewed by past projections. to $3.2 trillion in 2024. Halal products are also “The UAE has proven to be very a resilient being used by non-Muslims. economy during the crisis with a very agile Iqbal is keen to point to the opportunities and visionary government which is looking that stretch beyond simply the use of the to implement 17 Sustainable Development products for religious reasons. “Halal and Goals (SDGs) as its first mandate; the vision Islamic solutions have become a brand for UAE’s Energy 2050 policy is to reduce – a brand of trust, of corporate social carbon/fossil dependency. UAE is a country responsibility, of transparency and a brand of looking forward thanks to its inspired sharing the risk and moral values,” he says. leadership. Retreat is never an option, looking forward with optimism is the key to The broader picture in a COVID success.” n environment To counteract the current crisis, ECI’s More information is available from ECI on 126 CEO Massimo Falcioni points out that [email protected] Berne Union 2020
Venezuela: A Brief Update MARKET TRENDS
By David H Anderson, Principal, Anderson Risk Consultants
For most of the export credit and investment driven not just by the insurance world, and indeed for most country risk outlook of the financial world, Venezuela long but by loss experience. ago fell off the radar screen. When The spike in MLT information about the country is published, claims in 2018-2019 it tends to contain the words ‘economic followed many years of catastrophe,’ ‘humanitarian crisis,’ or ‘failed significant claims levels. state.’ Even for agencies tasked with aiding Carmen Vara, Director distressed countries, Venezuela poses at Spanish export daunting challenges. However, as risk takers credit agency CESCE, in Latin America, we ignore Venezuela at David H Anderson says that the turning our peril. It is too important to the region in point for her agency terms of geography, natural resources, and was in 2011, when CESCE started having size. If you have not read about the country problems on a supplier credit transaction to for a while, never fear, this article will give the Venezuelan state. At that point, CESCE you[photo in] a brief update and sources for additional stopped issuing new coverage. She expects research.Venezuela: A Brief Update that eventually such debts will be negotiated via the Paris Club. I recall when some types BerneBy David H Anderson Union Activity, Principal, Anderson Risk Consultantsof political risk cover and short term credit BerneFor most of the export credit and investment insurance world, and indeed for most of the financial Union members have reduced their coverage (particularly against offshore PDVSA- exposureworld, Venezuela long ago fell off the radar screen. and new commitments dramatically When information about the information about the controlled entities) were available from private overcountry is published, it tends to contain the words the past several years as per the figures‘economic catastrophe, insurers, but those’ ‘humanitarian crisis, days are over. ’A or quick below‘failed state. (in millions’ Even for agencies tasked with aiding of US dollars). distressed surveycountries, Venezuela poses daunting of private insurance brokers reveals that challSomeenges. of However, as risk takers in Latin America, we ignore Venezuela at our perilthat reduction is by legal necessity no one is quoting these .days, It is too important even where a asto the region in terms of geography, natural resources, and size. economic sanctions have been implemented transaction If you have wouldnot read about the country be theoretically permissible byfor a while the US and, never fea the EU.r, this article will give However, most ofyou a brief update it is by sanctions.and sources for additional research . Berne Union Activity
Berne Union members have reduced their exposure and new commitments dramatically over the past Berneseveral years as per the Union Activityfigures below (in millions of US dollars).
2020- Medium-Long Term Credit 2015-YT 2016-YT 2017-YT 2018-YT 2019-YT H1 New Commitments 90.5 570.6 0.0 0.0 0.0 0.0 Commitments Outstanding 6,863.8 4,896.6 4,038.8 1,952.7 292.8 248.4 Claims Paid 11.5 41.3 29.9 678.3 348.9 40.6 Recoveries 0.1 0.4 6.6 0.0 0.0 0.0
2020 - Political Risk Insurance 2015-YT 2016-YT 2017-YT 2018-YT 2019-YT H1 New Commitments 304.02 161.46 160.07 24.14 6.40 0.00 Commitments Outstanding 1,169.37 875.26 338.75 245.34 232.68 227.43 Claims Paid 0.00 3.70 6.82 0.00 0.00 0.00 Recoveries 0.00 0.00 0.00 0.00 0.00 0.00
2020 - Short Term Credit 2015-YT 2016-YT 2017-YT 2018-YT 2019-YT H1 Commitments 1,141.12 385.63 283.18 262.16 570.74 161.73 Claims Paid 202.42 56.24 25.56 1.05 0.34 1.76 Recoveries 25.01 11.93 19.52 0.24 0.00 22.50 Source: Berne Union Source: Berne Union 127 Some of that reduction is by legal necessity as economic sanctions have been implemented by the US and the EU. However, most of it is driven not just by the country risk outlook but by loss experience. The spike in MLT claims in 2018-2019 followed many years of significant claims levels. Carmen Vara, Director at Spanish export credit agency CESCE, says that the turning point for her agency was in 2011, when CESCE started having problems on a supplier credit transaction to the Venezuelan state. At that point, CESCE stopped issuing new coverage. She expects that eventually such debts will be negotiated via the Paris Club. I recall when some types of political risk cover and short term credit coverage (particularly
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The economic abyss supply of basic goods, a problem until The prolonged economic depression in the second half of 2018 because of the Venezuela is among the worst of any country government’s price and foreign exchange since the Second World War. Oil is still the controls. The government liberalised those lynchpin of the economy, and it has been controls quietly in 2019 and the shortages hit dramatically by the effects of low oil stopped. However, new prices are beyond prices, dramatically falling production due the reach of most Venezuelans, and to lack of investment and mismanagement, hyperinflation keeps it that way. and sanctions by the US, the EU and other Millions of Venezuelans have chosen countries. The IMF expects a 25% drop in migration as a way of surviving. Of a current GDP in 2020, coupled with 6,500% (hyper) population of 28.4 million, approximately inflation, and that follows five years in which five million Venezuelans have left the US dollar GDP had already contracted by country in the last six years. It is ‘the 60%.1 Since 2015, gross foreign exchange largest external displacement crisis in Latin reserves have been drawn down from US$16 America’s recent history’, according to the billion to $6.5 billion.2 International Organization for Migration.”7 The debt picture is similarly grim, with The vast majority of Venezuelans on the gross government debt at 232.8% of GDP.3 move (4.2 million) have stayed within Latin Having defaulted on multiple bonds from America. Colombia hosts the greatest 2017 to 2019, Venezuela’s access to new number at 1.8 million. Other hosting nations debt, even to formerly willing creditors such include Peru (861,000), Chile (455,500), as China and Russia, appears to have been Ecuador (366,600) and Brazil (253,500). nearly shut down. Attempting to cut off the According to the Wilson Center, the influx regime’s financing sources, the US prohibited of Venezuelan migrants and refugees has the purchase of Venezuelan debt in 2018. placed considerable strain on the resources Accordingly, the 2027 bonds were trading at of host countries, particularly the health and less than 10 cents on the US dollar as of mid- education systems. It has also increased September 2020.4 competition for jobs in the areas where The effects on Venezuelans have been Venezuelans are concentrated, which has the severe. While there was some progress in potential to inflame xenophobic sentiments fighting poverty under the high oil prices among locals.8 and social programmes of the previous With this kind of economic turmoil, one administration [under former President Hugo would be excused for thinking that no Chávez], more than 80% of the population foreign business would continue to operate now lives in extreme poverty.5 With the in this environment, but that is not the bankruptcy of most of the private sector, case. “Companies in oil services, chemicals, the middle class has been essentially wiped and food production still see long term out. Venezuela has fallen well behind its potential in Venezuela and are staying,” says neighbour Colombia in human development Raul Gallegos, who covers Venezuela for indicators like life expectancy, infant Control Risks, a specialist risk consultancy. mortality, and child malnutrition.6 Even “In addition, the regime has figured out before the onset of COVID-19, Venezuela’s that it has to become more capitalistic in health care crisis was well underway. Locals order to survive, and there are many key perceive crime, which is often perpetrated infrastructure assets that it can sell off to by military and police officers, as worse than private interests from China, Russia, Iran and ever. others. The regime has options to maintain One area of improvement has been the the status quo for a long time.”
The prolonged economic depression in Venezuela is among the worst of any country since the Second World War. Oil is still the lynchpin of the economy, and it has been hit dramatically by the effects of low oil prices, dramatically falling production due to lack of investment and mismanagement, and sanctions by the 128 US, the EU and other countries. Berne Union 2020
willing to provide new loans to the regime. MARKET TRENDS For the great majority New transactions are frequently done on a of export credit and cash or barter basis. With China and Russia backing the regime, the US has been blocked investment insurers, from mobilising the UN Security Council to there will be no new exert more pressure.12 commitments until With the regime in control, the opposition in disarray, and the international community conditions materially divided, it is difficult to see how conditions improve, and the main in Venezuela could improve. If there is going to be change, analysts agree it may have focus will be on the Paris to come from within ‘chavismo,’ (groups Club, reschedulings, and that were loyal to Chávez originally and claims recoveries. now are part of Maduro’s regime). Schisms in the military may develop, but anything approaching another coup attempt is still seen as a low probability event, mainly Political quandary because of the regime’s controls. Poland’s One reason that President Nicolas Maduro’s Lech Walesa or the Soviet Union’s Mikhail regime has options is that there is no Gorbachev may provide better models as to institution or opposition within Venezuela how change could occur. to check its power. In May 2017, Maduro Forecasters of various persuasions have a convened a constituent assembly that later long history of being wrong about Venezuela. declared itself to be the legislature, though One thing is certain, it is possible for the many countries refused to recognise it. existing economic conditions and regime to Chávez had packed the Supreme Court in continue for years. For the great majority of 2004, and then all its members were hand- export credit and investment insurers, there picked by Maduro in 2015. The military will be no new commitments until conditions has been shrewdly and corruptly brought materially improve, and the main focus will under control, with help from Cuba, since be on the Paris Club, reschedulings, and the Chávez administration.9 It is true that claims recoveries. Some bold companies Maduro’s popularity is extremely low (one will continue operations there, but they will poll says 13%), but opposition leader Juan generally do so without credit or political risk Guaidó (who is recognised as interim coverage. n President by about 60 countries) is only at about 26%.10 Gallegos asserts that there are three Notes main elements propping up the regime: 1 https://www.imf.org/en/Countries/VEN 2 https://tradingeconomics.com/venezuela/ Corruption, criminalisation of officials foreign-exchange-reserves#:~:text=Foreign%20 (which then binds them to their government Exchange%20Reserves%20in%20Venezuela%20 enablers), and surveillance. According to averaged%2012295.51%20USD%20Million%20 from,Million%20in%20September%20of%201962. Transparency International, Venezuela’s 3 https://www.imf.org/external/datamapper/profile/ corruption level is now in the same league as VEN/WEO Democratic Republic of the Congo, Somalia, 4 https://www.bloomberg.com/news/ articles/2020-10-19/venezuela-s-government-is- 11 and Afghanistan. trying-to-revive-moribund-debt-talks There are significant international pressure 5 https://www.imf.org/en/News/Articles/2020/01/29/ and sanctions on the regime. The US and tr012920-transcript-of-the-january-2020-western- hemisphere-department-press-briefing most Western Hemisphere countries do not 6 http://hdr.undp.org/en/countries/profiles/VEN recognize Maduro as legitimate, rather they 7 https://www.iom.int/venezuela-refugee-and- see the National Assembly-elected Guaidó migrant-crisis 8 https://www.wilsoncenter.org/article/ as the interim President. Talks between the understanding-the-venezuelan-refugee-crisis regime and the opposition mediated by 9 https://www.reuters.com/investigates/special- Norway stalled in 2019 after Maduro pulled report/venezuela-military/ 10 https://www.economist.com/the- out, citing US sanctions. americas/2020/06/25/how-venezuelas-regime- Maduro still has significant supporters, plans-to-win-this-years-legislative-election including Russia, China, Cuba, Turkey, and 11 https://www.transparency.org/en/cpi# 12 Congressional Research Service, ‘Venezuela: Iran. Although China and Russia were the Background and US Relations,’ Aug. 26, 2020, regime’s principal financiers, all of the debt is pg. 20. 129 in default and none of these countries is now Berne Union 2020
Buyer information in Africa
By Vinco David, Secretary General, Berne Union
Improving the quality and availability of buyer information in Africa is a key to boosting trade. Why is it needed and how can it be made better?
Amid the avalanche of news about the buyers. Many countries impact of the COVID-19 pandemic on the have legislation and economy, we could be forgiven for forgetting control systems in that there also are other issues affecting place to ensure the trade. One of these is the lack of reliable quality, timeliness credit information in many developing and accessibility of countries, in particular in Africa. This is an (at least) corporate impediment to the much-needed growth of annual accounts. trade – which is both important for economic This enables credit growth, and combatting poverty. Here is an insurers to assess the Vinco David analysis of the problem and some possible credit risk, in addition solutions. to assessment of other risk factors, such as more qualitative information, and political, The role of credit insurance macroeconomic and sector analyses. About 13% of global cross-border trade But developing countries are the ones is credit insured. Not all trade requires that could benefit most from trade support. protection against credit risk. Payment risk That includes much of the African continent in inter-company trade, or for goods and where reliable corporate financial information services paid in advance, or trade on spot is not available. This is a major reason why markets, such as for oil, is negligibly low. But credit insurers – both public (ECAs) and many goods and services are sold on credit private, both African and from other regions to companies and governments, with tenors – are holding back on underwriting corporate ranging from one day to over 20 years. A risk in Africa. And without credit insurance, fair amount of these transactions would many transactions on credit terms will only go ahead if credit insurance is available. simply not take place. This is a considerable This protects the continuity of the seller and impediment to the development of intra- unlocks bank financing for working capital African trade and imports into Africa. for the seller and extended payment terms The share of Sub Saharan Africa as a required by the buyer. destination region for credit insured trade is around $40-50 billion annually or 2% of The role of buyer information for global credit insured trade. This includes credit insurers both intra-African trade and imports into Buyer credit information is the basis for the Africa. This amount is far below the potential underwriting of credit risk on commercial and needs of the region.
Buyer credit information is the basis for the underwriting of credit risk on commercial buyers. Many countries have legislation and control systems in place 130 to ensure the quality, timeliness and accessibility of (at least) corporate annual accounts. Berne Union 2020
(Note: these data refer to trade credits MARKET TRENDS – so-called short-term credits. It does not Certainly in times of include export credits to Africa – the so- limited travel possibilities, called medium/long-term credits. These medium/long-term credits often benefit from such as during the current credit risk mitigants such as government pandemic, it is essential guarantees, offshore structures etc.) to digitise buyer credit Is it all that bad for trade credit? information to a much Generally, it is bad for trade credit in Africa, larger degree than has but there are a few exceptions: l Listed companies. They are required to make been done so far. available and file their audited accounts. l Some regional variance (e.g. South Africa). l Buyers with up-to-date, reliable accounts l Implementation and enforcement of who are willing to share these. This is quite globally accepted auditing standards a labour-intensive process. The buyer that all certified public accountants needs to be contacted and explained the must adhere to. Standards based on importance of sharing the accounts with a GAAP, IFRS, as applicable, or any other supplier and an insurer they do not know internationally accepted standard. for the benefit of being able to buy on l Improve education of certified public credit. accountants. There are many national and l In many countries the Registrar of international accountants’ associations companies allows for public search of and universities that provide education company information (i.e. shareholders, in internationally accepted accounting directors, share capital). However, this standards. process is manual, so requires traveling to l More frequent updating of records/ the Registrar. Additionally, the records are information held at Registrars. Non- not always up-to-date and do not include financial information, such as names of the accounts. directors, should be updated in a timely l Some institutions, such as Afreximbank, fashion. Financial information should are setting up depositories of buyer credit be updated at least once yearly within information. However, this is still in an a certain timeframe after close of each initial phase. financial year. l More reliable information from credit What needs to be done? reference bureaus. Bureau information, if At various levels measures are required to available at all, is often of low quality and better enable credit insurance and thus therefore not reliable. This low quality promote and support trade. These measures is a function of limited reliable financial start with the right legislation and regulation information being publicly available. needed in most Sub-Saharan countries: l Sanctioning and prosecution of fraudulent l A change in legislation requiring activity in trade, such as impersonation companies to submit audited financials fraud. with their annual returns in a timely l More generally, a culture of more financial manner. Many countries throughout the openness by corporates should be world have such legislation, mandating stimulated. Registrar such as Companies house, Chamber of Commerce or other The need for more digitisation amid organisation to collect audited financials the pandemic and disclose them. The example from the Credit insurers underwriting risk in Africa UK can be found here. often tend to visit the buyers (the importers) l Allow third parties to access the to get a better understanding of the credit information. It is important that this risk on them. This is, of course, a very labour- collected financial information is made intensive and costly activity. Certainly in available online by these mandated times of limited travel possibilities, such as organisations, so that remote access is during the current pandemic, it is essential to possible by any member of the public, digitise buyer credit information to a much usually against a (small) fee. larger degree than has been done so far. n 131
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Future4 trends Berne Union 2020
Time to double down on trade digitisation? On counting virtual beans
There are distinctions between virtual and real in trade digitisation. How much is the current crisis helping drive change? The challenges are more than simply counting metaphorical beans. Katharine Morton, Head of Trade, Treasury & Risk at TXF reflects on the state of play.
How many beans make five? A bean a bean, Distinguishing the a bean and a half, half a bean and a bean. ‘virtual’ from I have been growing runner beans for the ‘not real’ first time, and this children’s game leads me One of the elevator to think about reality, digitisation and trade pitches for digitisation finance in the current crisis. Digitisation is an is that it provides, awfully big adventure, a very big beanstalk hopefully, a more to climb. transparent approach Talking about digitisation of trade, both than paper, and in terms of logistics and finance, has been traceability is there Katharine Morton something the industry has been good at, for to highlight and years. Talking, that is. COVID-19 increases the eliminate human error and discrepancies. financiers, borrowers, exporters/importers, Distinguishing the virtual from the not real, insurers and lawyers and others’ desire to the non-existent, the double invoiced, the make sure documents are prepared, sent/ fraudulent is a problem for paper, as recent received, verified and signed electronically. expensive high profile frauds in trade and The pandemic appears to have gingered the commodity finance have shown. A problem pace up, and discussion of trade digitisation also of counting real beans versus virtual has been more animated of late. How ones. much is talk really becoming action? There The continued use of paper-based are great hopes for the ICC Digital Trade transactions, cumbersome due diligence Standards Initiative (DSI), the rebadged UTN requirements for banks, and lack of adequate launched again in March under the ICC’s business information on borrower firms, wing, supported by ADB funding, and a new especially SMEs, are key challenges in trade Managing Director appointed in September, finance provision. Rapid developments in Oswald Kuyler, could help pick up the pace. digitisation and automation should offer
Distinguishing the virtual from the not real, the non-existent, the double invoiced, the fraudulent is a problem for paper, as recent expensive high profile frauds in trade and commodity finance have shown. A problem also of counting real beans versus virtual ones. 134 Berne Union 2020
promise in addressing these challenges. Law on Electronic Transferable Records A trade distribution head at a major (MLETR). EssDocs announced its partnership FUTURE TRENDS trade bank told me, off the record, “I’m very in India with Portall to deliver eBL in July optimistic on digital trade from a trade and Bolero also notes a spike of interest in finance perspective. I think it’s accelerating, moving away from paper for trade. “The regulations are changing and there will be impact of COVID-19 on carriers, corporates focus on the business and it will be driving and banks has shown that paper processes the industry and there will be efficiency and business continuity planning scenarios gains.” Nonetheless, he says while he is ‘gung can fail and COVID-19 is not going away ho’ about the prospects for trade, “The soon. Thus meaning that traditional and question is how do we accelerate digitisation, contemporary trade is embracing the and not just in trade distribution but end to use of e-documents for anything from end. There are positive signs, especially with open account trade up to DLT Marco Polo e-bills of lading (eBL), but there needs to be transactions,” a spokesperson from Bolero scale.” said. The need to step up actual digitisation Positive signs on cargo, piecemeal as a way of facilitating and financing trade elsewhere? is pressing. Financing cross border trade E-bills of lading are certainly getting a lot and working capital via supply chain finance more discussion amid the crisis – the Digital (SCF) is also underpinned by digitisation Container Shipping Association (DCSA) (specifically of invoices, and electronic has been pushing for eBL standardisation developments in a/r and a/p and integration for cargo, and UN/CEFACT are all pursuing with ERP systems help facilitate working initiatives such as the UNCITRAL Model capital management digitally). Some lessons
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from this space can be applied in other areas with the source data stored in POs and of trade digitisation. invoices, which subsequently flows into Acceleration of digitisation on blockchain other documents, such as BL, CMR, AWB, platforms is proceeding amid the crisis, but CIM, CO, B/E, P/N, insurance documents it is sectoral and a bit stop/start. Says one etc. as a result of a logistical, insurance or trade blockchain provider, off the record, “On financial service), bridging physical and blockchain we’ve not had many new projects financial supply chain services. That requires into 2021 since the start of the crisis, and the involvement of financial institutions, the some, such as in aviation have been dead in transport industry and representation from the water, and auto has been tough. But we trade originators. It’s a big ask, but surely not have had fulfilment on project commitments insurmountable. Shouldn’t a body such as to year end. Another interesting trend has SWIFT be at the heart of the integration? been in agriculture blockchain where a lot of “Today banks look at SWIFT for companies that spent a lot digitising quickly financial messaging, but the reality is that and badly are now having to unpick what SWIFT Trade messaging, while definitely they did.” automating parts of the trade process, has been and today still is disconnected from Standards are stumbling blocks standardisation activities in the logistical Regulation, collaboration and scalability and trade origination world. The added will continue to be important to underpin value of moving current trade processes progress. But standardisation is key. As to a different technology platform, without Joel Schrevens, global solutions director achieving interoperability and portability of at China Systems asks: “Considering that trade documents and data between systems trade is a business that is heavily driven by used for trade origination, logistics and the exchange of documents is it realistic to expect that trade DLT platforms are able to get global cross-industry traction without fundamentally solving the requirement or Regulation, collaboration having at least a clear roadmap to enable portability of digital original documents and scalability will between existing trade processing continue to be important infrastructure and their own platform? While APIs can resolve specific integration to underpin progress. But challenges, considering the number of standardisation is key. parties involved, a more fundamental approach is required to solve the challenge for trade documents.” The key to mass adoption, and not settlement, will be relatively low. Whether it just some efficiency gains from ‘one by is SWIFT or another organisation, without one partner integration’ is fundamental a holistic approach or at least a roadmap digitisation of standardised documentation, with clear milestones for this challenging or at the least a clear plan to achieve that. journey, to convince those standing on the Schrevens, for one, is excited that the side lines, any progress is likely to be based technology for standardisation and secure on piecemeal developments, only serving the exchange of digital original documents few, further increasing the digital divide and exists today, that there has been progress putting a block on adoption,” Schrevens says. with the cargo industry and that lessons can be learned from the e-invoicing space. But, Are banks picking up the pace he cautions. “At this point, I do not see a on paper? coordinated cross-industry initiative to create What about the banks financing trade? In the standards for a core trade dataset with a ICC Global Survey on Trade Finance 2020 customer-centric mindset, with the customer released at the end of July, 54% of the 346 being the originator of trade transactions bank respondents said emerging technology, and managing their OTC/P2P processes digital trade and online trade platforms were mainly on the basis of purchase order (PO)/ an immediate priority over the next year. invoice related activities.” Some 70% also said traditional trade finance He argues that a holistic approach should was a priority in the same period. The report 136 be taken to standardise trade data (starting went further into digitisation. Although Berne Union 2020
there’s been progress, the results weren’t instruments initiative, all making positive stellar and documentary transactions are progress. FUTURE TRENDS rarely wholly digitised. In the three areas looked at, issuance/ Digitising the horse: Back to the advising, settlement/financing and document magic beans verification, the latter remained the most Fundamental questions remain as to whether paper-dominated area. That’s discouraging. digitisation is changing the game, or just It’s important to remember that, according transposing Henry Ford’s proverbial faster to the ICC survey, 90% of trade finance is horse onto outdated instruments – new ways provided by just 13 banks. The estimated of doing the same old thing. Should LCs global value of trade finance transactions become embedded into the logistics process, processed by respondents is $9 trillion. The so the financing is included in the purchase top three to five trade finance banks likely and bundled into the transportation process? account for a very high proportion of that That’s a discussion for another day. But in figure. the meantime, the transition to digital trade Anecdotally speaking, it is players in remains an imperative that is still in search those top trade finance banks (let’s call them of coherent and consistent standards. I’m HSBC, Citi, StanChart, DBS for starters) optimistic there’s a way to get through – but are the most positive about digitisation. complicated approaches are not helpful. Who Nonetheless, the survey says while 83% knew a year ago that Zoom would ‘win’? of global banks supposedly have a digital Economist John Maynard Keynes strategy, only 46% of local banks report speculated in the commodities futures having one. This highlights a growing gap market. There is an old story he took delivery between players of different scale and reach. of actual real beans and had to store them in Compliance was seen as the biggest King’s College Cambridge. My undergraduate obstacle for banks’ growth in financing memory doesn’t serve well, as when I international trade (AML/ KYC requirements checked it was Argentinian wheat in 1936, 63% and counter-terrorism and international which he didn’t actually store in the chapel sanctions regulation and compliance 61%). crypt as it was too small, so he used the ruse Compliance may be a major headache, but to object to its quality so he didn’t actually it is also stopping the bad hats. Nonetheless, receive it, but I’ll stick with the apocryphal for smaller players, compliance is an onerous beans as it suits my imaginings better. burden. Arguably Keynes’s reflationary policies One development at the end of August helped move the global economy out of that flew under the wire was encouraging, the slump of the great depression (but not the ability to embed Legal Entity directly by buying wheat or beans), and yes, Identifiers (LEIs) in digital certificates I know it’s a big argument that’s kept post under ISO standards. LEIs should help war economists in business. Here’s hoping with identifying legitimate players digitally. the ICC’s DSI – whose stated goal is to ‘work Another development was a trade towards the ambitious aim of establishing digitisation memorandum of intent first a globally harmonised, digitised trade signed at Davos (by banks, the ICC insurers environment’ – can help with an answer to and traders) but then developed at the end standards to support effective digitisation. n of SIBOS in early October. Through this, Singapore’s INFOCOMM and SWIFT intend to leverage the SWIFT network to encourage This is an updated version of an article that the use of the TradeTrust interoperability first appeared on TXF (https://www.txfnews. framework. ITFA (International Trade com/News/Article/7045/Time-to-double- and Forfaiting Association) too has been down-on-trade-digitisation-On-counting- working hard on the DNI, digital negotiable virtual-beans).
Fundamental questions remain as to whether digitisation is changing the game, or just transposing Henry Ford’s proverbial faster horse onto outdated instruments – new ways of doing the same old thing. 137 Berne Union 2020
Digitalisation in trade: The situation report
John Bugeja, Managing Director at Trade Advisory Network explores the current landscape on trade digitisation in depth. Where are we now, why is digitisation necessary and where are we heading?
What Is digitalisation? business benefits Digitalisation is the use of electronic under a number of records to drive processes through the headings: use of interfaces or through integration. The precursor to digitalisation was the use 1) Efficiency gains of telex and cable to initiate transactions This is a legitimate, in place of paper-based communications though somewhat between banks. This began to change in 1973 bank-centric, business when SWIFT was formed by 239 banks from benefit. By avoiding 15 countries. In order to improve efficiency, the use of paper, John Bugeja eliminate re-keying errors and achieve banks can streamline ‘straight through processing’ functionality, operations processing, speed up transaction banks quickly started to build interfaces execution, minimise delays and reduce costs. connecting their processing platforms to Paper documents generate huge costs. their SWIFT gateways. They are printed and amended multiple times, each time adding cost and creating a The challenge and the business version-control challenge. They are moved benefits from one party to another – often several The challenge for finance providers now is times and across several continents. The have to use data produced in corporate supply to be stored, indexed, retrieved and archived. chains to drive financial interventions. Certain paper documents confer rights Currently, much of this data is printed to upon the holder and are, as a consequence, paper and then presented to banks who ‘valuable’ in their own right (e.g. negotiable then enter the data into their own systems payment instruments and documents of to create new electronic records used in title) necessitating further costly measures to transaction processing. At Trade Advisory protect against loss and fraud. Network, we are frequently approached by Fintechs who purport to have solved some 2) Increased credit availability element of this challenge. Our first question Traditional documentary trade finance is is typically: ‘what problem are you trying seen as ‘short term, self-liquidating and to solve?’ We can categorise the potential secure’ resulting in increased credit appetite
Traditional documentary trade finance is seen as ‘short term, self-liquidating and secure’ resulting in increased credit appetite relative to unstructured, unsecured debt. Its use has, however, been in long term decline as trading parties have increasingly favoured open 138 account settlement. Berne Union 2020
relative to unstructured, unsecured debt. Its robotics in manufacturing, further eroding use has, however, been in long term decline any labour cost advantage. FUTURE TRENDS as trading parties have increasingly favoured These factors appear to be driving a move open account settlement. towards on-shoring and near-shoring. It is Digitalisation promises to deliver the probably naïve to suggest that the changing benefits of documentary trade finance. If trends in global trade are being driven paper documents were to be replaced with primarily by environmental concerns, but the electronic records and the data contained effect should nevertheless be beneficial in therein used to drive automated decision- terms of carbon footprint. making technology, it would be possible to Trade finance is also a carbon footprint replicate the benefits of documentary trade offender. The documentation associated with finance (i.e. visibility, control and security) trade is often excessive with the same data without the labour and cost associated with being repeated in multiple different paper paper. documents. The environmental impact is In addition, through the use of digital huge. At every stage in the process, there are marketplaces, secondary markets and carbon implications, including: distribution channels, the available liquidity l use of paper pool could be broadened, benefiting both l movement of paper between parties on a borrower and traditional lenders with capital global basis or funding constraints. l storage of paper l disposal of paper 3) Innovation Digitalisation offers the potential to Digitalisation will facilitate innovation. The eliminate these carbon-heavy processes as aim should not be to merely digitalise electronic records can easily be created and existing processes, but to find new, more transferred between parties. efficient ways to meet clients’ financing and risk mitigation needs, exploiting the 5) Fraud prevention (and AML, WMD and functionality that digitalisation brings. For non-proliferation compliance) example, a digital negotiable payment Fraudulent paper documents are very easy instrument could be integrated into a to create and very difficult to spot. In recent paperless workflow to create a more years fraud has become a major cause of effective insurance backed finance solution. loss in trade finance, particularly in respect of commodities trading where fraudulent bills 4) Sustainability of lading and warehouse receipts have been The movement of goods across the globe used to secure financing. Fraud prevention between producers, manufacturers, often goes hand in hand with regulatory distributors and retailers in different compliance, so banks are at risk of more than countries is bound involve a significant just incurring a loss. carbon footprint. Digitalisation may offer certain benefits Times are, however, changing. In addition relative to paper documents in terms of fraud to heightened awareness of the impact of protection, but caution is required at this trade on climate change, political factors are stage given the nature of electronic records. also challenging the status quo. Increased protectionism is eroding low labour cost 6) Business continuity benefits due to the imposition of tariffs and The disadvantages of being paper non-tariff barriers, as is the increased use of dependent have been thrown into sharp
Digitalisation will facilitate innovation. The aim should not be to merely digitalise existing processes, but to find new, more efficient ways to meet clients’ financing and risk mitigation needs, exploiting the functionality that digitalisation brings.
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focus by the global pandemic. Many banks technology and with its own rulebook, have found it impossible to transport paper also makes it more difficult to achieve documents efficiently due to resourcing critical mass using a common legal and challenges faced by couriers. Document technological framework. checking has proven more difficult and time-consuming due to the move to working Digital marketplaces and auction sites from home. The combined effect has been The emergence of platform-based delays in financing and settlement of trade marketplaces and auction sites through transactions, causing further financial stress which funders can be matched with for trading companies. The need to digitalise borrowers is a more recent development. trade has now become a top priority These sites are also membership based, business continuity issue. restricting access to parties that have signed
The problem with electronic records A digital signature appended to an electronic record is similar to a ‘wet signature’ on The need to digitalise a paper document. Common/civil law in most jurisdictions generally recognises that trade has now become a digital signature reflects the signatory’s a top priority business intention to be bound by the content of the record. continuity issue. A conventional electronic record can, however, be replicated on multiple systems and devices so the concepts of ‘originality’ and ‘possession’ are not accommodated, up. The traded assets are almost invariably even if it is digitally signed. This is a problem receivables so, behind the scenes, the where possession of an original document traditional process of assignment has to take is required, as is the case in trade finance place. with negotiable instruments and documents These platforms would benefit from the of title. In addition, there is nothing in a use of negotiable instruments, such as bills conventional electronic record that can of exchange or promissory notes, as they are prove that the content has not been changed unconditional, irrevocable and independent following application of the digital signature. and are tradable in their own right, making The Fintech industry has developed two them ideal for both the primary and the approaches to addressing the problems secondary markets. The independence of inherent in electronic records: closed user these instruments is key as the acceptor groups and digital original documents. cannot use contractual non-performance as a defence against non-payment. In addition, Closed User Group Solutions common/civil law in most jurisdictions Electronic bills of lading provides clear rules for transferring the The first example in trade was probably title rights and benefits from one holder Bolero which started in the mid-1990s and to another by endorsement and delivery – continues today. Bolero delivers electronic known as negotiation. bills of lading whereby the title to the goods A conventional electronic record is recorded in a title registry. Users agree to cannot, however, perform the function of a abide by a rulebook, making transfer of title negotiable instrument as the concepts of subject to contract law rather than maritime originality and possession are central to the law. This approach avoids the problem of latter’s enforceability. originality and possession and is a good mitigant against fraud. The disadvantage Consortia with this model is, of course, that legal These are also membership-based solutions enforceability only applies to users that have with users signing up to a set of rules signed up to the rulebook. governing their rights and obligations. There are now several competitors to The challenge, as with other closed user Bolero giving users greater choice and group solutions, is that each consortium is promoting greater acceptance of the effectively a digital island where payment concept. Unfortunately, the proliferation obligations are only enforceable amongst 140 of such solutions, each using its own members. Berne Union 2020
Digital original documents The principle here is to replicate the Though closed user FUTURE TRENDS functionality of paper documents in digital group solutions have the form, including the ability to: l distinguish between an original and a copy potential to deliver the l transfer ownership (and associated title benefits of digitalisation, rights and benefits) by delivery it will be difficult to l provide assurance that the content has not been tampered with in any way achieve critical mass due The functional specification for the use to the lack of common of digital original documents as payment undertakings has been defined by ITFA technology standards (the International Trade and Forfaiting coupled with the inability Association) through their DNI (Digital of conventional electronic Negotiable Instruments) initiative. The technology to deliver the required records to replicate the functionality, branded ‘trace:original’ has functionality of paper been developed by Enigio Time and is available without the need to join a closed documents in respect of user group. The solution is open to all originality and possession. whether they are members of a consortium or not. Indeed, trace:original documents can act as a vehicle for interoperability between the inability of conventional electronic consortia. records to replicate the functionality of ITFA and the ICC are leading the effort paper documents in respect of originality to ensure legal enforceability of digital bills and possession. Reliance on registries of exchange in key markets. The obstacle or databases, whether centrally held or in the UK, for example, is the current ruling distributed, limits the scope for adoption to regarding possession of an intangible. As members of a common club. transfer of possession (by endorsement and The need to develop technology delivery) is fundamental to the negotiability standards that facilitate interoperability has of a bill of exchange, clarity on this point been recognised and is the subject of the is essential. The consultative process is ICC’s Digital Standards Initiative (DSI). It is in progress and a statutory amendment felt that ITFA’s DNI initiative could become a in anticipated within 12 – 18 months. In key enabler in support of the ICC’s DSI. the meantime, an interim solution has The ICC is also developing Uniform Rules been defined by ITFA allowing electronic for Digital Trade Transactions (URDTT) to payment undertakings with similar practical complement their existing rules governing functionality to be created using this new letters of credit, collections, forfaiting and technology. guarantees. Overall, there is room for optimism What next? regarding the application of digitalisation Though closed user group solutions have and the delivery of significant business and the potential to deliver the benefits of environmental benefits. Certainly, we need digitalisation, it will be difficult to achieve the regulators to be visibly supportive, critical mass due to the lack of common but the real drive must come from the technology standards coupled with practitioners. n
There is room for optimism regarding the application of digitalisation and the delivery of significant business and environmental benefits. Certainly, we need the regulators to be visibly supportive, but the real drive must come from the practitioners. 141 Berne Union 2020
ECA support for software exports: An analysis
By Didem Erdoğan, Project Loans and Trade Finance Specialist at Turk Exim
According to the OECD, software refers to measured at all, ‘programs, procedures and data associated software and copyright with the operation of a computer system’. trade are rarely However, given the impact of digitalisation, taken into account2. globalisation, and the concept of Industry However, despite 4.0, the software sector is playing such all these obstacles, an important role in our daily lives that all while the share of definitions have become insufficient. Every telecommunications item used is made ‘smart’ thanks to software, services has declined, and the success of software exports has had computer services Didem Erdoğan a big economic impact. receipts more than The revenue of the global software market doubled in value, increasing their share of amounted to $456 billion in 20181. The Information and Communication Technologies ever-marching spread of the internet, the (ICT) trade from 65% to 78%. Computer ease of storage, streaming and processing services, including database development, services have all contributed to the further data processing and software design, have development of the software industry and, benefitted from technological changes such in terms of trade volumes, software trade is as an increase in businesses moving their IT significantly underestimated because it is operations to cloud computing3 (see Figure 1). usually based on the value of physical goods Moreover, the COVID-19 pandemic has rather than content and is often bundled with caused an unprecedented surge in demand computer hardware. In trade statistics, while for software amid global lockdowns. This has digitally delivered software is not generally caused the software market to expand while
Figure 1
142 Source: WTO-UNCTAD-ICT estimates4. Berne Union 2020
other industries dwindle. According to the banks around the world and another survey Financial Times5, the tech-heavy Nasdaq 100 was conducted to accurately identify the FUTURE TRENDS rose 15% in April, and during the lockdown needs of software exporters in Turkey, in period, companies like Amazon and Netflix which 71 current/potential software exporters were clear winners since their shares both participated. increased by about 30% in the early months According to the latter survey, 67% of of the crisis. That’s not to forget the increase software exporters would like to benefit from in the gaming industries too. Aside from the credit insurance while 77% of them prefer new virtual reality releases, console and PC exporter credits to buyer credits, and they products are skyrocketing. want to use these credits in the medium to long term (12-36 months) and also starting Surveying exporter needs and from the pre-shipment period. Furthermore, ECA support software exporters indicate their interest in In order to understand to what extent such acquiring credits for their staff expenses, an important sector is supported by ECAs, research and development expenses, whose main mission is to support their promotion and marketing expenses, national exporters in order to stimulate respectively. trade volumes in their favour6, research was With regards to the ECA/development conducted among 51 ECAs/development banks’ survey, support of ECAs for software export is very limited and this sector is generally evaluated under general export credit or credit insurance programmes. According to the Financial In this study, responses collected from Times5, the tech-heavy BNDES (Brazil), EDC (Canada), ECGC (India), Eximbank of India (India), K-sure Nasdaq 100 rose 15% (South Korea) and US Ex-Im (the US) in April, and during were taken as sample and highlighted the lockdown period, due to their applicability to the software sector. Among 51 ECAs, only ECGC has a companies like Amazon particular programme dedicated to software and Netflix were clear exports. The programme includes a special cooperation with the Reserve Bank of India. winners since their shares Most importantly, they solved the problem both increased by about of software trade valuation by introducing 30% in the early months a SOFTEX Form. Interestingly, Eximbank of India has also a special programme for of the crisis. software which is not for exports, but for
Figure 2
CREDIT EXPORT INSURANCE CREDIT
• Proving the shipment/delivery of • Inability to provide sufficient software transaction collateral • The nature of software as a tailor- • Prices are negotiated upon the made exporters’ credit rating • Measuring the value of the • Inability to declare the export software project transactions with some official • Determining the real financial documentation, such as Custom power of the software company Declaration Form • Failure to comply with traditional procedures 143 Berne Union 2020
the establishment of software training institutions. For US EXIM and EDC, a loss in In the era of knowledge, return fees and contract cancellation is not software trade does covered. As software projects are generally tailormade, this situation creates a problem not receive the support for exporters. it deserves when Moreover, in the case of BNDES, due to considering its importance the evidence of export documents requested in the pre-shipment credit line, software for digitalisation, and the companies often choose other types of ‘new normal’ order for the local financing to access the working capital needed, even if this way is more expensive. world. In order to increase In this context, the difficulties for software software export volumes export support are summarised as follows. with the help of more Whether related to credit or insurance, it is obvious that ECAs or development ECA support, structural banks cannot support software export trade changes in international sufficiently. The barriers for supporting software by ECAs around the world stem trade are needed. from one fundamental difference, there are no procedures that are appropriate for the initially, software trade should be numerically different nature of software as an export item determined. Although international trade (see Figure 2). in software goods and services is reaching higher volumes every year, these volumes are Suggestions to improve support actually underestimated due to the reasons In the era of knowledge, software trade does explained. One thought is the introduction not receive the support it deserves when of specific Harmonised System (HS) codes, considering its importance for digitalisation, if incorporated into the sector by the World and the ‘new normal’ order for the world. In Customs Organization or a similar body order to increase software export volumes may provide the measure required for this with the help of more ECA support, industry. Countries could be encouraged to structural changes in international trade are publish their official statistics in this way (see needed. Figure 3). In order to increase software export Accurate measurement support, a non-traditional approach can be In this regard, starting with the ‘you cannot used by ECAs considering the dynamic and manage what you cannot measure’ motto, intangible nature of software. For example,
Figure 3
A SUPRANATIONAL UNIQUE INSTITUTION PROCEDURES A newly constituted ACCURATE supranational institution or a committee within MEASUREMENT • Software trade should not be evaluated under an international organization can • You cannot manage traditional procedures. what you cannot • Financial institutions, determine the measure ECAs particularly may standardization of • Specific HS Code for follow a new approach software trade, software in terms of collateral including classifying, • Encouraging • There can be another measuring and document that can countries to publish reporting of the replace Custom their statistics in this transactions 144 context Declaration Form Berne Union 2020
ECAs could offer their own collateral to services such as tourism and transportation software exporters and in terms of valuation became almost impossible, software exports FUTURE TRENDS as in the case of ECGC, A SOFTEX form were not affected and even increased their could be introduced and there could be growth momentum with the introduction of another document that could replace the new products. Custom Declaration Form. However, due to reasons that mainly emerge from the nature of software, Unique procedures software exports are not supported at a level Additionally, with reference to the survey comparable with other sectors. Therefore, results, personnel expenditures are one of this sector lacks sufficient direct or indirect the most important reasons why software support and most software exporters are exporters want to use credit. According forced to find their own solutions. In this to the information collected from the 51 context, within the context of growing ECAs, only K-sure paid attention to this international software trade, some steps demand with its ‘Service Export Credit should be taken, especially by the ECAs Insurance Programme’, even if it is not a whose main goal is to contribute to their credit programme. Another conclusion is national export volumes. that special loan programmes should be As a result, in today’s ‘software first’7 world, developed for software exporters for the pre- it is necessary first to establish standardisation shipment period and the medium and long in classification and measurement methods term. With regards to the lack of collateral and then to introduce new solutions in line for software export credits, ECAs may follow with the needs of software exporters so a new approach, such as creating their own that ECAs would be able easily to support warranty with the help of insurance policies software exports, and thanks to this or assessing software companies based on success, many countries would benefit from their licensing values, etc. conversion to the information society and increasing world trade volumes. n Supranational institution The last suggestion actually involves the Notes two previous suggestions and relates to the 1 Statista. (2020, October 20). Statistics and Market Data on Software. Retrieved August 08, 2020, from establishment of a supranational institution https://www.statista.com/markets/418/topic/484/ that determines the standardisation software/ processes of software trade including 2 OECD (2002). OECD Information Technology Outlook ICTs And The Information Economy. classification. This institution (or committee) 3 OECD (2020, October 25). Retrieved from https:// could be in charge of every detail of software stats.oecd.org/glossary/detail.asp?ID=4905 trade, such as classifying, measuring, and 4 WTO (2019) World Trade Statistical Review. Retrieved from https://www.wto.org/english/res_e/ reporting respectively. statis_e/wts2019_e/wts2019_e.pdf 5 Financial Times (2020, May1) Supporting ‘software first’ 6 OECD. (2020). Export Credits. Retrieved from https://www.oecd.org/trade/topics/export-credits/ Last but not least, with the latest 7 Tessler, Shirley, Barr, A., & Hanna, N. (2003). transformation all over the world, the National Software Industry Development: importance of software and software trade Considerations for Government Planners. Retrieved December 10, 2019, from http://citeseerx.ist.psu. has been brought to the fore. Even when edu/viewdoc/download?doi=10.1.1.601.766&rep=rep1 exports of various physical products and &type=pdf
Due to reasons that mainly emerge from the nature of software, software exports are not supported at a level comparable with other sectors. Therefore, this sector lacks sufficient direct or indirect support and most software exporters are forced to find their own solutions.
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Legal perspectives on blockchain technologies for financing trade
By Michael Morris, Partner, Clyde & Co, Dubai and Emma Fidler, Associate, Trade and Corporate Finance, Clyde & Co
This year has brought unprecedented Unfortunately, the challenges to industry which have been felt current trading in every corner of the globe. The full financial infrastructure lends impact of the COVID-19 pandemic remains itself to exploitation to be seen. What is clear, however, is that by fraudsters, there has been a seismic shift in the way that deploying a number businesses operate and, as a result, in the of different tactics for strategies and business development models illegitimate purposes. employed to navigate this uncertainty and The investigation of drive organic growth. Digitalisation will play suspected fraud is a a crucial role in realising this objective, both Michael Morris cumbersome process in terms of unlocking capital through taking and often comes at advantage of cost-savings and in preventing significant expense to the risk of fraud. the insurer. Here we examine how blockchain and The most common distributed ledger technologies (DLT) can instances of fraud be successfully utilised to prevent instances which lead to of trade finance fraud and, more generally, considerable loss, and their place within the current trade finance are often most difficult infrastructure as a document verification tool. to detect, can be summarised as follows: Trade finance fraud Emma Fidler a) ‘Double The prevalence of fraud in trade finance discounting’, where remains a concerning issue to all the trader discounts the same invoice with stakeholders, including traders, banks, two or more financial institutions financiers and credit insurers. Every year b) Traders issuing multiple invoices for individual markets around the world are hit the same transaction, inflating the price and with a least one multi-million dollar fraud and obtaining separate financing each time even more during an economic downturn. c) Fake trades or ‘fresh air’ invoicing in Just look at the issues currently being seen in circumstances where the documentation is the commodities trading sector in Singapore. completely falsified and there is no shipment
The prevalence of fraud in trade finance remains a concerning issue to all stakeholders, including traders, banks, financiers and credit insurers. Every year individual markets around the world are hit with a least one multi-million dollar fraud and even more during an 146 economic downturn. Berne Union 2020
or sales of goods at all. controls the data or information, and each The potential for fraudulent activity and participant can verify the records of every FUTURE TRENDS problems encountered arise primarily due to transaction directly (without recourse to the following factors: an intermediary). Every transaction and its (i) participants, and especially banks in associated value are visible to anyone with this context, place a great deal of reliance on access to the system. The acceptance and physical, hard-copy documents which derive verification of such records by each user on special legal status (such as letters of credit the platform creates consensus. or bills of lading) The requirement for consensus ultimately (ii) such documents can be easily forged reduces the responsibility of any given or tampered with participant to verify documents and detect (iii) participants are usually based in fraudulent entries. The very structure of different jurisdictions spanning continents, the platform increases overall transparency time zones and cultures, each using different and lends legitimacy to data entries which systems and platforms which often impedes would ultimately prevent fraudsters from, for communication. The existing methods and instance, issuing several invoices in respect of tools used in any given finance transaction the same shipment. are outmoded when considered against the current climate in which traders operate (and Irreversibility of records especially in a post-COVID-19 environment Once a transaction and its documents are where increasing reliance is placed on created and transferred via a DLT platform electronic communications to conclude and the ledgers are updated, the records transactions). cannot be changed. Each entry contains a unique ‘hash’ code, and the code for the How can blockchain address these previous data block which came before issues? it, meaning that it is almost impossible for The inherent qualities and characteristics fraudsters to tamper with any of the data of blockchain and DLT mean that it is well entries, since to do so would invalidate the placed to address, and go some way in other blocks in the chain. preventing, attempts by fraudsters to ‘hack’ To prevent hackers from retrospectively the existing systems in place. changing the data in the block and regenerating the hash IDs for each block in The ‘de-centralised network’ and the chain, various security mechanisms (such peer-to-peer transmission as the ‘proof-of-work’ functionality) are built One key attribute of DLT which has the in to the DLT network, which effectively slow potential to radically transform the current down the creation of new data blocks. This, processes and procedures of trade finance combined with the nature of peer-to-peer is the nature of the network, namely, transmission, means that it would be almost each party participating on a blockchain impossible for participants to successfully platform has access to the entire database defraud the system. and its complete history. No single party
The execution of certain types of contracts, which would traditionally have required parties to sign in person, have left lawyers grappling with the need to find legal (and, perhaps more importantly, practical) solutions to these issues. The significance of this hurdle and the degree of collaboration required to overcome it cannot be overstated. Before governments can be convinced to support this effort, industry must agree on the best practices and standards of technology across international borders. 147 Berne Union 2020
Blockchain and the legal landscape Readers will be familiar with the plethora As with any new of complex maritime law, regulations and technology which commercial codes which give rights of promises to transform ownership between parties and across jurisdictions. Such laws and international the existing systems conventions have been developed over and structures which decades (even centuries) of trade, and plainly many of these laws and regulations underpin our daily lives, will not be suitable for a new digitally- it is usual to expect that defined, automated and decentralised such radical advancement network utilising DLT. The global impact of the COVID-19 would be met with some pandemic has recently brought questions suspicion. The potential of legal validity and status in e-commerce to the fore. For example, the execution of for blockchain and DLT certain types of contracts, which would to streamline the trade traditionally have required parties to sign finance process and in person, have left lawyers grappling with the need to find legal (and, perhaps more reduce instances of fraud importantly, practical) solutions to these are self-evident, but issues. The significance of this hurdle and the degree of collaboration required to there are inevitably more overcome it cannot be overstated. Before hurdles to overcome. governments can be convinced to support this effort, the industry must agree on the best practices and standards of technology across international borders. is different (and the formalities required Many questions surrounding COVID-19’s for valid execution vary on a case-by-case impact have been raised. As the pandemic basis), establishing industry-wide consensus has highlighted the gaps in legal validity of is difficult at this early stage given that digital transactions what practical solutions many of the new processes adopted remain to this have been attempted? To what ‘untested’. It is certainly true that COVID-19 extent has the pure necessity of the current has brought these issues (digital execution situation already gone some way to driving processes) to the forefront of lawyers’ an industry/legal consensus or are, from minds and it will be interesting to see a legal point of view, these kind of digital how technologies (and the legal position) contract execution processes (without develops over time. signatures) suffering from not really having been ‘tested’ in law? The future of blockchain Generally speaking, in English law, As with any new technology which electronic signatures are capable of being promises to transform the existing systems used if the authorised signatory intends and structures which underpin our daily to authenticate the document in this way. lives, it is usual to expect that such radical The biggest challenge however has been in advancement would be met with some trying to find solutions for the execution of suspicion. The potential for blockchain documents which would typically require and DLT to streamline the trade finance both parties to meet in person (and, in process and reduce instances of fraud the case of deeds, for example, sign in the are self-evident, but there are inevitably presence of a witness). more hurdles to overcome. Collaboration The Law Society in the UK recently between organisations, financiers, and other published instructive guidance1 on its stakeholders will be crucial to its success as a position on the use of virtual execution long term solution. n and e-signatures during the pandemic, which sets out the various options and Note recommended approach for each contractual 1 https://www.lawsociety.org.uk/en/topics/ coronavirus/our-position-on-the-use-of-virtual- arrangement based on any customary or execution-and-e-signature-during-the-coronavirus- 148 statutory requirements. As each situation covid19-pandemic Berne Union 2020
Machine Learning FUTURE TRENDS explored: Can ECAs benefit?
By Dr Simone Krummaker, Senior Lecturer at the Faculty of Actuarial Science and Insurance at Cass Business School and Professor Dr Mathias Bärtl at Offenberg University
What does Machine Learning offer to help ECAs predict claims? Simone Krummaker and Mathias Bärtl look at the data in depth.
Berne Union members have done well in extensive collection avoiding claims for a long while, by and of structured data on large. From 2005 to 2018, the claims-to- export credit insurance exposure ratio in medium- and long-term and finance (Auboin (MLT) insurance was, on average, in the order and Engemann 2014). of just 0.4%. However, within that, there has So far, the database been a huge variety in how hard individual has been made Export Credit Agencies (ECAs) have been hit available to support (see Figure 1). two scientific studies
Claims prediction remains as critical a Dr Simone Krummaker which analysed the challenge for ECAs as it does for any insurer. impact of trade Not only do claims affect the capacity credit and trade to underwrite further business, they may finance availability also have an impact on premiums. In order on trade (Auboin to predict claims and related reserves, and Engemann 2014; private insurers have been using a range Korinek, Le Cocguic of deterministic and stochastic methods, and Sourdin 2010). such as the Chain Ladder or Bornhuetter- In 2019, a third study Ferguson method, (Baudry and Robert 2019), was undertaken in while ECAs have focused on more traditional cooperation between approaches. But regulatory developments as the Berne Union Dr Mathias Bärtl well as a growing uncertainty in export credit Secretariat and the risks increase the need for the application Institute for Trade and Innovation (IfTI). of more sophisticated methods for both This study targeted MLT claims (excluding private and public providers (England and recoveries) of the 33 largest ECAs and Verall 2002; Verall, Hossjer and Bjorkwall investigated to what extent ML can serve to 2012). Therefore, Machine Learning (ML) exploit the Berne Union database beyond its may come with benefits that have not been primary purpose. fully exploited by traditional claim prediction methods (Thesmar et al. 2019). ML in a nutshell Supervised ML algorithms search available The ML exploration study data with the aim to uncover patterns that ECAs provide data to the Berne Union allow a prediction of a target attribute, for twice a year as a mechanism to share example, the volume of expected claims, their business information. This joint effort based on available input attributes (Varian has resulted in the creation of the most 2014) such as the conditions surrounding a 149 Berne Union 2020
given contract. In a way, this can be likened to mimicking the experience of a long- Common Machine Learning serving underwriter who has seen hundreds techniques explained of contracts including the events leading up to them, and has developed a pretty Decision Tree (DT): DT algorithms search good instinct about whether or not a certain all available input attributes and select transaction is going to go well. the one which, at an optimal split value, The scientific literature suggests a wide separates the data so that their target range of approaches to conduct this task attribute distributions diverge as much as but provides no guidance on how to link possible from one another. a particular problem to the most suitable Random Forests (RF): RF consist of ML technique (Kuhn and Johnson 2013; many DT, which all have been developed Wanke and Barros 2016). Therefore, the based on randomly selected subsets of all study explored four common ML techniques, training data. An RF’s prediction for new namely Decision Trees (DT), Random Forests data is the majority vote of each of these (RF), Neural Networks (NN) and Probabilistic DT’s individual predictions for the data. Neural Networks (PNN), and compared their ability to accurately predict export credit Neural Networks (NN): NN consist of insurance claims. layers of so-called neurons. Neurons in the input layer pick up input attribute Preparing the ground for ML values and apply an activation function A popular fantasy sees ML as some to calculate a ‘signal’ value as output. The electronic hyperintelligence that can be output is forwarded to the neurons in the unleashed onto whatever data is available subsequent layer, which each combine all to come back with smart insights. This is far inputs they receive and, again, convert the from the truth. results into a signal to be forwarded to First, a careful preparation of the the next layer and so on. In prediction, the data is paramount to the development learned rules are applied to new data, and of meaningful models. For example, the the resulting output conditions are used aggregate exposure of all ECAs to a given as prediction values. export destination country might be a Probabilistic Neural Networks (PNN): relevant factor in determining the country’s PNN are a modification of NN. They likelihood to incur claims. However, no ML replace the traditionally sigmoid activation algorithm comes up with that proposition functions with statistically derived all by itself. Prior to any ML exercise the exponential functions, which satisfy algorithm needs to be able to access certain additional optimality criteria potentially relevant information at the right founded in Bayesian Decision Theory. time in the right format. In total, we derived 25 attributes on ECAs and destinations to
indicate their size, general development, Figure 1: business diversification and claims history. 2005 – 2018 Claims-to-exposure ratio for MLT Business Secondly, all data needs to be separated into sets for training, validation and testing. It is widely known that ML algorithms claims-to-exposure ratio (MLT insurance) can overfit, meaning that they model the 0.006 training data well but perform poorly when confronted with new data. This can be countered by using the training set for 0.004 building the model, and a validation set to assess the model’s performance (Kuhn and
0.002 Johnson 2013; Mullainathan and Spiess 2017). In addition, a range of parameters are controlled externally, such as the number of 0 branches a DT should be allowed to grow, 2004 2006 2008 2010 2012 2014 2016 2018 or whether training should be based on an amount of data that is large (which can take a long time but might be more precise) 150 Source: Berne Union data or small (which is faster but might miss Berne Union 2020
important patterns). Therefore, we used data random. Accuracy and Cohen’s k do not from 2007 to 2017 to train and validate a work well for the claims-to-exposure ratio FUTURE TRENDS total of 47,520 models to reflect a range of task, for which we calculated R2 instead. R2, potential variations. From those, we selected the coefficient of determination, measures the best models and exposed them to 2018 the percentage of variation in the dependent data to test their ability to predict claims variable (in our case, the ratio) that is with three different levels of precision: explained by the prediction model. However, l ‘Claims YES/NO’: A prediction of whether while these measures allow for a comparison or not a given export finance condition will of the different techniques amongst each incur claims as a simple yes/no decision. other, they do not answer the question l ‘Ratio class’: A prediction of the ‘is it worth it?’. In other words: would a magnitude of claims, expressed as one much simpler approach yield equally good of five predefined classes of claims-to- results? Therefore, we also created a simple exposure ratios. benchmark (BM) that predicts claims based l ‘Ratio’: A prediction of an actual claims-to- on a moving average of claims from previous exposure ratio as a single value. years (see Figure 2). Finally, we needed to decide how to measure the performance of ML models How did ML perform? by comparing their predictions with reality. All ML techniques performed relatively well We calculated ‘accuracy’, the percentage of in predicting whether or not claims would be correctly predicted records, and ‘Cohen’s incurred, and, with limitations, in predicting k’, which adjusts the accuracy measure for their order of magnitude. No satisfactory correct predictions that would occur at results were achieved predicting actual
Figure 2: ML Exploration Method
training train data model 2007 to partition 2017 data data randomly assess separate validation MLT model data by data test model data performance year performance against 2018 2018 data data
Source: Berne Union data
Figure 3: ML Exploration Study Results
Accuracy Cohen's κ R2 0.9 0.6 0.1
0.88 0.5 0.08 0.4 0.86 0.06 0.3 0.84 0.04 0.2
0.82 0.1 0.02
0.8 0 0 Claims YES/NO Ratio class Claims YES/NO Ratio class Ratio
DT RF NN PNN BM 151 Source: Berne Union data Berne Union 2020
claims-to-exposure ratios. Consistent with the conditions preceding their occurrence. previous studies, RF achieved the best results However, irregular, exceptionally high claims against all prediction tasks, and most reliably are certainly of utmost interest to ECAs. carried their validation performance forward A follow-up study could investigate the to test performance. However, the simple prediction of claims of specifically that type, benchmark heuristic often outperformed although this may require more detailed data even the best ML models. and the addition of external economic data Does that mean they are useless? Not sources such as OECD. n quite. Actually, assessing them against the BM is somewhat unfair. All ML models are The full article, including descriptions of generic and can make claim predictions for the ML techniques employed, is available at any ECA and destination, irrespective of https://www.mdpi.com/2227-9091/8/1/22 whether or not the ECA has had business with that destination before. The BM, on the other hand, can only make forecasts for business relations that already exist. In References conclusion, and viewed positively, ML models • Auboin, Marc; Engemann, Martina (2014). Testing the trade credit and trade link: evidence from data are capable of predicting the virtue of a on export credit insurance. Rev World Econ 150 (4), business relationship (almost) as well as if it pp. 715–743. had materialized already, even if it has not • Bärtl, Mathias; Krummaker, Simone (2020). Prediction of Claims in Export Credit Finance: A (see Figure 3). Comparison of Four Machine Learning Techniques. Risks 8(1), 22, pp. 1–29. Conclusions and outlook • Baudry, Maximillien; Robert Christian Y. (2019). A machine learning approach for individual claims Most ECAs have an insurance history with reserving in insurance. Appl Stochastic Models Bus many destinations. Therefore, they are well Ind. 35, pp. 1127–1155. positioned to predict claims equally well or • Korinek, Jane; Le Cocguic, Jean; Sourdin, Patricia (2010). The Availability and Cost of Short-Term better than ML models by applying a simple Trade Finance and its Impact on Trade. OECD Trade heuristic. However, in cases where such a Policy Papers No. 98. history does not exist, ML might well serve • Krummaker, Simone (2020). Export Credit Insurance Markets and Demand, in: Klasen, A. (ed.), as a useful decision aid. The findings of our The Handbook of Global Trade Policy, Wiley & Sons, (and other) works recommend using the RF Chichester, pp. 536-554. technique. Further research could abandon • Kuhn, Max; Johnson, Kjell (2013). Applied predictive modelling. Corrected at 5th printing. New York, the requirement for ML models to be generic, Heidelberg, Dordrecht, London: Springer. and investigate ECA-specific time series of • Mullainathan, Sendhil; Spiess, Jann (2017). Machine claims. This could add insight into how ML Learning: An Applied Econometric Approach. Journal of Economic Perspectives 31 (2), pp. compares to traditional claims prediction 87–106. approaches. • Thesmar, David; Sraer, David; Pinheiro, Lisa; All ML techniques, and the benchmark Dadson, Nick; Veliche, Razvan; Greenberg, Paul (2019). Combining the Power of Artificial even more so, performed poorly in predicting Intelligence with the Richness of Healthcare actual claims-to-exposure ratios. Finding Claims Data: Opportunities and Challenges. the lowest performance against the most Pharmacoeconomics, Vol. 37 (6), pp. 745-752. • Varian, Hal R. (2014). Big Data: New Tricks for challenging task is unsurprising, but the huge Econometrics. Journal of Economic Perspectives 28 lag behind the two other tasks is unusual. (2), pp. 3–28. A more detailed inspection indicates that • Verall, Richard J.; Hossjer, Ola; Bjorkwall, Susanna (2012). Modelling Claims Run-off with Reversible singular events of high claims prevented the Jump Markov Chain Monte Carlo Methods. ASTIN creation of satisfactory prediction models; Bulletin, Vol. 42(1), pp. 35-58. no technique was capable of capturing
A popular fantasy sees Machine Learning as some electronic hyperintelligence that can be unleashed onto whatever data is available to come back with smart insights. This is far from the truth.
152 Berne Union 2020
Working towards FUTURE TRENDS a commitment to net zero
By Astrid Bronswijk (Dutch Ministry of Finance), Ranya Gabriel (EDC), Thomas Hale (Oxford University) and Andreas Klasen (Offenburg University)
In the grip of battling an unrelenting and development pandemic and economic collapse, some of finance in recent the world’s biggest political and financial years. Private climate powers are setting out bold visions for a zero finance provided on carbon economy that is healthier, cleaner, average $326 billion more resilient and more regenerative than per year in 2017 and our pre-COVID-19 systems. 2018, according to In the last few months, the EU, China, the Climate Policy Japan, South Africa, South Korea and the UK Initiative. Public have pledged to reach net zero emissions finance actors and by 2050 or 2060 (taking the world by Astrid Bronswijk intermediaries also surprise, in some cases). Meanwhile, the UN play a crucial role Net Zero Asset Owner Alliance has grown regarding global from 12 members with $2.4 trillion under financial flows for low management to 30 with $5 trillion in its first carbon and climate- year alone. These governments and investors resilient development, see the root causes behind the health and committing an annual economic crisis we’re now in –pollution, average of $253 billion deforestation, drought, food scarcity, climate in climate finance in change impacts such as storms and wildfires 2017/2018. National – and are seeking to build resilience to future development finance shocks. But, crucially, they also recognise institutions (DFIs) Ranya Gabriel the immense opportunity that comes with such as the Dutch shifting investment from fossil fuels to development bank FMO, Proparco in France industries that promote public health, nature and Germany’s DEG were the largest groups conservation and regeneration and job among the public finance institutions. creation. However, at the same time, much public The global economy is undoubtedly on a finance continues to flow to incumbent, race to zero emissions by the middle of the carbon-intensive sectors. century, and it’s gaining momentum by the day (Figure 1). So what role can members of The importance of climate finance the Berne Union play in this ‘race to zero’? for ECAs, Exim-Banks and PRIs We suggest it’s time for the Berne Union, Green finance is also a major topic for too, to join the pursuit of this zero emissions export credit agencies (ECAs) and export- world. import banks (Exim-Banks). Although most To achieve global climate goals and build organisations are demand-driven, climate a more resilient economy, the rules and action-related matters are priority themes institutions of global economic governance for governments and official export finance must align around green economic transition. instruments in many countries, and for their Financing for climate action related clients. Furthermore, dealing with the impact activities has become a priority in trade of climate change is increasingly important 153 Berne Union 2020
for public and private political risk insurers focuses on EDC’s (PRIs). This includes scaling down support support for low- not consistent with the 2015 Paris Climate carbon or carbon- Change Agreement, a contribution to climate resilient transactions in resilient development and low-carbon developing countries. financing, and the support of low-carbon Furthermore, the transformation related transactions. Canadian ECA updated ECAs, Exim-Banks and PRIs provide its environmental and financing and risk mitigation tools addressing social risk management challenges inherent to a large part of low- framework, to ensure carbon investment. Looking at selected Thomas Hale it serves customers Berne Union members, climate action is a key in a progressive, priority of Credendo’s latest strategic plan. responsible and EKF in Denmark is one of the most important sustainable way green finance institutions in the global that meets the export credit universe. In Germany, climate latest international action has become an important area of standards. An activity in particular in 2020. CESCE recently important commitment developed a new framework regarding towards the United commitment to sustainability. UK Export Nations Sustainable Finance (UKEF) is a crucial element of the Development Goals government’s ‘Green Finance Strategy’. (SDGs) is EDC’s Andreas Klasen standalone Climate Canada and the Netherlands in detail Change Policy. Approved in 2018, it provides Over the past several years, Export the principles and commitments that guide Development Canada (EDC) has been very EDC’s approach to the organisation’s climate purposeful regarding sustainability and change-related risks and opportunities. With impact. Supporting cleantech companies in the new policy, EDC recognises that it can many sectors is a corporate priority. EDC is contribute to the aims of the Paris Agreement the largest provider of financial solutions for through the choices the ECA makes about Canadian cleantech companies looking to the provision of financing and insurance, expand internationally. With global interest and through continued support of Canadian in climate financing continuing to rise, companies’ innovation and transition as the EDC also issued its fifth green bond last country works towards achieving net zero year and provided C$100 million in climate emissions by 2050. finance in support of the Government of In the Netherlands, climate action has Canada’s commitment to the UN Framework also become a crucial topic. The Dutch Convention on Climate Change, which government is committed to tackling climate
Figure 1: The Road to Success
154 Source: Mission 2020 Berne Union 2020
green the export credit insurance portfolio Despite progress on is. As shown in Figure 2, transactions FUTURE TRENDS mobilising finance to are labelled ‘green’ if they contribute substantially to reducing the speed of support a global green climate change or adapting to the effects of deal, there is much more climate change. There is also a third category to do. Ultimately, we need of ‘other footprint reduction’. to ensure all finance is ‘net Aligning global economic zero’ finance. governance to climate goals Despite progress on mobilising finance to support a global green deal, there is much issues on a global scale. The country’s more to do. Ultimately, we need to ensure all climate policy is mainly aimed at reducing finance is ‘net zero’ finance. Aligning global greenhouse gas emissions. With an ambition economic governance to climate goals will to become one of the ‘greenest’ ECAs, require additional reforms across the trade Atradius Dutch State Business (Atradius and investment regimes. DSB) has also started to put emphasis on The Paris Agreement aims to reach net climate financing. For example, the Dutch zero emissions by mid-century, in an effort agency was involved in project financing of to stem the global temperature rise to two large offshore wind farms in Taiwan last well below 2°C, and ideally 1.5°C. Scientific year. It also issued four financing policies to findings since then make clear the enormous Climate Investor One, for instance, for a solar differences between those two temperature project in Southeast Asia and a hydropower goals: millions more lives would be lost and plant in Uganda. The support is provided billions more dollars’ worth of destruction within the scope of the Paris Agreement would be sustained. The impacts of climate targets. change, such as wildfires, extreme heat, Multidisciplinary teams were also set flooding and tropical storms, are accelerating up at Atradius DSB last year to deal with even faster than scientists predicted. corporate social responsibility themes. These Meanwhile, air pollution, deforestation, include greening the business, reporting on inequality and other underlying problems green transactions within the portfolio of have magnified the impacts of COVID-19 and issued policies, and reporting on the impact put us at greater risk of future shocks. of transactions on the SDGs. In addition, Those are the drivers behind the shift Atradius DSB developed a green label to a healthier, cleaner, more resilient and methodology in 2019 to determine whether a more regenerative economy. But there is transaction meets the criteria to be labelled opportunity, too. The race to zero emissions as ‘green’. The purpose is to map out how offers us a route to recovering from this
Figure 2: Going Green in the Netherlands
If a transaction contributes to:
Reduce the speed of climate change Climate mitigation
Adjust the effects of climate change Climate adaptation
Not climate-related Green green ‘Other footprint reduction’ label
155 Source: Atradius DSB
3 Other footprint reduction: ‘This category includes those activities that do not directly target climate change mitigation or adaptation yet have a positive impact on the environment including water, waste and biodiversity’ (bron: Sustainability Bonds Framework (2018), FMO entrepreneurial development bank). 4 IFC’s Definitions and Metrics for Climate-Related Activities (2017), IFC Climate Business Department 25
Atradius Dutch State Business Annual Review 2019 Berne Union 2020
crisis in a way that reduces future risks. alignment of UNCITRAL reform of investor- More than 200 central bankers, G20 finance state dispute settlement with climate ministers, and academics from 53 countries goals, and climate protection in preferential agree that many of the most effective trade agreements. Furthermore, the idea solutions to recovering from COVID-19 of a ‘Berne Union Net Zero Club’ attracted are those that reduce carbon emissions, enormous interest. according to a report by the Oxford Smith School of Enterprise and the Environment1. Working towards a commitment to Investment in climate-resilient infrastructure net zero and decarbonisation will create new and What could a ‘Berne Union Net Zero Club’ better jobs in the near term while protecting look like? As discussed earlier, several the economy, and today’s near-zero interest ECAs, Exim-Banks and PRIs are already rates make this the perfect time to jump in, implementing ambitious climate-related according to McKinsey. policies. These include scaling down and A new research project explores these ceasing operations not consistent with shifts further, looking at a potential package the Paris Agreement. For example, some of reforms across many sectors in order agencies have started to apply stricter to create structural change. The project rules on exports related to coal-fired was initiated by the Blavatnik School of power generation. Furthermore, there are Government at Oxford University, the substantial contributions to low carbon ClimateWorks Foundation, and Mission 2020, and climate resilient developments with a shared global campaign convened by the more export promotion of climate-friendly former Executive Secretary of the United technologies in many countries. There are Nations Framework Convention on Climate also commitments to international policies Change (UNFCCC) Christiana Figueres. and standards from numerous institutions, In July 2020, a brainstorming workshop for example to the Climate Change Sector with more than 40 participants including Understanding (CCSU) and the Coal-Fired colleagues from Afreximbank, the Berne Electricity Generation Sector Understanding Union Secretariat, Columbia University, EKF, (CFSU), or through the application of Offenburg University, the OECD, Oxford UN Global Compact, IFC standards and University and the World Trade Organization guidelines, and the Equator Principles. (WTO) discussed ideas for this potential Although there are significant efforts package of reforms. Topics included how undertaken by many Berne Union members, to support countries to develop WTO- there is an opportunity to accelerate net compatible national climate policies, zero transformation. An important starting enhancing attention to climate issues in point would be full transparency regarding WTO Trade Policy Review mechanisms, an support for both high emission projects and
Figure 3: Berne Union Net Zero Club
156 Source: IfTI Berne Union 2020
carbon transformation related transactions. With economic weight In addition, scaling down support not FUTURE TRENDS shifting toward net zero, consistent with the Paris Agreement has become much more relevant. Further to now is the time for ECAs, green finance activities, the assessment of Exim-Banks, and PRIs to environmental impacts plays a major role lead. Despite previous for numerous ECAs, Exim-Banks and PRIs. Important examples of ECAs’ commitment success, aligning global towards SDGs include EDC’s Climate Change economic governance to Policy and Atradius DSB’s teams to deal with greening the business, reporting on green climate goals requires transactions within the portfolio, and on the additional activities impact of transactions on SDGs. across export finance With economic weight shifting toward net zero, now is the time for ECAs, Exim-Banks, and investment insurance and PRIs to lead. Despite previous success, institutions. aligning global economic governance to climate goals requires additional activities across export finance and investment low-carbon transactions, for example with insurance institutions. The new research harmonised methodologies and approaches. project initiated by Oxford University, Developing and implementing concrete ClimateWorks Foundation, and Mission plans for how to get to net zero might 2020 including other practitioners and include realigning mandates and corporate academics from institutions such as Atradius strategies, principles of intervention, as DSB, Columbia University, EDC, FMO and well as ECA, Exim-Bank and PRI operating Offenburg University focuses on reshaping models. This might, for example, lead to an future trade and investment governance in alignment of all new financing and insurance light of climate action. The idea of a ‘Berne activities with the objectives of the Paris Union Net Zero Club’ is an important item Agreement. A stronger integration of climate in a potential package of reforms. This can risks will help to reduce support for high include realigning mandates and corporate emission projects and lead to a broader strategies, principles of intervention, as shifting of portfolios towards low-carbon well as ECA, Exim-Bank and PRI operating projects. Members of a ‘Berne Union Net models in order to accelerate net zero Zero Club’ (Figure 3) might learn from peers transformation. Full transparency regarding such as Sweden with its commitment to Berne Union members’ activities would be cease support for fossil fuel exploration an excellent starting point. We invite all and extraction projects by 2022. Other interested parties in the sector to come best practices to look at are Denmark’s together to chart our own path to net zero. n combination of export support with Denmark’s Green Future Fund. Combining Note 1 https://www.smithschool.ox.ac.uk/news/ climate-related guarantee instruments such articles/200505-building-back-better-net-zero- as the Swiss Technology Fund with export emissions-recovery.html credit insurance can be another opportunity to work towards a commitment to net zero. Astrid Bronswijk is Head of Export Finance As ECAs, Exim-Banks, and PRIs consider in and Investment Guarantees at the Ministry of more depth what net zero looks like for our Finance in the Netherlands. sector, collaboration and exchange through Ranya Gabriel is Head of International forums like the Berne Union can help us all Relations with Export Development Canada move forward more quickly. (EDC).
The way forward: Join the club Dr Thomas Hale is Associate Professor at Climate financing has become a priority in the Blavatnik School of Government, Oxford trade and development finance in recent University. years. Although development banks are Dr Andreas Klasen is Professor of most relevant regarding financing for climate International Business and Director of the action activities, several ECAs, Exim-Banks Institute for Trade and Innovation (IfTI) at and PRIs have started to support low- Offenburg University. 157 Berne Union 2020
Sustainability: A key part of our due diligence work
By Kamil Zabielski, Head of Sustainability at GIEK
Sustainability, including environmental, financial instruments social and financial aspects, is a key part of for projects that GIEK’s due diligence work. GIEK has been actively contribute to an active contributor to ECA guidelines and SDGs, governments the regulatory framework that promotes can foster sustainable, sustainable business. GIEK’s work on responsible growth. sustainability is aimed both at reducing our In an environment clients’ business risks, as well as contributing where green finance to Norway’s work on the Agenda 2030 and is growing rapidly, the Sustainable Development Goals (SDGs). SDG friendly finance is Kamil Zabielski Agenda 2030 is a global roadmap for quickly becoming its eradicating extreme poverty through own niche, and offers great opportunities for sustainable development and for promoting both new and mature businesses looking for good governance and peaceful societies by alternative financial opportunities. 2030. Agenda 2030 defines 17 Sustainable Development Goals (SDGs), each with Preferential financing terms for SDG their own subset of targets, as a guide for friendly projects nations’ efforts to eradicate extreme poverty It is in this new financial environment while protecting planetary boundaries [a that GIEK is looking for ways to promote concept involving Earth system processes business opportunities that contribute that contain environmental boundaries] and to SDGs. We are exploring ways in which promoting prosperity, peace and justice. we can incentivise projects that actively contribute to them. In order to be able to Collaboration is crucial provide preferential terms, a system for Agenda 2030 is clear on the fact that evaluating projects against SDGs needed to the SDGs can only be met through the be developed. collaborative efforts of both public GIEK has been working on developing and private sectors, and other relevant a methodology, with feedback from like- stakeholders. By enabling an environment for minded ECAs, that enables us to better the private sector, such as creating dedicated evaluate a project’s contribution to SDGs.
GIEK aims to make the SDG assessment tool available to peers in the not too distant future. We hope to encourage other financial institutions to make use of the tool. GIEK hopes that this tool can be the starting point for the creation of a common framework for the financing of SDG-positive projects for ECAs, contribute to a level playing field, as well as increasing ECA 158 support for SDG-positive projects and transactions. Berne Union 2020
In the context of providing financing to project owner on how to make the project customers, being able to document a clear more ‘SDG positive’. The tool may also help FUTURE TRENDS and transparent SDG-assessment is essential identify at an early stage where a project to ensure a level playing field for all our may have a significant negative effect, and customers, while remaining accountable to therefore need improvement. our owners. A starting point for the creation of a GIEK has developed a SDG common framework? assessment tool GIEK aims to make the SDG assessment The SDG tool is intended to support tool available to peers in the not too distant financial institutions in evaluating a project/ future. We hope to encourage other financial transaction’s contribution to SDGs. The institutions to make use of the tool. GIEK methodology is a rather simple approach hopes that this tool can be the starting point that guides the user through the goals for the creation of a common framework for and targets, offering some guidance and the financing of SDG-positive projects for benchmarking where appropriate. The ECAs, contribute to a level playing field, as SDG evaluation does not replace an ESG well as increasing ECA support for SDG- assessment and has a prerequisite that positive projects and transactions. regular due diligence against applicable standards has been conducted. A project/ GIEK at a glance transaction’s contribution to each of the GIEK is a public-sector enterprise, fully SDGs is reflected in a score, ranging from owned by the Norwegian Ministry of Trade, -1 to +2, where -1 indicates the residual Industry and Fisheries, that provides both negative effect (post-mitigation efforts) on short- and long-term guarantees on behalf a particular SDG, and +2 indicates that the of the Norwegian state in order to encourage project has a particularly positive effect on Norwegian participation in international the specific SDG. trade and exports. Backed by Norway’s The methodology allows the assessor to AAA rating, GIEK provides guarantees on indicate projects as having both negative commercial terms for loans, investments and and positive effects on the same SDG. GIEK product deliveries. Guarantees are provided has developed guidance in order help to to Norwegian companies, international buyers support efforts that targets and their scoring and banks. GIEK is subject to international are understood by the assessor. This would rules and agreements governing ECAs. n in turn contribute to a more consistent result independently of the financial institution. GIEK has been using this tool for the past year in all relevant new credit cases. The SDG tool The intention is that the individual SDG evaluations gives the assessor the basis for making an overall SDG-assessment of the project or transaction. A project or transaction can be ‘very positive’, ‘positive’ or ‘neutral’. A project or transaction that has significant negative effect on one or more of the SDGs should not be assessed for its contribution to the SDGs. The results of this evaluation are displayed in a ‘rose’, showing in a simple and clear manner how the project affects SDGs. In advance of providing a guarantee for a project, it allows decision-making bodies, such as a credit committee or board, to quickly understand the sustainability aspects of a transaction, and make better informed decisions. When using the SDG-tool earlier in the project life-cycle, it may support the ESG practitioner to have a dialogue with the 159 Berne Union 2020
Harnessing Asia’s offshore winds
By MeiYean Lim, Senior Underwriter for AXA XL’s Global Political Risk
Many Asian countries have ideal conditions for generating electricity from offshore wind turbines. However, before the region can rely on this limitless source of green energy, some obstacles will have to be overcome. MeiYean Lim, AXA XL’s Senior Underwriter for Political Risk-Credit & Bond, has the details.
There is a lot of power in offshore wind. So Transitioning to much so that analysts calculate that it has low-carbon energy the potential to generate more than 18 times production current global electricity demand. Most Asian countries However, while wind resources are have relied on there, harnessing it efficiently and safely nuclear energy and is a daunting undertaking. Offshore wind fossil fuels to power projects require massive upfront investments, their fast-growing and there are numerous challenges and economies. Following risks involved in constructing and operating the Fukushima Daiichi these facilities in marine environments. Plus, MeiYean Lim accident and also due the energy grid needs to be capable of to the world’s increasingly urgent need to distributing the power produced. transition to low-carbon energy production, Nonetheless, the amount of energy many countries across Asia now aim for generated by offshore wind is projected to dramatic increases in the percentage of their increase threefold by 2025. While established electricity produced from renewable sources, markets are expected to see continued including offshore wind. growth in generation capacity, analysts In recent years, China has embarked on an predict that many countries across the Asia- ambitious effort to meet more of its energy Pacific region have the potential to become needs from wind power. It is now the world leading producers of energy from offshore leader in wind power with more than one- wind. third of the world’s total installed capacity,
Offshore wind projects require massive upfront investments, and there are numerous challenges and risks involved in constructing and operating these facilities in marine environments. Plus, the energy grid needs to be capable of distributing the power produced. 160 Berne Union 2020
followed by the U.S., Germany and India, which collectively generate about as much First and foremost, FUTURE TRENDS electricity from wind turbines as China. The governmental policies remaining one-third is produced in a variety of countries, including many in the European need to be enacted Union. governing the siting and In developed markets like Japan and licensing of offshore wind South Korea, the volume of installed wind power currently is quite small, even though operations. And given they have areas with strong, consistent current market realities – winds and possess significant manufacturing expertise. And in emerging markets like including the absence of Vietnam, the Philippines, Indonesia and carbon taxes – creating Malaysia, commercial wind operations are still a viable offshore wind in the planning phase. However, change is – so to speak – industry requires some blowing in the wind. Countries across the level of price support at region are beginning to establish the policies, infrastructure and expertise needed to the outset. build and operate wind farms in promising offshore locales. Vietnam, for example, could have around 10-12 gigawatts (GW) from in tariffs, or FiTs, whereby governments offshore wind online by 2030. That is about incentivize private investments in renewable one-third of what is installed today. energy by offering long-term contracts to Why the emphasis on offshore? In short, producers based on production costs – plus turbines sited offshore typically generate a reasonable return for their investment. more electricity at a steadier rate than their Also, the price levels built into these onshore counterparts. In many parts of contracts are often adjusted to reflect the world, those factors tend to outweigh the overall costs of developing different offshore wind’s higher construction and technologies. For example, offshore wind and operational costs and risks. solar photovoltaic projects may be awarded a higher per kilowatt-hour (kWh) price Enabling a new industrial sector compared to a tidal-power facility, based on All of these countries face the difficult the current capital costs for constructing and challenge of creating what is essentially operating the respective operations as well a new industrial sector. That is no as their expected future generating capacity. simple undertaking. First and foremost, Moreover, feed-in tariffs commonly are governmental policies need to be enacted ‘laddered’, meaning they are set at a high governing the siting and licensing of offshore level at the beginning to help a country wind operations. And given current market introduce new technologies, like offshore realities –including the absence of carbon wind, then reduced gradually over time. This taxes – creating a viable offshore wind can make a critical difference. Although industry requires some level of price support the raw material – be it wind, the sun’s rays at the outset. or the Earth’s heat – is ‘free’, ramping up These commonly take the form of feed- renewable energy production initially is
In developed markets like Japan and South Korea, the volume of installed wind power currently is quite small, even though they have areas with strong, consistent winds and possess significant manufacturing expertise. And in emerging markets like Vietnam, the Philippines, Indonesia and Malaysia, commercial wind operations are still in the planning phase. 161 Berne Union 2020
relatively costly while the supply chains, the possibility that typhoons or seismic infrastructure, project finance and local events could severely damage, if not destroy, expertise are still immature. However, facilities. once these elements are established, scale Moreover, financing for offshore wind and efficiency gains start to kick in, and facilities typically runs for 20 years, and the upfront costs and ongoing operating individual projects are owned by special- expenses begin to decline. purpose vehicles having few, if any, other Note, for instance, that the FiT currently assets. Thus, lenders need to be comfortable in place in Vietnam is $0.098 per kWh. participating in ventures with long risk However, this is less than in some other Asian horizons and limited collateral. countries. China, by comparison, has an Given these factors – an untested industry upper limit around $0.12 per kWh. There is sector, the natural catastrophe exposures, some speculation, on the other hand, that as and ownership by special-purpose vehicles the offshore wind industry becomes further – credit insurance is, not surprisingly, a established in other Asia countries, Vietnam prerequisite for international investors. In will have to revisit its tariff levels to remain addition to helping mitigate against possible competitive in a growing market. loan defaults, credit insurance enables lenders to: Attracting international investors l Manage in-country risks While financiers have many criteria l Achieve a better rate-of-return for assessing potential projects, their l Establish a competitive advantage by judgements ultimately centre on three supporting higher lending limits. factors: Also, the availability of credit insurance l the estimated costs – both construction from established re/insurance markets like and operational AXA XL – which has strong experience l the projected revenues over the lifetime of insuring project finance, offshore wind the operation turbines and the region’s natural catastrophe l the terms and conditions of the power exposures – is a critical consideration for purchase agreement (PPA) between leading renewable-energy investors looking the lender and the ‘offtaker’ – that’s the to expand their portfolios into new territories. entity that agrees to purchase the energy Notwithstanding the severe challenges produced by the wind turbines. The PPA confronting the global economy currently, plays a vital role in mitigating the various wind will continue to blow, and with proper risks associated with offtaker’s ability to planning and risk mitigation, more and more live up to its commitments. of that energy will be transformed into However, once a project gets underway, electricity from burgeoning offshore turbines. there are myriad ways in which the on-the- ground realities can unfold differently from MeiYean Lim is Senior Underwriter for AXA the business plan. Construction, for example, XL’s Global Political Risk, Credit and Bond can take longer than expected and/or prove team. In this role, she develops risk mitigation more costly. Either way, and even with the solutions to help enterprises trade and invest government’s tariff scheme, the projected in emerging markets. She joined AXA XL revenue stream may well start later than in 2016 after a career spanning nearly expected or may not be enough to cover the 13 years in trade credit insurance, commodity actual construction costs profitably. Also, the trading and reinsurance. MeiYean is based natural catastrophe exposures in many parts in Singapore and can be reached on of the region are not trivial – there is always [email protected]. n
Notwithstanding the severe challenges confronting the global economy currently, wind will continue to blow, and with proper planning and risk mitigation, more and more of that energy will be transformed into electricity from burgeoning offshore turbines. 162 Berne Union 2020
Does the Paris FUTURE TRENDS Agreement prevent EU ECAs from supporting oil and gas projects?
By Henri d’Ambrières, HDA Conseil
The first objective of the 2015 Paris With investments Agreement is to ‘keep the global limited to existing temperature rise this century well below two fields, production degrees Celsius above pre-industrial levels would be 22.4 mbpd. (1861-1880) and to pursue efforts to limit the increase even further to 1.5 degrees’. To make Greenhouse gases this happen, NGOs, Green parties and some and the Paris development banks, among others, propose Agreement to stop financing oil and gas and to prevent The main driver EU Export Credit Agencies (ECAs) from of global warming financing them. Henri d’Ambrières is the emission of The International Energy Agency (IEA) greenhouse gases said in its Outlook 2019 that, without any (GHG). The main GHG are carbon dioxide investment, the production of oil could be (CO2) which account for 76%, methane as low as seven million barrels of oil per day (16%), nitrous oxide (6%) and fluorinated (mbpd) by 2050 versus 97.7 mbpd in 2018. gases (F-gases). In its 2014 report1 the IPCC
Figure 1
Source: IPCC Report 2014 / Climate Action Tracker 163 Berne Union 2020
presented the link between global warming (BAU) and another based on reduced and cumulative GHG emissions, which were emissions. As the second scenario is more 1,900 gigatonnes (GT) equivalent CO2 in costly, its costs are supposed to be mainly 2010. If annual new net emissions were supported by richer countries. to remain at their levels of 2010 (49 GT equivalent CO2/year), cumulative emissions The view of the IPCC on primary would amount to 7,000 GT CO2 by 2100 energy sources in 2050 and global warming could reach four to five In 2019, the IPPC considered 90 scenarios degrees by 2100. To limit global warming and retained four consistent pathways to below two degrees, cumulative net emissions limit global warming at 1.5 degrees by 2100. would have to be capped at 2,380- 2,430 GT All assume zero net emissions by 2050 (see CO2 by 2100, or zero net emissions between Figure 2). 2070 and 2100. To limit global warming to 1.5 1. Pathway one is based on dramatic degrees, zero net emissions must be reached changes with a de-growth scheme (a between 2050 and 2070 (see Figure 1). political choice) and has no recourse to To reach zero net emissions, there must be CCUS. Reforestation is the only way to absolute reduction and capture technology, increase captures of GHG. with natural tools such as reforestation and 2. Pathways two and three are based on instruments such as CCUS (Carbon Capture, more sustainable growth, energy efficiency Utilisation and Storage). and recourse to some CCUS including The Paris Conference decided to share the BECCS (Bioenergy with Carbon Capture and efforts to reduce emissions of GHGs through Storage2). Nationally Determined Contributions (NDCs). 3. Pathway four is based on limited energy Each country has to update its Intended efficiency and massive recourse to CCUS. NDCs (INDCs) every five years. The more The absence of changes in energy needs and polluting (and richer) countries committed the massive use of CCUS is questionable. to reduce their emissions more rapidly. In The report says two sources of energy, 2015 the EU agreed to reduce its emissions in renewables and nuclear will develop. 2030 by 40% versus 1990 (or 30% vs 2005). Interestingly, the IPCC also considers that Now the EU considers zero net emissions in all pathways, the use of oil will mainly by 2050, which means reductions in 2030 decrease after 2030 (after coal) but not by 55% vs 1990 or 40% vs 2005. Some disappear. Gas use will decrease later than less-developed countries were allowed to oil (and even increase in the case of the third increase them but were also requested to pathway – see Figure 3). present two scenarios: Business as Usual
Figure 2
IPCC Scenarios (1.5° global heating) Pathway 1 Pathway 2 Pathway 3 Pathway 4 2030 2050 2030 2050 2030 2050 2030 2050 Final energy demand (vs 2010) -15% -32% -5% 2% 17% 21% 39% 44% GHG Emissions (vs 2010) -50% -82% -49% -89% -35% -78% -2% -80% IPCC Scenarios (1.5° global heating)Cumulative CCS until 2100 (GT CO2) Pathway 1 0 Pathway 2 348 Pathway 3 687 Pathway 4 1,218 including BEBCS (GT CO2) 2030 2050 0 2030 2050 151 2030 2050 414 2030 2050 1,191 Final energy demand (vs 2010) -15% -32% -5% 2% 17% 21% 39% 44% GHG Emissions (vs 2010) -50% -82% -49% -89% -35% -78% -2% -80% Source: IPCC Report 2019 Cumulative CCS until 2100 (GT CO2) 0 348 687 1,218 including BEBCS (GT CO2) 0 151 414 1,191 Sources of primary energy (vs 2010) Pathway 1 Pathway 2 Pathway 3 Pathway 4 2030 2050 2030 2050 2030 2050 2030 2050 FigureRenewable (but biomass) 3 430% 833% 470% 1327% 315% 878% 110% 1137% Biomass -11% -16% 0% 49% 36% 121% -1% 418% Sources of primary energy (vs 2010)Nuclear 59%Pathway 1 150% 93%Pathway 2 98% 98%Pathway 3 501% 106%Pathway 4 468% Coal 2030 -78% 2050 -97% 2030 -61% 2050 -77% 2030 -75% 2050 -73% 2030 -59% 2050 -97% Renewable (but biomass)Oil 430%-37% 833%-87% 470%-13% 1327%-50% 315%-3% 878%-81% 110%86% 1137%-32% BiomassGas -11%-25% -16%-74% -20%0% -53%49% 36%33% 121%21% 37%-1% 418%-48% Nuclear 59% 150% 93% 98% 98% 501% 106% 468% Coal -78% -97% -61% -77% -75% -73% -59% -97% Oil -37% -87% -13% -50% -3% -81% 86% -32% Gas -25% -74% -20% -53% 33% 21% 37% -48%
164 Source: IPCC Report 2019 Berne Union 2020
The view of the IEA on primary over the whole period while gas would energy sources in 2050 remain stable until the mid-2030s, to FUTURE TRENDS In its 2020 Outlook, the IEA also considers manage the transition, and then decline as different scenarios for 2040 and 2050 it remains a source of GHG. However, they including: will not disappear before 2050 for several l Stated Policies Scenario (STEPS), based reasons (see Figure 4): on public INDCs. Global warming would be l For some non-energy usages, there are no two to three degrees Celsius. credible alternatives yet (anodes; steel or l Sustainable Development (SDS), assuming cement for coal; bitumen and lubricants zero emissions by 2070 and global for oil; some chemical products for gas). warming of 1.8 degrees. l As a source of energy, they cannot be l A new Net Zero Emissions by 2050 always fully displaced as electricity cannot (NZE2050) inducing a global warming of be used in every situation and renewable 1.5 degrees. energies will not secure supply as long as the storage issue remains unsolved. The SDS is presented with more data than l Natural gas might be blended with NZE2050. The prerequisites of the SDS are biomethane and low-carbon hydrogen, clear: when produced under satisfactory l Economic production should be much conditions (possibly around 2040). more energy-efficient (by a factor of two). With GDP multiplied by 1.86 between Emerging and developing countries will 2019 and 2040, demand for energy would consume most fossil fuels in 2040 (91% reduce by 10%. of coal, 62% of oil and 70% of gas). This l Energy production should be much use is consistent with the elimination of cleaner. CO2 intensity (tonne of CO2 per poverty and increased standards of living, tonne of energy) would fall from 2.29 combined with less financial resources than to 1.09. This would be achieved through in developed countries to switch to cleaner a reduced use of fossil fuels and some sources. The EU will become a marginal recourse to CCUS instruments. consumer (2% of coal in 2040 versus 5% in 2019, 5% of oil vs 10%, 6% of gas vs 10%). In the NZE2050, energy demand would be Electricity will become increasingly 11% lower than in the SDS in 2030 and the important (31% in SDS in 2040 vs 24% in recourse to CCUS would be more important. STEPS in 2040 or 19% in 2019) but fossil fuels In the SDS, the use of coal and oil would will remain predominant (see Figure 5). regularly decrease (in different proportions) Generation of electricity would rely first on
Figure 4
WƌŝŵĂƌLJĞŵĂŶĚ;ŶdŽ ͿΘEĞƚ ŵŝƐƐŝŽŶƐKϮ;'ƚͿ ϭϴ ϯϱ.Ϭ ϯϯ.ϯ ϯϯ.Ϯ ϯϯ.ϯ ϭϲ ϯϬ.ϰ ϯ.ϲ ϯϬ.Ϭ Ϯ.ϯ ϭϰ ϭ.ϱ Ϭ.ϱ Ϭ.ϵ Ϯϱ.Ϭ Ϭ.ϵ Ϭ.ϲ Ϭ.ϴ Ϯϰ.ϯ ϭϮ Ϭ.ϳ ϯ.Ϭ Ϭ.ϴ Ϭ.ϳ ϰ.ϲ ϭϬ ϯ.ϯ ϯ.ϴ ϰ.ϯ Ϭ.ϵ ϱ.ϱ ϯ.ϰ ϮϬ.Ϭ Ϯ.ϴ ϭϳ.ϰ ϭ.Ϭ ϴ ϯ.ϯ ϭ.ϭ ϭϱ.Ϭ ϭϰ.ϳ ϭ.ϱ ϲ ϰ.ϭ ϰ.ϱ ϰ.ϴ ϰ.ϴ Ϯ.ϵ ϯ.Ϭ Ϯ.ϯ ϭϬ.Ϭ ϰ ϰ.Ϭ ϳ.Ϭ ϯ.Ϭ ϯ.Ϭ Ϯ.ϲ ϱ.Ϭ Ϯ ϯ.ϳ ϯ.ϴ ϯ.ϱ ϯ.ϯ Ϯ.Ϯ ϭ.ϯ ϭ.Ϭ ϭ.ϱ Ϭ Ϭ.Ϭ ϮϬϭϬ ϮϬϭϵ ϮϬϯϬ ϮϬϰϬ ϮϬϯϬ ϮϬϰϬ ϮϬϱϬ ϮϬϯϬ ^d W^ ^d W^ ^^ ^^ ^^ E ϱϬ
ŽĂů Kŝů EĂƚƵƌĂůŐĂƐ EƵĐůĞĂƌ dƌĂĚŝŽŵĂƐƐ ZĞŶĞǁĂďůĞƐ EĞƚ ŵŝƐƐŝŽŶƐKϮ
Source: IEA – Outlook 2020 165 Berne Union 2020
more renewables (27% in 2019, 52% in SDS mind that 770m people had no access to in 2030, 72% in 2040 or 60% in NZE2050 in it in 2019, mainly in Africa) with off-grid 2030) and also on some more nuclear (11-12% solar energy, mini-grids and also better vs 10%). In the SDS 2040, renewable energies distribution networks. will be mostly be wind (31%, six times more l Access to clean cooking fuels for 2.6 billion than in 2019), hydro (24%, up 60%) and solar people who still use traditional biomass (21%, 10 times more). today. This could be achieved with more The SDS (and NZE2050) scenario also efficient wood stoves, Liquified Petroleum includes the completion of two other Gas (LPG) or some access to electric Sustainable Development Goals (SDGs): cooking. The impact on deforestation and l Universal access to electricity (bearing in public health (with much lower emissions
Figure 5
dŽƚĂůĐŽŶƐƵŵƉƚŝŽŶ;ŶdŽĞͿ ϭϰ.Ϭ
ϭϮ.Ϭ ϭ.ϯ ϭ.Ϯ ϭϬ.Ϭ ϭ.Ϭ ϯ.Ϭ Ϭ.ϴ ϭ.Ϭ Ϯ.ϰ ϭ.Ϭ ϴ.Ϭ ϭ.ϵ Ϯ.ϯ ϭ.ϱ Ϯ.ϯ ϲ.Ϭ ϭ.ϳ ϭ.ϵ Ϯ.ϵ ϭ.ϰ ϭ.ϲ ϰ.Ϭ ϭ.ϰ ϰ.ϰ ϰ.ϱ ϯ.ϲ ϰ.ϭ ϯ.ϳ Ϯ.Ϭ Ϯ.ϴ Ϭ.Ϭ ϭ.ϭ ϭ.Ϭ Ϭ.ϵ Ϭ.ϵ Ϭ.ϳ Ϭ.ϲ ϮϬϭϬ ϮϬϭϵ ϮϬϯϬ ϮϬϰϬ ϮϬϯϬ ϮϬϰϬ ^d W^ ^d W^ ^^ ^^
ŽĂů Kŝů EĂƚƵƌĂůŐĂƐ ůĞĐƚƌŝĐŝƚLJ ,ĞĂƚ ŝŽĞŶĞƌŐLJ KƚŚĞƌƌĞŶĞǁĂďůĞƐ
Source: IEA – Outlook 2020
Figure 6 ŶĞƌŐLJ/ŶǀĞƐƚŵĞŶƚƐ;ďŶΨͬLJĞĂƌͿ ϰϬϬϬ
ϯϱϬϬ ϴϬϱ KƚŚĞƌĞŶĚͲƵƐĞ ϯϬϬϬ ŶĞƌŐLJĞĨĨŝĐŝĞŶĐLJ ϯϴϱ ϴϬϵ ϮϱϬϬ ϯϭϭ ĂƚƚĞƌLJƐƚŽƌĂŐĞ Ϯϭϭ ϱϯϳ ůĞĐƚƌŝĐŝƚLJŶĞƚǁŽƌŬƐ ϯϬ ϱϮϭ ϮϬϬϬ ϯϲϰ KƚŚĞƌWŽǁĞƌWůĂŶƚƐ Ϯϱϭ ϴϮϵ ϱϭϳ ϰϯϳ ZĞŶĞǁĂďůĞWŽǁĞƌ ϭϱϬϬ Ϯϵϰ ϯϵϯ ϭϳϮ ϭϯϴ ϭϮϲ ϭϭϱ ϭϭϳ KƚŚĞƌĨƵĞůƐ ϯϵϲ ϭϬϬϬ ϯϭϬ ϯϰϬ ϱϲϵ ϲϲϲ ŽĂů KŝůĂŶĚŶĂƚƵƌĂůŐĂƐ ϱϬϬ ϳϴϭ ϴϬϬ ϴϬϵ ϲϮϴ ϰϲϰ Ͳ ϮϬϭϱͲϮϬϭϵ ^d W^ϮϬͲϯϬ ^d W^ϯϬͲϰϬ ^^ϮϬͲϯϬ ^^ϯϬͲϰϬ
166 Source: IEA – Outlook 2020 Berne Union 2020
of particulates) would be very positive. In Sub-Saharan Africa, two thirds of energy Emerging and developing FUTURE TRENDS demand was linked to biomass in 2018. countries will consume To reduce it, for example, Ghana’s INDCs3 indicate that LPGs could serve 55% of most fossil fuels in 2040 cooking needs in peri-urban and rural (91% of coal, 62% of oil areas in 2030 instead of 5% in 2015. and 70% of gas). This
These figures were affected in 2020 by the use is consistent with the consequences of the COVID-19 crisis as some elimination of poverty and people lost their access to electricity or returned to biomass use. increased standards of The switch from STEPS to SDS or NZE250 living, combined with less requires improvements in energy production financial resources than and use but also changes in individual behaviours (0.8 GT CO2 saved in 2030 in in developed countries to SDS/2.8 GT in NZE2050 or 18% of total switch to cleaner sources. savings). The IEA lists 11 individual behaviours including, for example, limited usage of air conditioning or increased eco-driving (see in 2040. It will create a pressure to support Figure 6). only low-investment cost oil and gas projects In SDS, energy investment would be (see Figure 7). doubled to reach $3.9 trillion per year around According to the IEA, the emission 2035. They will be mostly dedicated to end intensity varies widely with average life-cycle use (individual renewable sources of energy emissions of 630 kg CO2 per barrel but best – seven times – and energy efficiency – four practices are 440 kg. It estimates that these times) as well as to electricity networks (two emissions could be reduced by 40% between times) and some power plants. SDS is more 2019 and 2030. Limiting methane leaks costly (by 34% in the 2030s) than STEPS. would be a very important development. Investments in production of energy would remain stable, with more investments in Financing investments in oil and gas renewable and less in oil and gas. The IEA says that its NZE2050 is very similar The production of oil was 97.7 mbpd in to the IPCC - P2. These scenarios converge 2018. Without any investments in existing on the 1.5 degree global warming of the Paris fields, production would be as low as 6.8 Agreement, with some growth. They also mbpd in 2050 (58% of the level expected mean: in the IPCC – P1). With investments limited l A need to stabilise energy demand, with to existing fields, production could drop to an increased recourse to electricity thanks 22.4 mbpd (50% of the IPCC - P2 level or to renewables (and nuclear). It means 40% of the IAE – SDS level). Similar impacts more investments in networks and on the would appear for gas and it would question end-user side. the use of gas during a transition period (in l A sharp reduction of coal which theIPCC Scenarios (1.5° global heating) 2020s and 2030s). Hence, investmentsPathway 1 Pathway 2will remain veryPathway 3 important for somePathway 4 in new fields are required. Oil 2030 prices would2050 2030 developing2050 2030 countries2050 2030 2050 Final energy demand (vs 2010) -15% -32% -5% 2% 17% 21% 39% 44% decline, while they would increase in STEPS, l A reduced role for oil (down by 50% in GHG Emissions (vs 2010) -50% -82% -49% -89% -35% -78% -2% -80% 2050 in P2) whichCumulative CCS until 2100 (GT CO2) assumes higher levels of production 0 348 687 1,218 including BEBCS (GT CO2) 0 151 414 1,191
Figure 7
Sources of primary energy (vs 2010) Pathway 1 Pathway 2 Pathway 3 Pathway 4 2030 2050 2030 2050 2030 2050 2030 2050 Renewable (but biomass) 430% 833% 470% 1327% 315% 878% 110% 1137% Biomass -11% -16% 0% 49% 36% 121% -1% 418% Nuclear 59% 150% 93% 98% 98% 501% 106% 468% Coal -78% -97% -61% -77% -75% -73% -59% -97% Oil -37% -87% -13% -50% -3% -81% 86% -32% Gas -25% -74% -20% -53% 33% 21% 37% -48% Source: IEA – Outlook 2020 167 Berne Union 2020
l A need for natural gas during an interim environmental, human and social impacts period until the mid-2030s before its such as the Equator Principles (EP). reduction (-53% in P2) Most large energy projects, including l Some recourse to CCUS. those based on solar or wind energy, are classified as impacting projects (Category These levels of production of oil and gas will A) and so need to be reviewed carefully require new investment. The lack of supply when they are financed by commercial would question the transition, especially in banks. If EU actors were to ban the developing economies, as it could preserve financing of oil and gas, there is a risk more polluting sources of energy such that less cautious financial players, in the as wood or coal, which are the cheapest Americas or Asia, not as regulated as in energies. These countries might not meet developed countries, could intervene with SDGs by 2030 in the absence of sufficient looser Environmental and Social (E&S) energy. criteria. Many financial investors adopted coal l The efficiency of the production process policies, with a ban on investment in coal- in terms of associated GHG and natural related projects. However, most of them limit resources, using the best available it to thermal coal, considering that for some practices and targeting a level below the industrial usages (steel, cement, anodes, average of 630 kg CO2 per barrel etc), there is no viable alternative today. l The capacity to face the low prices And some organisations, including NGOs, envisaged by the IEA in the SDS (below recognise that, in some remote places, there $60/ barrel) is no alternative to coal-fired power plants. A nuanced approach would be appropriate OECD ECAs and energy for oil and gas, considering the need for a The first purpose of ECAs is to support transition phase. Developing countries will domestic exporters. While the business need financing coming from Europe and model of private credit insurers includes other rich countries to develop and reach the recoveries (in the range of 50% of SDGs. Europe itself can probably afford to indemnifications), OECD ECAs cover all their support a reduction of 40% of net emissions costs (operation and indemnifications) with of CO2 in 2030 (vs 2005) with less oil and premiums. Over the period 1999-2018, with gas. recoveries of €119 bn, €132 bn were returned In SDS, investments in oil and gas might to taxpayers. Hence, ECAs are not subsidised be in the range of $464 bn/year in the 2030s (see Figure 8). (vs $781 bn today). Hence, financing required Most OECD ECAs’ covers are related to by these projects will decrease. In order transport (39% in 2009-2018) and industrial to select projects, a few criteria might be projects (22%). Natural resources, including considered, such as: mining, represent 9% and electricity 14%, l Compliance of the project with INDCs. with a growing share for renewables (55% in The lack of consideration by developed 2018 vs 32% over 2005-2018). countries for the INDCs prepared by developing countries might question their Building on obligations role in the latter. The success of the Paris Agreement will l The compliance with stringent rules on require more investment in the end-
The success of the Paris Agreement will require more investment in the end-use segment, in power transmission networks and in renewables. Its successful implementation also means the use of some fossil fuels in the next 30 years, but at lower levels than now. NGOs give stringent lectures about the Paris Agreement, which is their mandate, but a nuanced approach, referring to the all IPCC pathways (and not only P1) or 168 IEA data, should prevail. Berne Union 2020
use segment, in power transmission networks and in renewables. Its successful The EU might consider FUTURE TRENDS implementation also means the use of some that the burden of fossil fuels in the next 30 years, but at lower levels than now. NGOs give stringent lectures investing in new about the Paris Agreement, which is their fields has to be left to mandate, but a nuanced approach, referring other countries as its to the all IPCC pathways (and not only P1) or IEA data, should prevail. In IPCC P2 or the marginal consumption IEA NZE2050, oil and gas consumption in could be satisfied by 2050 at 50% of existing levels would require the development of new fields. existing fields or new The EU might consider that the burden of fields in the North Sea, investing in new fields has to be left to other outside of the EU. countries as its marginal consumption could be satisfied by existing fields or new fields in the North Sea, outside of the EU. In line with EIB policy, EU ECAs would also be prevented crucial during a transition phase. This will not from supporting new projects out of the EU prevent EU ECAs from covering renewable too. Other sponsors and ECAs will probably energy projects or transmission systems, as develop these fields with looser E&S criteria, they do today, or from supporting European including the generation of more GHGs in exporters of new technologies such as their production. hydrogen or storage facilities. Such support The EU might also decide still to support would not contradict zero net emissions in its ECAs in some projects on a selective the EU in 2050 as it is the starting point of basis with some clear criteria (strict E&S the IPCC P2 or the IEA NZE 2050 schemes. standards, efficient production regarding And it might also be very helpful to support GHGs for instance, below the average of 630 the growth required in most developing kg CO2 per barrel, low costs of production to countries to reach SDGs. n support prices in the range of $50-60/barrel, compliance with INDCs, etc). New fields Notes would be developed in a more sustainable 1 https://www.ipcc.ch/site/assets/uploads/2018/02/ SYR_AR5_FINAL_full.pdf way and make available the production that 2 https://www.globalccsinstitute.com/wp-content/ the world, including developing economies uploads/2019/03/BECCS-Perspective_FINAL_18- will probably require in 2050, unless all March.pdf 3 https://www4.unfccc.int/sites/ndcstaging/ countries agree on a de-growth scheme. PublishedDocuments/Ghana%20First/GH_ It should also be recognised that gas is INDC_2392015.pdf
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Source: OECD Export Credit Group / Cashflows and Business Activities 169 Berne Union 2020
Blended insurance programmes in difficult times
We need a change in the requirement profile of public funds. That is a central conclusion of Thomas Mahl and Franz Karmann, Managing Directors, SFR consulting, reflecting on their practical experience in Sub Saharan Africa.
The business perspective looks rather development gloomy with a high risk of uncertainty programmes – in the COVID-19 crisis. That almost goes financial support to without saying. In particular the finance and the private sector. insurance market has started to become In light of the more cautious and risk sensitive with scarce availability respect to capacity allocation. To avoid an of public funds, the accelerated economic downturn, the public additional burden sector has stepped in as an ‘insurer of last on public budgets resort’ to minimise potential losses and will emphasise Thomas Mahl enhance the investment climate. and enhance the Reflecting the risk environment in Sub- importance of the Saharan Africa, our company is spearheading effective use of public the effective use of scarce public funds for money in the future. risk mitigating instruments. We want to share our view of the impact of the crisis in our Efficient use of daily work and, in particular, the need for a public funds change in the requirement profile of public Insurance programmes funds’ allocation. in partnership with COVID-19 has accelerated the risk of the public sector can increased uncertainty now and for the be very efficient if Franz Karmann near future. To cope with these challenges, they are structured governments and public institutions in the right way. Here we summarise some have provided – in addition to existing important factors:
In particular the finance and insurance market has started to become more cautious and risk sensitive with respect to capacity allocation. To avoid an accelerated economic downturn, the public sector has stepped in as an ‘insurer of last resort’ to minimise potential losses and enhance the investment climate. 170 Berne Union 2020
l Risk appetite of the commercial insurance and reinsurance sector will be mirrored FUTURE TRENDS in the risk position of the public funds. In African Energy Guarantee the case of new and unknown risk – where Facility (AEGF) hardly any underwriting experience is The African Energy Guarantee Facility available – commercial insurance markets (AEGF) is a reinsurance platform for tend to prefer the allocation of public commercial, reactive and comprehensive fund as a buffer in the form of a first loss risk mitigation solutions, with a high tranche. This is in contrast to other cases, coverage capacity and without sovereign where for example the tail end of the loss guarantee requirements. The AEGF was distribution is unknown (for example, initiated by the European Investment climate risk), and the insurer tends to Bank (EIB), Munich RE and ATI. It is allocate additional public funds as a supported by KFW and provides $1 second loss tranche. billion in reinsurance capacity for energy l Pricing needs to incorporate the goals access, energy efficiency and renewable of public funds. No one wants to provide energy projects that are in line with SDG7 money for free. On the other hand, if the objectives. risk portion of public funds is priced too high, this will ultimately lead to increased insurance premiums for the insurance buyer which could contradict the coverage) can be structured in a way that objective of the public funds’ earmarked the remaining risk distribution becomes development goals. Therefore, the focus attractive for the commercial insurance of the pricing of the public funded risk market. Although those blended structures portion should be on the enhanced could move the barriers of insurability, attractiveness of the investment climate to the bureaucratic and inflexible processes channel a sustainable capital flow towards of public institutions tend to limit private the achievement of development goals. insurance market interest in pursuing this l Eligibility criteria are often very narrow type of business opportunity. and complex. Usually programmes implemented by Development Finance Limiting factors of blended insurance Institutions (DFIs) are designed in a way programmes that eligibility criteria follow regional or Insurance programmes are efficient if sector-specific goals. Often additional the fundamental principle of a diversified requirements are incorporated into portfolio is met. Size and grade of diversity those programmes. Insurance operates of a portfolio determines the allocation of on a portfolio perspective where risk capital and the portfolio resilience in case diversification is key to generate premium of claims. As the insurance market operates discounting effects. Having a narrow on the basis of reliable future promises scope of insurance programmes runs regarding premium and claims payments the counter to that fundamental principle and quality of the portfolio is one of the crucial subsequently increases the price of those components to secure a sustainable product programmes. offering in the future. If we structure an insurance or reinsurance programme with public funds, the underlying Lessons from AEGF risk does not usually meet the commercial Looking at the AEGF, we were originally market risk appetite for one reason or confronted with diversification limiting another. Public funds as risk capital (via factors like regional focus (Sub Sahara guarantees or other forms of insurance Africa) and product (mainly political risk
Insurance programmes are efficient if the fundamental principle of a diversified portfolio is met. Size and grade of diversity of a portfolio determines the allocation of risk capital and the portfolio resilience in case of claims. 171 Berne Union 2020
insurance) for the portfolio. Now, with the accession of KfW and a running technical We hope that as assistance programme sponsored by the EIB, consequence of the we are working on several enhancements of AEGF to improve the composition of the impact of the COVID-19 portfolio. The COVID-19 crisis-related focus crisis, the development on enhanced efficient fund allocations helps finance industry fosters with the discussion to open up programmes. Donors often claim that strict eligibility the paradigm shift of criteria are one of the paramount development policy prerequisites to avoid misuse of public funds. This is an important factor, but we towards risk transfer should always have in mind that public solutions by adapting funded insurance solutions are deemed to its available instruments correct potential market gaps. Hence, also in the view of sustainability, diversity of the towards this unique portfolio should steer the scope of eligibility market’s needs where criteria in future. Looking at past experience of blended diversification and insurance programmes, there are hardly any portfolio setup is key. solutions which have gone from pilot status into the next phase of scaling. In fact, a lot of public fund supported innovative insurance programmes have been dissolved after a few the already capital abundant finance industry, years as business volume did not meet the we would recommend building up intelligent requirements to build up a self-sustainable and attractive risk transfer solutions which portfolio. Besides the failed development enhance the investment climate for the objective, a discontinuation of an insurance private sector. programme is a huge reputational risk for the Blended insurance programmes that are private insurance company that operates it. It currently publicly supported could play a is understandable then that the local primary crucial role. However, to follow this route a insurance market, in particular, shows limited shift from the current donors’ mindset and appetite to expand and enhance its product practice is required. A pure continuation of offering in the development finance space. public fund distribution which is restricted to single project investment-orientated The way forward eligibility criteria and stipulations does not COVID-19 has changed the risk landscape work. Insurance operates on the portfolio for the financing industry. Although there is perspective which instead requires a broader abundant available capital to be invested, scope. We hope that as consequence of affordable and attractive risk transfer the impact of the COVID-19 crisis, the solutions will continue to gain in importance development finance industry fosters the as a way to channel capital flows in future. paradigm shift of development policy If we want to achieve the ambitious towards risk transfer solutions by adapting development goals, a paradigm shift in its available instruments towards this unique respect of development policy is requested. market’s needs where diversification and Instead of adding additional public funds in portfolio setup is key. n
If we want to achieve the ambitious development goals, a paradigm shift in respect of development policy is requested. Instead of adding additional public funds in the already capital abundant finance industry, we would recommend building up intelligent and attractive risk transfer solutions which enhance the investment 172 climate for the private sector. Berne Union 2020
5Directory Berne Union 2020
Berne Union Members
The Berne Union has 84 members from around the world, including 2 Observers. The membership is diverse and includes private insurance, government-backed ECAs and multilateral organisations, both large and small. Together they represent all aspects of the export credit and investment insurance industry worldwide.
As of October 2020, the Berne Union’s 84 members include: 69 ECAs, 11 private insurers and 4 multilateral institutions. We also welcome 2 guests of the Prague Club Committee.
The Berne Union member directory has moved online – this allows us to ensure that member information and contact details are always current and accessible. For contacts and more detailed information about each member please visit:
https://www.berneunion.org/Members
AIG United States of America BPIFRANCE France American International Group, Inc. Bpifrance Assurance Export
AOFI Serbia CESCE Spain Serbian Export Credit and Insurance Agency Compania Espanola de Seguros de Credito a la Exportacion ASEI Indonesia Asuransi Asei Indonesia (Asuransi Asei) CHUBB Switzerland Chubb Insurance Company ASHRA Israel Israel Export Insurance Corp Ltd COFACE France Compagnie Française d’Assurance pour le ATI Multilateral Commerce Exterieur African Trade Insurance Agency COSEC Portugal ATRADIUS The Netherlands Companhia de Seguro de Créditos, S.A. Atradius NV / DSB CREDENDO GROUP Belgium AXA XL United Kingdom AXA Group Insurance Company SE CREDIT OMAN Oman Export Credit Guarantee Agency of Oman BAEZ Bulgaria Bulgarian Export Insurance Agency DHAMAN Multilateral The Arab Investment & Export Credit Guarantee BANCOMEXT Mexico Corporation Banco Nacional de Comercio Exterior S.N.C. ECGC India Bandex Dominican Republic Export Credit Guarantee Corporation of India Ltd Banco Nacional de las Exportaciones ECGC Z Zimbabwe BECI Botswana Export Credit Guarantee Corporation 0f Zimbabwe 174 Export Credit and Guarantee Company Berne Union 2020 DIRECTORY
ECI UAE EXIMBANKA SR Slovak Republic Etihad Credit Insurance Export-Import Bank of the Slovak Republic
ECIC SA South Africa EXIMGARANT Belarus Export Credit Insurance Corporation of South Eximgarant of Belarus Africa Ltd FCIA United States of America ECIO Greece FCIA Management Company, Inc Export Credit Insurance Organization FINNVERA Finland EDC Canada Finnvera Plc Export Development Canada GEXIM Ghana EFA Australia Ghana Export-Import Bank Export Finance Australia GIEK Norway EGAP Czech Republic Garanti-Instituttet for Eksportkreditt Export Guarantee & Insurance Corporation HBOR Croatia EGE Egypt Croatian Bank for Reconstruction & Development Export Credit Guarantee Company of Egypt HKEC Hong Kong EGFI Iran Hong Kong Export Credit Insurance Corporation Export Guarantee Fund of Iran ICIEC Multilateral EH GERMANY Germany Islamic Corp for the Insurance of Investment & Euler Hermes Aktiengesellschaft Export Credit
EIAA Armenia Indonesia Eximbank Indonesia Export Insurance Agency of Armenia Export-Import Bank of Indonesia
EKF Denmark JLGC Jordan Eksport Kredit Fonden Jordan Loan Guarantee Corporation
EKN Sweden KAZAKHEXPORT Kazakhstan Exportkreditnämnden Kazakh Export Credit Insurance Corporation
Enterprise SG Singapore KREDEX Estonia Enterprise Singapore KredEx Credit Insurance Ltd.
EXIAR Russia KSURE Korea Export Insurance Agency of Russia Korea Trade Insurance Corporation
EXIM HU Hungary KUKE Poland Hungarian Export-Import Bank Plc. Export Credit Insurance Corporation Joint Stock Company EXIM J Jamaica National Export-Import Bank of Jamaica Limited LIBERTY United Kingdom Liberty Mutual Insurance Europe Limited EXIM R Romania 175 Eximbank of Romania Berne Union 2020
MBDP Macedonia SOVEREIGN Bermuda Macedonian Bank for Development Promotion Sovereign Risk Insurance Ltd
MEXIM Malaysia SWISS RE CORPORATE SOLUTIONS Export-Import Bank of Malaysia Berhad Switzerland Swiss Re Corporate Solutions MIGA Multilateral Multilateral Investment Guarantee Agency TEBC Chinese Taipei Taipei Export-Import Bank of China NEXI Japan Nippon Export and Investment Insurance THAI EXIMBANK Thailand Export-Import Bank of Thailand NZECO New Zealand The New Zealand Export Credit Office TURK EXIMBANK Turkey Export Credit Bank of Turkey ODL Luxembourg Luxembourg Export Credit Agency UK EXPORT FINANCE United Kingdom Export Credits Gurantee Department OeKB Austria Oesterreichische Kontrollbank Aktiengesellschaft UKREXIMBANK Ukraine Joint Stock Company the State Export-Import PICC China Bank of Ukraine People’s Insurance Company of China US EXIMBANK United States of America PwC Germany Export-Import Bank of the United States PricewaterhouseCoopers AG USDFC United States of America QDB Qatar U.S. International Development Finance Corporation Qatar Development Bank UZBEKINVEST Uzbekistan SACE Italy Uzbekinvest National Export-Import Insurance Servizi Assicurativi e Finanziari Company
SEP Saudi Arabia ZURICH United States of America Saudi Export Program Zurich Surety, Credit & Political Risk SERV Switzerland Swiss Export Risk Insurance
SID Slovenia SID Inc, Ljubljana
SINOSURE China China Export & Credit Insurance Corporation
SLECIC Sri Lanka Sri Lanka Export Credit Insurance Corporation
SONAC Senegal Société Nationale d’Assurances du Crédit et du Cautionnement 176 1st Floor Thanet House, 231 - 232 Strand, London WC2R 1DA Tel: +44 (0) 20 7841 1110 | Fax: +44 (0) 20 7430 0375
www.berneunion.org