Berne Union 2018
Contacts CONTACTS
Published by TXF Ltd on behalf of the Berne Union. TXF ©TXF Ltd 2018 & the Berne Union. All rights reserved. Editor-in-chief The contents of this publication are protected by Jonathan Bell copyright. No part of this publication may be reproduced, Editor stored, or transmitted in any form or by any medium Oliver O’Connell without the permission of TXF and/or the Berne Union. The content herein, including advertisements, does not Production editor John Smith represent the view or opinions of TXF Ltd or the Berne Union and must neither be regarded as constituting advice Managing director on any matter whatsoever, nor be interpreted as such. Dan Sheriff Co-founder and director About TXF Dominik Kloiber TXF is a media, technology and events group, set Chief technology officer up to service the corporates, traders, financiers and James Petras deal-makers that encompass the trade, commodity, Head of communications export and project finance communities. TXF has a Katy Rose contemporary and innovative approach to delivering Business development these markets with specialist news, high profile Alex Sheriff networking events, online and offline training and data Data analyst intelligence services. Ana Jovanovic TXF now offers a unique subscription package, TXF Essentials, combining critical industry deal data, and cutting edge news and insight. For more information on how to sign up to this exclusive business information solution, visit www.txfnews.com/essentials.
About tagmydeals TXF has pioneered an online platform that connects individuals, teams and companies to financial deals. tagmydeals collates accurate, up-to-date public deal information. It’s credible, transparent, unbiased, and totally free of charge: www.tagmydeals.com
Published by International Union of Credit & TXF Investment Insurers Canterbury Court Including Berne Union Prague Club Kennington Park 1st Floor 1-3 Brixton Road Thanet House London SW9 6DE 231-232 The Strand United Kingdom London WC2R 1DA United Kingdom Tel: +44 (0) 20 3735 5180 Email: [email protected] Tel: +44 (0)20 7841 1110 Fax: +44 (0)20 7430 0375 www.txfnews.com 1 www.tagmydeals.com www.berneunion.org Berne Union 2018
Contents
1 Introduction
Berne Union elected officials, A note from the hosts of the 2018 AGM 19 committees and secretariat 6 Nicolas Dufourcq, CEO, Bpifrance
Foreword 13 Topi Vesteri, president, Berne Union
2 Data and Statistics
Berne Union totals 22 2018 H1 in review: business is stable, but risks are high and unpredictable 31 Short-term export credit insurance Paul Heaney, Associate Director, Berne Union Medium- and long-term export credit insurance
Investment insurance
3 Expert Analysis
MEMBER SPOTLIGHT Sinosure: helping corss-border E-commerce sellers in an expanding global market 60 New member profile: BANDEX 39 Chen Jichao, underwriter, Sinosure and Zhou Huihan, underwriter, Sinosure New member profile: ECGC Z 41
The Prague Club 25 years on 43 MEDIUM- AND LONG TERM EXPORT CREDIT Malcolm Stephens and Lennart Skarp INSURANCE
Interview: Private Political Risk Insurance 64 INNOVATIONS IN TRADE TECHNOLOGY Christina Westholm-Schroder, chief underwriter, senior vice president, Sovereign Risk Insurance, and Nuria Gorog, senior vice Radical innovation in trade finance 47 president, head of credit and political risk, Christophe Spoerry, co-founder, Euler Hermes Continental Europe, Zurich Digital Agency ECAS weathering stormy seas 68 Assessing startup potential in insurtech 50 Hendrik Holdefleiss, chair of the Berne Martha Notaras, partner, XL Innovate Union MLT committee, and head of division underwriting and risk management, Euler The economic impact of smart ledgers Hermes on world trade 52 James Pitcher, associate, Z.yen Group and Credit insurance for project finance 71 programme director, Distributed Futures Mark van der Does, assistant vice president, Marsh and Abbey Sturrock, public agency, Customer expectations drive digital senior vice president, Marsh (Singapore) transformation while disruptive technology enables it 54 The LMA moves into the export finance market 77 Jérôme, Pezé, CEO and founder, Tinubu Square Kam Mahil, director (legal), LMA and Ashley McDermott, senior associate, Clifford Chance
SHORT TERM CREDIT INSURANCE APPROACHES TO SUSTAINABLE DEVELOPMENT Building a digital future for short-term credit insurance - Liberty Specialty Markets online The complementary role of official platform, Toredo 57 development finance 81 2 Chris Hill, senior underwriter - global financial Paul H.J. Mudde, consultant, Sustainable risks, Liberty Specialty Markets Finance & Insurance Berne Union 2018 CONTENTS 3 Expert Analysis continued
Berne Union – Offenburg University Risk outlook 129 Partnership on ‘Financing. Impact. John Lorié, chief economist, Atradius, Ludovic Together’ 91 Subran, chief economist, Euler Hermes and Mariane Søndergaard-Jensen, director, EKF Julien Marcilly, chief economist, Coface and Christine Lund Andersen, senior advisor, EKF NEW PRODUCT DEVELOPMENTS Sustainable insurance 94 Thomas Mahl, managing director, SFR Would gradual de-dollarization boost trade? 132 Consulting and Franz Karman, managing Harald Hirschhofer, senior advisor, TCX and director, SFR Consulting Niels Vermeijden, vice president, TCX
Winds are changing for wind financing 98 Extending support to Indian MSMEs 134 Christian Ølgaard, deputy CEO, EKF Sunil Joshi, general manager, country underwriting and international relations, ECGC
THE REGULATORY LANDSCAPE Finally: An export credit agency for Ukraine? 138 Dr Hans Janus, lawyer and consultant Export credit competition goes beyond the arrangement 100 Pekka Karkovirta, chairman of the participants REGIONAL BUSINESS DEVELOPMENTS to the Arrangement on Officially Supported Export Credits, and vice president, Finnvera The role of exports in Spain’s post-crisis recovery 140 Export credit at the OECD: Good Beatriz Reguero Naredo, director, CEO state governance and sustainability 104 account business, CESCE Silvia Gavorkníková, chair of the Export Credit and Credit Guarantee Working Party, and HBOR: 20 years of export credit insurance director of international relations, EXIMBANKA in Croatia 142 SR AOFI: Serbia has good news… 145 IWG: Time to lay the foundation stones 108 Michal Ron, IWG secretary general, managing director, head of international business, SACE Unlocking the potential of African export credit market for trade and economic transformation 146 Export finance and financial regulation 110 Professor Benedict Oramah, president and Henri d’Ambrières, advisor, export, trade and chairman of the board of directors, African project finance, HDA Conseil Export-Import Bank
Economic development and protecting trade 149 POLITICAL RISK ENVIRONMENT Vinco David, secretary general, Berne Union Political risk likely to moderate returns 114 Simon Coote, deputy director, Oxford Analytica
Trade at war 117 Jean Francois Lambert, founding partner, Lambert Commodities
Sovereign debt restructuring and debt swap provisions 121 Paola Valerio, head of international relations, SACE SIMEST
Venezuela: three scenarios 123 David H. Anderson, president, Anderson Risk Consultants and William Green, founder and managing partner, TDI
4 Member Directory
Berne Union members 158 3 Berne Union 2018 Berne Union 2018
Introduction1 Berne Union 2018
The Berne Union: Who’s Who 2018
Berne Union Leadership
The Management Committee consists of:
President Vice President
4 Committee Chairs 13 Member Organisations
The 13 Member Organisations are institutional positions, held by the two largest volume members from each of the ST, MLT and INV Committees, plus seven additional members drawn from amongst all four Committees on a voluntary, rotating, basis. All positions are held for a term of two years.
President: Institutional Members: Topi Vesteri (FINNVERA) ATRADIUS
Vice President: COFACE Mandisi Nkuhlu (ECIC SA) EULER HERMES
Short Term Committee Chair: BPI FRANCE Verena Utzinger (SERV) NEXI
Medium/Long Term Committee Chair: SINOSURE Hendrik Holdefleiss (EULER HERMES) ECGC
Investment Committee Chair: EXIMBANKA SR Christina Westholm-Schroder HBOR (SOVEREIGN) KSURE
Prague Club Committee Chair: US EXIM Danilo Ćirković (AOFI) AXA XL
ZURICH 6 Berne Union 2018 INTRODUCTION
Elected Officials
President, Topi Vesteri Vice President, Mandisi Nkuhlu FINNVERA Finland | Deputy CEO, Group ECIC South Africa | Chief Operating Officer Chief Credit Officer Mandisi Nkuhlu holds the Topi Vesteri joined Finnvera position of Chief Operating in 1998 as Executive Vice Officer at the Export Credit President responsible for Insurance Corporation of running Finland’s officially South Africa SOC Limited supported export credit and (“ECIC”). guarantee system. Having ECIC is the official Export managed Finland’s state Credit Agency of South Africa and provides backed ECA business for almost 17 years, political and commercial risk insurance Topi assumed the position of Deputy CEO to facilitate export trade and investments and Group Chief Credit Officer responsible outside South Africa. for credit and analysis functions of both Mandisi has worked for various financial Export Credit Agency (ECA) as well as institutions involved in the financing of domestic SME financing business of Finnvera, infrastructure development. He spent five in October 2015. years at the Development Bank of Southern Topi is Chairman of the Board of Finnish Africa (“DBSA”) as the legal advisor to the Export Credit Ltd, the subsidiary of Finnvera Project Finance team responsible for cross- responsible for providing funded export border private sector projects. During his credit solutions as well as Finnvera’s venture stay at DBSA, he was seconded to Masons capital subsidiaries Veraventure Ltd and in London, a law firm specializing in Public Seed Fund Vera Ltd. Topi also served as Private Partnerships. Board Member of Finnfund (Finnish Fund for Later on, Mandisi worked for the Industrial Industrial Cooperation Ltd), Finland’s official Development Corporation of South Africa development finance agency and as a board Limited (“IDC”) in the International Finance member of Finnish Credit Insurance Ltd. Department dealing with export finance Before joining Finnvera, Topi had a 17- transactions. Prior to re-joining ECIC in year banking career in Postipankki, one of February 2011, he was a Director of Export Finland’s leading commercial banks. During Finance at Standard Bank of South Africa. this period he held various managerial Mandisi has worked on numerous positions in Helsinki, Tokyo and London infrastructure and mining projects. He cut covering debt capital markets, corporate his teeth in the Mozal I and Mozal II projects banking, leasing, international network and and worked on the Nelspruit Water PPP lending as well as general management Concession, the first bank financed water of the bank’s overseas and domestic PPP Concession in South Africa. subsidiaries and business units. Mandisi holds a B Iuris and the LLB degree Within the Berne Union, Topi was from the University of the Western Cape. appointed President in 2015, was Chairman He is an admitted attorney. He furthered of the Medium and Long Term (MLT) his studies at Wits Business School – Committee in 2009 – 2011 as well as Vice Management Advancement Programme, President of the Union in 2003 – 2004. Senior Executive Programme and at the UCT Topi holds a Master’s Degree in Law Graduate School of Business – Executive (LL.M.) from the University of Helsinki. Leadership Programme. 7 Berne Union 2018
Short Term Committee Medium / Long Term Committee ST Committee Chair, Verena Utzinger SERV Switzerland | Senior Relationship MLT Committee Chair, Manager Hendrik Holdefleiss Verena Utzinger has been EULER HERMES Germany | Head of Division working for Swiss Export Underwriting & Risk Management Risk Insurance ‘SERV’ since Dr. Hendrik Holdefleiss Spring 2000. Initially she studied economics at the joined the underwriting Universities of Regensburg, department, with Barcelona, Muenster and responsibility for key holds a PhD in international accounts, financial and various other economics of the University institutions in French-speaking Switzerland, of Kaiserslautern. He started as well as Ticino and a part of German- his career at Deutsche Bank AG and joined speaking Switzerland. Euler Hermes in 1999. In the State Export Verena is now responsible for relationships Credit Guarantee Division Hendrik Holdefleiss with financial institutions, new customers and headed the Economic Research Department bilateral chambers of commerce, as well as carrying out analysis of trade policy and coordinating collaboration with the private country risk. insurance market within the framework of He has been in charge of international reinsurance agreements. relations and cooperation in international Verena is a Member of the Board of institutions (EU, OECD) for several years. SABC Swiss African Business Council in Later he was in charge of Public Relations Switzerland. of the Export Credit Guarantees at Euler As the Head of the Swiss Delegation Hermes. Since 2011, as Head of Underwriting at the Berne Union, she represents SERV and Risk Management, he is responsible for at various Berne Union meetings and also the global business of the German ECA. appears regularly as a speaker at other external events MLT Committee Vice Chair, Pedro Pessoa Carriço ST Committee Vice Chair, Chunyi Xiao ABGF Brazil | Executive Manager - SINOSURE China | Deputy General Manager International Credit Assessment & of Export Trade Credit Underwriting International Relations Department Pedro Carriço is Executive Ms. Xiao Chunyi, Deputy GM Manager of Credit & Market of ST Export Trade Credit Analysis at the Brazilian Underwring Dept, in charge Guarantees Agency (ABGF), of large credit approval. She where he is responsible for has been working in Sinosure risk assessment of since its establishment in counterparties in export- 2001. related insurance as well as domestic guarantees. He has been with ABGF since 2014 when the Agency took on the role of export credit agency on behalf of the Brazilian Government. His experience within the Brazilian officially-supported export credit insurance scheme goes back to 2009 when he started working in the country risk department at SBCE. Prior to that, Pedro spent eight years in various positions at Banco Pactual, a Brazilian investment bank. He holds a Masters’ degree from the Johns Hopkins 8 University School of Advanced International Studies. Berne Union 2018
Investment Insurance Postgraduate Degree (“DEA”) in International INTRODUCTION Committee Prospective from the University of Paris V and a specialisation in International Trade from the “Ecole Européenne des Affaires”/ INV Committee Chair, EAP in Paris. Christina Westholm-Schroder She is fluent in French, Spanish and SOVEREIGN RISK INSURANCE Bermuda | English. She is a former Chairman of the Chief Underwriter & SVP Single Risk Committee of the International Christina is responsible for all Credit Insurance & Surety Association aspects of Sovereign’s (ICISA) 2014-2015 and an active participant transactional underwriting, in theBern Union. with particular focus on capital markets and financial institution business. Christina is also relationship manager Prague Club Committee for a number of Sovereign’s ECA and Multilateral Agency clients. Christina has PC Committee Chair, Danilo Ćirković worked in the political risk field for more than AOFI Serbia | Executive Board Member and 30 years. Prior to joining Sovereign, she was Executive Director for Insurance with the Multilateral Investment Guarantee Agency (MIGA) for 11 years. Danilo joined Serbian Export She joined MIGA as one of its first Credit Agency (AOFI) in employees in 1988 and worked in several January 2006, just a few capacities, including regional manager for months after it was founded. Asia and Latin America and most recently From the beginning Danilo as manager for syndications and business has been engaged in development. In this capacity, she was establishing and developing also responsible for the Agency’s re- and the credit insurance business of the coinsurance activities. company. During his career in AOFI Prior to MIGA, Christina worked as a (2006-present), Danilo has worked in risk political risk insurance broker in the Bank of and policy underwriting as well as America’s global trade finance department reinsurance. Since November 2013, Danilo in New York and as manager in the political has been appointed to the position of risk department at AB Max Matthiessen in Executive Board Member and Executive Stockholm, Sweden. Christina has an MBA Director for Insurance. in international business from Stockholm His previous work experience has been School of Economics and Business with the National Assembly of the Republic Administration and an MBA in finance from of Serbia, where Danilo worked as an Adviser New York University. (2005), and with the UN International Criminal Tribunal for the Former Yugoslavia at The Hague, Netherlands (2001-2004), INV Committee Vice Chair, Nuria Gorog where he worked as the case manager for ZURICH Switzerland | Senior VP – Head of defense in three court cases. Credit & Political Risk, Continental Europe An economist by university education, Danilo also holds a Masters degree in Nuria Gorog joined Zurich in Management from the Faculty for January 2007 as Senior Vice Finance, Economics and Administration in President and Regional Belgrade, Serbia. Manager for Continental Europe – Credit & Political Risk. Prior to joining Zurich, she served seven years as Chief Underwriting Manager in Continental Europe for Unistrat Coface (Coface Group). Previously, she was Business Development Manager -Credit & Political Risk- in the in house insurance broker of Natixis (Cauri). Ms. Gorog holds a Master’s Degree in Law 9 from the Universidad Autonóma of Madrid, a Berne Union 2018
PC Committee Vice Chair, Laszlo Varnai Yerdan Bekkhozhin Berne Union | Associate Director KAZAKHEXPORT Kazakhstan | Deputy Chief MLT Committee Support) Executive Officer Laszlo joined the Secretariat Yerdan Bekkhozhin joined in June 2015, to advise it on KazakhExport as a Deputy legal matters and to support Chairman of the Board in the Committees (primarily October 2014. He is the ST Committee) and responsible for underwriting, Specialist Meetings. Since risk management, legal April 2017, Laszlo has been aspects and international supporting the MLT Committee and the data relations. Before joining KazakhExport, development project. Yerdan spent more than 6 years in banking He gained focused experience in policy sector working for local and international analysis as he worked for EXIM Hungary banks in Kazakhstan and in JP Morgan Chase for more than 5 years, leading the ECA’s in Australia. international relations (OECD, EU and Berne He started his career as a consultant in Union) and ensuring compliance with WTO, the investment systems area. Yerdan holds OECD and EU regulations, as well as the a Bachelor of Banking and Finance and international sanctions. a Bachelor of Computing from Monash Laszlo graduated in law from Peter University Melbourne, Australia. Pazmany University, holds a DipHE in Law of England and Wales and the European Union from the University of Cambridge, and a diploma of economic diplomacy from the Berne Union Secretariat Károli Gáspár University in Hungary.
Vinco David Berne Union | Secretary General Paul Heaney Berne Union | Associate Director Vinco David was appointed (Communications, Media & Outreach) Berne Union Secretary General in March 2017. Prior Paul manages to this, he has served as a communications and Management Committee outreach at the Secretariat, Member and as the Chair of having joined in July 2016. the Investment Insurance His responsibilities include Committee. A Dutch national, he has over 30 coordinating production of years’ experience in various aspects of credit Berne Union publications, and investment insurance, including more development of digital engagement and data than 20 with leading international credit tools, and press and media liaison. Paul insurer Atradius, in diverse management works with the Outreach Task Force to roles. develop joint-initiatives and build influence Before joining the Berne Union as with the Berne Union’s external network of Secretary General, Vinco David served as industry partners. a Management Team Member of Atradius He has 8 years of experience working in Dutch State Business, the Export Credit communications, events and publications Agency of the Netherlands. Prior to this relating to the trade finance and export he has held positions at the Berne Union credit insurance industry. Prior to joining the Secretariat and the Netherlands Ministry BU, Paul worked as a Conference Producer of Finance. He holds an MA in political for Informa, one of the world’s largest events science and international relations and a and publications companies. BA in economics and Italian language and Paul holds a BA in Philosophy from literature from the Free Reformed University Trinity College Dublin and an MA (also in of Amsterdam. Philosophy) from King’s College London. .
10 Berne Union 2018
Nicole Cherry Olga Kompaniets INTRODUCTION Berne Union | Event Logistics & Berne Union | Associate Director Office Manger (Short Term Committee Support)
Nicole joined the Secretariat Olga brings over 7 years of in July 2016 and is experience gained in responsible for all meeting banking where she held a and office logistics. In this number of front office role she works closely with positions with overall Berne Union member hosts responsibility for building the and external suppliers, Trade & Structured coordinating preparation for General and Commodity Finance business within various Specialist Meetings across the world. client sectors, geographies and products. She also manages office operations, Her skills include relationship finance and accounts and is the first port of management, deal origination/ structuring/ call for all member support and assistance. implementation/ execution, credit analysis as Nicole has a degree from Roehampton well as substantial knowledge of Blockchain. University and has spent six years working Olga holds a Masters Degree in in Tanzania on various charity and non for- Management from Cass Business School profit projects as well as gaining corporate (London) and a BA in International Economic experience working as the assistant to the Relations from MGIMO University (Moscow). CEO of East Africa’s largest company.
Ian Gordon-Brown Eve Hall Berne Union | Data & Technology Manager Berne Union | Associate Director Ian qualified with a BSc (Prague Club Committee Support) (Chemistry and Applied Eve joined the Berne Union Mathematics) from the Secretariat team in October University of Cape Town in 2017 with primary 1991. He moved to London in responsibility for managing 1994 and has worked in the Prague Club Committee, finance IT in both London a dedicated forum for credit and New York in this time. insurance companies from More recently he completed 4 years new and emerging markets. of application development and support She has over fifteen years of experience in at Fidelity International and database corporate finance, business development and structuring and development at RPMI and investor relations. Eve held several positions Pantheon. at various GE media businesses in New York, In his spare time Ian is a keen skier, opera Hong Kong and London. Most recently, she goer and traveler. has focused on management consulting projects for both young and mature organisations. A Londoner of 20 years, she enjoys spending time with her family, travelling, learning Italian, practicing Bikram yoga and skiing. Eve holds an MBA in Finance from Bentley Graduate School of Business in Massachusetts, USA.
11
Berne Union 2018
Foreword from the INTRODUCTION Berne Union President
Topi Vesteri, Berne Union president, deputy CEO and group chief credit officer at FINNVERA, reflects on the transformations he has seen in his 20 years’ involvement with the Berne Union.
2018 was the hottest summer ever recorded deficit – where in Finland, hitting temperatures in excess foreign financiers of 30 degrees Celsius, even as far north as can ultimately stop Rovaniemi in the Arctic Circle. It was here that financing the deficit. I observed the remarkable sight of reindeer Without careful lapping at the shore, standing side by side policy management, with human bathers, and all seeking relief untenable borrowing from the extreme heat – more than 10 degrees costs and escalating higher than the average for the time of year. defaults may be the This caused me to reflect on the powerful, result. perhaps permanent, effects of climate change, Topi Vesteri The cycle of crises the counterbalancing, instinctive adaptation repeats again and again. It is debatable of an ecosystem, and how the observed whether they are avoidable, or rather an environment inevitably alters with time. inherent aspect of our financial system. But almost more important than the crisis The Cycle of Crises itself is the process of its resolution. The It is 10 years since the collapse of Lehman reactions from international borrowers and Brothers ushered in the global financial lenders; the policy moves to address the crisis (GFC), drying up credit, tightening systemic shortcomings and to avoid worst- regulation and hammering home the concept case fallout: These are the actions which of systemic vulnerability in the globalised shape the long-term outcomes. In the case financial system. of the GFC, it is these outcomes which have The economic impact of the crisis can delivered the largest impact to the financing barely be overstated and is still being felt of international trade. today. The sociological impact is no less concerning: It has eroded confidence in the Bank retrenchment and the foundations of the international financial transformation of ECAs system and contributed significantly to the Since the GFC, the number of banks involved wide-spread backlash of anti-globalism in trade and export finance has decreased which is now concentrated in shockwaves of significantly. The immediate effect was populist, nationalist and protectionist politics a massive shortage of bank liquidity and we see throughout the world. increased costs of borrowing. The withdrawal Of course, the GFC was not the first, nor of correspondent banking and financial lines indeed the last banking crisis we will endure. for banks and credit lines for borrowers Since the start of my finance career in 1982 produced a consequent bottleneck in the I have observed many such cycles. From financial life-blood of trade. Export Credit LatAm, to the Nordic crisis of the early 90s, Agencies (ECAs) have a mandate to support followed by the Asian and Russian crises at national exports and to fill financing gaps in the end of that decade, in all cases there was exactly these circumstances. Since the crisis, some unhealthy combination of undisciplined it is no exaggeration to say that the role lending and inadequate macro control in an and products of ECAs have become more environment of financial liberalisation. As important than ever before for the financing we are now experiencing in some markets of world trade. again, debt funded in foreign currency is The amount of new cover provided 13 very vulnerable to high current account annually for trade by ECA members of the Berne Union 2018
Berne Union has almost doubled in ten years, institutionally in the Berne Union. The from around half a trillion USD in 2007, to Chinese ECA, Sinosure, is relatively young by just a bit less than one trillion USD in 2017. ECA standards: founded in 2001 and a Berne Even with the return of liquidity to the Union Member since then, it has now grown market, banks are more reluctant than to become the largest and one of the most previously to take so much risk on their own most professional members, by any measure. balance sheets and even with the maximum At the start of my ECA career, our role cover percentage provided by an ECA, was predominantly to support transactions there is sometimes still difficulty sourcing in political risk countries, but over time financing for long term transactions. This has this has changed, and the biggest driver led to an increase in the number of funded is often now the need to fill market-gaps (as opposed to pure-cover) export credit arising from large transaction size and schemes. In 2009 the Finnish government tenor. Consequently, we are now seeing a mandated Finnvera to fund long-term maturation of exposure in OECD countries: financing of exports through its subsidiary Finnvera now has its biggest exposure in the Finnish Export Credit Ltd. At the time this USA and Germany, something which would was a temporary scheme, approved through have been unthinkable 20 years ago. parliament in an impressively quick process. While previously a large portion of ECA But, as we say, there is nothing so permanent business was based on sovereign guarantee, as a public temporary scheme, and FEC is the majority is now covering corporate to still going strong, ensuring long term buyer corporate trade, with no guarantee in place credit solutions for the clients of Finnish – African markets are a notable exception capital goods exporters. here. This trend has shifted the emphasis This development is not unique to Finland, from country risk to corporate buyer credit and many other countries and ECAs have risks and also demanded the development of deployed similar schemes – a reflection both a prudent approach to corporate credit risk of the economic conditions in which we are underwriting. operating and the impressive adaptability of many ECAs. Indeed, those ECAs who report Liberalisation of ECA Policy direct lending activity to the Berne Union, Over the years, there has been a forward- together provided almost 2.5 times as much moving trend amongst ECAs towards more finance between 2009 and 2012 (collectively) flexible structures, greater innovation and a than for the same period between 2005 and more market-driven philosophy. The policy- 2008. shift towards national interest rather than The situation for banks remains national content requirements reflects the challenging. Strengthened regulations have global value-chains which underpin so much brought with them onerous KYC compliance of international trade and allow ECAs to be and capital requirements which continue to more flexible in how they support exporters. squeeze their profitability. The recovery of At the same time, the growing importance banks’ appetite for trade business is probably of ECAs should not lead to a situation more or less complete now, but with these where guardian authorities apply pressure additional burdens it is unlikely to return to to take imprudent risks or provide support its pre-crisis state any time soon. in a way which is not sustainable in the long term. It is extremely important that The role of ECAs in trade is changing ECAs manage to maintain independence Changes in the global economy have in their risk management processes, even if refocused many elements of trade their philosophy is more policy-oriented. In facilitation, including ECA business. China general the industry has becomes extremely was once one of the biggest markets for professional in this regard, which is a many Western ECAs, but as the economic positive development, due in part to the profile of the country has changed so has encouragement and peer benchmarking of our business. Many ECAs now have much forums like the Berne Union. more limited exposure on China, while at the same time, Chinese companies investing Growth of the private insurance in China and abroad are now more likely to market make use of international sources of finance, Today, the private credit and political risk including partnering with ECAs and private insurance market has more similarities 14 insurers. These changes are also reflected than dissimilarities with the ECA world. Berne Union 2018
The growth in number of participants, costs of KYC make it progressively less INTRODUCTION risk appetite, capacity, and tenor from the attractive for banks to close deals with private market over the past ten years has smaller exporters and their clients. By been phenomenal. This is a really positive fostering a closer relationship with their development for the industry as a whole. smaller exporters and providing more of a It demonstrates well the solid foundations consulting role, ECAs help to educate the of our industry and the resilience and exporters and the borrowers and at the same profitability of the products, across cycles. time can transfer some of the KYC challenge Private market participation and from banks. reinsurance provides increased capacity This is one of the challenges we all hope for ECAs, making room for new business technology can help to tackle. However, for which may otherwise be unviable due the time being ECAs in particular need to be to concentration in certain industries or especially creative in their support for these countries, even with support from other clients. ECAs. I am proud to say that Finnvera, and other Nordic ECAs, have been some of the Promoting regulation and standards pioneers in making serious use of reinsurance For 40 years the OECD Arrangement has to increase capacity, both from the private been the de facto framework governing market and from other ECAs, spurred by the various national policies on export credit relatively small size of our countries. activities. It is notable for its longevity and At the same time, the growth of the comprehensive guidelines on all aspects of private market brings fresh expertise and export credit support. The Arrangement professionalism to our industry and there is continues to adjust to accommodate the lots that we can learn. In credit rating, for changing landscape of export support and example, ECAs are usually very adept at there are ongoing and active discussions understanding sovereign and bank risk, but the private market often has an edge on corporate risk, and here we can learn and Technology is the great benefit from their experience and tools. disruptor. All areas of
Technology is both a driver of finance and trade are now change and response to it responding to the new Technology is the great disruptor. All areas environment of instant of finance and trade are now responding to the new environment of instant global global communication. communication. It is a challenge, especially for the smallest (or largest) companies, to manage the level of investment this requires. which are providing fruitful input to the But at the same time, we are all constantly challenges arising. However, under the improving our processes, our data, our shifting gravity of world trade, and with efficiency and our flexibility. We are learning many emerging economies now becoming here from each other all the time, and this some of the largest exporters, the OECD will continue to be one of the biggest drivers consensus becomes less and less universal, of innovation for the foreseeable future. and consequently less and less relevant. The Arrangement is becoming less SMEs are of paramount importance relevant, simply due to the fact that the Small and medium sized enterprises are majority of financing is now happening essential to global supply chains and an outside of its remit. But that fact does indispensable component of world trade not detract from its importance nor and employment. They also offer the biggest its achievements. The objective of the growth prospect for banks and insurers in Arrangement has been to obtain a level terms of new clients. playing field, where exporters compete on However, the particular nature of export the quality and price of goods and not on transactions for small and medium sized the terms of financing offered. enterprises continues to be challenging This objective is shared by the for financiers and commercial providers of International Working Group on Export export support. Small ticket transactions, Credits (IWG), a multi-party collaborative combined with falling margins and increasing initiative created by China and the USA 15 Berne Union 2018
in 2012. The work of the IWG is extremely business and because of this ordinary people important in order to achieve a global level will eventually demand that politicians playing field, without which national trade take action on such issues. If, through our competition can easily escalate to trade industry we can be a tool to promote more wars. It is still early in the process for this environmentally friendly solutions, then we new initiative, and only time will tell how should. successful it will be, but certainly it will gain a lot from the groundwork already laid by the Berne Union promotes best practice, OECD over the previous 40 years. professionalism and even friendship It was almost 20 years ago that I attended The Berne Union creates a my first ever Berne Union meeting – The constructive professional forum for Spring General Meeting in London, in the whole industry April 1999. I remember being surprised at Institutions like the OECD and IWG are the length of the agenda – a full week of incredibly important to our industry. They meetings – and unsure what to expect. Any help to mediate competitive tendencies, initial apprehensions disappeared quickly promote constructive engagement and however, and I could happily say that even ensure sound principles are adhered to. In from that first meeting I had learned more a similar manner, the Berne Union, through than I ever expected – more indeed than at our Value Statement and Guiding Principles, any other such gathering. provides a positive benchmark for the In the years which have followed, I industry and an informal commitment from have never become any less in awe of the all members to adhere to a common set of great depth of knowledge, experience and prudent standards for the industry. creativity which is regularly shared at our Outside of the formal rules governing meetings, and I can honestly say that today, parameters of rating, pricing and taking risks, 20 years later, I am still learning from our all of these forums are useful in promoting exchanges. essential industry dialogue. This process The Berne Union is unusual for an industry allows us to constantly monitor and review association, in that despite the inherent the wider context of our activities. competitiveness of the industry, the Members The climate change I observed so starkly do not shy away from openly sharing their in Rovaniemi provides a good example: technical risk underwriting knowledge, best We may benefit from climate change on practice and new initiatives. This attitude is the shores of our 188 thousand lakes in the quite special, and it is something which helps summer, when warmer weather brings a to drive the industry forward, making us taste of Mediterranean relaxation even to more progressive, more adaptive and more to a northern country like Finland. But at resilient, together. the same time this causes severe damage All things change, of course, and over 20 which will impact all industries and the real years the Berne Union itself has adapted to economy as well as the sociocultural sphere. a changing environment. We are currently Our industry is becoming increasingly better organised and better equipped sophisticated and increasingly aware of than ever. A lot of hard work has gone into these factors. Indeed, already it is common building up resources and tools to keep practice to look into environment and human us connected, both to each other and to rights conditions as part of standard project the wider industry. We have an excellent assessment. Even if industry change is online portal, creating a virtual community sometimes slow moving, it does eventually for instant reference to information and happen that these considerations evolve. communication with other Members at any Generally, unsustainable factors of any sort time; we have held webinars which attracted in the long term can lead to increased credit hundreds of participants across the globe, risks, and there is now greater awareness of all connected and sharing an experience this. without the need to travel; our data is Ultimately, climate change will impact not becoming richer and more useful, both for just the underlying environment in which we Members and others. operate, but also the way in which we do Beyond any of this, however, the personal business. Connected to this is reputation risk. connections still matter the most. Since the GFC there has been an element of I have made lasting friendships and 16 suspicion and greater public scrutiny of big solid business connections with colleagues Berne Union 2018
from all corners of the earth, through my help to propel us more smoothly in tackling INTRODUCTION time in the Berne Union. Meeting in person, the challenges and initiatives which will come sharing stories, experiences, culture and next. good humour, even outside the conference We have greatly improved our rooms, builds trust, respect and personal communications and outreach activities. The connections in a way which cannot be Berne Union is becoming much better known replaced. And from these connections each than ever before in the financial world, of us comes away with a new resource, a and our engagement with other industry guide, a support or a partner, just a phone stakeholders – the ICC export finance banks, call away. for example – gives us a vital connection to I am incredibly happy to be part of the wider industry and an opportunity to this Berne Union family, and incredibly influence this in a meaningful way. proud of what we have achieved together, I am proud and happy to see so many over the last three years when I have had members actively contributing to the work of the privilege to serve as President. From the Berne Union and give all credit for these Shanghai to Warsaw, Lisbon, Copenhagen, achievements to our successful collaboration. The Berne Union is no less than the sum of all of the Members, and I wish to thank In the coming years I have everyone I have had the pleasure to meet no doubt that the Berne and work with over the past two decades. I must give special thanks however to a few Union will continue to groups and individuals: flourish, and I am excited To all of the Elected Officials I have to see the development worked with over the past three years as President: All of the Committee Chairs and of new initiatives and new Vice Chairs, who are too many to name here; ideas from those who will Secretary Generals Vinco David and Kai Preugschat, The Secretariat, an incredibly now pick up the mantle of able and energetic team who provide the leadership. glue which binds together the Union; The Chairs, and participants, of the new Task Forces, which have been instrumental in achieving the momentum I hoped for during Belgrade, Kilifi and now Paris, I think we have my Presidency: Maëlia Dufour, Jim Cruse built admirably upon the foundations our and Simon Foister. And of course, also my predecessors laid almost 85 years previously, two Vice Presidents, Mandisi Nkuhlu and in Berne, Switzerland. Michal Ron, with whom I have shared the I was given the fortunate honour of Presidential Platform and together conceived presiding over an exceptional three-year a vision for the Berne Union, as well as my term as President and it is fair to say that this predecessor Dan Riordan who initiated has provided a great opportunity to achieve many of the reforms completed during my real progress. I have approached this with Presidency. a spirit of momentum and completion, and In the coming years I have no doubt that the achievements I am most proud of, really the Berne Union will continue to flourish, and had their seeds almost since the start of my I am excited to see the development of new Berne Union career. initiatives and new ideas from those who will The unification of the Berne Union and now pick up the mantle of leadership. Prague Club increased our membership I hope that we will continue to look from around 50, to over 80 organisations. outward and to build our influence and But this is not a numerical achievement. The engagement within our own industry and additional depth of experience and culture, that of our partners, clients and other fresh perspectives and new energy have stakeholders. This is the way that we can made us a much richer group than before. effect real, lasting and positive change. But The revision of the Berne Union Statutes after all, I remember that it is people who was no less daunting a task, but has helped really make change, and in that spirit I hope to create a framework of better and fairer most of all that we will always keep our representation, increased transparency and close-knit community of family, friendship more effective decision making, which will and professional partnerships. 17 Bolder together
XL is now part of the AXA family. A bold new force of expertise and leading technology to reinvent solutions for even your most complex risks. So if you’re moving your business and the world forward, we’re the partner to help you do it.
Find out more on axaxl.com AXA, the AXA and XL logos are trademarks of AXA SA or its affiliates. AXA XL is a division of AXA Group providing products and services through four business groups: AXA XL Insurance, AXA XL Reinsurance, AXA XL Art & Lifestyle and AXA XL Risk Consulting © 2018 AXA SA or its affiliates. Berne Union 2018
Bpifrance, the French Investment INTRODUCTION Bank and Export Credit Agency for Entrepreneurs
By Nicolas Dufourcq, CEO, Bpifrance
With global ambitions and a bold strategy to improve the competitiveness of French business, Bpifrance looks forward to an exciting and promising 2019.
Bpifrance is a state-owned, privately run embrace globalization. bank, created in December 2012 by bringing Our mission is together Oseo, CDC Entreprises, the FSI and ‘serving the future’ FSI Regions. and we must stay at Since then, our 2,500 employees have the cutting edge of become essential partners for companies innovation and get and investors financing businesses, at every our many initiatives stage of their development, through loans, to come to fruition as guarantees or equity investments. We have we are key players in also developed a large range of extra- world trade growth. financial services (training, consultancy, Nicolas Dufourcq Today, Bpifrance networking) to help entrepreneurs meet their has the great pleasure to welcome all the challenges (innovation, export, digitization…). members of the Berne Union to France On the 1st of January 2017, the French and to organize, for the very first time, its government enlarged the power of Bpifrance General Assembly. More than three hundred by assigning it the role of the national members from all over the world have Export Credit Agency providing insurance come to Paris. As a proof of our faith in the to large companies, but especially for the benefits of globalization, Bruno Le Maire, the thousands of French small and medium sized French Minister of Economy and Finance, companies that need to go abroad, so much joins us for an introductory keynote. more ! Bringing together all the members of the Gathering their strength and expertise, the Berne Union, our global network of industry bank and ECA has become a successful ‘one- practitioners representing 84 members stop-shop’ : as a banker we provide solutions from 74 countries, in a single place is a for entrepreneurs to accomplish their dreams unique opportunity to express our combined in France and abroad too. As an ECA we ambition to improve international trade. make them feel secure about the payments Altogether we already support 13% of cross- related to their export contracts. We can border trade, we can be proud of that! offer a continuum of financing solutions for We need to continually adapt our entrepreneurs throughout their companies’ solutions to international rules and complete lifecycle that allow them to think production structures, to globalization, bigger, go further and go abroad. to digitization… Everything is constantly Last year, more than 80,000 businesses changing, but this is the name of the game of all sizes received more than € 24 billion in and we are all struggling to win it. investments, loans and guarantees, and € 20 Our global ambition is to understand billion of credit insurance has been delivered and serve our clients better, to stimulate to our exporters. the rejuvenation of the French economy, to Deeply rooted with its 48 branches across raise the productivity and competitiveness France, Bpifrance has a powerful ‘client- of French businesses, and boost our national oriented’ network that is strongly weaving its economy on the international market. way into every corner of the country to give Our future is exciting and promising, a hand to all entrepreneurs, from start-ups anticipating more growth in new business 19 to large companies, and encourage them to in 2019. Berne Union 2018 Berne Union 2018
2Data and Statistics Berne Union 2018
Berne Union: Totals Key ST – Short Term Trade Credit MLT – Medium/Long Term Export Credit INV – Investment Insurance Note: all figures in USD millions, unless otherwise stated.
New commitments each year by business line Total exposure at end of each period
Ϯ͕ϱϬϬ͕ϬϬϬ ϯ͕ϬϬϬ͕ϬϬϬ
Ϯ͕ϱϬϬ͕ϬϬϬ Ϯ͕ϬϬϬ͕ϬϬϬ
Ϯ͕ϬϬϬ͕ϬϬϬ ϭ͕ϱϬϬ͕ϬϬϬ
ϭ͕ϱϬϬ͕ϬϬϬ
ϭ͕ϬϬϬ͕ϬϬϬ ϭ͕ϬϬϬ͕ϬϬϬ
ϱϬϬ͕ϬϬϬ ϱϬϬ͕ϬϬϬ
Ϭ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϴ,ϭ
Claims paid during each year Claims paid during H1 year
ϳ͕ϬϬϬ ϯ͕ϬϬϬ
ϲ͕ϬϬϬ Ϯ͕ϱϬϬ
ϱ͕ϬϬϬ Ϯ͕ϬϬϬ
ϰ͕ϬϬϬ ϭ͕ϱϬϬ ϯ͕ϬϬϬ
ϭ͕ϬϬϬ Ϯ͕ϬϬϬ
ϱϬϬ ϭ͕ϬϬϬ
Ϭ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ,ϭ ϮϬϭϱ,ϭ ϮϬϭϲ,ϭ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ
Recoveries during each year Recoveries during H1 year
ϳ͕ϬϬϬ ϯ͕ϬϬϬ
ϲ͕ϬϬϬ Ϯ͕ϱϬϬ
ϱ͕ϬϬϬ Ϯ͕ϬϬϬ
ϰ͕ϬϬϬ ϭ͕ϱϬϬ ϯ͕ϬϬϬ
ϭ͕ϬϬϬ Ϯ͕ϬϬϬ
ϭ͕ϬϬϬ ϱϬϬ 22 Ϭ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ,ϭ ϮϬϭϱ,ϭ ϮϬϭϲ,ϭ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ Berne Union 2018
Public and private share of total exposure in Public and private share of exposure in DATA AND STATISTICS each reporting period 2018 H1, per business line
ϯ͕ϬϬϬ͕ϬϬϬ ^ddƌĂĚĞƌĞĚŝƚ ϭϬϬй Ϯ͕ϱϬϬ͕ϬϬϬ ϴϬй
ϲϬй Ϯ͕ϬϬϬ͕ϬϬϬ ϱϭй ϰϬй
ϭ͕ϱϬϬ͕ϬϬϬ ϮϬй
Ϭй ϭ͕ϬϬϬ͕ϬϬϬ
ϰϵй /Ŷ ϱϬϬ͕ϬϬϬ /ŶǀĞƐƚŵĞŶƚ/ŶƐƵƌĂŶĐĞ D>d džƉŽƌƚƌĞĚŝƚ
Ϭ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϴ,ϭ WƌŝǀĂƚĞ WƵďůŝĐ WƵďůŝĐ WƌŝǀĂƚĞ
Short-Term Export Credit Insurance
Public and private share of outstanding ST credit limits at period end exposure at period end
ϭ͕ϴϬϬ͕ϬϬϬ ϭϬϬй
ϭ͕ϲϬϬ͕ϬϬϬ ϵϬй E͘ŵĞƌŝĐĂ ϭ͕ϰϬϬ͕ϬϬϬ ϴϬй
ϭ͕ϮϬϬ͕ϬϬϬ ϳϬй ϲϬй ϭ͕ϬϬϬ͕ϬϬϬ ϱϬй ϴϬϬ͕ϬϬϬ ϰϬй ϲϬϬ͕ϬϬϬ D E ϯϬй
ϰϬϬ͕ϬϬϬ ϮϬй
ϮϬϬ͕ϬϬϬ ϭϬй
Ϭ Ϭй ŵ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϴ,ϭ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ ƌĞĚŝƚ>ŝŵŝƚƐĂƚLJĞĂƌĞŶĚ ĚũƵƐƚŵĞŶƚ WƌŝǀĂƚĞ WƵďůŝĐ
ST claims paid each full year ST claims paid in fi rst half of year
ϯ͕ϬϬϬ ϭ͕ϰϬϬ
ϰϯйzd Ϯ͕ϱϬϬ ϭ͕ϮϬϬ ϯϵйzd
ϭ͕ϬϬϬ ϰϳйzd Ϯ͕ϬϬϬ ϯϱйzd
ϴϬϬ ϭ͕ϱϬϬ
ϲϬϬ
ϭ͕ϬϬϬ ϰϬϬ
ϱϬϬ ϮϬϬ
Ϭ Ͳ 23 ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ,ϭ ϮϬϭϱ,ϭ ϮϬϭϲ,ϭ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ Berne Union 2018
ST recoveries each full year ST recoveries made in first half of year
ϳϬϬ ϯϱϬ ϯϵйzd
ϲϬϬ ϯϬϬ
ϱϬϬ ϮϱϬ
ϰϬϬ ϮϬϬ ϰϯйzd
ϰϳйzd ϯϱйzd ϯϬϬ ϭϱϬ
ϮϬϬ ϭϬϬ
ϭϬϬ ϱϬ
Ϭ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ,ϭ ϮϬϭϱ,ϭ ϮϬϭϲ,ϭ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ
Regional share of ST commitments at Regional share of ST claims paid in 2018 H1, ECA and private 2018 H1, ECA and private ͕ ϯϬй ϱϬй
Ϯϱй ϰϬй ϮϬй
ϯϬй ϭϱй
ϮϬй ϭϬй
ϭϬй ϱй
Ϭй Ϭй ƵƌŽƉĞ ^͘Θ ͘ƐŝĂ E͘ŵĞƌŝĐĂ >Ăƚŵ D E ^͘^͘ĨƌŝĐĂ t͘Θ͘ƐŝĂ ^͘Θ ͘ƐŝĂ ƵƌŽƉĞ E͘ŵĞƌŝĐĂ D E ^͘^͘ĨƌŝĐĂ >Ăƚŵ t͘Θ͘ƐŝĂ WƌŝǀĂƚĞ WƌŝǀĂƚĞ
Private ST claims and commitments ECA ST claims and commitments by region 2018 H1 by region 2018 H1
ƵƌŽƉĞ ƵƌŽƉĞ ϳϬй ϯϱй ϲϬй ϯϬй ϱϬй Ϯϱй t͘Θ͘ƐŝĂ E͘ŵĞƌŝĐĂ t͘Θ͘ƐŝĂ E͘ŵĞƌŝĐĂ ϰϬй ϮϬй ϯϬй ϭϱй ϮϬй ϭϬй ϭϬй ϱй Ϭй Ϭй
^͘Θ ͘ƐŝĂ D E ^͘Θ ͘ƐŝĂ D E
^͘^͘ĨƌŝĐĂ >Ăƚŵ ^͘^͘ĨƌŝĐĂ >Ăƚŵ
24 ŽŵŵŝƚŵĞŶƚƐ^ŚĂƌĞ ůĂŝŵƐ^ŚĂƌĞ ŽŵŵŝƚŵĞŶƚƐ^ŚĂƌĞ ůĂŝŵƐ^ŚĂƌĞ Berne Union 2018 DATA AND STATISTICS
Top countries private Top countries ECA commitments 2018 H1 commitments 2018 H1
' ZDEz ϭϬй hE/d ^dd ^ ϭϰй
hE/d ^dd ^ ,/E ϴй ϱй &ZE ,KE' /d>z E ydϱ E ydϱ ϱй ϭϮй ϭϳй Top countries ST private Top countries ST ECA claims paid 2018 H1 claims paid 2018 H1 ^͘^͘ĨƌŝĐĂ >Ăƚ hE/d ^dd ^ ϭϮй ŽŵŵŝƚŵĞŶƚƐ^ŚĂƌĞ ůĂŝŵƐ hE/d ϭϭй Ϯϴй Z ^dK&tKZ> /E/ ϱϬй ϱй ,/E ϭϱй h͘͘ E ydϱ ϱй ϭϱй ,/E E ydϱ ϰй ϭϯй hE/d ^dd ^ h͘͘ ϭϬй /d>z ϱй ϱй 25 Berne Union 2018 Medium/Long-Term Export Credit Insurance New MLT commitments during each year New MLT commitments during half year Ő ϭϴϬ͕ϬϬϬ ϴϬ͕ϬϬϬ ϰϱйzd ϱϭйzd ϭϲϬ͕ϬϬϬ ϰϱйzd ϳϬ͕ϬϬϬ ϭϰϬ͕ϬϬϬ ϲϬ͕ϬϬϬ ϰϮйzd ϭϮϬ͕ϬϬϬ ϱϬ͕ϬϬϬ ϭϬϬ͕ϬϬϬ ϰϬ͕ϬϬϬ ϴϬ͕ϬϬϬ ϯϬ͕ϬϬϬ ϲϬ͕ϬϬϬ ϮϬ͕ϬϬϬ ϰϬ͕ϬϬϬ ϮϬ͕ϬϬϬ ϭϬ͕ϬϬϬ Ϭ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ,ϭ ϮϬϭϱ,ϭ ϮϬϭϲ,ϭ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ ^ŽǀĞƌĞŝŐŶ KƚŚĞƌWƵďůŝĐ ĂŶŬƐ ŽƌƉŽƌĂƚĞƐ WƌŽũĞĐƚƐ hŶƐƉĞĐŝĨŝĞĚ ^ŽǀĞƌĞŝŐŶ KƚŚĞƌWƵďůŝĐ ĂŶŬƐ ŽƌƉŽƌĂƚĞƐ WƌŽũĞĐƚƐ hŶƐƉĞĐŝĨŝĞĚ MLT exposure at period end Regional share of new MLT commitments in 2018 H1 OECD and other ECAs ϳϬϬ͕ϬϬϬ ϯϬй ϲϬϬ͕ϬϬϬ Ϯϱй ϱϬϬ͕ϬϬϬ ϮϬй ϰϬϬ͕ϬϬϬ ϭϱй ϯϬϬ͕ϬϬϬ ϭϬй ϮϬϬ͕ϬϬϬ ϱй ϭϬϬ͕ϬϬϬ Ϭ Ϭй ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϴ,ϭ ^͘Θ ͘ƐŝĂ D E ƵƌŽƉĞ E͘ŵĞƌŝĐĂ >Ăƚŵ ^͘^͘ĨƌŝĐĂ t͘Θ͘ƐŝĂ K KƚŚĞƌƐ /ŶƐƵƌĂŶĐĞ >ĞŶĚŝŶŐ New MLT commitments by region 2018 H1 Top countries new MLT commitments 2018 H1 LJŐ ^͘Θ ͘ƐŝĂ Ϯϱй ϭϱй hE/d ^dd ^ E͘ŵĞƌŝĐĂ ϮϬй ϭϬй ϭϬй t͘Θ͘ƐŝĂ D E ϭϱй E'> ^, ϱй ϳй ϭϬй YdZ ϱй ϳй Ϭй Z ^dK&tKZ> ϰϳй Ϭй ' ZDEz ϱй ^͘^͘ĨƌŝĐĂ ƵƌŽƉĞ 'zWd ϱй E ydϱ ϭϵй 26 >Ăƚŵ E͘ŵĞƌŝĐĂ Berne Union 2018 MLT claims paid each year MLT claims paid each half year DATA AND STATISTICS ϯ͕ϱϬϬ ϭ͕ϲϬϬ ϰϵйzd ϭ͕ϰϬϬ ϯ͕ϬϬϬ ϰϭйzd ϭ͕ϮϬϬ Ϯ͕ϱϬϬ ϰϳйzd ϭ͕ϬϬϬ Ϯϳйzd Ϯ͕ϬϬϬ ϴϬϬ ϭ͕ϱϬϬ ϲϬϬ ϭ͕ϬϬϬ ϰϬϬ ϱϬϬ ϮϬϬ Ϭ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ,ϭ ϮϬϭϱ,ϭ ϮϬϭϲ,ϭ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ WŽůŝƚŝĐĂů ŽŵŵĞƌĐŝĂů EŽŶͲWĞƌĨŽƌŵŝŶŐ>ŽĂŶ WŽůŝƚŝĐĂů ŽŵŵĞƌĐŝĂů EŽŶͲWĞƌĨŽƌŵŝŶŐ>ŽĂŶ MLT recoveries each year MLT recoveries during half year ϲ͕ϬϬϬ Ϯ͕ϱϬϬ ϰϯйzd ϱ͕ϬϬϬ Ϯ͕ϬϬϬ ϰ͕ϬϬϬ ϭ͕ϱϬϬ ϱϲйzd ϯ͕ϬϬϬ ϰϵйzd ϰϱйzd ϭ͕ϬϬϬ Ϯ͕ϬϬϬ ϱϬϬ ϭ͕ϬϬϬ Ϭ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ,ϭ ϮϬϭϱ,ϭ ϮϬϭϲ,ϭ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ WŽůŝƚŝĐĂů ŽŵŵĞƌĐŝĂů >ĞŶĚŝŶŐ WŽůŝƚŝĐĂů ŽŵŵĞƌĐŝĂů >ĞŶĚŝŶŐ Commercial and political MLT claims paid by region 2018 H1 Top countries MLT claims paid 2018 H1 ƵƌŽƉĞ ϴϬй ϳϬй ϲϬй t͘Θ͘ƐŝĂ ϱϬй E͘ŵĞƌŝĐĂ s E h > ϰϬй ϭϳй ϯϬй Z ^dK&tKZ> ϮϬй Ϯϴй ϭϬй Ϭй dhZ< z ϭϰй ^͘Θ ͘ƐŝĂ D E E ydϱ /E/ ϭϴй ϴй E ^͘^͘ĨƌŝĐĂ >Ăƚŵ Zh^^/ ϴй ϳй ŽŵŵĞƌĐŝĂů WŽůŝƚŝĐĂů 27 Berne Union 2018 Investment Insurance, Maximum limit of liability at each period Sovereign Obligations ϯϱϬ͕ϬϬϬ and Other Cross- ϯϬϬ͕ϬϬϬ Border Trade ϮϱϬ͕ϬϬϬ ϮϬϬ͕ϬϬϬ ϭϱϬ͕ϬϬϬ ϭϬϬ͕ϬϬϬ ϱϬ͕ϬϬϬ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϴ,ϭ /ŶǀĞƐƚŵĞŶƚŝŶƐƵƌĂŶĐĞ KƚŚĞƌĐƌŽƐƐͲďŽƌĚĞƌŝŶƐƵƌĂŶĐĞ ^ƚĂƚĞŽďůŝŐĂƚŝŽŶŝŶƐƵƌĂŶĐĞ New cover provided each year New cover provided H1 each year ϭϮϬ͕ϬϬϬ ϲϬ͕ϬϬϬ ϭϬϬ͕ϬϬϬ ϱϬ͕ϬϬϬ ϴϬ͕ϬϬϬ ϰϬ͕ϬϬϬ ϲϬ͕ϬϬϬ ϯϬ͕ϬϬϬ ϰϬ͕ϬϬϬ ϮϬ͕ϬϬϬ ϮϬ͕ϬϬϬ ϭϬ͕ϬϬϬ Ϭ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ,ϭ ϮϬϭϱ,ϭ ϮϬϭϲ,ϭ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ /ŶǀĞƐƚŵĞŶƚŝŶƐƵƌĂŶĐĞ KƚŚĞƌĐƌŽƐƐͲďŽƌĚĞƌŝŶƐƵƌĂŶĐĞ ^ƚĂƚĞŽďůŝŐĂƚŝŽŶŝŶƐƵƌĂŶĐĞ /ŶǀĞƐƚŵĞŶƚŝŶƐƵƌĂŶĐĞ KƚŚĞƌĐƌŽƐƐͲďŽƌĚĞƌŝŶƐƵƌĂŶĐĞ ^ƚĂƚĞŽďůŝŐĂƚŝŽŶŝŶƐƵƌĂŶĐĞ Claims paid during each full year Claims paid during each H1 year ϲϬϬ ϮϱϬ ϱϬϬ ϮϬϬ ϰϬϬ ϭϱϬ ϯϬϬ ϭϬϬ ϮϬϬ ϱϬ ϭϬϬ Ϭ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ,ϭ ϮϬϭϱ,ϭ ϮϬϭϲ,ϭ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ 28 WŽůŝƚŝĐĂůsŝŽůĞŶĐĞ dƌĂŶƐĨĞƌ džƉƌŽƉƌŝĂƚŝŽŶ ƌĞĂĐŚŽĨŽŶƚƌĂĐƚ KƚŚĞƌ WŽůŝƚŝĐĂůsŝŽůĞŶĐĞ dƌĂŶƐĨĞƌ džƉƌŽƉƌŝĂƚŝŽŶ ƌĞĂĐŚŽĨŽŶƚƌĂĐƚ KƚŚĞƌ Berne Union 2018 Recoveries during each full year Recoveries during each H1 year DATA AND STATISTICS ϭϮϬ ϲϬ ϭϬϬ ϱϬ ϴϬ ϰϬ ϲϬ ϯϬ ϰϬ ϮϬ ϮϬ ϭϬ Ϭ Ϭ ϮϬϭϯ ϮϬϭϰ ϮϬϭϱ ϮϬϭϲ ϮϬϭϳ ϮϬϭϰ,ϭ ϮϬϭϱ,ϭ ϮϬϭϲ,ϭ ϮϬϭϳ,ϭ ϮϬϭϴ,ϭ WŽůŝƚŝĐĂůsŝŽůĞŶĐĞ dƌĂŶƐĨĞƌ džƉƌŽƉƌŝĂƚŝŽŶ ƌĞĂĐŚŽĨŽŶƚƌĂĐƚ KƚŚĞƌ WŽůŝƚŝĐĂůsŝŽůĞŶĐĞ dƌĂŶƐĨĞƌ džƉƌŽƉƌŝĂƚŝŽŶ ƌĞĂĐŚŽĨŽŶƚƌĂĐƚ KƚŚĞƌ Regional share of new investment insurance Regional share of new sovereign and other cross- cover provided in 2018 H1, by provider border trade covered in 2018 H1, by provider ϰϬй ϯϬй ϯϱй Ϯϱй ϯϬй ϮϬй Ϯϱй ϮϬй ϭϱй ϭϱй ϭϬй ϭϬй ϱй ϱй Ϭй Ϭй ^͘Θ ͘ƐŝĂ ƵƌŽƉĞ >Ăƚŵ D E ^͘^͘ĨƌŝĐĂ E͘ŵĞƌŝĐĂ t͘Θ͘ƐŝĂ ^͘Θ ͘ƐŝĂ ^͘^͘ĨƌŝĐĂ t͘Θ͘ƐŝĂ ƵƌŽƉĞ D E >Ăƚŵ E͘ŵĞƌŝĐĂ DƵůƚŝůĂƚĞƌĂů WƌŝǀĂƚĞ DƵůƚŝůĂƚĞƌĂů WƌŝǀĂƚĞ New investment insurance cover provided New sovereign and other cross-border trade by region 2018 H1 insured by region 2018 H1 ƵƌŽƉĞ ƵƌŽƉĞ ϯϱй Ϯϱй ϯϬй ϮϬй Ϯϱй t͘Θ͘ƐŝĂ E͘ŵĞƌŝĐĂ t͘Θ͘ƐŝĂ E͘ŵĞƌŝĐĂ ϮϬй ϭϱй ϭϱй ϭϬй ϭϬй ϱй ϱй Ϭй Ϭй ^͘Θ ͘ƐŝĂ D E ^͘Θ ͘ƐŝĂ D E ^͘^͘ĨƌŝĐĂ >Ăƚŵ ^͘^͘ĨƌŝĐĂ >Ăƚŵ 29 Berne Union 2018 Top countries new Top countries insured for new sovereign and investment cover 2018 H1 other cross-boarder trade 2018 H1 ,/E dhZ< z ϭϬй ϴй Z/:E s/ dED ϴй ϵй ,/E ϴй Z ^dK&tKZ> /EKE ^/ ϰϱй ϳй Z ^dK&tKZ> ϰϳй hE/d ^dd ^ Z/> ϳй ϱй ^ Z/ DKD/Yh E ydϱ ϱй ϱй ϭϵй E ydϱ ϭϳй Top countries investment insurance Top countries sovereign and other claims paid 2018 H1 cross-border claims paid 2018 H1 Z ^dK& tKZ> ϲй Z ^dK&tKZ> ϭϲй d,/>E ϭϱй KE'K ϰй ,/E ,Z/E ϰй ϰϬй d,/KW/ ϰϵй Z/:E ϴй h 30 Berne Union 2018 2018 H1 in review: business DATA AND STATISTICS is stable, but risks are high and unpredictable By Paul Heaney, associate director, Berne Union The landscape of international trade is currently stable, but fragile – precarious even – and subject to a rising number of threats. In a September press release, the WTO The effects are not downgraded its forecast for world trade so far visible in data growth to 3.9% for 2018, slowing to 3.7% in from Berne Union 2019.i This is lower than the 4.4% predicted in Members’ business, April, but still falls within the expected range and the direct impact set earlier in the year. Following the positive to the world economy upswing seen in the last couple of years, this is probably not so new deterioration is attributed to a ‘loss of severe as it might be, momentum’ in export orders, amid increasing in the short term at economic uncertainty. least. Despite this, Paul Heaney Added to the decline in overall growth, the situation is highly there is an increasing divergence in concerning for Members. performance across regions, encompassing Perhaps more troublesome than the both developed and developing economies, formal trade barriers, is the implicit shift with North America and emerging Asia away from multilateralism which they outperforming Europe and Japan.ii These represent. Even when negotiations ultimately imbalances give a hint of wider economic end amicably – as with the new USMCA uncertainty and the general sentiment trade deal – the repeated waves of high- from international economists appears to stakes gambling on trade relations imparts be of a shifting balance towards downside a hugely negative impact on business risks which could derail the current benign confidence and supply chain integrity. It is situation. this destabilisation of international norms Financial volatility arising from policy- which is most concerning for investors and normalisation in advanced economies and the uncertainty which this generates is likely imbalances in some emerging markets is an to have the biggest impact on world trade. important factor. Movements in commodity Despite this, Berne Union Members’ prices and their contribution to inflationary business has generally been performing well pressures on resource-dependent countries over the last period. will also play a role. But commentators are In 2018 H1, Berne Union Members: united in identifying the biggest threat to zissued aggregate credit limits up to USD the current status quo as coming from the 1.64 trillion in support of short term trade escalating tensions in international trade credit which we have seen playing out since the zinsured USD 88.8 billion of new medium / start of the year. long-term exports It is impossible to approach any discussion zprovided cover for USD 18.6 billion of new of current trends in global trade without foreign investments addressing the on-going trade war between Compared to data from the previous the US, China and other major trading reporting period, growth is more or less flat partners. This has seen the world’s biggest for trade-related business. Aggregate credit economies engaged in a tit-for-tat exchange limits outstanding at the half year mark are of actual or threatened import tariffs, just around 1% lower than at 2017 year end, but targeting everything from basic commodities how this will translate into insured turnover by 31 to high-tech goods and auto parts. the close of 2018 is difficult to predict. Berne Union 2018 New MLT commitments compare to USD Western Europe on the other hand, fell by 89.4 billion for the same period in 2017 – 60% relative to the previous period, and again, just a fraction of a percentage lower. account for only 6% of total in 2018 H1, Investment insurance is significantly relative to 28% of new business; a positive lower than the USD 38.9 billion reported indication of stability. The largest claims for 2017 H1. This difference – over USD 20 volumes were recorded for obligors located billion – while impossible to ignore, is not in Turkey and Venezuela, and in both cases primarily the result of a change in underlying relating predominantly to MLT business. business conditions, but rather the result of Recoveries continue to be strong, significantly revised reporting practice from especially in MLT business (85% of total) and one large member.iii USD 1.58 billion was collected by Members The share of total exposure remains evenly overall in the first half of the year. Argentina, distributed between public and private Iraq and Pakistan all saw notable volumes, members, with these claiming 51% and 49% again almost entirely for MLT transactions. respectively. Private members dominate short term business, issuing 72% of all new Short term trade credit insurance credit limits, while this is reversed in the case zRepayment terms < 12 months. Often 30, of MLT business, where public institutions 60, 90 days report 86% of all new business. Private zProtect against non-payment/protracted members cover 18% of total investments. default of buyer Short term trade accounts for around zCover credit risks and sometimes political 90% of total Berne Union business, by value. risks too Any analysis of the total portfolio therefore zIncludes whole turnover, multi-buyer and mostly reflects that business line. That single risk policies said, the highest volume of new business zTypically involves shipments of overall in 2018 came from: Western Europe commodities and consumer goods (28%), North America (11%), East Asia (10%), Southern Europe (9%), Eastern Europe (7%), Short term business has been quite stable South East Asia (6%) and South America in the first half of 2018. USD 1.64 billion of (5%). Despite claiming the overall highest aggregate credit limits were outstanding at share, all of the European markets saw the end of 2018 H1, just a little bit lower than lower new commitments than in the last at the end of H2, 2017. period (ranging from -3% to -7%), while the A number of reporting changes in the Americas and Asia saw comparable positive second half of 2017 resulted in a significant increases. boost to Berne Union Short Term figures. The biggest % growth of new business Firstly, the introduction of a more precise was in North Africa – up 18% from the definition of ‘new commitments’ in short previous period – and the biggest decline term business, provided a boost to year was in Central Africa – down 39%. end exposure, as some member adjusted their reporting to coincide with aggregate Overall claims trends credit limits, rather than utilisation. At the Members paid out claims of USD 2.65 billion same time one member began to report in total, with 47% attributable to short term data at group level – a positive addition to business and 53% coming from medium / our market coverage, but also providing a long-term transactions. This is just marginally distortion relative to previous years. lower than first the first half of 2017 and While these factors significantly alter the in line with previous years in terms of overall short term figures, they are of course distribution amongst the business lines. The not related to any trend in the underlying high claims period we entered in 2015 does business. For this reason, the graphs in the not appear to have ended yet, and judging statistics section of this publication given from previous form, we may record a fourth an indication of the expected ‘real change’ consecutive year of > USD 6 billion total through 2017 and 2017. We estimate that claims when final figures for 2018 H2 are around 5 of the 27% year on year increase in revealed. insured turnover recorded in 2017 was due to Naturally, the markets with biggest improvements in the business, and the rest exposure also tend to provide the most due to these reporting changes. Likewise, claims: North America, for example, 13 of the 66% increased commitments at 32 providing 11% of each in 2018 H1. Claims in year end are estimated to have a substantial Berne Union 2018 cause. These changes were elaborated upon DATA AND STATISTICS in greater detail in our Spring Data Summary, Change in share of turnover covered public and published in March.iv private 2016 The amount of real trade transactions supported is measured as turnover insured. This data is only reported by Members at year end, and as such we are unable to measure the total amount of new short term business at the half year mark. The credit limits outstanding give us an indication of the direction of travel, but without also knowing utilisation ratio and the length of the credit terms, the most we can say for now is that business appears to be comparable to 2017. Public and private short term business Both public and private members of the Berne Union provide short term trade credit insurance. The overall profile of business supported can be quite different in each total. However, this is low considering private case. Historically, the split between public members claim 60% of business in those and private share has been relatively even, markets. but more recently the private market has The top countries for claims in short term taken the lead. Over the past 3 years the business also reflect the differences already private members’ share of turnover has noted between the profile of public and increased from 53% to 60%. Credit limits private business: at 2018 H1 show 72% in favour of private Private members paid claims in the UK, members.v China, USA, Italy and the U.A.E, collectively accounting from 67% of their total. ECAs top New commitments by region 5 claims meanwhile were for the USA, Cuba, Overall, almost 50% of short term India, U.A.E and China, accounting for just commitments are for trade to buyers in 37% of the total. European countries. South and East Asia account for a further 20%, North America Medium / long-term export credits 12%, Latin America 7% and MENA a bit less provided by ECAs than 5.5%. Sub-Saharan Africa and West / zTenors > 12 months. Often 3, 5, 7 and up to Central Asia amount to less than 2% each. 10 years Private market commitments are highly zFor ECAs, must include some level of concentrated in Europe (60% of total). The national content or interest top 5 countries (Germany, USA, France, UK zProtects against commercial credit risks and Italy) account for 35% of total, and the and political risks top 10 over 50%. zPolicies often issued to banks and financial ECA business meanwhile is more widely institutions as credit enhancement disbursed, with top commitments (31%) for zTypically involves capital goods exports, South and East Asia. The USA is the top transport / energy / infrastructure obligor country with 14% of total business, zOECD sets minimum pricing for followed by China, Hong Kong, India and signatories to the ‘Arrangement’ Germany. Top 10 countries for ECA business amount to just over 40% of total. ECA members of the Berne Union’s MLT committee made USD 69.7 billion of new Claims data commitments in the first half of 2018. The Members paid claims of USD 1.24 billion in majority of this (60%) was in respect of total for short term policies in the first half of corporate obligors. This is an impressive leap 2018. 70% of this came from ECAs, who paid up from the 52% recorded in 2017 and set a higher claims than their private counterparts new peak for percentage of commitments in all regions, except for South and East to corporates, in continuation of a long Asia, where private members paid 56% of progressive trend over the past 10 years 33 Berne Union 2018 at least. Sovereign (23%) and other public for the first half of 2017 and are on course (10%) obligors make up the majority of the to exceed the average for the 5 year period, remainder. if similar results are achieved for the second 24% of new MLT commitments from half of the year. ECAs were to risks located in South and East Asia (Bangladesh, India, Indonesia and ECA reinsurance China). Just behind this at 23% the next ECAs reported a significant increase of 8% highest destination was MENA (Qatar. Egypt, in outward reinsured commitments, relative U.A.E, Kuwait and Iraq). Europe and North to the last reporting period at the end of America make up the second band at 18% 2017. This takes the reinsured portion of total and 14% respectively, while Latin America exposure up to 11%. At the same time, the and Sub-Saharan Africa attracted 8% of new total inward reinsurance commitments barely commitments each. increased at all. This means that some USD 50 billion of outward reinsurance (62% of the MLT claims and recoveries total reinsured amount) has been ceded to ECAs paid USD 1.24 billion in claims during private insurers, reinsurers and multilaterals. the first half of 2018. This is 10% lower than This data seems to confirm the trend over for the same period in 2017, but still on the past 5 – 10 years of increasing use of the high side in comparison to H1 results, private market capacity from ECAs. historically. Claims for the full year have been descending since a high peak in 2015 (seen Investment insurance, sovereign non- also in other areas of the business), so this honouring and private PRI relative decrease for the first half of the year zBU ’INV’ committee houses several is a positive indicator for a further decline in different business lines, including: 1. the year end results. traditional investment insurance (INVI), 2. Commercial triggers were the cause Private ‘PRI’ (INVO) and 3. sovereign non- of 72% of MLT claims and political risks payment (INVS) the remainder. This is lower than the 89% zPRI includes private market MLT recorded in the course of 2017, and could commercial non-payment risks indicate a resurgence of political risk factors zTraditional Investment Insurance offers for this business, but it would be sensible to some of the longest tenors – up to 20 see how results for the second half of the years, protecting against: political violence, year appear before drawing any conclusions. expropriation, contract frustration, In any case, we can note that political claims wrongful calling of bonds, business paid for 2018 H1 were at their highest than interruption and currency inconvertibility for any H1 period since 2014. MLT business was the source of several The maximum limit of liability for all three lines of the top countries noted for the overall reported to the Berne Union’s INV Committee portfolio, and referenced above – e.g. grew to USD 303.60 billion, around a 2% Venezuela and Turkey. The next highest increase on results at the end of 2017. 53% claims were paid in India, Canada, Russia, of the portfolio is for traditional investment Spain, Brazil, Chile, Singapore and the USA. insurance exposure (INVI), 16% for sovereign Together the top 10 accounts for 72% of non honouring (INVs) and 31% for ‘other total claims paid for the period. Commercial cross border risks’ (INVO): predominantly claims were quite evenly distributed, while encompassing the private members’ PRI political claims were strongly concentrated in business, providing medium/long-term cover Latin America (Venezuela). for credit and political risks on private obligors MLT recoveries have performed well in in cross-border trade transactions. the past several years and 2018 has shown In terms of new cover provided, INVS a promising start in this regard too. At USD saw similar levels to 2017 H1, INVO saw 1.30 billion, recoveries were 28% higher than increase of around 16% on the same period Overall, Berne Union Members’ business is in a relatively stable position. Over the past 18 months we have seen a return to growth in MLT business and a 34 maintenance in volumes of new business in most areas. Berne Union 2018 in 2017. INVI, as previously noted, dropped spot for new commitments in the first half DATA AND STATISTICS considerably, from USD 38.89 billion in 2017 of 2018, with 21% of the total. The highest H1 to USD 18.59 in 2018 H1. This significant levels of ECA and multilateral sovereign change was due to a previous reporting non-honouring business (as well as healthy practice by one large member which resulted commitments from private insurers) helps to in renewed contracts counting several times keep Sub-Saharan Africa in a close second towards the tally for new business over the place, with 20% of total new commitments. tenor of cover, without any corresponding The largest part of multilateral business increase in total exposure. New investment comes from a USD 1.1 billion commitment insurance business now reported by all to Azerbaijan. Other top countries for this members, reflects only new commitments period: Turkey, China, USA and Mozambique. and not renewals, giving the appearance of a large drop in business. However, as we INV claims data see from the exposure figure, the drop does Similar to the other areas of business, not reflect a change in underlying business claims appear to be stable, and are lower written. than the comparable period in 2017, but still Despite these figures, there is some historically relatively high. anecdotal suggestion that demand for Only a handful of claims (USD 8.8 million) investment insurance has decreased came from pure political sources, relating in recent years. Traditional investment to investment insurance. The vast majority insurance is purely a risk mitigation product of claims paid arose from INVO and INVS and therefore has different drivers to non- transactions: USD 156.1 predominantly paid payment insurance. It is used to cover equity by private insurers, who account for most investments and loans for projects in high of this business. The largest claims were in political risk countries. Noted decreases in Ethiopia, Brazil, Azerbaijan, China and the flows of FDI and portfolio investments, as Congo. Political claims came from Bahrain, well as a fall-off in project finance loans could Ukraine and Thailand. provide some explanation for this. Conclusion New Investment Cover Overall, Berne Union Members’ business is in New Investment Insurance commitments were a relatively stable position. Over the past 18 distributed as follows: South and East Asia months we have seen a return to growth in (35%), Europe (22% – mostly Eastern Europe), MLT business and a maintenance in volumes Latin America (13%), MENA and Sub-Saharan of new business in most areas. Claims are still Africa (11% each), North America (5%) and relatively high across members and business West and Central Asia (4%). lines, but these seem to have plateaued The distribution for private insurers and into a kind of new normal, and appear to be public institutions (ECA and multilateral) manageable. is notably different here. Private insurers’ We are in a busy environment for risks, business allocates 30% to Asia, and 27% and for many of these downside impact is as to Europe. Over 50% of ECAs’ portfolio unpredictable of as the outcome – think of, meanwhile goes to Asia, and less than 20% ‘Brexit’, for one example. The key to stable to Europe. ECAs allocate around twice as growth seems to be maintaining confidence much to MENA (14% vs. 7%). Multilaterals in the sustainability of global trade and value committed the most (80% of total) to Sub- chains. Hopefully prevailing politics with guide Saharan Africa. The overall split between us in the right direction to achieve this. public and private providers of investment insurance is 55% and 45% respectively. Notes Overall, top countries for new investment i https://www.wto.org/english/news_e/pres18_e/ cover in the first half of 2018 were: China, pr822_e.htm Vietnam, Indonesia, Brazil and Serbia. ii https://www.imf.org/en/Publications/WEO/ Issues/2018/07/02/world-economic-outlook- update-july-2018 INVO and INVS commitments iii For further details, see the investment insurance The INVO and INVS categories are section of this paper iv http://cdn.berneunion.org/assets/Images/2f873b47- dominated by the private insurers’ business eb33-4945-acd0-b81ee394888c.pdf – 76% of the total. New business is much v Note that this will not equate to a 72% share of more evenly geographically distributed, but turnover insured at the end of the year, due to difference in utilisation and term of credit limits here, again South and East Asia takes the top issued by the different providers 35 Berne Union 2018 Berne Union 2018 3 Expert analysis GO FOR YOUR DEAL WE’LL DEAL WITH THE RISKS Count on Credendo to cover your risks worldwide. We are a European trade credit insurance group, present across the continent, offering a wide range of fl exible solutions: > Belgian export credit agency services; > Whole turnover short-term credit insurance; > Single risk; > Excess of loss; > Top-up cover; > Surety; > Financial guarantees; > Reinsurance. Discover our tailor-made solutions and worldwide risk analyses on www.credendo.com Turning uncertainties into opportunities 02CRE17022_Wave3_AD_Port_297x210_UK_fc3mm.indd 1 31/05/2018 16:43 Berne Union 2018 Introducing new members EXPERT ANALYSIS BANDEX, Dominican Republic The National Bank for Exports (BANDEX) dedicated to supporting exports, we must be from the Dominican Republic has a long able to assist the export sector managing its track record in the financial system, including foreign currency funds in the most accessible its previous stages as the National Housing and fastest way possible. Bank (Banco Nacional de la Vivienda), 3. Eximbank: One of BANDEX’s roles, as created in 1962 and the National Bank for it is the case with most of the world’s export Promoting Housing and Production (Banco banks, must be to finance importers from Nacional de Fomento de la Vivienda y la other countries so that it is easier for them Producción) created in 2004. In both phases, to buy from exporting companies in our it made important contributions to the country. development of the Dominican Republic, 4. Risk Coverage: The main products and especially serving as a regulatory agency of services of the Bank should be focused on the then nascent housing market. covering the risks incurred by companies With the creation of BANDEX on July 17, when exporting, as highlighted in the 2015, our country took an important step in National Development Strategy. complying with the National Development Strategy (END) 2030. The END objectives Organizational Philosophy include “the promotion of exports Purpose development on the basis of competitive Support the country’s export capability insertion in international markets” and the by offering financial services to contribute creation of “institutions and programs that to the development and well-being of the facilitate access to competitive and timely country. export financing, including export credit insurances”. Mission The new Strategic Plan 2017-2022 is based To offer financial products and services to on the conviction that BANDEX should help strengthen the export sector, through become a world-class bank focused on four innovative and specialized alternatives (4) main elements: to boost the exportable supply of the 1. Global Vision: BANDEX must “think Dominican Republic. globally and act locally”. That is, we must be able to understand international trends Vision in global banking, in export banking and To be one of the 10 best export banks in the in international trade in general and take world, following the practices of the OECD advantage of them to boost the country’s and positioning ourselves as allies of our exportable supply. clients offering specialized and competitive 2. Foreign Exchange (FX): As a bank financial services. BANDEX’s mission is to offer financial products and services to help strengthen the export sector, through innovative and specialized alternatives to boost the exportable supply of the Dominican Republic. 39 Berne Union 2018 Values an Eximbank and an issuer of export credit z We are passionate about working insurance. However, such products and and providing the best service to our services will be developed in the near future customers. as the bank is still completing its process of z We are committed to everything we do in transformation from being a financial entity pursuit of excellence. previously devoted to funding housing and z We demonstrate honesty and solvency in production in general to its current role as a all our actions. bank specialized in financing exporters and z We innovate with reliable products and their potential buyers. services. BANDEX applied to Berne Union’s Prague Club precisely to be able to Some Facts about BANDEX receive technical assistance from its peers Current products and be part of this incredible exchange z Financing (loans and credit lines) for space in order to help us navigate the exporters steep learning curve associated with such z Certificates of Deposit for investors a transformation. We were thrilled to be accepted in December 2017 and have Products to be developed been enjoying the advantages of such z Customized financing for different membership ever since. exporters’ needs Our goal is to learn as much as we can z International factoring from our colleagues from the Prague Club z Guarantees and other ECAs at BU and are extremely z Export Credit Insurance grateful to the ones who have been already z Letters of Credit in contact with us. In particular, we are z Foreign Exchange (FX) grateful to BANCOMEXT and CESCE not only for supporting our membership Future work with application but also for the time they have z Women exporters devoted to sharing their best practices with z Environment-friendly financing for BANDEX. In fact, BANDEX and BANCOMEXT exporters already signed an MOU in April 2018 during z Exporting start-ups a week-long work visit from BANDEX to BANCOMEXT and we hope to do so with Priority sectors other ECAs in the near future. Although BANDEX’s mandate is to support Additionally, BANCOMEXT’s all exporters and their suppliers, our Business assistance has been very helpful for Plan calls for prioritizing the following sectors establishing BANDEX’s second tier of the Dominican economy due to their mechanism. This allows us to reach the importance and their potential for increasing entire country channeling resources our country’s participation in international through other financial intermediaries to markets. BANDEX’s priority sectors are: multiple sector and activities that are part of the Dominican export chain. And, after 1. Manufacture the Berne Union’s General Assembly this 2. Mining and metallurgical year, we will be visiting CESCE again to learn 3. Agriculture and livestock more about their work with export credit 4. Tourism insurance. 5. Transportation and logistical services In sum, BANDEX appreciates enormously 6. Construction services its relationship with the Berne Union and gives thanks for the follow up and support Small size received from its Secretariat, the Prague 91 employees and one office (regional Club team, as well as the different members representation offices to be created in the the Bank has been in contact such as near future in the Northern, Eastern and BANCOMEXT, CESCE, US EximBank, EDC Southern regions of the Dominican Republic) and NZECO, among others. Thanks to the support shown by all of you and the new Our Relationship with the collaborative relationships we will establish at Berne Union this General Assembly, BANDEX will continue BANDEX is the Dominican Republic’s official developing the tools that will convert it into a 40 ECA and, as such, it will function as both world-class exports bank. Berne Union 2018 Introducing new members EXPERT ANALYSIS ECGC Zimbabwe Export Credit Guarantee Corporation of Zimbabwe (Pvt) Ltd (ECGC Z) Background Our vision ECGC Z is Zimbabwe’s national export Our vision is to be the leading Export and credit agency which was formed in 1999 and Trade Growth Enabler. started its operations in 2000. It is a wholly owned subsidiary of the Reserve Bank of Our mission Zimbabwe and is a registered and licensed Our mission is to release national business insurance company under the regulatory potential through credit insurance, authority of the Insurance and Pensions guarantees, general insurance and advisory Commission (IPEC). services. ECGC Z reinsures all its business with local reinsurers for the commercial risk and ECGC Z’s objectives underwrites the political risk on account of z To promote & facilitate Zimbabwe’s the government of Zimbabwe. domestic & international trade; In Zimbabwe, ECGC Z is a member of z To provide specialized skills in risk the Insurance Council of Zimbabwe (ICZ) assessment; and internationally is a member of the z To provide business information on Berne Union Prague Club to which it was domestic & foreign risks; readmitted in 2017. It is significant to note z To enhance businesses’ competitive that membership to the Prague Club by positions; ECGC Z will contribute to sound principles z To assist new traders & SMEs access in export credit insurance underwriting finance from Banks. through attending forums/workshops for professional exchange, sharing of expertise ECGC Z’s products and networking with members within the In order to meet its objectives, ECGC Z has organization. two core operational units, with the Insurance Division providing insurance products and ECGC Z is Zimbabwe’s national export credit agency which was formed in 1999 and started its operations in 2000. It is a wholly owned subsidiary of the Reserve Bank of Zimbabwe and is a registered and licensed insurance company under the regulatory authority of the Insurance and Pensions Commission (IPEC). 41 Berne Union 2018 the Guarantees Division providing bonds & economic growth and important catalysts guarantees. for the turnaround of the economy. However, The insurance policies, which the Division MSMEs continue to face challenges in provides, fall into two categories namely, accessing finance from formal banking Export Credit Insurance and Domestic Credit institutions largely due to perceived high risk Insurance. and lack of requisite collateral. It is against this background that the Export Credit Insurance scheme was established to facilitate access Policies issued can be structured to suit the specific needs of the exporter in the case of export credit insurance. Options available include: Standard EPIP Policy, SME Exporter’s Policy, Specific Shipment Policy, Specific Globalisation, the Buyer Policy and Consignment Stocks Policy. adoption of free market Exports being covered under the export policies by a number credit insurance policies include minerals and agricultural products to various export of countries and the destinations such as countries within the increasingly important SADC region and Europe. role played by regional Domestic Credit Insurance trading blocs are changing ECGC Z provides the domestic credit the nature and complexion insurance policy to cover local transactions where terms of payments are on credit of export credit risks. basis. The policy can be structured to suit the specific needs of the insured. Options available include: Standard DPIP Policy, Specific Accounts Policy, and Consumer to formal finance by MSMEs with bankable Credit Insurance. projects. The Credit Guarantee Scheme is provided Bonds & Guarantees to the Lender as an alternative form of The guarantees division provides a wide security which may be called upon by the range of bonds and guarantees to different Lender if the Borrower fails to meet their sectors of the Zimbabwean economy, which repayment obligations. include the construction industry, shipping Globalisation, the adoption of free and forwarding agents, the financial services market policies by a number of countries sector and suppliers of different goods and and the increasingly important role played commodities. The various products include: by regional trading blocs are changing the customs bonds, construction bonds and nature and complexion of export credit guarantees and pre and post shipment risks. The structure, composition and finance guarantees. direction of Zimbabwe’s exports are also undergoing changes and the changes are Micro, Small and Medium Enterprises likely to intensify in the years to come. Credit Guarantee Scheme ECGC Z believes that it will be able to ECGC Z recently introduced a Micro, Small make significant contribution to the and Medium Enterprises Credit Guarantee growth, development and diversification of Scheme (MSME CGS) following a realization Zimbabwe’s exports in the period of great that MSMEs are foundational for inclusive changes that lies before us. Policies issued can be structured to suit the specific needs of the exporter in the case of export credit insurance. Options available include: Standard EPIP Policy, SME Exporter’s Policy, Specific Shipment Policy, 42 Specific Buyer Policy and Consignment Stocks Policy. Berne Union 2018 Prague Club EXPERT ANALYSIS 25th Anniversary By Malcolm Stephens, CB, (former president and secretary general) and Lennart Skarp (former deputy secretary general and secretary general) of the Berne Union The ‘Prague Club’ is the fourth and most and encourage them recent committee of the Berne Union, in some technical formally established at the Berne Union matters. Spring Meeting in Warsaw in May 2016. It I happily agreed differs from the other 3 committees – Short and we met in, I think, Term, Medium/Long-Term and Investment 1993. There were Insurance – by having as its special focus about eight people at not a specific business line, but rather a the meeting and we developmental objective: to supporting small, sat around the table in regionally focused and newly establishing the small conference insurers of export credit as they build their Malcolm Stephens room of the BU office, business, capacity and technical expertise. at the time located 2018 marks the 25th anniversary of the in Queen Anne’s first meeting of the group which would Gate in London. ultimately become the ‘Prague Club’, Representatives providing an auspicious occasion to look came from the Czech back on the genesis and transformation Republic, Slovak of the group and celebrate its unique Republic, Poland and contribution to the culture of the Berne Hungary plus Axel Union, now and throughout the years. (although this was his final appearance as he As Berne Union Secretary General Lennart Skarp sadly died while on a between 1992 and 1998, and before this, visit to Central Europe President from 1989 – 1992, Malcolm shortly after the meeting). I am not even sure Stephens was instrumental in the that any minutes were taken. establishment of the nascent Prague I remember being hugely impressed not Club and remembers fondly the humble only by the keenness and determination beginnings of what was known at the time of those present but also by the technical simply as ‘The Secretary General’s Group’. knowledge some of them had already acquired – and mostly from scratch – in a “The Birth of the Prague Club” very short period. The birth – or, perhaps, it should be the One of the earliest messages I wanted to conception – of the Prague Club was a very stress was that there was no single or perfect informal discussion I had in 1992 or 1993 structure for an ECA. BU members varied with the distinguished Swedish commercial greatly not only in size and structure and diplomat and former head of EKN, Axel status, but also in the range of facilities and Wallén. He had been having a series of products which they offered. It was essential meetings and discussions in East and Central to develop a system which, more than Europe with some of the embryo Export anything else, fitted in with the individual Credit Agencies (ECAs) as part, I think, of a situation in the country concerned, especially Swedish Government Technical Assistance taking account not only of the nature of Programme and he asked if I would be willing the goods and services being exported but to host a meeting with some of the people also of the structure, activities and skills and concerned. The original idea was a one-off expertise of the banks. meeting both to explain the work of the We quickly agreed that we would have 43 Berne Union (BU) and also to try to help another meeting and this rapidly developed Berne Union 2018 into a pattern of regular meetings and, would sum up and give what I thought was later, into these meetings being hosted by the answer and the reasons/background the participating institutions in their home for it. This often then gave rise to further country. discussion and questions. While these developments were taking We also quickly developed a system place, I had very much in mind the concern for participants reporting their business of a number of existing BU Members that the levels. We also introduced some Country BU was already large and that an influx of discussions where I could draw on any recent a number of new members over a relatively discussions and IMF and IBRD comments at short period – especially of new institutions recent BU meetings. with little experience and few resources – I reported on these meetings at each BU would not be generally welcomed. I was also meeting and on the general progress and concerned that some existing BU members direction of the Secretary General’s group. I might not be happy that any BU funds also sought and got approval for attendance were being spent on non-members. I knew, at BU Workshops to be offered to members therefore, that BU membership should not of the Group. This offer was rapidly taken up in any way be promised and that I should on a regular basis. concentrate on helping on technical matters I was – and remain – astonished at the as best I could, mostly in my own time. rapid progress most of the institutions So the meetings were simply called “The made and the sheer determination of Secretary General’s Group”. A little later, I those involved. However, it was soon clear managed to get some modest funding from that there were significant and growing the UK Aid Programme and the EBRD. differences in the volume of business and Given these constraints, I also wanted the range of products being offered by the meetings to be essentially practical and to institutions. These partly reflected the concentrate on issues which were of most position and policies of their Governments immediate importance and relevance to the but were also reflective of the drive and institutions themselves. priorities of these running the institutions. So the general structure quickly evolved Inevitably, our meetings became more of the Meeting agendas concentrating on the structured and a little more formal. Their participating institutions sending in questions duration also increased. The complexity of on any subject of their choice. We developed the questions and issues discussed grew. the format that the institution which had Importantly, too, the number of countries asked the question would introduce it by and institutions increased significantly with explaining the background and why they Romania, Slovenia, the Baltic States and were asking it and what they thought the Croatia joining. It was a little time before best answer was. All of the other institutions any institution from outside Europe joined. present would then give their comments and Overall, I was very pleased that our meetings suggested answers. After some discussion, I became more and more like BU Meetings. Timeline, Facts and figures Formally Became 4th First meeting in established as Committee of Prague in 1993 ‘Prague Club’ the Berne Union in 2001 in 2016 38 Members: 34 ECAs, 3 Multilaterals; 1 Private – from 35 countries US$ 40.2 bn in new business | US$ 360 mn claims paid in 2017 First Chair: Pavol Parízek, EGAP | Current Chair: Danilo Ćirković, AOFI 3 New members in 2018: ECGC Z, Enterprise Singapore, BANDEX 44 Berne Union 2018 Over time, the meetings also EXPERT ANALYSIS demonstrated what I believe to be an It is very pleasing that important point, namely that where new the Secretary-General’s and small institutions face challenges and Group has morphed into problems, it is very often the case that the best source of advice and help will not be the Prague Club and also the older, larger and most experienced that so many members of institutions but, rather, the newer and smaller ECAs which will often have faced or the group have become be facing exactly the same challenges and full BU members. It is also problems. The older and bigger ECAs may impressive that current well have forgotten what it is really like to be small and short of technical and professional Prague Club membership expertise and experience! is so large and so varied. In those early days, Pavol Parízek (ably assisted by Karol Simsa) and EGAP were in some ways the leading light of the group and the institution whose business and range Lennart Skarp (Deputy Secretary General of facilities and products had grown most 2000 – 2011 and Secretary General in 2011 – rapidly. But I also recall the rather larger 2012) recalls the positive transformation he than life Romanian Eximbank President, observed as the Prague Club matured and Petru Rares, telling me over a cup of tea at solidified to a more formal, professional and a meeting in Bucharest that he had fixed a expansive entity. meeting with someone he thought I would like to meet. So off we went in his official car “The Grown-Up Prague Club” after the meeting ended and I found myself The Prague Club (PC) was an important in the Presidential palace and ushered in for part of my job at the Berne Union in 2000 a meeting with the Romanian President with – 2012, as Deputy Secretary General until TV cameras recording the event! At an early 2011, in the last year as Secretary General. My meeting in London, I remember taking the observations below are based, in particular, group to the oldest restaurant in London and on experiences from attending several PC introducing them to the delights of steak and meetings in that period. kidney pudding. My observations are focused on three The meetings also began to copy the BU main points, the Prague Club’s wider scope meetings in having some social programme over the years, its firmer status, and its and an excursion which, importantly, helped members’ professionalism. greatly to develop a corporate spirit and closer personal relationships. Wider scope It is very pleasing that the Secretary- Starting from only 4 institutions at its General’s Group has morphed into the outset in the early 1990s, the membership Prague Club and also that so many members of the Prague Club has grown impressively of the group have become full BU members. and steadily over the past two-and-a-half It is also impressive that current Prague Club decades, to 38 members in 2018. This, in membership is so large and so varied. itself, speaks great success! Personally, I am very pleased and very Perhaps even more significant than proud to have been one of the founders or the sheer numbers is the geographical midwives of the Prague Club and I am sure transformation that the Prague Club has that Axel Wallén would be amazed at the undergone in this rather limited time frame, results of his telephone conversation with me from being an exclusively Central/East of some twenty five years ago. European body (or more precisely Northern Central/East European), today spanning Malcolm Stephens, CB widely over the globe, to Thailand in the east, In addition to his roles as President and New Zealand in south-east, Botswana in the later, Secretary General, of the Berne Union, south, even to the Dominican Republic in Malcolm Stephens was previously the Chief the west. Only a third of today’s members Executive of ECGD (now UKEF) and most are located in Central/Eastern Europe or the recently, Group Chairman of International former Soviet Union. Financial Consulting As I have seen for myself, this 45 Berne Union 2018 geographical expansion has clearly served to enrich the exchanges and networking Starting from only 4 within the community of Prague Club institutions at its outset members, rather than setting up some sort in the early 1990s, the of cultural or other barriers between them. An Omani view on underwriting or claims membership of the handling matters is not always the same as Prague Club has grown an Estonian one, but may be eye-opening to both of them. And, as a very personal impressively and steadily example of the inter-cultural encounters over the past two-and- in the Prague Club, I vividly remember the a-half decades, to 38 two thrilled Thai Eximbank ladies who had their first (and last?) go in the noble art of members in 2018. This, in snowball war at the end of the PC meeting in itself, speaks great success! Bratislava in, I think, 2008. Firmer status the later years of my involvement with the As “the meetings of the Berne Union Prague Club, that if blindfolded I would most Secretary General with new and emerging probably have been unable to tell whether ECAs”, as described by Malcolm Stephens, I was listening to a discussion in the Prague become regular and had been so for some Club or in the Berne Union! years, it appeared to many that they should This progressively higher level of be given a firmer and clearer status. professionalism seems to me to be First, the name “the Prague Club” was somewhat linked to the large proportion of adopted in the early 2000’s, and it was also relatively young pweople even in leading agreed to elect a Chairperson of the Club, positions in many of the Prague Club to steer its meetings and to take care – in member institutions. A dynamic, eager to cooperation with the Berne Union Secretariat learn, can-do attitude – more evident than – of issues emerging between meetings. among mature Berne Union members – is, in Second, a few years later, the first formal my view, an important element behind the Statutes of the Prague Club were crafted and success of the Prague Club and its members adopted by its membership. (and also a reason why I found it particularly Third, as recently as in 2016, the Prague stimulating to attend meetings in the Prague Club was re-defined as one of four Berne Club!). Union Committees, thus opening the doors Not surprisingly, more than ten Prague for PC members to take part in Berne Union Club members have over the years been AGMs and Spring Meetings, while until then voted in as full members of the Berne Union, they had been invited only to attend certain starting with EGAP (Czech Republic), KUKE specialist meetings in the Berne Union. (Poland), MEHIB, – now Exim Hungary – and SEC – now SID – (Slovenia), already in the Professionalism late 1990s, the latest example being EXIAR Last, the most important development of (Russia) in 2018. them all, namely the remarkable increase My warmest congratulations to the Prague in the level of professionalism displayed by Club at 25, grown-up and youthful! Prague Club members. Malcolm Stephens noted how impressed he was with the Lennart Skarp technical knowledge that some members As noted above, Lennart Skarp served as had acquired already by the mid-1990s, and Deputy Secretary General 2000 – 2011 and I can confirm that the build-up of expertise Secretary General in 2011 – 2012. Prior to this was no less impressive in the 2000s. Thus, he was a Country Risk Analyst and later Risk it struck me several times, especially in Director at EKN, between 1982 and 2000. A dynamic, eager to learn, can-do attitude – more evident than among mature Berne Union members – is, in my view, an important element behind the success of 46 the Prague Club and its members. Berne Union 2018 Radical innovation in EXPERT ANALYSIS trade finance By Christophe Spoerry, co-founder of the Euler Hermes Digital Agency Digital technologies and innovations are and catalysts such as reshaping the world of trade finance. While big data, blockchain, less prominent than in business to consumer cheap funding and the (B2C) financial services, our industry and cloud revolutionise our its customers’ expectations are changing industry, who will still dramatically – at a rapid pace never buy credit insurance experienced before. and under what Credit insurer Euler Hermes established conditions? its own internal, yet independent, digital agency (EHDA) two years ago to further its Time to throw in Christophe Spoerry digital leadership in tomorrow’s global B2B the towel? data and financial services. In considering Quite the opposite – it’s a time of immense three key questions about the ‘most likely’ opportunity! As a global market and thought radical changes expected in the next five leader, Euler Hermes is actively pursuing years, EHDA has created a snapshot of their deep digital transformations to digitise its potential impact and how their combined core offering, enhance its business model effects could further accelerate change: and exploit the many new opportunities that lie ahead. 1. Big data & artificial intelligence (AI) To capture the opportunities, when Euler Our clients increasingly have access to Hermes created the EHDA in July 2015, it significant volumes of meaningful data, was initially an innovation lab co-founded by analytics and artificial intelligence. What will Louis Carbonnier and Christophe Spoerry, the role of a trade insurer be if clients can reporting to the group CEO. EHDA works self-insure and make informed credit risk closely with a wide range of leading experts decisions themselves? inside and outside the business, particularly focusing on exceptionally innovative start- 2. Platformisation of B2B commerce ups in data science, blockchain and supply In a world where a significant proportion chain finance. EHDA’s central aim is to of goods and services are traded on digital reinvent trade finance and position Euler platforms, including electronic contracts, Hermes as the digital leader in B2B trade and e-invoices, smart payments, and full access financial services. to the behavioral patterns of all buyers and sellers across the platform, where does credit EHDA was founded with three core risk insurance come into the picture? What missions: about other trade-related risks? 1. Monitor and evaluate trends, especially new technologies and potential disruptions 3. Product substitution 2. Establish a competence center with Trade finance is on the verge of the expertise in digital transformation exponential change many other sectors – 3. Create an incubator for digital mobile phones, media and transport – have innovation and experimentation already faced. After years of limited innovation Over the past two years, EHDA has begun in trade finance instruments, slow adoption of identifying promising new opportunities invoicing networks and sluggish supply chain – including new technologies, services, progress, a new door is opening to a future processes and partnerships – that will help full of creative financial solution substitute shape the future of credit insurance and the products. When game-changing technologies trade finance sector. 47 Berne Union 2018 As an industry, we can better serve clients Creating two-way porosity and sustain profitability by changing the way During its first year EHDA explained the we distribute and develop products, predict, fundamental concepts of credit management price and underwrite risk. Ultimately, the and insurance to hundreds of innovators. question is whether this can lead to solutions Listening to customers, we designed value serving a wider portion of B2B trade than the propositions with them and for them, current 5% of businesses leveraging credit unleashed the teams’ creativity, opened insurance? APIs into Euler Hermes assets and made Believing in reinventing existing services company data accessible in innovative while also investing in disruptive services including ‘plug and play’ data and service platforms, EHDA is forging partnerships with Getting innovators innovators. The goal: position Euler Hermes as the preferred facilitating partner, from interested in that investment to market access, for B2B fintech ecosystem was not start-ups and data platforms. To better support the global acceleration enough in itself — EHDA of Euler Hermes’ digital transformation, also had to interest the EHDA has grown rapidly with experienced broader Euler Hermes teams now in France, Hong Kong, the UK and the US. Their activities include: employee base in the z The Innovation Lab: Incubates disruptive world of innovators. ideas for trade finance, with a global network of innovators and start-up partners z The New Business Factory: Vertically ways. We also created many partnerships in scales successful experiments validated in Silicon Valley and other innovation hubs in the Innovation Lab, and transforms them countries including France, Germany, Hong into sustainable new tech-powered lines of Kong, Sweden, the UK and the US. Providing business in partnership with Euler Hermes’ the foundations of a scalable platform for business units innovation accelerated positive porosity z Spinoffs: Vertically scales selected within the trade credit ecosystem. successful experiments validated in the Getting innovators interested in that Innovation Lab, to enable them grow ecosystem was not enough in itself — EHDA with the support of leading external also had to interest the broader Euler entrepreneurs Hermes employee base in the world of z The Data Lab: Leverages artificial innovators. The founding Digital Agency intelligence and advanced data science; team three people acted as translators and identifies new data sources to improve interpreters; adding scalability was key to Euler Hermes’ grading, underwriting and maximising the number of ideas tested and marketing activity to interacting meaningfully with the external z Digital Culture: Fosters digital world. A raft of proof of concepts (PoCs) and transformation and awareness across the prototypes, largely in the US and Western company. Europe, rapidly materialised. But behind the scenes was a greater story … a deep-rooted How does Euler Hermes attract relationship being created between the world innovators? of innovators which is key to Euler Hermes’ It took EHDA just 12 months to build the platform for innovation. foundations for a sustainable innovation platform by creating two-way porosity From EHDA to Euler Hermes between the world of credit insurance and One on hand, the EHDA platform for the ecosystems of innovation. While the trade innovation provides several services finance industry could be seen to traditionally which are relatively standard in corporate operate in something of a vacuum, Euler innovation labs and start-up studios. These Hermes views its industry as a great include deciphering market trends and ecosystem, full of opportunities. EHDA’s first technology shifts, connecting with innovator priority, therefore, was to create porosity to networks, ideating and validating ideas let positive innovators infiltrate the ecosystem through PoCs and prototypes, and being 48 and, step-by-step, enrich and develop it. digital culture ambassadors across the Euler Berne Union 2018 Hermes overall. some change being potentially disruptive EXPERT ANALYSIS What is less common, especially in to current offerings. For instance, despite regulated industries, is the level of autonomy a widespread need for risk protection, less that Euler Hermes management gave EHDA than 5% of receivables are currently insured; from the outset. This freedom has been better, more accessible trade credit services key in driving innovation throughout the will unlock the potential of a huge market. company. It has enabled everyone to speak The same is true for receivables financing a common language, uniting the worlds of and other trade finance services. innovators and trade credit while working at EHDA is also a significant new business an innovator’s pace. lead generator. The innovation – and Building on this platform, scalability technology-first approach deepens client was created through a de-centralised, yet and partner relationships, increasing cohesive, network of internal and external both trust and mutually beneficial deals. innovators. EHDA acts as a connector In addition, bringing together the best matching tech solutions to client needs, trade finance experts and leading external bringing its trusted internal and external network together to solve problems and maximise resources. A typical EHDA initiative ... despite a widespread need for risk will mobilise an external partner start-up, a data lab, a couple of developers and an protection, less than 5% of receivables internal business owner over a few short are currently insured; better, more weeks. Accelerating this cycle of ideating, assembling, testing and disbanding creates accessible trade credit services will scalability for Euler Hermes. In exploration unlock the potential of a huge market. phases such as this, velocity is important: The same is true for receivables financing large corporates can often be tempted to revert to the deceptive security of more and other trade finance services. traditional and structured approaches. Increasingly, EHDA is becoming a ‘new business factory’. Ultimately, the objective innovators creates a unique perspective is to create and test products that support on future developments. With EHDA’s New Euler Hermes customers. Although at the Business Factory, Euler Hermes is actively beginning of this journey, the ability to bring building technologies and services that will products to market and scale them up as a power the future of trade. mini-business unit brings significant potential for the business. As a result, hundreds of What next? external innovators are now simultaneously At Euler Hermes, the creation of EHDA engaged on a wide range of initiatives, and the acceleration of the group’s digital connected with hundreds of colleagues transformation has been a rapid and intense within Euler Hermes and the wider trade journey. A large number of opportunities finance industry. This is the central ingredient have already been unlocked. The platform of the EHDA platform – a rich dynamic cycle for innovation is a significant achievement of open innovation – creating and building which will continue to open many more positive porosity in trade credit. opportunities for the business and the wider industry. However, the journey has Powering the future of trade just begun and the path is paved with The Euler Hermes platform for innovation new challenges. Sustaining a high level of transforms connections and ideas into innovation over the long term is not easy, tangible business that benefits the wider particularly on a global scale. In adjusting the trade finance industry in several ways. design of EHDA’s platform to achieve equal The porosity between trade finance and innovation at global and local levels, we innovation ecosystems fosters deeper must also continue to attract top innovators exchanges and a more forward-looking to our ecosystem and bring in tangible understanding of client needs. This in turn new business. Trade finance is undoubtedly leads to the creation of fundamentally better a fascinating ecosystem, with a virtually trade services. Better trade services are unlimited potential. We have only just begun clearly beneficial for the overall economy as to scratch the surface of what may ultimately well as the trade finance industry, despite be possible. 49 Berne Union 2018 Assessing startup potential in insurtech By Martha Notaras, partner, XL Innovate How does a venture fund decide on whether or not to invest in an insurtech startup? Marta Notaras, partner at XL Innovate, explains. The trends driving the insurtech boom are delivering better neither new nor unique to insurance. Like customer experience many other industries, it is digitization, and product selection customer experience and better data that to small business are driving innovation. Technologies such as owners. artificial intelligence, analytics, blockchain, Improved customer and Internet of Things (IoT) are new, exciting experiences for tools in the startup toolkit that can be used incumbents: However, to solve longstanding problems in creative not all companies ways -- including within insurance. But they creating new insurance Martha Notaras are just that – tools. How those tools are put experiences are to work and the solutions they are able to working against established insurers. Others, deliver is what creates value. like Slice, are licensing new platforms to At XL Innovate, a venture fund focused incumbents, so they can integrate the latest on insurtech, we use four criteria to judge innovation and enter new segments more the potential success, scale, and longevity of rapidly. Insurers continue to be focused on insurtech startups and decide whether or not risk, but are eager to change to meet the to invest: rising expectations of customers, who have 1) Team: Does the leadership team bring come to expect fast, seamless service, like convincing expertise and entrepreneurial Amazon and Netflix. drive, as well as the ability to attract Better Data: Still other companies are outstanding talent? focused on using technology to provide 2) Problem: Does the company solve a new forms of data or greater accuracy of real, current problem? existing data. Cape Analytics, for example, 3) Product: Is the startup building a uses computer vision to extract property differentiated product that will delight information from aerial imagery and provide customers? it to insurers, enabling faster and better 4) Scale: Can the company scale to underwriting. Notion uses IoT sensors to support a large customer base and generate provide insurers with risk data about insured significant revenues? homes, such as potential water leaks as Using these criteria, we’ve identified and well as insight into the attentiveness of the invested in a number of companies that homeowner. Lastly, GeoQuant, combines have the right combination of team, product machine learning with human insight to and the ability to scale. Over time, we have create political risk scores and predictions, noticed the companies making substantial helping insurers, corporations and traders to progress can be organized into three main make informed business decisions. buckets which, together, illustrate the overall When insurtech startups entered the direction of insurtech: market in force several years ago, their battle New customer experiences: One of the cry was “insurance stinks and we will disrupt most well-respected insurtech companies it!” Today, incumbent insurers are embracing today is Lemonade, which uses AI and insurtech startups, as evidenced by dozens of behavioral economics to go toe-to-toe corporate venture capital funds and hundreds with major insurers, and offer homeowners of commercial relationships. These financial 50 and renter’s insurance with a far superior and commercial partnerships illustrate the user experience. Meanwhile, Embroker is mutually beneficial impact of insurtech. TINUBU SQUARE Enabler of the Trade Credit, Surety and Trade Finance digital transformation www.tinubu.com Founded in 2000, Tinubu Square is a software vendor, enabler of the Trade Credit, Surety and Receivables Finance digital transformation. Tinubu Square enables organizations across the world to significantly reduce their exposure to risk and their financial, operational and technical costs with best-in-class technology solutions and services. Tinubu Square provides SaaS solutions and services to different businesses including credit insurers, receivables financing organizations and multinational corporations. PARIS LONDON MONTREAL NEW-YORK SINGAPORE TinubuSquare_AD_BerneUnionYearbook_2018_V5.indd 1 23/08/2018 17:34 Berne Union 2018 The economic impact of smart ledgers on world trade … and for the export credit and investment insurance industry? By James Pitcher, associate at Z.yen Group, and programme director, Distributed Futures Cryptocurrencies, for better or worse, are making almost daily headlines. Similarly, blockchain, the technology that underpins cryptocurrencies is grabbing the attention of governments, financiers, regulators, entrepreneurs and importantly, industry. Long Finance’s Distributed Futures research The econometric programme, in its report ‘The Economic approach used in the Impact Of Smart Ledgers On World report mapped trade Trade’, mapped out the trade frictions that frictions that Smart blockchain technology might be able to Ledger technology offset, especially in the realm of non-tariff might be able to and bureaucratic barriers to trade. offset, especially in the So, what are ‘Smart Ledgers’? They realm of non-tariff and are based on a combination of mutual bureaucratic barriers distributed ledgers (aka blockchain, multi- to trade and drew the James Pitcher organisational databases with a super audit following conclusions: trail) with embedded programming and z Smart Ledger technology could boost sensing, thus permitting semi-intelligent, world trade in goods by at least $35 billion autonomous transactions. Smart Ledgers dollars per annum but perhaps up to as are touted as a technology for fair play in much as $140 billion. a globalised world. There are numerous z The cost of importing a single container projects building trade systems using this could, therefore, be reduced by around technology with announcements from $46, by simplifying procedures. governments, shipping firms, large IT firms, z These potential benefits are driven and the like. by a 2.5% cost clawback assumption, Trade is bogged down with ‘frictions’ of supported by case studies on previous all kinds. Before you get to corrupt customs technological advancements in trade. One officials or arcane trade restrictions, just think such case study is containerisation, where bureaucracy and paperwork. For example, the cost savings have been calculated to regulations around anti-money laundering, be in the range of 20%. know-your-customer, and ultimate beneficial z If reduced uncertainty is, also, taken into ownership increase legal and regulatory account, using option pricing theory, the costs, uncertainties, and hassles. Previous potential gains become even larger, with a studies have reported that anti-money potential monthly net cost saving of $172 laundering can be the most significant million (or, approximately, $2 billion per impediment to trade. Smart Ledger identity annum). systems may have a large role to play here. z This would boost world GDP by $10 to $20 So how do you quantify the potential impact billion and could, potentially, add between 52 of Smart Ledger technology on international 450,000 and 900,000 to the worldwide trade? demand for labour, boosting wages and Berne Union 2018 living standards worldwide. The World was encouraging to see that the highest EXPERT ANALYSIS Bank estimates that 10.7% of the world’s percentage, over 36%, are planning trials or population still lives in extreme poverty, collaborations. This was balanced somewhat with an income below $1.90 a day (2011 by the fact that only 3.33% are presently prices). using. In one sense, these conservative results may Importance: Overall, respondents ranked appear lower than expected. Full digitisation ‘Artificial intelligence using deep learning’ of trade paperwork could raise exports as the most important and ‘Micropayment significantly. A widely referenced ratio from systems’ as the least important. the World Economic Forum estimates the Pain: Overall, and by some way, ‘defining/ costs of processing trade documents at negotiating the contract and supplier as much as a fifth of those of moving just agreements’ was seen as the most painful goods around. Interestingly, this most recent aspect, while ‘Credit information and study raises a good question about whether validation’ and ‘making and validating the dominance of the US$ in trade might payments’ were seen as the least painful. itself be a trade friction. Also, according to As Professor Mainelli summarised “Trade the World Economic Forum, reducing trade reaps economic benefits from specialisation barriers halfway to global best practice could and comparative advantage, creates expand trade by 15% and increase global prosperity, distributes success and wealth, gross domestic product (GDP) by nearly 5%. and collectively enriches all of our societies Yet, Cebr estimates benefits of between $35 and communities. Hopefully, knowing the billion and $140 billion per annum for global scale of relative benefits can help speed use of Smart Ledgers alone. adoption of some boring technology – ‘multi- In another sense, the optimistic $140 organisational databases with a super audit billion is more than might be expected. In trail’ – for the benefit of all of us.” context, Smart Ledgers are only one part of ‘full digitisation’. Future work on ‘services’ About the author in addition to ‘goods’ (focused on in the James Pitcher: Associate at Z/yen Group and report), combined with identity, payments, Programme Director, Distributed Futures. and transactions, will only increase the scale A senior securities operations manager, of benefits. consultant and advisor, with over 35 years of investment banking experience. In the last 13 The report also included the results years specifically, James has worked closely of a global survey by The International with operations management at many top- Association for Contract & Commercial tier (and other) organisations, helping them Management (IACCM) of 247 contract and review and improve operating procedures and commercial managers, focusing on the client management processes. These detailed respondents’ awareness and use of Smart insights have given him a unique perspective Ledgers, the importance they attach to and overview of operational best practice with a various aspects, and the areas of ‘pain’ that keen focus on costs, operating models, location could be relieved by the adoption of Smart strategy, operational risk and efficiency. Ledger technology. James joined Z/Yen in March 2003, within Awareness: While over 30% of the financial services practice. His background prior to this was 20 years in Investment respondents were unaware of this Banking, notably at Morgan Stanley, where he technology, and 25% were sceptical, it was an Executive Director. “Trade reaps economic benefits from specialisation and comparative advantage, creates prosperity, distributes success and wealth, and collectively enriches all of our societies and communities. Hopefully, knowing the scale of relative benefits can help speed adoption of some boring technology – ‘multi-organisational databases with a super audit trail’ – for the benefit of all of us.” 53 Berne Union 2018 Customer expectations drive digital transformation while disruptive technology enables it By Jérôme Pezé, CEO and founder, Tinubu Square The digital transformation of the insurance purpose, they want industry has moved on in the last year as more and they want insurers continue to cast aside the customs it to fit their specific that were holding them back and slowly, but requirements. surely, embrace the countless advantages Amongst that technology affords. As well as established insurers, infrastructure, services too are evolving and a as well as newer more customer-centric, value-add approach entrants to the is evident as the market becomes more market, technology global and, importantly, more competitive. is in the process of Jérôme Pezé It is the global nature of today’s being developed insurance industry that has made such a big to help ECAs and insurers deliver a digital contribution to the need for change. The response to this need. Tools that can fluctuations of the financial markets deliver engage companies, not just as ‘users’ but both risk and opportunity in equal measure. as ‘customers’, are being designed and However, as the news headlines attest on gradually implemented to provide detailed a daily basis, the volatility and uncertainty business intelligence, and, importantly, to of geo-politics make risk management measure the satisfaction levels of those that decisions, particularly in the area of trade are receiving it. credit, a challenge. These tools are intuitive and easy to use, Companies are turning their sights which means that companies can get more towards emerging markets, in Asia, Latin from them and more quickly. They prompt America and Africa particularly, and they best practice, enhance processes and help are looking to export credit agencies and to provide good governance, and this will insurers to help them manage the risk. Their reap dividends in the form of support from needs are complex and constantly changing, reinsurers. Instead of offering standard which means that standard trade credit off-the-shelf insurance solutions, ECAs and insurance products are often not fit for insurance companies will be more able to Companies are turning their sights towards emerging markets, in Asia, Latin America and Africa particularly, and they are looking to export credit agencies and insurers to help them manage the risk. Their needs are complex and constantly changing, which means that standard trade credit insurance products are often not fit for purpose, they want more and they want it to fit 54 their specific requirements Berne Union 2018 build tailor-made products and adopt a Digital transformation as I said EXPERT ANALYSIS multi-niche, customer-centric strategy which previously, however, is not a rapid process will boost policy growth. for the insurance, or any other financial This is all part-and-parcel of digital services industry. The introduction of transformation. Technology is the means by new platforms battles constantly with which insurers can revolutionise the services the continued, entrenched use of legacy that they offer and how they offer them practices, processes and technologies. with the customer front and centre of the But transformation is necessary, and is the proposition. This is a real departure from the previous approach to customer relations, and reflects a growing understanding that trade credit insurance buyers and specifiers, Technology developers like everyone else, are accustomed to the and the insurance seamless experience offered by the digital market are increasingly titans of our age, Amazon, Google and Apple. Unless insurers deliver a fast response, working hand in hand. a personalised approach and services based Collaboration is the way on high quality data, rigorous research and real-time analytics, they will get left behind forward if the needs and as more nimble competitors jump into the realities of the industry space. and most importantly, It is customers and their needs that are now driving ‘product development’. its customers, are to be Customer-centric design principles enable realised. The focus now insurers to use direct feedback to gain a better understanding of what their audience should be on emerging expects and wants, and only then, do they technologies, including build it. This is demonstrated through advanced integration and customer portals, chatbots driven by artificial intelligence and machine learning that can deep analytics, and how steer customers to the best policies based on they can be embedded current risk assessments. in the platforms that are Turning to tech being used to manage Of course, insurers and ECAs are looking trade credit globally. to their technology providers to support this shift in approach, so it has become incumbent on them to innovate, to explore most conservative, not the most expansive new, often disruptive, concepts and to investment and implementation decision that deliver. insurance companies can make right now. The list of ‘wants’ is long, from improved Which is why technology partners have an integration with the finance ecosystem and important role to play in creating solutions the facilitation of new transactions processes that ease the burden, that are seamless, - such as DLT and blockchain - through to productive, scalable and future-proof from support for multi-services, not just credit the start. insurance products, but bonding and surety, Part of this collaboration is around testing political risks, intelligence and advisory and refining how the solutions and platforms consulting, etc. can be used in situ, how they will be Technology developers and the insurance perceived by customers and being prepared market are increasingly working hand in to trial, fail and start again as well as trial and hand. Collaboration is the way forward if the succeed. It is the same approach that ECAs needs and realities of the industry and most and insurers are taking in the introduction of importantly, its customers, are to be realised. their own insurance products. Getting it right, The focus now should be on emerging not making do, is now paramount. technologies, including advanced integration A case in point is EDC (Export and deep analytics, and how they can be Development Canada), the export credit embedded in the platforms that are being agency, which we work with in partnership. used to manage trade credit globally. EDC had high expectations of us being able 55 Berne Union 2018 to bring cutting edge technologies with of the next steps to knowledge sharing in a predictable outcomes and benefits to its business environment. This can be a daunting business and cost structures. In 2015 the prospect for insurers, but if new toolsets to company launched Select Credit Insurance use those technologies are available directly (SCI), which was able to offer Canadian from trade credit management platforms companies export credit insurance policies that are already familiar, and they provide on select foreign buyers through an online functionality to assist with integration by portal in just a few minutes. This was in many parties involved in trade transactions, comparison to a 15-day offline process adoption will be easier and faster. previously and the objective was achieved. When it comes to advanced analytics, That example, and there are many others, leading developers in the field are already would not have been possible without deploying algorithms that have enabled collaboration, but equally it was enabled by tens of millions of trade credit management new technology which brings a level of high decisions to be made by companies, and value functionality through existing trade they can expect that tighter integration credit management platforms. of advanced analytics will be an ongoing The tools now at the disposal of feature of platforms in the future. In addition, software developers are designed to customers will be able to take advantage of help them improve their decision-making smart APIs that address the ever-increasing processes, to respond to the new challenges need for fast integration of assets, analytics and opportunities emerging with the and data demands for rapid connectivity and digitalization of the supply chain and trade guaranteed success. finance, and to integrate with their extended It’s still relatively early in the digital ecosystem, not just locally but across the transformation lifecycle for the financial world. The focus has to be on how ECAs and services industry. It is now accepted that insurers can optimize their capabilities in this change is necessary, and acknowledgement new customer-centric environment. of this was vital. Where once there was To ensure success, the insurance industry, suspicion that the larger players would which is known for its conservatism, lose out to the agility of the newer market will need to be open-minded about the entrants, we now know that, in fact, both are benefits of blockchain, for example, still trying to understand and harness the or the externalization of data to the tools and technology innovations that are distributed ledger, powerful data security, needed to drive long-term customer loyalty cryptocurrency implications, automation and engagement. An open-minded approach and multiparty workflows. These are all and an acceptance that these innovations functionalities that are crucial to digital can only be of benefit is what is needed transformation. In the same way that now to drive forward and bring about the customers share information on a personal transformation that customers not only want, level and information sharing over the but deserve from their insurance providers. Internet has become commonplace, the launch of data sharing through DLTs is one www.tinubu.com Where once there was suspicion that the larger players would lose out to the agility of the newer market entrants, we now know that, in fact, both are still trying to understand and harness the tools and technology innovations that are needed to drive long-term customer loyalty and engagement. An open-minded approach and an acceptance that these innovations can only be of benefit is what is needed now to drive forward and bring about the transformation that customers not only want, but deserve from their 56 insurance providers. Sponsored editorial Berne Union 2018 Building a digital EXPERT ANALYSIS future for short-term credit insurance Chris Hall, senior underwriter – global financial risks, Liberty Specialty Markets and former head of risk distribution at Lloyd’s Bank, discusses Liberty Speciality Markets new on-line platform, Toredo After many years of debate and discussion, similar trend in the there is now undeniably a growing trend banking world and in the insurance market towards greater in particular in the digitisation and the use of electronic trade finance space placement. Digital transformation is a good where a wide range of example of how the market will need to new trade execution change if it is to remain relevant in the future platforms have been and short term credit insurance is leading developed. These the way. The recent launch of the Toredo markets are similarly platform by Liberty Specialty Markets dealing in relatively Chris Hall demonstrates this trend. commoditised Traditionally the commercial insurance transaction types and as a result the market has been slow to embrace new technology required to transact them online technology as a means to facilitate is simple and effective. business, but it has become increasingly It is of course much harder to take a clear in the last few years that this trend is standardised approach when selling more starting to change. As margins have been complex insurance policies like those seen compressed across the insurance space, a in the commercial insurance market, and need for efficiency is driving change. The consequently technological innovation has consequence is a new focus on electronic been slow. placement across the market with Lloyd’s in However, there are pockets of the particular, through their PPL system, looking insurance market – the short term trade to spearhead a change in attitude and credit market being one of them – where working practices. the underlying transaction is simple and Of course, technology has been embraced relatively standardised and consequently the in the personal lines insurance market for many insurance provided can be commoditised. years; think of the various insurance comparison The large multi buyer insurance providers websites and online insurance purchasing that have embraced this need for technological is available when you buy products online. innovation for a long time and consequently These markets lend themselves to technological all have invested heavily in online solutions. innovation due to the commoditised nature of But in the single risk credit insurance market the insurance being sold. the pace of change has been slow. Outside of insurance we are seeing a A number of the brokers in the single Digital transformation is a good example of how the market will need to change if it is to remain relevant in the future and short term credit insurance is leading the way. The recent launch of the Toredo platform by 57 Liberty Specialty Markets demonstrates this trend. Sponsored editorial Berne Union 2018 risk credit insurance market have developed Why did Liberty see a need for Toredo? electronic placement systems over the years The asset quality of trade finance instruments and whilst these have performed relatively is superb; industry statistics from the ICC show well, they have struggled to become widely that between 2008 and 2017, the effective adopted due to the fact that they are limited default rate is around 0.03% leading to losses to clients of that particular broker. As these of about 0.01%. However, these transactions systems have shown, there is a demand often materialise in the shape of small value from clients for the efficient execution that short-term instruments which in isolation still is provided by technology, but unless they necessitate the same underwriting as much can be utilised by the whole market, their larger and more remunerative transactions application is always going to be limited. and this has historically made it challenging to Against this backdrop, in early 2018, write this volume of business. Having Toredo Liberty Speciality Markets launched a new allows us to efficiently underwrite the volume on-line platform called Toredo, designed to of these transactions, whilst at the same provide a fast, efficient and secure method time removing any minimum policy/premium of transacting short term single risk trade values. credit insurance. Toredo is available for any broker or their client to access. The initial Who provides the capacity behind focus is on facilitating insurance for short- Toredo? term trade finance business but the aim in Capacity is provided by the London Credit the future is for the platform to be used for a Consortium, a specially formulated Lloyd’s much broader range of transactions, dictated Consortium led by Liberty and working with entirely by client demand. Canopius and The Channel Syndicate. Each Chris Hall, formerly head of risk provides one third of the capacity available distribution at Lloyd’s Bank, was hired to on the system. spearhead the initiative and now that the system has been up and running for a few What type of clients best suit such an months we take the opportunity to catch online platform? up with Chris to learn more about the There is no “one size fits all” approach here. platform and how he sees it changing the It works equally well for bank clients as it way that short term credit insurance is being does for traders and corporates. The key transacted in the market. question is what they hope to achieve. If the client is looking to access a more efficient Chris, to start us off, can you provide a channel of insurance, whilst benefitting from brief overview of the Toredo platform and transparent pricing and capacity, then an what it is designed to do? online insurance offering like Toredo should Toredo is an internet-based platform to work very well for them. enable our brokers and clients to access efficiently single situation non-payment How can the system be used to help insurance for what are typically trade finance ECAs and multilateral institutions with assets. Capacity is typically pre-loaded their risk distribution? onto the system, with pricing parameters Toredo has more applications than determined based on obligors, structures supporting solely bank clients with their and tenors. Having capacity pre-agreed requirements for cover of letters of credit in this vein allows us to make speedy, yet or payment undertakings, although it does robust, transactional underwriting decisions, this very well. It is equally useful in covering allowing parties to move from enquiry to portfolios of transactions, whether in the quote to bind in a matter of minutes. form of using Toredo to administer a binder “Toredo is an internet-based platform to enable our brokers and clients to access efficiently single situation non-payment insurance for what are typically trade finance assets. Capacity is typically pre-loaded onto the system, with pricing parameters determined based 58 on obligors, structures and tenors.” Sponsored editorial Berne Union 2018 or, for example, running a multilateral’s as Placing Platform Limited (“PPL”), which EXPERT ANALYSIS trade facilitation programme. is the London market’s electronic placing platform and attempts to rid the market Are all trade credit transactions suitable of duplication and administration. Toredo to be carried out online? supports this strategic direction and is, to our Despite our journey to be more efficient and knowledge, the only such underwriter-driven provide a better broker and client experience, channel in the Lloyd’s political and trade face to face meetings and discussions remain credit risk market. critical and much of the business in our class requires extensive communication to Now that platforms like Toredo are being understand the requirement and provide used in the industry, will it encourage a solution. We still have an underwriting broader take up in other classes? team sitting behind the system, speaking Seeing transactions completed securely online, with all the benefits that brings, will surely encourage the insurance industry to embrace digital transformation. We think “It is clear that with that Toredo has wider usage both for ECAs the launch of Toredo and multilaterals, but it lends itself equally that Liberty and the well to other classes of business which have similar types of transactions, i.e. relatively consortium partners that simple and volume based, such as various are providing capacity parts of surety, terrorism, marine etc. It could also be used as a binding tool for the more onto the system, have complex products within our own class, helped to solve a where the due-diligence and underwriting particular need in the processes has been concluded in a more traditional manner and Toredo is simply used short term trade credit for execution. market. However, Toredo It is clear that with the launch of Toredo that Liberty and the consortium partners is only one solution and that are providing capacity onto the system, it is clear that this type have helped to solve a particular need in the of innovation will need to short term trade credit market. However, Toredo is only one solution and it is clear that continue if the insurance this type of innovation will need to continue market, as we know it, is if the insurance market, as we know it, is going to remain relevant in the future. going to remain relevant The provision of insurance remains ripe in the future.” for disruption from all sides, whether from established technology platforms, or new entrants that provide the market with its with clients and brokers to understand “uber” moment. We can’t predict what is requirements. Toredo simply facilitates the likely to happen, other than to say that process and delivers all the benefits of speed, technology is going to play a larger part in transparency and efficiency that I mentioned, how insurance is transacted in the future and but complex transactions still need human those that embrace that concept are most interaction. likely to survive. How does Toredo fit into the wider www.libertyspecialtymarkets.com narrative of increased digitisation in the insurance market? Any industry has to innovate to stay relevant to its clients and there has been a well-publicised view that the traditional face-to-face insurance model is maybe less appropriate in the current market environment. Lloyd’s is mandating its syndicates to modernise and adopt its 59 Berne Union 2018 Sinosure helps cross-border E-commerce sellers in expanding global market By Chen Jichao, underwriter, and Zhou Huihan, underwriter, Sinosure With the support of business technology and big data, the development of cross-border e-commerce has a promising future. Background Exploration and In the background of continuous downturn Practice in the world economy, the lack of external New model: overseas demand has in turn caused a lack of impetus warehouse business for China’s growth in imports and exports. model Considering also the rising costs of land, In response to the labor and energy, the growth of China’s total country’s support import and export trade has been slowing for new forms of down from 2011 to 2014. From 2015 to 2016, foreign trade and imports and exports have actually declined, in order to help Chen Jichao causing concern for traditional trade. companies to develop Under these circumstances, cross-border globally, Sinosure is e-commerce breaks through the lengthy cooperating with a intermediate links and multiple price layers globally renowned of traditional trade, greatly reducing the cost cross-border of export goods and improving circulation e-commerce platform efficiency. At the same time, it faces (hereinafter referred consumers directly, and brings about better to as “e-commerce timeliness of products and better consumer platform”). After experience. With the support of business in-depth research technology and big data, the development and multi-party talks, of cross-border e-commerce has a promising Zhou Huihan and based on the future. needs and business In addition, cross-border e-commerce is features of all parties, Sinosure has designed supported by the Chinese government. At an innovative new model of “Overseas the end of 2016, 12 cities including Shanghai, Warehouse Business”, with the participation Chongqing and Hangzhou became pilot of foreign trade BPO (Business Process cities for cross-border e-commerce. With Outsourcing) enterprises, and formulated a favorable policies, infrastructure support targeted underwriting plan with a series of and efficiency advantages, cross-border risk management and control measures. e-commerce trade has developed rapidly, The new model has achieved good results. gaining a significant increase in the The details are as follows: proportion of import and export trade it The e-commerce platform is a B2C represents, with an average annual growth (direct-to-end consumer) platform with rate of 32.0%. Furthermore, the cross- more than 100,000 sellers in China and border e-commerce export penetration rate an annual export scale of approximately increased from 14.37% in 2012 to 39.73% US$10 billion. In order to gain a competitive in 2016. This rapid rise of cross-border advantage and enhance the consumer e-commerce has become a new growth point experience, more and more sellers are for China’s foreign trade (see Figures 1 and 2 setting up overseas warehouses to shorten 60 on the next page). logistics time and facilitate the return of Berne Union 2018 goods. However, in this mode, the seller also EXPERT ANALYSIS faces two major diffi culties: First, sellers Figure 1: China’s import and export trade and need to prepare goods in advance to stock cross-border E-commerce transactions overseas warehouses. This requires a certain amount of funds. Second, the export of & ' (". goods involves a series of procedures, such & " '". as customs declaration, logistics, and foreign % ' exchange settlement, which could distract % " &". sellers and prevent them from focusing on $ ' %". $ " sales. For the e-commerce platform, because # ' $". they do not have enough value-added # " services and rely solely on homogeneous #". " ' competition, it is diffi cult for them to attract " " ". new sellers, and they even face the risk of $"## $"#$ $"#% $"#& $"#' $"#( losing customers (see Figures 3 and 4). In order to solve the problem of capital occupation and help sellers to focus on sales, Sinosure has developed new models of overseas warehouses through in-depth research and innovation. Under the new model, the seller’s own procurement, arrangements for logistics, customs Figure 2: Proportion of traditional export and clearance and other procedures will be cross-border E-commerce export carried out by professional foreign trade BPO enterprises. According to the instructions #"". of the e-sellers, the BPO enterprises +". respectively sign purchase contracts with *". domestic factories to realize advance )". purchase, and sell the goods to the overseas (". warehouse companies of e-commerce sellers, thus solving the diffi culty of capital '". *' (%. *" %#. occupation. In order to control the risks, &". )' #+. (* #&. the BPO enterprises will rely on Sinosure to %". (" $). insure the receivables of overseas warehouse $". companies. #". ". Sinosure’s concerns $"#$ $"#% $"#& $"#' $"#( For Sinosure, under this model, there are two major risks: credit risk and moral risk. With regard to credit risk, overseas warehouse companies may not be able The seller’s sales data comes directly from or willing to make payments to the BPO the e-commerce platform and is regularly enterprises. Most overseas warehouse monitored. 3. Only top sellers are eligible companies have been set up recently, and for the new overseas warehouse model. Top they are relatively weak fi nancially. It is sellers are deemed to be lower in risk as they therefore generally diffi cult to grant them normally have stable operation, professional credit according to the traditional method. R&D teams, and established brands. In order to facilitate such a model, With regard to moral risk, the risk control Sinosure has set up the following risk control measure is to set up to assess standards measures: 1. The domestic e-commerce of foreign trade BPO enterprises. Sinosure sellers provide guarantees for their overseas generally select BPO enterprises with rich warehouse affi liates. 2. The e-commerce trade experience and strict risk control seller and all its overseas warehouse management. Besides, Sinosure will defi ne companies are regarded as a group. The limit in the policy that if domestic factories and for the group is determined by the seller’s e-commerce sellers are associated, the sales performance and purchase scale. Then, commercial risks will not be covered. In a the credit limit is distributed among this further innovation, Sinosure also signs a group’s overseas warehouse companies. three-party agreement with the e-commerce 61 Berne Union 2018 identity is thoroughly reviewed. The Figure 3: Traditional model seller is then constrained by their rating, negative comment ratio, and abnormal sales monitoring. Once problems occur, the e-commerce platform can take measures to reduce the seller’s default motive, such as freezing accounts and even closing online stores. Win-win Results This model has been awarded the first prize of China’s National Financial Funding Scheme, due to its innovative approach and with win-win results, Figure 4: New model For e-commerce sellers, the difficulties of financing bottlenecks and energy distraction have been settled, and they have consequently achieved rapid growth. According to the e-commerce platform, the growth rate of e-commerce sellers using this model is much higher than the average growth rate of all e-commerce platform sellers. For example, a domestic home seller, by using this model, increased their sales scale from US$ 5 million in 2015 to US$ 80 million in 2017. The seller’s impressive performance attracted a US$25 million venture capital investment from a leading platform and foreign trade BPO enterprises institution in 2017. to define the rights and obligations of all For the e-commerce platform, now parties. that the crucial financing problems of e-commerce sellers have been solved, the E-commerce platform’s values platform can attract more sellers. Moreover, On the one hand, the e-commerce platform as the sellers grow rapidly on the platform so carries out business management and the income of platform itself is also increased risk control for sellers, such as: Providing significantly. introductions to financial institutions and For BPO enterprises: On the one hand, logistics companies, guiding sellers to they can obtain a stable source of business adopt standard modes of cross-border and avoid direct competition with traditional e-commerce, and briefing them on local laws outsourcing companies. On the other hand, and regulations related to import and export, due to the provision of financing support, etc. By providing relevant value-added they can obtain excess returns. services to sellers, the e-commerce platform For Sinosure, we have innovated our helps their sellers conduct business smoothly business model, supported the growth so as to attract more sellers to the platform. of domestic exporters, and assisted in On the other hand, the e-commerce expanding their business scale. From July platform provides “credit enhancement” 2016 to the end of 2017, more than 40 sellers services such as data support and risk were supported in total and the financing control measures from Sinosure. For figures exceeded US$30 million. No loss has example, before registration, the seller’s been reported so far for this model. For Sinosure, we have innovated our business model, supported the growth of domestic exporters, and assisted in expanding their business scale. 62 Who we are Ad FA (21 X 29.7 CM).indd 1 2/10/17 6:27 PM Berne Union 2018 Developments in the private PRI industry Interview with chair and vice chair of Berne Union INV Committee Christina Westholm-Schroder, chief developing markets. underwriter & SVP, SOVEREIGN RISK The trade war that INSURANCE seems to be an Christina is responsible for all aspects of unavoidable situation Sovereign’s transactional underwriting, with will further add to that particular focus on capital markets and uncertainty and both financial institution business. Christina is banks and sponsors also relationship manager for a number of are taking a wait-and Sovereign’s ECA and Multilateral Agency see attitude at the clients. She was elected chair of the Berne moment. Christina Westholm- Union Investment Insurance Committee in Schroder On the supply November 2016. side, private market capacity continues to Nuria Gorog, senior VP, head of credit & grow. New entrants to political risk, Continental Europe, ZURICH the market are adding Nuria Gorog joined Zurich in January to this and it remains 2007 as senior vice president and regional very much a “buyers’ manager for Continental Europe – credit market” at present. & political risk. She was elected vice-chair We have seen some of the Berne Union Investment Insurance consolidation recently, Committee in November 2016. which is healthy Nuria Gorog and will hopefully How would you characterise the counter some of the overall state of the PRI market over negative effects of overcapacity, such as the the past 12 months? downward pressure this causes on premiums, CWS: From the perspective of the combined as well as a general deterioration of terms market, taking into account both investment- from an underwriting perspective. type insurance and non-payment insurance While many ECA Members of the INV on private and government obligor, the Committee report flat or decreasing demand market overall is healthy. for the traditional investment insurance On the demand side, we are seeing product, a few are in the process of updating relatively stable volumes. This is a reflection their offering in a way which may make of uncertainties relating to the political and the product more attractive and thereby economic situation across both mature and stimulate demand further. From the perspective of the combined market, taking into account both investment-type insurance and non- payment insurance on private and government obligor, 64 the market overall is healthy. Berne Union 2018 Some of the private companies are also Azerbaijan and a handful of others. It is the EXPERT ANALYSIS reporting increased interest in the traditional nature of the business to see these peaks PRI-perils, mainly in connection with and troughs, but overall levels are consistent infrastructure transactions. with recent precedents. NG: As Christina says, current demand is NG: Recovery actions are going in the right flat. It is a buyers’ market and we are seeing direction. Berne Union data shows the first strong competition on several fronts; not just half of 2018 as having the highest recoveries on pricing but also with policy wordings. achieved for any H1 period since 2006. If It is too early to know what the impact that trend carries through the second half of of the recent consolidation will be, but we the year it will be a positive message for the should bear in mind that consolidation not industry. only impacts capacity and pricing but can also generate new growth opportunities for What are the drivers behind the consolidated parties. declining demand for investment We are currently seeing more complex insurance? How is the private market transactions emerging, involving alternative responding to this? lenders such as investment funds. The CWS: The drivers behind traditional business shows good profitability and during investment insurance are different to those the past 12 months the PRI market has affecting the non-payment segment of the been investing for growth, in people and in market. technology and is well placed to serve its Financial institutions provide the customers over the coming year. majority of the demand for non-payment/ comprehensive insurance, and banks are CWS: In terms of countries, or rather regions, less likely to be interested in investment Africa continues to attract a lot of interest, insurance, since this product primarily particularly in the infrastructure sector. provides risk mitigation, and neither capital Renewable energy is steadily increasing as relief and, in most cases, nor internal limit a percentage of overall energy production, relief. and this has generated interest among many Banks do sometimes use this product, sponsors. These sponsors, as well as equity but most often in sectors where the risk investors, may be new to emerging markets in a project can be classified as purely and therefor perhaps more likely to need “Expropriatory” or at risk of political violence. support in the form of an insurance policy A good example would be mining or oil covering the political and non-payment risks. and gas, where the commercial risks can be mitigated through offshore purchasers and NG: We are seeing increasing opportunities offshore accounts. for PRI in the communications, transportation We have also seen demand for investment and defence sectors, in particular for insurance products for infrastructure and transactions involving government or state- other project finance-type transactions, often owned obligors. including also Breach of Contract/Arbitration Award Default cover. The latter is effectively CWS: Claims continue to be moderate, with a credit enhancement as well although a certain peaks in a few countries. As an more involved process since an arbitration example. Ethiopia is one country which has award in most cases needs to be obtained suffered, reflecting a perhaps overambitious before the policy would trigger. growth objective which has put a strain on Sponsors in infrastructure projects are the country’s resources and foreign exchange however often looking to buy investment availability. Other large claims have been insurance policies, and the product is getting reported for the first half of the year in Brazil, better known in this regard. Banks may also We are seeing increasing opportunities for PRI in the communications, transportation and defence sectors, in particular for transactions involving government or state-owned obligors. 65 Berne Union 2018 insist on sponsors getting such coverage the underwriting of this class of business is in order to ensure project completion and one part hard facts and analytics, and one ability to repay loans in adverse situations. part intuition and experience. The latter is not easily modelled or captured in actuarial NG: We see more and more risk managers models. who deal with property programs Client demand is also a driving force, and considering PRI as well, but there are a since regulation is in many cases dictating number of barriers to effecting this. the use of the product, it is not a surprise There is definitively a gap between the to see amendments to wordings to ensure political risk and their “perception of the banks can get regulatory relief. risk”. Lack of familiarity with the products Competition and the need to stay ahead also means that their expectations with in a tight market will of course continue to respect to the terms and conditions are not encourage innovation in many areas. NG: Technology will definitely help to speed the underwriting process and improve There are already signs data quality. This will allow underwriters to focus on underwriting matters and be that banks are behaving ready to respond in a timely way to their more cautiously, taking clients. Beside technology, we should a wait-and–see attitude continue to listen to our customers and put the customers at the centre of our value while we anticipate proposition. finalization of various Most of the innovative solutions in the future will be facilitated by the constant regulatory developments, cooperation between insurers and their including BASEL IV, and clients. how regulators will treat How are changes in the banking credit risk mitigation sector affecting political risk products provided by insurers? Are regulatory pressures already impacting appetite from private insurers. banks for export finance? CWS: This is an extremely important issue. Insurance of financial institutions is by far the largest segment for most private insurers always aligned with the current wordings in today. The motivation to buy insurance is the PRI arena. With limited budgets usually largely driven by capital relief, so regulatory available, we ultimately compete with other changes affecting banks have a significant products and these days quite often risk direct impact on private insurers. managers prefer to allocate any additional There are already signs that banks are budget to e.g. cyber risks. behaving more cautiously, taking a wait-and– see attitude while we anticipate finalization What are the main drivers for of various regulatory developments, innovation in the private PRI market? including BASEL IV, and how regulators will CWS: Technology is definitely one driver, and treat credit risk mitigation products provided most companies are exploring how to make by private insurers. the underwriting process more efficient, Regulators are not as familiar with banks’ with a couple already offering an electronic use of the private insurance market as they platform. should be. There are on-going initiatives The adoption of this sort of technology to provide better education in this regard is in most cases gradual and it too early and to highlight both the vast amount of to measure its impact on the underwriting coverage provided by insurers, as well as overall. These developments are their robust capitalisation and high credit predominantly about making processes ratings – higher in some cases than many more efficient, and assisting in the collection ECAs. and storage of information about obligors, If regulators take an unnecessarily 66 countries, specific sectors, etc. In the end restrictive view on banks’ ability to effectively Berne Union 2018 use private insurance products as risk and can be structured for part or all of the EXPERT ANALYSIS mitigation, there will likely be unintended business written by an ECA/Multilateral. In consequences as banks are forced to take the end, the ability to team up and to bring on risks which insurers are better equipped in the private market on transactions and to handle. Export finance volumes will suffer risks that private insurers would otherwise and ultimately so will exporters. not consider is a huge driver for expanding cooperation. NG: Banks continue to have appetite for export finance, despite regulations and are NG: I would add that this public-private using different tools and combining solutions cooperation is not decreasing the PRI players to release capital for this. PRI is one of those capacity to serve the primary market which tools and should continue to be recognized of course continues to be their core business. as effective and satisfactorily tested during the latest financial crisis. What do you see as the biggest PRI stakeholders are now working challenge for political risk insurers together to underline this impact to the from the external environment at regulator. Banks understand the importance present? (e.g. from the economic of PRI in their business and although the environment, regulation or subject is currently a source of concern we compliance) are sensing an increased engagement of CWS: Economic and political events will all stakeholders; this global effort illustrates always affect our market, and ECAs and private insurers are there to assist when the markets respond to negative events. One of biggest challenges Regulatory changes will affect the availability of insurance cover. in our industry is how I think compliance is a fact of life for all to anticipate distress of us and we are all instituting and following situations and be compliance procedures and protocol to make sure not to violate sanctions or other prepared for unexpected regulations. Compliance procedures may scenarios; portfolio slow down the process but this is something we all have to get used to and complete in an management and risk as efficient manner as possible. selection will be key in this regard. NG: One of biggest challenges in our industry is how to anticipate distress situations and be prepared for unexpected the importance of maintaining effective PRI scenarios; portfolio management and risk solutions for banks seeking capital relief. selection will be key in this regard. Are private insurers increasingly What one development would looking to partner with ECAs? change the industry for the better? How big a part of the overall market CWS: Speaking from the perspective of a is this? private insurer, I would like to see a better CWS: The private-public cooperation has understanding among regulators as to been going on for a long time (meaning the benefit both banks and their clients more than 20 years by now). Private insurers derive from the use of insurance products are indeed looking to partner with ECAs, and provided by highly-rated private insurers as conversely, ECAs benefit from the capacity a complement to ECA-provided insurance the private market offers in support. It is products. difficult to estimate how big the market is overall, and different insurers and different NG: Private insurers need to collect and ECAs (and Multilaterals as well) differ widely consolidate industry data about claims, in their approach to cooperation and to what exposures etc., in order to evidence the huge extent they offer/buy capacity. Facultative support that private insurers have provided reinsurance is the most common form of over the years and continue to provide cooperation and provides flexibility for both in support of international trade to the parties, but treaty reinsurance is also helpful regulators. 67 Berne Union 2018 ECAs weathering stormy seas By Hendrik Holdefleiss, chair of the Berne Union MLT committee, and head of division underwriting & risk management, Euler Hermes Forces of innovation and disruption impact every aspect of our lives, but what is the outlook for the medium and long-term export finance? The current market conditions for ECA wind strength 7-8 support in medium and long-term finance Beaufort, in some are dominated by two major factors. They regions the squalls are set the conditions under which exporters and even stronger. financiers act. The second issue Let`s compare it to the situation of a sailor is the state of the sea, on the open sea: the macroeconomic First, there is the general weather cycle. For a couple situation, for us: the geopolitical state of the of years we face a world. Geopolitical conflicts, global as well as situation dominated regional political uncertainty and increasingly Hendrik Holdefleiss by low, or even unpredictable foreign policies determine negative interest rates where to go as an exporter or whether to and overwhelming liquidity. This situation still set sail at all. Same goes for the importer, persists this very day. who decides to continue with investments Interest rates do not reflect the or to postpone them. It seems worrisome for underlying risks of projects or borrowers me, that the surge of nationalism in many in many situations. A lot of investments, societies, for very different reasons leads not all of them productive, were financed to open conflicts, fears and eroding value shortsightedly by cheap external borrowing systems. The achievements of multilateralism, without considering the potential impact of of international cooperation and work rising interest rates. Foreign exchange rate sharing and joint policies are perceived as variations as well as the volatile character a matter of course. For international trade of international portfolio flows now put and export finance this has led to more enormous pressure on public budgets, protectionism, misuse of obsolete trade private companies and non-recourse projects policy instruments and – what is worst for in many places around the world. The change MLT cross border business – it has shaken in macroeconomic conditions threatens confidence into stable conditions. the financial stability of many projects and For the sailor you would translate it into borrowers. It is like a huge wave at the Interest rates do not reflect the underlying risks of projects or borrowers in many situations. A lot of investments, not all of them productive, were financed shortsightedly by cheap external borrowing without 68 considering the potential impact of rising interest rates. Berne Union 2018 horizon which could jeopardize the business importance for the global export industry. EXPERT ANALYSIS of many exporters and banks. In a world of boundless supply chains and Under such conditions the sailors need a multi-sourcing, rules for export promotion reliable marine compass and should prepare need to be rethought accordingly. for manoeuvres to weather unfavorable Aligning these different regulations conditions. No doubt that ECAs should with the changing needs of exporters, rather act as steersmen than stewards… importers, banks and investors is key for the development and the future role of the ECAs Looking out for shallows and reefs in global trade. From my point of view there are two crucial It is about bringing more agility to our areas for the future of the ECA business. I’m service sector with the purpose to adapt referring to regulation and digitalisation. easier and quicker where necessary. Such ‘Regulation’ encompasses two main an approach does not contradict the main dimensions. The first one is the regulative principles and ad-vantages of the ECAs, as framework we as ECAs give ourselves. they are reliability, long term perspective and It is our seamanship, forming a common the goal of export promotion. understanding, best practices and the pillars The second area of regulation which of a global level playing field in ECA backed is decisive for MLT business is banking business. regulation. The different approaches by regulators to address structural risks in the financial sector do not take into account The different approaches the small, or from the regulators’ view neglectable, ECA business. On the other by regulators to hand, the impact of new regulations on ECA address structural activity might be fundamental. Other than the regulation mentioned before, banking risks in the financial regulation is far beyond our responsibility sector do not take into as ECAs. In this field we need to contribute account the small, or to the discussions by providing information, empirical data and whatever is necessary to from the regulators’ create awareness for our specific sector. view neglectable, ECA In our analogy, the regulators could be seen as lock keepers looking out for business. freighters and cruise ships while ignoring the tiny sailing boats. To make sure that both areas of regulation These rules, which in some aspects do not prevent ECAs from promoting might cause barriers for a more efficient international trade, but rather facilitate and export support, exist on different levels of encourage ECA backed export finance regulation. activity, we need to think of new ways, There are the national strategies of the join forces in advocacy, and listen to the respective ECAs. In this regard we have exporters. Leaving behind obsolete rules and seen many changes towards new national practices, and creating regulation fit for the approaches, e.g. adapting local content dynamic export finance markets should be rules, implementing instruments to promote the objective. business internationalization or direct The second point of change and lending. On the OECD level the reform of the disruption is digitalization. As the rest of consensus is a pressing topic of increasing the world and all areas of economic activity, ‘Regulation’ encompasses two main dimensions. The first one is the regulative framework we as ECAs give ourselves. It is our seamanship, forming a common understanding, best practices and the pillars of a global level playing field in ECA backed business. 69 Berne Union 2018 export finance has already entered the digital such they are indispensable to take part in era. the regatta. With regard to medium and long-term ECA business one might take refuge in an Setting a new course easy and dangerous excuse: “medium and In the current circumstances of increased long-term finance is far too complex to be political and economic risks exporters require handled with digital applications; it is too strong and capable ECAs to open sound, unique to be supported by digital solutions sustainable ways for medium and long and it is too conservative to be part of the term financial solutions. The strategic and digital revolution.” operational challenges ahead for our business I am deeply convinced that this standpoint are huge but manageable. Some disruptive and a respective passivity would be the first developments create the momentum to amil in the coffin for our business. There improve our services in an equally disruptive is no indication at all that could make me manner. The need for closer cooperation believe that digitalization will reign the entire between our institutions is growing. Global world, but not export finance. It is key for us challenges, global sourcing and global as ECAs to be part of this fourth industrial technology require a joint and global answer. revolution. The areas of digital solutions and ECAs will have to develop joint approaches applications in the MLT business are manifold and offer huge opportunities to improve our services for exporters and banks. These In the current solutions range from automatic information circumstances of gathering, digital assessment of balance sheets, easing of clients’ communication to increased political and fully digitalized operational processing. economic risks exporters Block chain will facilitate international require strong and trade documentation for our claims assessment. Platform solutions will capable ECAs to open enable all stakeholders in the business sound, sustainable ways to meet, exchange information and match their different requests. Why should a for medium and long term reduction of complexity and an easy digital financial solutions. handling not boost financing solutions for SME business? These are only a very few examples to explore these possibilities and overcome coming to my mind as a non-digital native. obstacles we face as single institutions. In this I am pretty sure that these developments regard, the Berne Union offers a unique plat- will disrupt our service sector in the same form for us to start from. way it has done in other areas of our private To conclude the allegory: In these times and business lives. It is key to understanding exporters and banks, our sailors, face rough the new possibilities of modern technology sea and heavy swell. With a reliable crew as a chance to improve, to secure the ECA of ECAs, their proven seamanship and the business for the future even beyond the courage to try new manoeuvres there is digital era of today. no doubt that they reach their ports of In seaman’s language, digital solutions destination. will be our GPS and sea-chart plotter and as So: anchors aweigh and ship ahoy! With regard to medium and long-term ECA business one might take refuge in an easy and dangerous excuse: “medium and long-term finance is far too complex to be handled with digital applications; it is too unique to be supported by digital solutions and it is too conservative to be part of the digital revolution.” 70 Berne Union 2018 Credit insurance for EXPERT ANALYSIS project finance By Mark van der Does, assistant vice president, Marsh and Abbey Sturrock, public agency, senior vice president, Marsh (Singapore) Introduction their efforts. Many Credit insurance and credit enhancement insurance companies products designed to transfer credit risk have adapted in project finance lending have become their underwriting increasingly sophisticated in recent years, guidelines to offering insurance solutions that respond to contemplate more the evolving risk and capital consumption complex and nuanced issues faced by project finance lenders risks associated with and export credit agencies (ECAs). Credit project financing insurance, for example, described in this and offer bespoke Mark van der Does article as non-payment insurance (NPI), is risk sharing solutions a staple in trade and export financing. The to project finance product has its early origins in export credit lenders and ECAs insurance, but has evolved into a unique in the form of NPI product which is now widely offered by (please see remarks private market insurers globally. Chief among from underwriters recent innovations in the NPI market is the Liberty and Everest use of NPI to transfer credit risk of long- Insurance below). NPI term project finance loans. Insurers that protects the lender provide this product (NPI providers) have (the insured) against developed the specialised expertise required non-payment by the Abbey Sturrock to underwrite project finance risk, and are borrower for any positioned to offer solutions which not only reason whatsoever respond to risk and capital consumption (including commercial and political risks). issues, but which also compete with and In exchange, insurers charge a premium complement related methods of risk typically equal to 60-70% of (a) the distribution found in project finance lending. applicable loan margin (often subtracting This article explores the reasons insurers the insured’s funding costs) applied to the have invested in this space, the flexibility and insured portion of drawn exposure; and (b) maturing risk appetites of NPI providers, and the commitment fee on the insured portion the product’s relevance to the wider project of undrawn exposure. Importantly, lenders finance market. We will also address some of retain 100% of the upfront fees (arrangement the key challenges facing insurers, and the and structuring fees, etc.) and the remaining lenders and ECAs who use NPI and similar portion of the margin. In the context of non- credit risk distribution methods. recourse project finance, the amount of NPI cover purchased usually does not exceed Background 60% of the insured lender’s participation in Marsh’s Credit Specialties practice has the financing. focused on developing insurance capacity NPI has become a standard part of a loan for project finance loans since 2012. The or guarantee portfolio manager’s toolkit for insurance market has invested considerable managing geographic, sector, or single name resources to develop expertise in this area concentrations, enabling banks and ECAs to 71 and hired several former bankers to lead simultaneously increase their lending (or ECA Berne Union 2018 guarantee/insurance) capacity and manage analyse and model those risks relevant in risk. Additionally, NPI can be used as an most project finance transactions. NPI allows ‘eligible guarantee’ under Basel III guidelines, these same insurers to access attractive but providing regulatory capital relief (Using less liquid parts of the market on a capital- Credit Insurance for Capital Relief, Marsh, efficient, unfunded basis from the liability 2013). For multilaterals and development side. This achieves diversification in longer finance institutions (DFIs), NPI can be dated assets that have demonstrated highly used to mobilise private-sector capital in favourable performance characteristics support of development in emerging and relative to other industries, according to frontier market countries. In most cases, NPI Moody’s annually produced study, “Default policies are strictly confidential, and are not and recovery rates for project finance bank disclosed to the borrower or any other lender loans” (Moody’s, 2017). participating in the same loan. This allows an Based on Marsh’s experience, the amount insured lender or ECA to silently syndicate of NPI issued to cover project finance loans risk while maintaining its direct relationship is unlikely to represent more than 2.5% of and relevance to its client. global project finance loan volume on an Risk retention (i.e. the insured’s retained annual basis, estimated to be USD 204.57 uninsured exposure in the transaction for the billion FY2017 (Inframation Deals FY2017 duration of the insurance policy) is central to Project Finance League Table and Trend insurers’ underwriting criteria and helps to Report). However, the institution-specific ensure the alignment of interests between benefits NPI provides the policy-holder can the NPI provider and the insured lender and be much greater and fall into three broad avoid adverse selection. Figure 2.0 details categories: risk retention expectations for different (i) Internally recognised risk mitigation (to classes of risk as well as providing insight address exposure concentrations and into the private market insurance capacity thereby increase lending capacity). available for various financing structures. (ii) The ability to compete and manage execution risk in pre and post primary Project finance market loan syndication. NPI providers are more familiar with project (iii) Achieving regulatory capital relief. finance than many realise. Many insurers While NPI-insured project finance loan offering NPI for project financing already volume may make up as little as 2.5% of buy funded, project-related participations global volume annually, it is certain to have on the ‘asset’ side of their balance sheet. facilitated a higher percentage of project Many insurers are also exposed to these finance lending globally. This is due to the projects through surety or other construction way in which NPI allows policy-holders to related coverages, and they are able to make institution-specific determinations Figure 1: Single-transaction capacity growth in the NPI market USD 3,000.00 2008-2009 Financial Crisis By Marsh estimates, roughly USD2 billion was paid by insurers to banks in this period in respect of USD 2,500.00 credit claims. The success of this “live stress test” of the NPI market proved the product and accelerated USD 2,000.00 its development and adoption by global banks in post-crisis years 8.5x USD 1,500.00 (USD millions) USD 1,000.00 USD 5000.00 2002 2004 2006 2008 2010 2012 2014 2016 2018 Year Non-Payment Insurance (Private Borrower) Non-Payment Insurance (Sovereign/Sub-Sov Borrower) 72 Investment Cover (Pollitical Risk Insurance: equity & assets) Source: Marsh Berne Union 2018 about the risk of default on the insured PF loans on a capped basis. EXPERT ANALYSIS portion of the underlying loan that support z Ability to cover project finance loan the recycling and redeployment of capital. securitisations. z Ability of bank surety syndication Flexibility/appetite providers to transfer credit and Some project finance industry participants performance risk associated with have expressed scepticism of the NPI advanced payment and performance product’s ability to support long-term bonds backed by bank-issued letters of lending in emerging markets (Creating credit (Marsh and African Trade Insurance capacity – Project finance lenders search Agency arrange innovative bank surety for a new paradigm in changing regulatory solution for Tanzanian high-speed rail times, Mayer Brown, 2017), but insurers project, 2018). have demonstrated that this objection is z Ability to cover private placement bonds unfounded. This is evidenced by examples via coinsurance or reinsurance of ECAs or of NPI being used to support non-recourse/ multilaterals. commercial project finance lending in z Willingness to take quasi-merchant and countries such as Peru, Taiwan, and in the merchant tail (market price) risk in power Middle East and North Africa region. More and renewable energy projects. importantly, NPI providers principally seek to z Willingness to take traffic risk. risk-share behind or alongside experienced z Willingness to underwrite risk involving project finance lenders and ECAs who can new technology in the liquefied natural demonstrate underwriting expertise on key gas (LNG) manufacturing and renewables risk issues relevant to the project financing in sectors. question. When this underwriting expertise These examples should not be taken can be demonstrated, NPI capacity is often as evidence of significant depth in the available for transactions being financed in NPI market for taking on these risks and developed, emerging, and frontier market financing structures, but as transaction- countries, and this is especially true for ECA specific decisions made by insurers who have or DFI-backed transactions (Source: Marsh taken the time to underwrite these risks on a Credit Specialties). case by case basis, in part as a result of their Other examples of the improving flexibility willingness to respond to the expertise and of some insurers in this space and their changing needs of their clients. ability to underwrite new types of risk and financing structures include: Challenges z Ability to cover interest and some FX rate A key challenge for commercial lending exposure under swap agreements tied to in project finance is the cost of capital it Figure 2: NPI market capacity and risk retention requirements for different types of risk Swaps & Decreasing market Derivatives Increasing required risk capacity retention Working Capital (non- trade) Project Finance, Aircraft Finance, Secured Coporate lending Commodity Finance (Looser ties to trade) Pre-Export Finance - Export pre-payments Supply Chain Finance (Receivable purchases, payables, trade letters of credit Source: Marsh 73 Berne Union 2018 requires, and so an important benefit of NPI in changing regulatory times, Mayer Brown, to lenders is its recognition as a qualified 2017). Some examples of this flexibility could credit risk mitigant under the Basel III include further effort by NPI providers to regulatory framework for risk-based capital cover derivative exposures and ancillary requirements that are applied to commercial credit facilities tied to project finance loans banks by their relevant regulators (Marsh, (a key role of commercial project finance 2013) (Non-Payment Insurance as Credit lenders), and to offer portfolio-based rather Risk Mitigation Under Regulation Q, Clifford than single-transaction NPI solutions (to Chance, 2017). improve the ease of use and scale of the However, the already strict capital product’s benefits). requirements placed on project finance More readily, deepening capacity and lenders may become even more burdensome investment by NPI providers in their ability under proposals being considered for to underwrite project finance risks has the revisions to the Basel III framework, setting potential to increase the role of NPI as a the stage for renewed focus on the risk provider of reinsurance to ECAs who are distribution methods available to banks active in project finance lending. This will which include NPI but also, for example, loan help public agencies seeking to fulfil their syndication (which competes with NPI but domestic economic growth mandates which is also often complemented by it) amidst growing risk concentrations in their and loan securitisation (which can also be own guarantee/insurance portfolios, and complemented by NPI) (Creating capacity increased capital constraints on commercial – Project finance lenders search for a new project finance lenders. paradigm in changing regulatory times, 2017) (Non-Payment Insurance as Credit About Marsh Credit Specialties Risk Mitigation Under Regulation Q,Clifford Marsh is a global insurance broker and Chance, 2017). risk adviser, with extensive experience Some proposals currently being acting on behalf of our clients who utilise considered include: NPI and related insurance products to z Changes to the ‘standardised’ approached manage their project finance portfolios. As for calculating risk-weighted assets which a leading broker in the credit & political risk would raise the risk weighting of non- insurance and surety markets, we are able externally rated project finance loans. to leverage our market experience in order z Changes to the ‘advanced’ or internal to develop product innovations and obtain ratings based (IRB) approach for contractual terms for our clients which may calculating risk-weighted assets which not be readily offered by any one individual would introduce minimum ‘capital floors’ insurance provider. tied to the capital required to be held For more information please contact: based on the higher risk weights used [email protected] under the standardised approach, and Mark van der Does is a broker in Marsh’s z Proposed restrictions on internal risk Credit Specialties practice based in New modelling parameters used by IRB York. approaches banks. Abbey Sturrock leads Marsh’s ECA If NPI is to increase its relevance to practice within Marsh Credit Specialties and project finance lenders, NPI providers will is based in Singapore. need to continue to adapt in order to add value in a market with growing depth in the Comments from insurers risk distribution and institutional funding Jim Thomas, Global Head of Credit and (including during construction) channels that Political Risk, Everest Insurance: are available (Creating capacity – Project “Due to increasing global demand for finance lenders search for a new paradigm infrastructure financing and the changing NPI providers are more familiar with project finance than many realise. Many insurers offering NPI for project financing already buy funded, project-related 74 participations on the ‘asset’ side of their balance sheet. Berne Union 2018 regulatory environment for banks, project having a PF specialist onboard allows us to EXPERT ANALYSIS finance has recently become a growth area work more closely with our bank partners of credit insurance. and, in turn, to better serve their needs. While the demand for project finance The enhanced and detailed due diligence is rising, the ability of traditional bank that project finance requires means that lenders to provide such long term financing working with experienced partners is a critical on their own accord has diminished due aspect of our underwriting. We seek to to increasing regulatory constraints and develop a close partnership and dialogue with capital requirements. As a result, banks are the bank’s project finance team so that we increasingly seeking ways to maintain their can understand the teams’ general approach rightful role of arranging project finance, to underwriting project finance, as well as while at the same time bringing in funding their due diligence on specific projects.” and risk-sharing partners, including the use of credit insurance. Peter Sprent, Head of Global Financial Recognising this growing, but Risks, Liberty: underserved, niche of the market, Everest “Developing our project finance capabilities has been a key strategic priority for Liberty Global Financial Risks (GFR) over the last two years. In entering this new area we were very conscious of the need to ensure Marsh is a global that our underwriting approach remained insurance broker and risk rigorous, holistic and data-driven. We adviser, with extensive therefore resourced project finance with new hires, additional data sources and experience acting on membership of organisations such as the behalf of our clients who International Project Finance Association. The attraction of the product is that it offers utilise NPI and related a diversifying asset class that enhances the insurance products to GFR portfolio, whilst also providing a stream manage their project of long term revenue. Feedback from our brokers demonstrated a clear appetite within finance portfolios. the market for this cover and so it’s been a great way to deepen our relationships with our core clients, many of whom are leading project finance banks. We have chosen hired a project finance specialist from a to focus on the energy and infrastructure major PF lender to manage our project sectors globally and have underwritten a finance business and we’re seeing a high diversified portfolio of both greenfield and volume of demand from banks in North brownfield assets. Large scale renewable America, Europe, and Asia. Everest can cover projects in both Europe and the Middle the non-payment risk of a special purpose East have been a particular focus, as well as entity for 15+ years and does not require a traditional thermal and other utility projects. government off-take agreement. We are able to offer policies of up to 15 years Due to the significant project structuring in order to provide maximum capital relief efforts that are involved, the bespoke to our insureds. To partner with our clients nature of each transaction, the longer tenor in this way, whilst also supporting projects requirements, and the need to underwrite that make a positive impact on both mature each project itself in the absence of recourse and emerging economies has been a very to the project sponsors, we’ve found that exciting development for GFR.” If NPI is to increase its relevance to project finance lenders, NPI providers will need to continue to adapt in order to add value in a market with growing depth in the risk distribution and institutional funding (including 75 during construction) channels that are available. Exports? Make them secure. SERV – for financially secure exports and improved liquidity Is there a risk your contractual partner SERV Swiss Export Risk Insurance abroad is suddenly unable or unwilling to +41 58 551 55 55 pay for your delivery or service? Do you [email protected] have the potential to land a new contract, www.serv-ch.com but lack liquidity for the production of the exports goods? SERV covers political and commercial risks of exports to prevent defaulting on payments. Furthermore, it helps enhance exporters’ and service providers’ liquidity. Berne Union 2018 The LMA moves into the export EXPERT ANALYSIS finance market: the LMA Export Credit Agency Buyer Credit Facility Agreement By Kam Mahil, director (legal) – LMA and Ashley McDermott, senior associate – Clifford Chance LLP With its new ECA Buyer Credit Facility Agreement, the LMA aims to increase efficiency, bring down costs, and introduce new borrowers to the market. On 25 April 2018, the LMA published a new ECA, the ECA in the recommended form of facility agreement exporting country for use in export finance buyer credit would typically transactions (the ‘LMA ECA Buyer Credit provide a guarantee Facility’). The export finance market is and/or insurance to a new area for the LMA and marks an the lenders under important progression for the LMA suite a separate cover of recommended form of documentation. document to mitigate The view in the market is that the LMA ECA all or part of the risk Buyer Credit Facility should bring down of non-payment by Kam Mahil execution timelines and cost, drive efficiency the buyer under the and help introduce new borrowers to the facility. benefits of using export finance. This typical buyer credit structure Export credit agencies and buyer is outlined in the credit transactions diagram on the next Export credit agencies (ECAs) play a vital page. role in supporting international trade. Countries provide officially supported Genesis of the export credits through ECAs in support of LMA ECA Buyer their exporters. ECAs can be government Credit Facility institutions or private companies operating Ashley McDermott The documentation on behalf of governments. The support they project was started provide can include direct lending, credit in February 2017 in response to demand insurance and/or financial guarantees as part from the market to provide a form of ECA of a financing. supported buyer credit agreement. For Under a buyer credit transaction, an some time, it has been convention in the exporter will typically enter into a contract market to use boilerplate language from for goods and/or services with an overseas LMA documents when drafting ECA covered buyer. This purchase of exports may be facility agreements. However, there are also financed by a facility agreement under which divergences in approach to provisions in loan the lenders agree to provide finance to the documentation between market participants buyer (which is also often the borrower on which it was thought to be helpful to get under the facility agreement). The lenders a common starting point in order to promote will either pay the exporter directly on behalf efficiency and liquidity in the market. of the buyer via a utilisation of the facility, From an early stage it was recognised or will reimburse the buyer for payments that the nature of ECA supported finance previously made to the exporter. Where a transactions was such that it would be very buyer credit transaction is supported by an difficult to produce a document which was 77 Berne Union 2018 in any way ‘standard’. In particular, it was global association for the export credit and accepted that any document which was investment insurance industry, participated in produced would need to be adapted so as the project as an observer. to be tailored to the particular transaction It is important to remember that there structure, the particular ECA and the are differing approaches to review of jurisdictional and export related specifics of documentation between ECAs. The LMA each transaction. However, it was still felt that ECA Buyer Credit Facility is not intended it would be a step forward in promoting the to interfere with the positions taken by the efficiency of the market if a document was ECAs or alter allocation of documentation produced which was a good starting point risk. In addition, involvement of any ECA for discussions. Indeed, one of the perceived with the LMA ECA Buyer Credit Facility does issues with accessing ECA support is that not mean that an ECA has accepted the documentation requirements can be seen as documentation or that it complies with their onerous, particularly with different market policies/documentation. However, the LMA participants taking different approaches and ECA Buyer Credit Facility is a helpful step there being no standardised documentation forward in producing a good starting point in the market. for negotiation and promoting efficiency in The LMA documentation project was also the export finance buyer credit market. seen as being particularly desirable given the increased size of some ECA backed deals, Basis and key assumptions of the which require syndication across the market. LMA ECA Buyer Credit Facility The focus of the documentation project was The LMA ECA Buyer Credit Facility takes as on the buyer credit market, which was felt to its starting point the LMA Unsecured Single be the best starting point for an initial LMA Currency Term Facility Agreement for use export finance template. in Developing Markets Transactions and seeks to provide for a typical export credit Participants in the project agency supported buyer credit structure. As In putting together the LMA ECA Buyer with all LMA documentation, the agreement Credit Facility, the LMA set up a working has been produced on the basis of various party. This consisted of experienced assumptions made in order to avoid representatives from the banks (including overcomplicating the document. in-house lawyers) and major City law firms These assumptions include that the ECA is active in the ECA market, along with certain not a party to the facility agreement (although export credit agencies. The LMA ECA Buyer could have certain rights under it) and would Credit Facility is focused on the European be providing cover to the lenders by way of market, and the LMA involved the major guarantee or insurance policy (with no direct European ECAs as part of the project. The lending or fronting structure being assumed). ECAs involved included SACE, Euler Hermes, The agreement also assumes that the UK Export Finance, Finnvera, EKF, SEK, financing is tied export credit financing under Credendo and CESCE. The Berne Union, the the Organisation for Economic Cooperation Outline of typical buyer credit structure 78 Berne Union 2018 and Development (OECD) Arrangement on Key terms of the LMA ECA Buyer EXPERT ANALYSIS Export Credits (also known as the OECD Credit Facility Consensus) and that the financing is not Whilst buyer credit transactions have often subject to any sector specific arrangements. used LMA documentation as a base, the LMA By way of background, the OECD Consensus ECA Buyer Credit Facility contains additional is intended to provide a framework for the clauses not found in other LMA documents orderly use of officially supported export which were deemed by the working party to credits. In practice, this means providing for be customary for ECA buyer credit facility a level playing field, whereby competition agreements. Certain of these additional is based on the price and quality of the clauses are discussed below. exported goods and not the financial terms One such key clause contained in the provided. The OECD Consensus does this LMA ECA Buyer Credit Facility is an ‘Isabella by placing limitations on the terms and clause’, which is a standard feature of buyer conditions of officially supported export credit transactions. The intention of an credits (e.g. minimum interest rates, risk fees Isabella clause is to ensure, amongst other and maximum repayment terms) and the things, that the obligations, rights and provision of tied aid. The LMA ECA Buyer responsibilities under the export contract Credit Facility therefore includes footnotes are separate from those under the facility directing users to the relevant requirements agreement. of the OECD Consensus, for example, in The LMA ECA Buyer Credit Facility also respect of the scheduled repayment profile, contains an ECA ‘override’ clause, which is final maturity date and total commitments. intended to ensure that the provisions of the Whist the focus of the LMA project was finance documents do not conflict with the on the European market and the European ECA cover document and that the finance ECAs, the LMA ECA Buyer Credit Facility will parties are not obliged to do anything that be of application across all countries covered conflicts with the ECA cover document or by the OECD Consensus. The participants the requirements of the ECA. There is also a to the Arrangement are: Australia, Canada, clause to protect the finance parties if they the European Union, Japan, Korea (Republic act in accordance with the instructions of the of), New Zealand, Norway, Switzerland and ECA. the United States. In addition, by its very Another key feature of the LMA ECA nature, the LMA ECA Buyer Credit Facility Buyer Credit Facility is that utilisations can is intended to be used on an international be structured either as disbursements, basis, as the ECAs will be providing support being paid directly to the exporter, or for lending to other countries (often into reimbursement to the buyer, in which case developing markets). evidence of receipt of payment will be The LMA ECA Buyer Credit Facility is required from the exporter. These drawing accompanied by a User Guide, which sets mechanics are typical to an ECA buyer credit out further assumptions on which the transaction. The LMA ECA Buyer Credit agreement is based. Facility also provides that financing of any “The new LMA form includes most of the typical export finance provisions and encompasses options that would allow it to be adjusted to deal with specific circumstances. More specifically, the LMA ECA Buyer Credit Facility envisages the possibility for refinancing previously paid export contracts, capitalisation of interest maturing during the construction period, as well as the financing of local costs. It will certainly be a useful tool to simplify the negotiation of standard clauses and to assist the ECA market in general.” Massimo Schirò, Legal Affairs Director at SACE, commenting on the LMA ECA Buyer Credit Facility 79 Berne Union 2018 ECA premium is permitted and is capable of for export credit transactions. Export credit being financed via the proceeds of the initial transactions backed by ECAs are rarely loan rather than on a pro rata basis under governed by local law. each loan. The LMA ECA Buyer Credit Facility What next? also provides that if the ECA support is As with all LMA documentation projects, suspended, terminated or ceases to be the LMA ECA Buyer Credit Facility will be in full force and effect up to the agreed kept under review, and in particular will be level and scope of cover then a mandatory reviewed once it has been used on a number prepayment event will occur. The definition of transactions and practice has settled in of an ECA mandatory prepayment event is the market. It is indeed already being used one that needs to be considered on a case- on transactions. by-case basis. It was also agreed with the working In terms of the agency role, ECAs often party that, whilst there would be no specific require that the ECA cover document be environmental or social action clauses included entered into between the ECA and a specific in the agreement at the moment (as these are person (but not each of the lenders). This is deal/export credit agency/lender specific), likely to be an agent on behalf of the lenders. the working party would consider looking at As a result, this agency role may involve any language being produced by the OECD additional obligations regarding compliance working group on this area in due course. with the terms of the ECA cover document. In the meantime, the LMA would like As a breach of such obligations can to thank the working party members for potentially impact on the ECA cover for each their support for, and engagement in, this lender, the agent role is central to the ECA project. The project is an excellent example cover. There is no single preferred approach of pan-European cooperation between the to agent provisions in relation to ECA cover. public and private sector to support the The role may be designated as either a development of international trade and the ‘facility agent’ or an ‘ECA agent’, which may LMA looks forward to a continuing dialogue sometimes be documented as a separate on future export finance documentation. role. Therefore, the LMA ECA Buyer Credit Facility provides the option for a separate ECA agent role where required. This article was first published in the H2 2018 Finally, the LMA ECA Buyer Credit Facility edition of the Loan Market Association’s is governed by English law. This is typical biannual newsletter. “The LMA ECA Buyer Credit Facility template documentation is impressive for the way that it reflects collaboration between lenders, ECAs and lawyers, facilitated by the LMA and delivered in a user-friendly format. While the documentation is rightly focused at this stage on more vanilla ECA finance scenarios and is not designed to be a prescriptive document, it is a great template and should assist in the development of ECA finance as an asset class. It will bring a degree of commonality that will be welcomed by new entrants to the market whether they are lenders or borrowers. The fact that the LMA will review the document on an ongoing basis to ensure that it continues to reflect market standards is important, as is its potential for relevance beyond European markets.” 80 Jonathan Joseph-Horne, Managing Director, Structured Export Finance at SMBC, commenting on the LMA ECA Buyer Credit Facility Berne Union 2018 The complementary role of EXPERT ANALYSIS official development finance: some observations and recommendations By Paul H.J. Mudde, consultant of sustainable finance & insurance Introduction is needed. In various studies of the World Bank and A substantial part other development finance institutions (DFIs1) of the UN SDG it is highlighted that the financing needs of financing gap is developing countries to meet the UN caused by the lack of Sustainable Development goals (UN SDGs) bankable projects. are enormous. These SDGs cover a broad This means that more range of development topics among which efforts have to be put infrastructure, climate change, poverty into project development. An reduction, education and health. UNCTAD Paul Mudde estimates that the UN SDGs require an interesting initiative of additional investment of $2.5 trillion a year the DFI community is SOURCE, which is a over the next 15 years (see Figure 1). public project management tool enabling The international aid community broadly government and public sector agencies to recognizes there is a huge financing gap improve their project preparation activities.2 between the UN SDG financing needs and the financing that is available from The role of the OECD DAC developing countries’ own resources and In light of these developments the OECD funds from bilateral aid donors and DFIs. This Development Assistance Committee (DAC), implies that mobilization of non- which is the most important international developmental sources of capital – both forum dealing with the international aid public and private – is of utmost importance. architecture, has made some important In their joint report “from billions to trillions”, changes that have an impact on the published in April 2015, leading DFIs among which the World Bank Group, ADB, EIB, EBRD, IaDB, AfDB and the IMF state that “to Figure 1: Estimated annual investment needs & UN SDG meet the investment needs of the SDGs, the Financing Gap in U$ trillion global community needs to move the discussion from “Billions” in ODA to “Trillions” in investments of all kinds: public and private, national and global, in both capital and capacity”. It is also recognized by leading DFIs that the SDG agenda and their efforts to mobilize non-developmental sources of capital require “not only just more money”, but also “a global change of mindsets, approaches and accountabilities”. In other words a 81 fundamental redesign of the aid architecture Source: Unctad investment report 2014 Berne Union 2018 development finance community and other the economic development and providers of finance for developing countries. welfare of developing countries as its The main topic in the OECD DAC concerns main objective; and Official Development Assistance (ODA), b) is concessional in character and which is basically a soft or concessional form conveys a grant element of at least 25 of development finance. The international per cent (calculated at a rate of donor community has committed to allocate discount of 10 per cent).” 0.7% of their Gross National Income (GNI) to Source: OECD DAC ODA for developing countries, which explains the importance of ODA. ODA consists of In 2014 the OECD DAC agreed to implement bilateral ODA from donor countries to aid a new methodology to measure the recipient countries and contributions from minimum concessionality level for Official ODA donor countries to multilateral Development Assistance (ODA). With development finance institutions. A grant to concessionality calculations the OECD DAC for example IDA is recognised as ODA. donor countries measure in essence the Disbursements under bilateral aid loans with amount of subsidy provided by a donor to a minimum concessionality or grant level of distinguish ODA from other forms of 25% can also be reported as ODA. (official) financing (see Figure 2). Repayments of these loans are treated as negative ODA. This is why the current ODA Development of a new ODA framework recognises gross and net ODA. framework According to preliminary OECD DAC In the current OECD DAC system to measure statistics the net ODA disbursements of all concessionality a grant leads to a DAC members were in 2016 approximately concessionality level of 100%, whereas a $170 billion, of which $128.6 billion commercial bank loan (without any official concerned bilateral ODA and $41.6 billion subsidies) leads to a concessionality level of financial contributions to multilateral 0%. According to the current ODA definition institutions. the minimum concessionality level for a loan to qualify as ODA is 25%, but for many years Current ODA definition a fixed – highly doubtful – discount rate of The DAC defines ODA as “those flows to (1) 10% has been used, irrespective the tenor of countries and territories on the DAC List of the loan, the relevant currency and market ODA Recipients and to (2) multilateral interest rates of the financing. Today market institutions which are: discount rates are substantially lower than i. provided by official agencies, including the fixed 10% of the OECD DAC. In the state and local governments, or by their context of OECD tied aid regulations in the executive agencies; and OECD Arrangement for officially supported ii. each transaction of which: export credits (which is governed by a a) is administered with the promotion of different OECD forum than the DAC) more realistic discount rates are used. They are currency specific; take into account market Figure 2: Net ODA disbursements in million U$ (at current interest rates for sovereign borrowers and the prices) tenor of the loan. Today’s discount rates for ! 8 tied aid credits with a tenor between 15 and !8 ! 8 ! 8 ! 8 20 years are for the Euro 1.7% and for the ! 8 ! 8 ! 8 ! 8 ! 8 ! 8 $3.7%3. They are therefore substantially lower ! 8 ! 8 than the 10% discount rate for ODA. For ! 8 ! 8 many years it has been quite easy for many ! 8 donors to lend at or slightly above their own ! 8 long-term sovereign bond rates, while still ! 8 meeting the 25% ODA concessionality ! 8 threshold. The artificial high ODA discount ! 8 rate led therefore to a highly inflated ODA 8 performance of donor countries during the 8 8 8 8 8 8 8 8 8 8 8 past decade. This was an important motive for the DAC to redefine ODA. =;0>:?0;8-,@8=;0>:?0;88-,@8 41>?=($>=41)8>48$;>=;0>:?0;)841>?=($>=41)8>48$;>=;0>:?0;)8 64>0;8-,@864>0; -,@8 82 At the end of December 2014 OECD DAC Source: OECD DAC members agreed to count only as ODA Berne Union 2018 development grants and for development Least Developed Countries (LDC) and other EXPERT ANALYSIS loans only the “grant portion” of the loan. Low Income Countries (LIC) have been This “grant portion” is in essence the aid increased from 25% to 45%, which implies subsidy involved and is calculated on the that for these countries aid loans require a basis of new specific ODA discount rates. higher amount of subsidy to qualify as ODA. These new discount rates are now Important is that these new ODA rules are differentiated in three country categories, not only relevant for bilateral ODA loans, but namely 9% for Least Developed Countries also for the concessional lending activities of (LDCs) and Low Income Countries (LICs), 7% multilateral donors such as IDA and the for Lower Middle Income Countries (LMICs) regional development banks. For and 6% for Upper Middle Income Countries concessional loans of Multilateral (UMICs). Unfortunately the new ODA Development Banks (MDBs) have to meet the discount rates are again not an accurate applicable ODA minimum concessionality reflection of market interest rates and still levels. much higher than the more realistic discount The rationale of the ODA changes of rates for tied aid credits. It implies that ODA minimum concessionality levels is to will remain highly inflated in the future. encourage donors to provide more ODA to Interesting is that the IMF and World Bank countries that are highly dependent on aid apply a fixed 5%4 discount rate to measure and less ODA to countries that have minimum concessionality levels for loans to reasonable access to alternative sources of countries that fall under the IMF / World finance. But the unintended side effect could Bank Debt Sustainability Framework very well be that ODA loans to LMICs and (IMF/WB DSF). The DSF was developed to UMICs will increase, because donors require avoid unsustainable borrowing by developing substantial less aid subsidies for aid loans to countries. It applies to all Low Income these countries. The new concessionality Countries (LICs) of which many in the past rules could therefore be completely two decades benefitted from debt relief. counterproductive. Additional measures are As a consequence of these recent changes needed to avoid a misallocation of ODA (see there are currently three different Ta b l e 1 ) . methodologies for concessionality In the IMF/ WB DSF, which applies to LICs, calculations for aid loans of which the one for the minimum concessionality level is 35%, ODA is the least realistic. This is likely while for tied aid credits the minimum influenced by the desire of DAC member concessionality levels are 50% for LDCs and countries to meet the 0.7% ODA/GNI 35% for all other countries. It is unclear why commitment. the DAC has opted for its own minimum In addition the OECD DAC agreed in 2014 concessionalty requirements. Fact is that the to new minimum concessionality levels, which new ODA minimum concessionality levels and further complicate the ODA framework. For discount rates have complicated the Lower Middle Income Countries (LMIC) the international aid architecture. minimum concessionality level is set at 15% Currently the OECD DAC is discussing how and for Upper Middle Income Countries ODA can be used to encourage mobilization (UMIC) it is 10%. This implies that for aid loans of private sector sources of capital. This to these countries less aid subsidies are concerns a discussion on Private Sector required than under the old ODA framework. Instruments (PSI), which includes loans, Furthermore the concessionality level for the guarantees and equity investments. The focus Table 1: Aid architecture and concessionality calculations Old IMF / ODA New ODA WB DSF Tied Aid 4 Grant Element 25% • 45% for LDCs and other LICs 35% • 50% for LDCs Thresholds • 15% for LMICs • 35% for all other • 10% for UMICs countries Discount Rates 10% • 9% for LDCs and other LICs 5% • Euro: 1.7% (1) • 7% for LMICs • U$: 3.7% (1) • 6% for UMICs (1) These interest rates are according to the OECD arrangement on officially supported export credits the 83 applicable discount rates for tied aid credits with a tenor between 15 and 20 years in March 2017. Berne Union 2018 of the current discussion is to determine the only ODA, but also other forms of officially so-called ODA component (i.e. aid subsidy) supported development financing, is of these PSI-instruments. Very arbitrary therefore of utmost importance. It is in the calculation methodologies are suggested to interest of the donor community and the SDG distract the ODA subsidy from these financial agenda at large to use scarce subsidized aid instruments. This ODA component can then financing only for projects in countries that be reported as ODA, which will likely imply an do not have adequate access to financing increase of the ODA performance of donors. that requires no or less official support. The The intention of the OECD DAC is to seek higher the aid subsidies involved the more first an agreement on these ODA aid subsidy prudency is needed to avoid crowding out. calculations and at a latter stage a discussion In other words a clear understanding on will take place on the complementary role of the complementary role of development ODA. One of the problems is that again finance is critical and urgently needed to unrealistic discount rates are used to enhance aid efficiency and aid effectiveness calculate the ODA component of the PSI– and achieve the UN SDGs. instruments, which has also an impact on others forms of official finance. ODA and other sources of finance A challenge in all these OECD DAC available for developing countries discussions is that the entire new ODA Countries make use of various sources of framework is discussed in complete isolation finance. These sources include market based without properly taking into account market debt finance from domestic and international realities and the potential negative impact of bank and capital markets (without any form new regulations on alternative (non-ODA) of official support), ODA and Other Official sources of capital that are available to Flows (OOF). OOF, which is also reported to developing countries. Instead of crowding in the OECD, concerns official (government non-developmental sources of capital ODA supported) financing, which does not meet may crowd out these alternative sources. the ODA conditions, either because it is not Clarity about the complementary role of not primarily aimed at development of The role of official Export Credit Agencies (ECAs). ECAs exist in many OECD and non-OECD countries. Their main objective is to support exports and foreign investments from their home country. Leading ECAs are member of the so-called Berne Union, which is a global association of credit and political risk insurers. Berne Union members supported in 2016 11.1% of global exports. At the end of 2016 the total MLT exposure of Berne Union members in both export credits and investments was approx. U$ 961 billion. This amount is more than 200% of the outstanding exposure of leading DFIs on developing countries, which in 2016 stood at approximately U$ 419 billion. Outstanding exposure of leading MDBs in 2016 (in million U$) Loans Equity Guarantees Total IBRD/IDA 167.643 0 5.198 172.841 IFC 23.910 10.793 3.478 38.181 ADB 67.599 1.187 2.105 70.891 IaDB 81.952 0 230 82.182 AfDB 21.641 104 565 22.310 EBRD 26.213 5.949 638 32.800 Total 388.958 18.033 12.214 419.205 Obviously the mandates of ECAs and DFI’s differ. DFI’s have a developmental mandate, whereas ECAs have primarily an export promotion mandate. It is, however, a fact that both DFIs and ECAs have an important developmental impact, for they are both key in financing 84 the import and investment needs of developing countries. Source: Berne Union and MDB annual reports 2016. Berne Union 2018 developing countries or because it has a EXPERT ANALYSIS Figure 3: Multilateral gross disbursement in billion U$ concessionality level of less than 25%. OOF includes officially supported export credits of : !:::: !::: :::::::: :!::::!::: ::":::"::: : ::: official Export Credit Agencies (ECAs) and : :::: ::: : ::: ::: : :::: ::: :!::::!::: : ::: ::: : ::: ::: : ::: ::: loans from bilateral DFIs that provide : !:::: !::: financing on non-concessional terms, either :!::::!::: :" :::" ::: :" ::::" ::: at preferential interest rates (but too high to :" :::" ::: : ::: ::: qualify as ODA) or on market based terms. :"!::::"!::: Other examples of OOF are official : !!:::::: investment loans5 of EXIM banks and ECAs :::::: that are in particular used in project finance, "!!!:"!!!: "!! "!!:"!! "!!: "! ::::::::"! ":"::"! :::"! : :: "! ::: private sector market based lending of 2- Proparco) and so-called bilateral Source: OECD DAC “promotional loans6” to sovereign borrowers, regime not concessional7, but benefit from a whereby the bilateral DFI passes on the substantial subsidy. The interest rates are not benefits of its low funding costs to the loan market based. Although each MDB applies its to the sovereign. The German development own pricing system and pricing differs among bank KfW is quite active in this area of MDBs, the interest rates of individual MDBs promotional sovereign loans. are for all their sovereign borrowers the same, Developing countries borrow also irrespective their credit standing. An IBRD substantial amounts from Multilateral loan to a country like China, Mexico, Brazil, Development Banks (MDBs). Such financing Turkey or India has for example the same provided by entities like the IBRD/IDA is interest rate as an IBRD loan to a high risk reported to the OECD under “multilateral country in Africa (see Table 2). concessional lending” (which is the ODA In the OECD DAC discussions on the ODA equivalent for MDBs) or “multilateral non- component of PSI instruments the DAC is in concessional lending” (which is the OOF fact looking at the “ODA aid subsidy” in OOF equivalent for MDBs). (See Figure 3.) financing statistics. Would it not be easier for Non-concessional loans of MDBs include donors to partially reallocate ODA funds to market-based loans to private sector OOF financing instruments? Most OECD DAC borrowers. Examples are private sector loans donors are apparently not in favor of that provided by IFC and the private lending because this would likely negatively affect departments of ADB, EBRD, IaDB and AfDB their international commitment to spend 0.7% and sovereign loans to the public sector at of GNI on ODA (see Figure 4). preferential subsidized interest rates. The Figure 4 summarizes all main forms of latter concerns loans whereby the MDB official financing available to developing passes on the benefits of its low funding countries. It provides also indications of the costs (based upon its AAA credit rating and ‘”level of official support” for each financing preferred creditor status) to the loans for modality. Obviously an “ODA grant” their sovereign borrowers. These sovereign constitutes the highest form of official preferential loans are under the current ODA Table 2: Indicative non-concessional U$ lending interest rates of MDBs for sovereign loans with an average maturity of 15 years (Sept 2017) IBRD ADB IaDB AfDB Floating Base Rate for U$ 6 month Libor 6 month Libor 3 month Libor 6 month Libor Base rate 50 Bps 50 Bps 85 Bps 80 Bps Maturity premium 30 Bps 20 Bps Not Applicable 10 Bps Funding rebate/costs - 5 Bps - 5 Bps + 10 Bps - 2 Bps Total spread over LIBOR 75 Bps 55 Bps 95 Bps 88 Bps 85 Sources: IBRD, ADB, IaDB, AfDB Berne Union 2018 support and “market based finance”, such as Figure 4: Indicative non-concessional U$ lending interest a commercial bank loan, involves no official rates of MDBs for sovereign loans with an average maturity support. Between “market based finance” of 15 years (Sept 2017) and “ODA grants” there are various forms of official finance, with different levels of official support. Official non-development finance concerns (1) OECD ECA exports and (2) OECD ECA investment loans. The other forms of official finance concerns Official Development Finance (ODF), which is the sum of ODA + OOF provided by DFIs. How to avoid crowding out of market based finance or other sources of official finance 888888%4$%4$?<:98%$)>0=10(;:8*=101<:8#8"1)$?01<:8?<:9888%$)>0=10(;:8*=101<:8# "1)$?01<: Given the enormous financing needs of *98?=+0>:8<02=>0;8.;4)8*98888?=+0>: <02=>0; .;4) --*-*98->5:?84..=<=0;8.;4)8988->5:):? 4.....==<=0; 88.;4 developing countries mobilization of private ---*98$;>=;0>:?0;8--*883$;>=;0>:?0;8141 <41<:))=410;8;:1'=1 8-*988888$;>=;0>:?0; --* 3$;>=;0>:?0; 141 <4 1<:))=410; 88;:1'=1 -,,@98-..=<=0;8,:+:;423:1>8.=101<:8@988-...==<=0; ,:+:;423:1> 88.=101<: capital is high on the agenda of the --,@98$;>=;0>:?0;8-,@883$;>=;0>:?0;8<41<:))=410;8;:1'=1 8,@988888$;>=;0>:?0; -,@ 3$;>=;0>:?0; <41<:))=410; 88;:1'=1 international aid community. This implies that 88888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888 the DFIs and their guardian authorities need to be fully aware of which other sources of Figure 5: Top 10 MLT export credit exposure countries finance are (potentially) available to Berne Union members 2016 developing countries and how these other Between brackets the OECD ECA country risk rating of Oct. 2017 sources can be tapped. There is tendency within the aid community to narrow the discussions on the mobilization of private capital to the 5AB>+<)B4B>-< # <5AB>+<)B4B>-< # < (--A4< <(--A4<< development of public private partnerships :(C >3< <:(C >3<< (PPPs), in particular through project finance. C4A?< <C4A?< < The latter concerns projects that have the )4(+A financed and managed by the public sector. < 8?87,A4< <8?87,A4<< 8?45+< # <8?45+<< # In most other developing countries the share < !< < DC >5BA54< mobilizing capital for public sector projects. Participants to the OECD Arrangement on EXPERT ANALYSIS This is currently hardly discussed in the DFI officially supported export credits have made community, whereas the opportunities for the some important regulations on this topic. mobilization of capital for public sector They have amongst others defined minimum projects are substantial. Many governments in premiums to avoid distortion of competition developing countries – in particular middle- between various ECAs that are caused by income countries – have good or reasonable pricing differences. Furthermore the rules access to the private market and can obtain have been set to avoid a credit subsidy race financing (support) from for example official between OECD governments, because Export Credit Agencies, commercial banks ultimately the ECA export promotion and private insurers. This concerns in schemes involve scarce governments particular countries that are rated in OECD budgets and tax payers’ money. These ECA risk categories 2 – 4, but opportunities considerations are obviously also relevant for also exist in countries with a higher risk other forms of official finance, including profile9. The impressive overlap of exposures development finance. of for example IBRD/IDA and Berne Union The minimum OECD ECA risk premiums members on many countries show there are are based upon a joint risk assessment by all huge opportunities for cooperation and OECD ECAs of the financial, economic and alignment of operations. More or less similar political situation of countries. In the design overlaps exist with the portfolios of other of the minimum premiums market based Multilateral Development Banks (e.g. ADB, pricing benchmarks were also taken into IaDB, EBRD, EIB, AfDB). Enhanced account. The system is furthermore fed by cooperation through among others the joint payment experiences of OECD ECAs guarantee and risk transfer operations should with developing countries. These minimum be explored and utilized to mobilize more premium rules have been highly effective to financing for development and to improve aid avoid pricing distortion of competition in the efficiency and aid effectiveness (see Figures export finance business between OECD 5 and 6). ECAs.10 The aid community focuses on mobilizing The minimum OECD premium rules do not private capital, but this ignores that apply to bilateral investment loans provided important public – non-developmental by EXIM banks or supported by investment – sources of capital can be catalyzed for guarantees from ECA-insurers, because these developing countries, This concerns among loans or guarantees are not tied to exports others insurance capacity of official export but tied to the nationality of the (equity) credit agencies and lending capacity of EXIM investor. Reliable data on ECA pricing banks and investment capital from sovereign practices for these investment loans or wealth funds. These three public sources have investment guarantees are unfortunately not substantial capital available to support SDG available. There are, however, indications that projects in developing countries. That’s why these untied investment loans are crowding (governments through their) multilateral and out official export credits. During the past 6-8 bilateral DFIs should include these potential years the volume of untied investment loans sources in their mobilization strategies. and guarantees have substantially increased11. DFI mobilization strategies require not only They are mainly used for debt financing of clarity on which public or private funds can greenfield project finance transactions in be crowded in, but also a clear view on how which foreign equity investors are involved. potential “crowding out” of other forms of This concerns the largest share of Public finance without or with substantial less Private Partnership projects. official support, can be avoided. In other The problem of crowding out of official words: clarity about the complementary role export credits by these official investment of official finance. In this area the OECD DAC loans / guarantees could be avoided if for has thus far made little progress. There is the these EXIM / ECA investment loans the intention to discuss “additionality” in the near OECD minimum premiums would apply. For future, but this is limited to ODA PSI- the ECAs involved this should technically not instruments. The upcoming DAC discussion be a problem, because they are already should also include additionality of non-ODA familiar with the OECD pricing system and forms of official development finance and the risks to which they are exposed under development finance for public sector their investment programs are very similar to 87 borrowers. the risks under their export credit programs. Berne Union 2018 Multilateral or bilateral DFI investment to local banks to encourage them to lend to loans for private sector borrowers are usually certain parts of the economy in developing provided on market based terms, but unlike countries. (e.g. climate friendly investments, the ECAs, DFIs do not have a system of SME sector, microfinance). For many private minimum risk based premiums. In this area sector oriented DFIs this credit line business DFIs compete with market financiers concerns approximately 25% of their total (without official support) and ECA supported lending to the private sector. Minimum loans and even among each other. “Unfair premiums for trade related business would competition” caused by different pricing reduce the risk of private sector DFI loans practices could be avoided if the DFIs would crowding out other sources of finance that implement the OECD minimum premiums for require no or less official support. For private trade related foreign currency denominated sector oriented DFIs implementation of the export or import financing12. It would OECD minimum premiums should also therefore not apply to general DFI credit lines technically not be a problem, because they Table 3: The complementary role of different forms of official finance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erne Union 2018 currently apply market-based rates. If achievement of the UN SDGs. EXPERT ANALYSIS needed, they can, like ECAs and EXIM banks, An interesting additional tool that can be charge higher rates. The advantage of the introduced to check potential distortion OECD ECA minimum premiums is also that it between (highly) subsidized development will reduce pricing competition among DFIs. finance and market based finance or ECA An issue is likely that most DFIs are not export credits or market based DFI loans familiar wit the OECD minimum premium could be the so-called “commercial viability rates and do not like to be bound by (new) test” that has been developed for tied aid rules. On the other hand the OECD export credits13. This test ensures that non-market credit rules are formally already applicable to based tied aid finance operates bilateral DFIs if and when they support an complementary to the market. A similar export transaction from their home country. It commercial viability test could be introduced may be the case that bilateral DFIs are not for non-market based untied development fully aware of the potential relevance of finance. In this way it can be avoided that export credit regulations. It is therefore scarce non-market based funds are recommended that ECAs and DFIs work unintentionally crowding out private capital together to compare their pricing practices or public capital that involves less official and experiences. support. The OECD DAC could benefit from Promotional loans of bilateral DFIs and the extensive “body of experience” of OECD non-concessional preferential loans from export credit Participants with their MDBs, which in general are only provided to discussions about tied aid eligibility. sovereign borrowers, have a larger subsidy A commercial viability test for non-market component than the DFI private sector loans based untied aid will also contribute to define or ECA supported export credits. They may more precisely the complementary role of therefore potentially not only crowd our non-market based DFI finance (including market based financing, but also these two ODA) and enhance the developmental other officially supported sources of finance. impact of DFI operations. This is obviously of To avoid this from happening relevant DFIs great importance to developing countries and MDBs should check whether their more and the global SDG agenda. favourable financing terms are indeed required. It is also in the interest of bilateral Conclusions DFIs and MDBs to harmonise their pricing Enormous amounts of financing are needed practices for these preferential / promotional to achieve the UN SDGS, which implies that a loans, because today they differ quite strong alignment of development finance substantially from one another, resulting in with other forms of finance is critical. pricing competition among the various Mobilization of non-developmental sources of providers of “promotional” development capital is important to achieve the UN SDGS. loans. The discussion should not be limited to Bilateral ODA loans and concessional MDB mobilizing private capital. There are loans have even a greater risk of crowding important non-developmental sources of out other forms of finance for these loans public capital that can be catalyzed. Non- involve a substantial higher aid subsidy. These developmental sources of capital cannot only funds should therefore only be used as be catalyzed for private sector projects, but “finance in last resort”, when other sources of also for public sector projects. A focus on finance are not (adequately) available. In this “crowding in” other sources of capital way it can also be ensured that ODA is mainly requires a different mindset, incentives and provided to the least developed countries business approaches of DFIs. Of equal and low-income countries, which currently fall importance is the question how “crowding under the IMF / WB DSF. out” of market based finance without support This complementarity ranking could help or official finance with substantial less official official financiers, in particular bilateral and support can be avoided. multilateral development financiers, to It is therefore very important that the allocate their subsidized development OECD DAC starts with a fundamental financing only for those (parts of) projects discussion on the complementary role of and countries that truly require subsidized ODA and other forms of development development financing. The suggested finance, both for the financing of public and additionality check will contribute to aid private sector projects. For that purpose the 89 efficiency and aid effectiveness and OECD DAC should invite non-development Berne Union 2018 financiers to the table. In this way it can be both export credit and development finance avoided that new ODA regulations will be (tied and untied aid) topics. For some non- developed that negatively affect private or OECD countries have become important other official (financial) flows to developing official financiers of the SDG needs of countries. Clarity on the complementary role developing countries. These non-OECD of development finance is also critical to countries are currently not bound by improve aid efficiency and aid effectiveness. international export credit and aid OECD members should therefore seriously regulations. OECD and non-OECD providers consider applying the OECD ECA minimum of official finance and Multilateral premiums to: Development Banks should therefore work (1) untied investment loans of EXIM banks closely together on additionality of official and /or untied investment guarantees for finance. A global understanding on the debt financing of ECA insurers. complementary role of official finance is (2) Investment loans or guarantees for critical for the achievement of the debt financing from both multilateral and UN SDGSs. ■ bilateral DFIs for private sector projects. Furthermore a commercial viability test could be introduced for non-market based Notes development finance with relatively high 1 There are multilateral and bilateral DFIs. The most well known multilateral DFIs are IBRD/IDA, IFC subsidy levels. This could be used to assess MIGA, ADB, IaDB, AfDB, EBRD, IDB and EIB. the need for sovereign “promotional loans” Recently two new multilateral DFIs were and concessional loans. Concessional loans established, namely the AIIB and NDB. Examples of bilateral DFIs are public sector development banks should preferably only be provided to / agencies such as KfW (Germany) and AfD (France) and private sector development banks such as OPIC (USA), DEG (Germany), Proparco (France) and FMO (The Netherlands). 2 SOURCE has been developed by the Sustainable Infrastructure Foundation (SIF), which acts as A global understanding on executing agency for all participating development banks among which ADB, AfDB, BNDES, DBSA, the complementary role of EBRD, IaDB and the World Bank group. 3 These are the so-called Differentiated Discount official finance is critical Rates (DDRs) that are published by the OECD Export credit secretariat. The DDRs vary by for the achievement of the currency and tenor of the financing. 4 The IMF / WB adopted a 5% discount rate for UN SDGSs. simplicity reasons. 5 Investment loans or investment guarantees from EXIM banks and ECA-insurers are formally not tied to exports from the ECA country, but tied to the nationality of the investor. 6 It is unknown whether these bilateral promotional loans will qualify as ODA or OOF under the new countries that have no or limited access to ODA regime. It all depends on the level of market based finance or official finance that concessionality of these promotional loans. 7 It is unknown whether these preferential MDB requires less official support. This includes sovereign loans will be reported as concessional or amongst others the IMF/ WB DSF countries. non-concessional loans under the new ODA These suggestions could assist OECD DAC framework. It will depend on the concessionality level of the MDB loans. members and MDBs to enhance lending to 8 It is noteworthy that most PPP projects in those countries that really need ODA or other developing countries concern electricity generation forms of officially supported development / energy and telecom projects. See the PPI database of the World Bank. loans and improve the effectiveness and 9 More information about the OECD country risk efficiency of their development finance classification can be found via the following link: activities. http://www.oecd.org/trade/xcred/crc.htm 10 More information about the OECD minimum ODA can be used for project development premium for officially supported export credits can to increase the number of bankable projects. be found on the following website of the OECD: In this way ODA can contribute very http://www.oecd.org/tad/xcred/ 11 Important providers of untied investment loans are effectively to the achievement of the UN amongst others JBIC (Japan), KEXIM (South Korea) SDGs. and OPIC (The United States). Last, but not least: the OECD export credit 12 Due to the lack of reliable data on trade related DFI financing the volume of such DFI business activities and DAC member countries and the is unknown. 90 international DFI community should reach an 13 See the OECD Arrangement on officially supported understanding with non-OECD countries on export credits. Berne Union 2018 Berne Union-Offenburg University EXPERT ANALYSIS partnership on ‘Financing. Impact. Together’. What did we learn and what is next? By Mariane Søndergaard-Jensen, director, EKF and Christine Lund Andersen, senior advisor, EKF In June, a partnership between the BU and Offenburg University brought together BU members, representatives from the development finance communities, international banks, academics and policy makers at a symposium called ‘Financing. Impact. Together’. The Symposium was hosted by EKF together with KFW DEG and International Islamic Trade Finance Corporation. What did we learn and what is next? The objective of the symposium in projects increase? Offenburg was to discuss the roles of trade These are important and development finance in the quest for questions to ask mobilisation of private capital for growth, today, where we find trade and development. ourselves in need How does that objective fit with the of investments of BU’s mission to “actively facilitate cross- USD 3,300-4,500 border trade by supporting international billion per year if acceptance of sound principles in export we want to obtain credit and foreign investment”? Why does an the UN Sustainable Mariane Søndergaard- ECA like EKF decide to host this discussion? Jensen Development With the symposium, we wanted to goals (SDG’s) – in challenge the idea that the purpose developing countries of facilitating cross-border trade and alone. The gap the purpose of promoting economic between the need for development have nothing in common. We investments and the wanted to promote a discussion of whether available resources the mandate/purpose of an institution is is enormous, and the more important than the impact it delivers; need for cooperation to throw light on the idea that markets and and efficient use policy demands are changing, and that of resources and our mandates and purposes are creating Christine Lund financing instruments unhelpful silos. That perhaps development Andersen is essential in order to and trade finance institutions have more in reach the goals. common than we think. The BU is reaching out to various If we are using different instruments and organisations that may have different methods yet arriving at the same place purposes. Nevertheless they deal with and creating similar impact, how do we business, have a similar impact and may even make sure that our institutions provide operate with many of same instruments and complementary products and solutions? methods. The Symposium in Offenburg was What type of financing is needed to a part of the BU’s work in reaching out to the deliver on policy goals set by governments development finance community in order to and other stakeholders? Which way are explore methods for cooperation. institutions moving and will we complement Now, did we achieve what we set out 91 each other or will competition for the same to do? Berne Union 2018 We need to know the size and colours of each LEGO brick, but once we have that overview, the bricks are quite easily put together. The scene was set and a day and a half of intense discussions and exchange of views on how to meet future challenges and break down the silos ensued. We learned a lot during the two days in Offenburg. Four of the most important points we would pass on are 1: The objectives of the trade and development finance worlds are merging There are no longer two separate worlds. The “How do numerous financing institutions find their trade and export credits world and a world places in financing projects and work together like of traditional development financing have LEGO bricks?” worked in separate silos for many years. In the trade and export credits world, the sole policy goal was to promote national exports Financing could be as simple as and interests and to promote a level playing playing with LEGO bricks field with fair competition for trade. In the As host, EKF was asked to set the scene development finance world, the goal was to for 120 people from government agencies, fight poverty in developing countries through multilateral development banks, bilateral non-commercial projects. development finance institutions and Today, the worlds are merging. Our feet export credit agencies, most of whom are planted on unfamiliar ground between did not yet have much knowledge of the the two worlds: A land of question marks potential for cooperation, shared objectives without well-defined rules. We used the and similarities between the trade and symposium in Offenburg to get to know development finance worlds. that world. The diverse audience at Offenburg meant We can use the new common world to our that a simple but effective message on why advantage, if we can create a transparent it was relevant to bring all these different market, where our instruments can communities together was required. While complement each other. An efficient use of the actual underwriting of risk may require scarce economic resources can contribute to specialised knowledge and technical better mobilisation of private capital for the expertise, explaining the concept of covering SDGs. different types of risk need not. 92 Berne Union 2018 2: There is a growing interest in risk different financial instruments, and that the EXPERT ANALYSIS sharing different organisations do what they exist in The interest in risk sharing is definitely the world to do without stepping on each growing, but it is easier said than done. other’s toes. Sharing senior debt is complicated – it takes In the future, we have to use our energy numerous institutions and several tranches in not on what divides us, but what aligns us. the big projects, and everything need to be in sync. But there are many ways to do it. We Next step in our outreach to the should not just look at the layers of risk, but development finance community: also at the lifetime of the project. The Capacity Sharing Market Place Despite good intentions, it is challenging. The symposium in Offenburg revealed a lot We have to be willing to learn more about of good intentions and a willingness to better unfamiliar instruments. It is also necessary understand the new financing market. We to take time to get used to thinking of the all want more cooperation. Therefore, it is trade and development finance market important to act before we all sink back into in a holistic perspective. If one institution the usual routines and remain in our silos. specialises in insurance products, we should not step on each other’s feet to reinvent the same instruments. Feedback from Offenburg 3: There is a knowledge gap between was that we still need a the institutions and this threatens better understanding of efficient use of resources the different institutions. DFIs have a different mandate and raison d’etre than ECAs but the projects and The Capacity Sharing transactions relevant for ECAs and DFIs are Market Place is the first increasingly similar. ECAs and DFIs, multilateral and bilateral, step in hopefully many will meet on more and more projects in the years of successful future pursuit of financing the SDGs. We want to cooperation. avoid that lack of knowledge in the new world of financing leads to a situation where public instruments compete against each other in a race to the bottom. A situation At the next BU meeting in Paris on where public instruments crowd out the October 15th, we launch a pilot of a new private sector we are trying to mobilise, or concept called The Capacity Sharing where scarce public resources are being Market Place. The high-level objective is to used for projects that could be financed encourage and facilitate better co-operation with no (or maybe a minimal amount amongst BU Members and Development of) development assistance. If scarce Institutions. Amongst the invited will be development finance is used to win contracts DFI’s, MDB’s, commercial banks and the with national benefits either in terms of BU members, and the agenda will be a national content or national interests instead topic relevant to our common goal. At of using the trade finance instrument that is our first meeting, topic of the day will be available, we have a problem. infrastructure financing in high-risk markets, as this is where we see the right combination 4: We need to build bridges of practical overlap, low capacity and op- Transparency and coordination across portunities for impact and risk sharing. institutions and governments are important Along the day, there will be separate if we want to reach the SDG’s without a race sessions, where relevant institutions can to the bottom for trade and inefficient use of discuss specific financing cases, new public money. products or new partnerships that could lead The SDG’s have created a momentum and to new cooperation. a will for collaboration among the various Feedback from Offenburg was that we still financial institutions. It is important that need a better understanding of the different we build bridges between the traditional institutions. The Capacity Sharing Market silos and create a division of labour. This Place is the first step in hopefully many years should be based on an understanding of the of successful future cooperation. 93 Berne Union 2018 Sustainable insurance: leveraging public funds via new insurance partnerships By Thomas Mahl, managing director, and Franz Karman, managing director, SFR Consulting New partnerships can transfer the mechanics and principles of development finance from banking into the insurance market. Here we explain the challenges and potential of this new product type. The surrounding environment achievement The new sustainable development goals` of the sustainable paradigm shift has caused a substantial development goals. change in development assistance policy. The insurance The optimization of the scarce available industry is a public development funds – measured prominent provider by the leverage ratio of mobilized private of such instruments investments – became one of the key and therefore well performance indicators. Operating under the equipped to tap enforced maxim of private sector leverage, into that field. One Thomas Mahl the development finance industry seeks of its operational additional solutions to mobilize the influx of principles of maximum the private capital. capacity versus In addition, given the abundance of minimal risk capital private capital and the limited number of allocation shows sustainable bankable projects in developing excellent alignment countries, concerns were raised regarding to the formulated the risk that the activities of the development leverage goal of finance industry might crowd out potential the paradigm shift. private investors. These leverage Risk transfer and risk mitigating effects can be instruments have been identified by Franz Karman amplified via the development finance institutions reinsurance as its (DFIs) – which also comprises multilateral diversified portfolio generates additional finance institutions (MFIs) – as a discounting effects regarding the allocation promising tool to enforce and advance the of risk capital. The new sustainable development goals` paradigm shift has caused a substantial change in development assistance policy. The optimization of the scarce available public development funds – measured by the leverage ratio of mobilized 94 private investments – became one of the key performance indicators. Berne Union 2018 The basic structure DFI’s role and responsibility as advocated EXPERT ANALYSIS The idea of the new partnerships is to trustee, by transferring the methodology transfer the mechanics and principles of of development finance into the insurance development finance from the banking market. Hereby risks are shared between (re) into the insurance market. Currently DFIs act mainly as lenders and to some extend as investors for single projects. Subject to the risk the development banks blend their The public sector and DFIs capacity with donor funds, where they take insurance to either traditionally benefit from a unique access as insure their investment, sole accredited trustee of these funds. The idea of the new partnerships is to transfer or to expand the the development finance systematics and company’s own capacity instruments into the insurance ecosystem. As accredited trustees of concessional donor on an unfunded basis. To funds, development finance institutions are consider insurance and the entrusted with the role of using these funds market as an additional in blended finance structures to enhance investments in projects supporting the source for the expansion sustainable development goals. Besides of the institutions’ product direct investment, these institutions distribute subsidized finance instruments set is new. via a regional banking network. Generally, an agent ensures that the portfolio of supported business complies with the goals and insurers and DFIs via a risk participation or objectives of the concessional funds. guarantee structure. In addition, donor funds Focusing on the emphasized leverage – being allocated at a trust as “collateral” of scarce public funds, we designed a – complement the risk carrying facility to structure which supports and enhances the expand the boundaries of insurability. To Development finance transferred into the insurance ecosystem 95 Berne Union 2018 AEGF: sustainable energy for all in Africa In Sub-Saharan Africa the creditworthiness ceded to Munich RE. The facility operates of off-takers is one of the key factors on the principle of an open architecture deterring investments in this sector. and is eligible for Sub-Saharan African The weak balance sheets and poor “Sustainable energy for all (SE4All)” payment track records of many national projects which focus on energy efficiency, utilities is one of the reasons why many energy access and renewables. Investment commercial banks have been unwilling insurances ceded to AEGF will be to fund projects. Combined effort of managed and vetted by sfr-consulting governments, public institutions, the against environmental, social as well as financial/banking sector and the private governance standards according to the investors are therefore necessary to participating guarantors’ eligibility criteria. meeting the growing energy demands As acting primary insurer for AEGF, while addressing climate change risks. the African Trade insurance Agency (ATI), In response the European Investment a multilateral of 13 Sub-Saharan Africa Bank (“EIB”) and Munich RE designed a states, received underwriting training paid facility AEGF where EIB backs partially by technical assistance funds of EIB to via a guarantee agreement political risks enhance ATI’s capabilities and capacities. enhance and exaggerate the leverage effect finance institutions tend to prefer to stick to as well as the aggregated capacity building established routines and solutions, as new for primary insurers, the facility is designed products require a complex and long-term and structured as reinsurance risk capital approval process. substitute. The African Energy Guarantee Facility (AEGF) is an excellent example how Outlook this can work in practise: The involvement of public money, either via development banks or donors, in the The challenges insurance ecosystem as risk carriers is one The public sector and DFIs take insurance to of the most effective uses of public funds. either insure their investment, or to expand It attracts private capital in terms of (re) the company’s own capacity on an unfunded insurance capacity, which in turn can be used basis. To consider insurance and the market to insure private investments in sustainable as an additional source for the expansion projects. But these structures are complex of the institutions’ product set is new. and need external management. Irrespective of the new product’s alignment We are confident that more of these with existing market practice, the complexity structures will emerge, which will move of this multi-stakeholder structure, as well the insurance industry with its risk transfer as the limited experience with insurance solutions to an important contributor for the market cooperation, seems to hinder scale achievement of the sustainable development and multiplication. Besides, development goals. The involvement of public money, either via development banks or donors, in the insurance ecosystem as risk carriers is one of the most effective uses of public funds. It attracts private capital in terms of (re)insurance capacity, which in turn can be used to insure private investments in sustainable projects. But these structures are complex and need 96 external management. Berne Union 2018 Winds are changing for wind financing EKF has played a crucial role in the development of wind financing – a sector that continues to evolve to face new challenges. Wind energy has developed rapidly over the capacity. The offshore last two decades. From a small industry that industry is still much few believed would ever become more than smaller than onshore, a marginal source of energy to a promising, but the expected grand-scale industry offering important expansion of 34 GW contribution to the green transition. will double the present One ECA stands out as the one that has capacity. been part of the journey since the birth of the modern wind industry: EKF Denmark’s Projects exposed Export Credit Agency. They have been to new risks Christian Ølgaard labelled The green ECA, because wind makes As the industry up more than 60 percent of their portfolio. matured, and as the technology became EKF has contributed to the financing of more efficient and reliable, investor interest wind projects totalling EUR 20 billion during increased. In their search for yield, many the past 14 years. Consequently, in 2016, equity funds and institutional investors have EKF covered more than 50% of the total come on board attracted by the stable cash renewable energy commitments among flow and generous subsidies offered by wind OECD ECAs. projects. However, winds are changing in the However, the financing conditions are industry, and EKF is changing with them. changing rapidly in these years, not least in the Western world. Licenses for new projects An expanding source of energy are increasingly obtained via auctions which For many years, wind energy was heavily are driving down the need for subsidies. dependent on government subsidies. Simultaneously, regulators and offtakers However, as a result of strong competition require projects to carry part of the risk of and technological advances in the industry, changing electricity prices and fluctuations in wind energy has increasingly become wind production. Dealing with these risks is a competitive in its own right compared to challenge to lenders. fossil fuel-based energy and nuclear power. “New structures in the financing models This is stimulating demand and assisting are introduced to mitigate these new risks. the transition towards a sustainable energy Creativity is warranted as projects are future. banked upon confidence in their ability to Onshore wind capacity is expected to service the debt,” says Christian Ølgaard, grow by more than 250 GW from now on to deputy CEO and head of client services in 2022, corresponding to 50% of the present EKF. For many years, wind energy was heavily dependent on government subsidies. However, as a result of strong competition and technological advances in the industry, wind energy has increasingly become competitive in its own right compared to fossil fuel- 98 based energy and nuclear power. Berne Union 2018 Offshore power plants producers into the new markets,” Ølgaard EXPERT ANALYSIS Size matters and wind farms, especially explains. offshore, are no exception. In the last decade, EKF has been involved in financing some of Onshore wind expanding into the largest offshore wind farms off the coasts emerging markets of England, Scotland, Belgium, Holland and Onshore wind, on the other hand, is Germany. The 500 MW Walney Extension cheaper, having had a much more global situated at the west coast of England – the presence for many years. With its improved world’s largest offshore wind farm to date is competitiveness, onshore wind is increasingly a recent example. moving into emerging countries. In these “14 years ago, we financed wind turbines. parts of the world, wind investments are Then we financed wind farms. Nowadays more about satisfying the constant growing we are just one among a group of lenders demand for energy rather than meeting financing power plants that can supply policy targets for green energy supplies. several hundred-thousand households with Several emerging countries like Argentina, green energy,” says Ølgaard. Pakistan, Egypt, Kenya and Mongolia have The UK plans to build more and even embarked upon an expansion of onshore larger offshore farms above 1 GW – thus supplying more than a million homes with green energy. The UK plans to build “We believe that there is still a role for EKF more and even larger to play in Europe. The scale of project costs calls for numerous financing sources and offshore farms above given our experience in wind financing, we 1 GW – thus supplying still have much to offer,” says Ølgaard. more than a million homes He adds. “That offshore wind in Northern Europe is now a well-developed market does with green energy. not mean that the risk is lower than it was 14 years ago. A strong political commitment, wind capacity. However, these markets still including a government-supported fixed suffer from a shortage of finance as the price offtake agreement, backed the first commercial banks are neither willing nor offshore wind farms. Since then, construction able to offer financing without significant and technology risks have diminished, participation from non-commercial players whereas the market risks have increased.” such as ECAs, IFIs and DFIs. National policies and targets for green EKF is witnessing a significant rise in the energy supply combined with the lack of demand for financing in emerging markets. empty land suitable for larger and more However, putting together a financing efficient wind farms have been the driving package in the emerging markets is often a factors for offshore wind in Northern Europe. challenging and time-consuming process. The same factors are expected to drive the “Although it is important to us to assist new offshore markets in Taiwan, the USA, our exporters into the emerging markets, South Korea, Japan and China in the coming we also have to acknowledge that the risks, years. EKF stands ready to expand our both commercial and political, are often scope. significant. In the most difficult cases we “Denmark has a stronghold in offshore seek partnerships with other non-commercial wind. As long as it benefits the Danish players to ensure a strong group of lenders,” offshore industry, we are ready to follow our says Ølgaard. “Although it is important to us to assist our exporters into the emerging markets, we also have to acknowledge that the risks, both commercial and political, are often significant. In the most difficult cases we seek partnerships with other non-commercial players to ensure a strong group of lenders.” 99 Berne Union 2018 40 years – export credit competition goes beyond the Arrangement? By Pekka Karkovirta, chairman of the Participants to the Arrangement on Officially Supported Export Credits, vice president, Finnvera The only detailed international agreement governing public support for trade is the Arrangement of the Participants to the Officially Supported Export Credits. Celebrating 40 years anniversary it is time to reflect on its importance particularly in export credit competition. A living document most competitive The motivation and purpose of the first element of public version of the Arrangement, agreed in 1978, export credit support is still valid today: creating a framework for is still the actual the orderly use of export credits. This is financial terms and commonly referred to as fostering a so-called conditions. ’level playing field’ in order to encourage Within these 40 competition between exporters based on years, some of the quality and price of goods and services most prominent exported, rather than on most favourable negotiation milestones Pekka Karkovirta financial terms and conditions offered by include: the movement different public Export Credit Agencies of maximum repayment terms from clearly (ECAs). subsidized minimum matrix interest rates to Although many other important “softer” more market reflective CIRRs (Commercial elements have been introduced into export Interest Reference Rates), agreements on credits, such as environmental and social due minimum premia rules and trade-related diligence, anti-bribery policies, sustainable tied aid. Special sector understandings lending / debt sustainability and, perhaps have also been negotiated to govern e.g. more recently – under discussion in various climate change mitigating transactions, fora – sustainable finance as a whole, the coal fired power plants, ships, aircraft and Although many other important “softer” elements have been introduced into export credits, such as environmental and social due diligence, anti-bribery policies, sustainable lending / debt sustainability and, perhaps more recently – under discussion in various fora – sustainable finance as a whole, the most competitive element of public export credit support is still the actual financial terms and conditions. 100 Berne Union 2018 rail transactions, amongst others. The basic the developments within the commercial EXPERT ANALYSIS setting of rules are in place: I could argue banks’ regulatory framework, but one can that there is a basic trust and understanding still question whether ECAs are in fact between the negotiators, supported by very competing with banks, and indeed what the large transaparency; there is information future role of banks will be in export credits. shared when making decisions by ECAs There are other, perhaps softer elements, for certain transactions, and very thorough the emergence of which we have seen in information sharing afterwards, including detailed information even on premia rates charged and interest rates used. During the 40 years of negotiations within One of the hot topics for the Arrangement, the focus has steadily years has been national shifted into those areas where competitive advantage has been most exploited – indeed, interest policy. Discussion this has been so comprehensive a process ranges from domestic that there are very few areas left to explore. content requirements However, the present negotiations are concentrating on the structural issue of the to national interest and construction of fixed interest rates (CIRRs), even further: value chain as well as operational aspects of holding and locking-in of these; a practice which support. This could be can constitute very lucrative competitive described as being able to terms for borrowers. Should any further support global companies needs appear for improvement, Participants can easily table issues for discussion. It with headquarters could even be argued that parties to the typically in the ECA’s Arrangement have been relatively succesful in reaching satisfactory level playing field, country but whose and, therefore an innovative country has to activities are worldwide. find other ways beyond the Arrangement to possibly gain advantage. New competitive elements recent years. These include active marketing Once the most prominent terms and efforts. Many ECAs have established regional conditions for export credits have been offices to engage buyers and borrowers, agreed, what is left for ECAs to compete obviously with an attempt to create long- with? term relationships and secure future deals. New developments include ECA direct Those were the days when the ECA business lending facilities. The European ECA model was to await applications in the business model was largely based on a pure office! As industry consolidation continues, cover structure prior to the 2008 financial increasingly there are only a few major crisis. The crisis prompted a development buyers and a few major capital goods away from this, which today is seen as the exporters in any specific industry. Here, an ECA direct lending business model. One active ECA providing financial support to could argue that without commercial bank the buyers may play a crucial and highly involvement (as in a pure cover model), influential role. In many cases, exporters are direct lending by ECAs can be more efficient already required to provide an ECA financing and even more effective. We all know option when placing a bid. During the 40 years of negotiations within the Arrangement, the focus has steadily shifted into those areas where competitive advantage has been most exploited – indeed, this has been so comprehensive a process that there are very few areas left to explore. 101 Berne Union 2018 Another marketing tool is to create providing the service he needs. Competitive ”programs”. An ECA ”climate program” edge may be found inside a country’s ability may combine existing traditional export to provide services efficiently and even more credit guarantees or finance and still use importantly, effectively, so that SMEs can Arrangement terms. However, using the grow through internationalisation. ’climate program’ label, more attention is On a larger scale, and particularly in ”big gained, and when combined with ECA staff business” it is a well known fact that not all expertise on climate issues the ”program” major official export credit providers are may become a powerful marketing tool, Participants to the Arrangement. Certainly, not only to support exporters but also to one can question the relevance of any engage with other stakeholders. A similar agreement if a major part of the business tendency seems now to be emerging on the is conducted outside its reach. That is sustainable finance issue. why a new process, the IWG (International One of the hot topics for years has been Working Group on Export Credits) has been national interest policy. Discussion ranges established to provide a level playing field from domestic content requirements to among more countries than the Arrangement national interest and even further: value of today. Although the IWG may find its own chain support. This could be described as ways to structure a new arrangement, there being able to support global companies with is a choice to make: a relatively detailed headquarters typically in the ECA’s country agreement with long standing negotiations – but whose activities are worldwide. These although perhaps not 40 years – or, to have value chains eventually benefit the ECA a general framework for the provision of country, and the export credit support is thus export credits – read: more vague guidelines. justified. This kind of flexibility in support In order to be succesful, the latter requires for exported content may bring more high openness and transparency of all the opprtunities for exporters to combine various programs and even transactions. trade flows of goods and services. Finally, many countries provide various programs outside the scope of the Competition goes beyond Arrangement: investment loan support, Arrangement market window financing, and development Smaller countries especially have found finance support via ECAs, development success through combining various different finance institutions (DFIs) or other public support mechanisms and organisations to organisations, including even International gain efficiencies. For example, the country’s Financial Institutions (IFIs). There are only ECA may be merged with domestic SME so many ”good” projects in the world that support to better service internationalisation, some sort of cooperation but even more or government marketing boards may have competition is bound to emerge between the a strong link to ECAs to find additional various export, investment and development synergies. Very often, export support support organisations. If a country provides organisations on a country level may be seen many support windows both in and outside as fragmented and confusing – many SMEs the scope of Arrangement, it may bring may not know where to look for support. A competitive advantage. The competition is ’one-stop-shop’ offers a compelling model accordingly being raised from ECA level to where public export services may be found country level. Unfortunately, if this leads to in one place and the customer, in theory, trade diversion, undoubtedly we are not on does not even need to understand who is the right track. If a country provides many support windows both in and outside the scope of Arrangement, it may bring competitive advantage. The competition is accordingly being raised from ECA level to country level. Unfortunately, if this leads to trade diversion, undoubtedly we are not on the right track. 102 Since 2001 we have continued to provide commercial and political risk insurance for cross-border transactions, off ering risk mitigation solutions to South African exporters of capital goods and investors . We have partnered with credible fi nancial institutions and believe through partnerships economic growth can be achieved. As Export Credit Insurance Corporation of South Africa (ECIC) we are committed to supporting our South African businesses who export and invest in capital projects beyond our borders. If youʼre planning on exporting to or investing in capital projects beyond our borders, contact ECIC for assistance +27 12 471 3800 | [email protected] | www.ecic.co.za ECIC is a registered service provider with the FSB No. 30656 A US$1 Billion funding facility available for the South African-Africa Trade and Investment Promotion Programme (SATIPP) ECIC and Afreximbank, Africa’s trade nance leaders have partnered to bring you the South African-Africa Trade and Investment Promotion In partnership with Programme (SATIPP), a $1 billion funding facility aimed at boosting South African business export capacity, help them access investment opportunities on the continent and grow the country’s trade activities with other African countries. To access SATIPP please visit - ECIC.CO.ZA J24678_ECIC_Berne Union Yearbook_FA.indd 1 2018/08/29 13:35 Berne Union 2018 Export credit developments at the OECD: Good governance and sustainability By Silvia Gavorkníková, chair of the Export Credit and Credit Guarantee Working Party (ECG). Director of international relations, EXIMBANKA SR This year, the Working Party on Export Since this time the Credits and Credit Guarantees (ECG) ECG continues to celebrates 65 years of its contribution to strengthen national shaping landscape of the official support and international of export credits. Moreover, the year 2018 efforts to form a also marks the 40th Anniversary of The “level playing field” Arrangement on Officially Supported with respect to this Export Credits, one of the most significant financing support, milestones in official support of export thus minimizing the credit, reflecting the needs for the adoption possibilities for market Silvia Gavornikova of the framework – ensuring transparency distortions. OECD and fair competition among exporters from export credit disciplines are based on three participating countries based on the quality pillars: and price of goods and services exported, 1) Rules on the financial terms and rather than on the most favorable officially conditions for export credits, supported financial terms and conditions. 2) Trust building transparency on at the Today, the export credits community finds transaction-level itself again in the middle of a challenging 3) Flexibility of the Members to modify period of the globalized and dynamically the rules with the changing environment of evolving international trade, where we the international markets. need to face various internal as well as Since its establishment, the ECG has external influences. However, in ECG, current mainly monitored, compared and analyzed developments are perceived in a balanced existing export credit policies of its members, manner as a complex set of challenges, but focusing on the implementation of new at the same time opportunities, reflected in ECG instruments, creating a tailor made our work. reporting system, which is increasingly OECD work on officially supported export considered to ensure that the Member’s credits started 65 years ago, as the Group of policies for providing official export credit the Trade Committee, held its first meeting support are coherent not only with their in Château de la Muette in Paris in January international and domestic policies, but also 1964, with 60 delegates from 15 countries with the international obligations of the and the EEC. with the first Chairman good governance. The good governance being elected Mr. Bühler from Switzerland. issues relevant to the area of official export Today, the export credits community finds itself again in the middle of a challenging period of the globalized and dynamically evolving international trade, where we need 104 to face various internal as well as external influences. Berne Union 2018 credits are environmental and social due a positive impact on climate sustainability. EXPERT ANALYSIS diligence, anti-corruption measures, and debt The aim of the approved reporting, which sustainability. is able to identify such a transaction, is to provide a common set of disciplines for all Responsibility for an environmentally involved stakeholders such as exporters, vital future project sponsors, buyers, NGOs, industry The export credits community is, besides representatives and business lobbies, its economic aspects of the official export reducing the administrative burden support, very much aware of responsible for export credit agencies (ECAs), and business conduct in respect of human rights, addressing all export credit relevant concerns environmental and social sustainability, in in the environmental and social area. order to minimize possible negative footprint and preserve vital conditions for future. Combating bribery in Within the ECG, efforts to tackle all related international trade issues and challenges are first made on In the ECG, we all believe, that export the technical expert level of Environmental credits should be provided to transactions and Social (E&S) Practitioners from ECAs, not tainted by bribery. The intention to gathering at least twice a year to discuss replace and update 12 years old Council and develop methods and measures to Recommendation on Bribery and Officially enhance E&S due diligence processes and Supported Export Credits from 2006 reflect current trends in ECAs practices and is definitely one of the most discussed international environments, such as animal topics in recent period. Awareness for the welfare, biodiversity, and human rights. many aspects of bribery has evolved over The “Council Recommendation on recent years and it is our responsibility to Common Approaches for Officially act accordingly by addressing the issues Supported Export Credits and Environmental such as to deterring and detecting bribery and Social Due Diligence” sets the strong in officially supported transactions by procedures on monitoring of projects with including also domestic official under the high and medium potential environmental scope of the recommendation, as well as and social impacts and this process also calling for increased transparency in respect requires technical and administrative of the transactions. The ambition of the coordination concerning harmonizing of the new Recommendation is to prepare the environmental and social standards with ground for further measures to effectively other financial institutions, such as The World deter bribery, providing Adherents with Bank and other Multilateral Development necessary guidelines as well as flexibility Banks as well as Equator Principle Financial needed, which may serve as a new standard Institutions. for the time to come. The follow up of the Nowadays, climate finance objectively new Recommendation will be also practical continues to be in the global spotlight exchange of the implementation with regards creating pressure to have a reliable data to to the ECA guidelines and good practises in understand the positive impacts respective this area. financial institutions have on the climate. This area of the good governance is very Export credits community, acknowledging important, as well as regular co-operation this trend has introduced the common with the other directorates of the OECD and methodology for the identification of export continual dialogue with NGOs with regard to credits transactions that are deemed to have best practices. The Export Credit Group has traditionally been a platform for information exchange among OECD members and their ECAs with respect to the development and operations of their programs, the reporting and analysis of their overall ECA activities, raising awareness and understanding by governments, the private sector and general public of export credits. 105 Berne Union 2018 Sustainability of doing business decision. For instance, calls from industry Members of the OECD, being major representatives to consider increasing the providers of the official export credits, need flexibility of local costs support in order to to be responsibly aware of the fact that maintain competitiveness of the businesses Lower Income Countries (LDCs) are often from OECD countries engaged mainly in struggling with large external debts that can large infrastructure projects abroad, is now overwhelm their ability to reduce poverty discussed by the Adherents. Elements or provide essential government functions. of valuable comments on transparency Therefore also ECG representatives recognize by renowned global Non-Governmental that the provision of official export credits to Organisations (NGOs) were incorporated the public sector in such countries could play to reviewed text of Recommendation on a role in the run-up of unsustainable external Bribery and Officially Supported Export debt levels by these countries, and that due Credits. Constructive dialogue with NGOs consideration of this risk should be taken before providing such support. Thus, in order to support existing international framework The export credits of the rules, 10 years ago, ECG members had community is, besides adhered to a set of Principles and Guidelines to promote sustainable lending practices its economic aspects in the provision of official export credits of the official export to lower income countries in coordination with the Paris Club to support the World support, very much Bank Group and International Monetary aware of responsible Fund’s efforts to help countries avoid future business conduct in debt problems. This commitment has been consented by the OECD Council by adoption respect of human rights, of the revised Recommendation of the environmental and social Council on Sustainable Lending Practices and Officially Supported Export Credits on 30 sustainability, in order May 2018, and therefore transposed into the to minimize possible OECD legal instrument becoming binding for negative footprint and the Member States. preserve vital conditions Having stakeholders onboard for future. Export credits are part of a complex international trade ecosystem, with active engagement of various stakeholders focused on environmental and human rights performing their respective roles. ECAs, topics was very appreciated in context of committed to act responsibly in respect of developing new approaches to E&S due transparency and sustainability, are strongly diligence. affected by different external and internal Finally, the Export Credit Group has impacts. At the same time, governments traditionally been a platform for information have entrusted ECAs with support of the exchange among OECD members and their export activities of the businesses. In order to ECAs with respect to the development and familiarize with and possibly accommodate operations of their programs, the reporting relevant concerns of stakeholders from and analysis of their overall ECA activities, different spheres related to ECAs activities, raising awareness and understanding by there is an annually organized consultation governments, the private sector and general meeting between Civil Society Organizations public of export credits. To maintain best (CSOs) and members of the Export Credit practices and fostering a level playing field in Committees. Consultation is enabling the area of export credits good governance, stakeholders to exchange views on issues the ongoing work with Adherents and relating to particular dimensions of the stakeholders to monitor best practices official support of export. relating to the three ECG instruments, As a result, some of the most relevant with the view to facilitate their increased concerns are incorporated to proposals contribution to the wider policy goals of and room documents tabled on the good governance and official export credits 106 Group meetings for discussions and even will continue. Brazilian Guarantees Agency ABGF - Brazilian Guarantees Agency The Brazilian Export Credit Guarantees Agency is in charge of the export credit insurance and guarantees programme in Brazil, acting as the Government’s Official Agent for Medium and Long Term (MLT) and Small and Medium Enterprises (SME) cover. ABGF has 20 years of experience, 197 exporters served and 18.3 USD billion covered in 49 countries. The export credit insurance achieved 143.3 USD million in 2017. Our main products are export credit insurance, bonding support and SME export working capital cover. Providing risk mitigation solutions for traditional and high tech export industries. Our team of experts helps export-driven enterprises to boost their business in new and complex markets, helping Brazil move up the value-added chain. We provide on-line service to our clients facilitating the export cover process and building an export credit loss protection culture. Brasília, Federal District - Brazil Setor Comercial Norte, Quadra 02, Bloco A, 10º andar, Sala 1002. Edifício Corporate Financial Center. Zip code: 70.712-900 +55 (61) 3246-6200 Rio de Janeiro, Rio de Janeiro - Brazil Av. Rio Branco, 1 - 9º andar - Parte B - Centro. Zip code: 20.090-003 +55 (21) 2510-5000 www.abgf.gov.br/en Berne Union 2018 IWG: Time to lay the foundation stones By Michal Ron, IWG secretary general, managing director, head of international business SACE Collaborative and productive discussions in May in The Hague have helped light the way for news global rules for export credit. Global trade is increasingly threatened by President Obama and protectionist tendencies focused on limiting President Xi proposed economic cooperation in favor of defending to implement this national interests. Political turbulences and initiative. Moreover, diplomatic confrontations amongst states SACE is honoured to affect international stability. After years further contribute to of expansion of trade exchange and cross this historical process border investments, the risk of a return with a dedicated to market fragmentation is currently a team in support of feasible scenario. However, in this general the activities of the Michal Ron context, the discussions held in The Hague Secretary General. (Netherlands) in May at the 16th Meeting of Much has occurred in the global economy the International Working Group on Export since the first OECD Arrangement on Credits (“IWG”) were both collaborative Officially Supported Export Credits was and productive. Out of the reach of media drafted in the Seventies. With a wider, lights, delegates and experts from the interlinked world came bigger challenges: largest economies in the world had technical more exporting countries, advanced confrontations and in-depth debates in order products, new industries, diversified and to try and define the new global rules for more demanding customers. The time has Export Credit. come for the Export Credit universe to adapt The IWG is at present one of the few to this changing environment. institutional forums where both advanced The Participants in the IWG process are and emerging economies are represented, naturally motivated by different commercial reciprocally engaging in a constructive interests and their respective needs may dialogue. The IWG is revealing itself as a diverge substantially. However, the general unique opportunity to enhance the dialogue approach and the guiding principles are and the cooperation amongst different largely shared, and they constitute the countries. SACE, part of the EU delegation, philosophical basis for the future Guidelines. is an active participant since 2012, when In particular, discussions have been Much has occurred in the global economy since the first OECD Arrangement on Officially Supported Export Credits was drafted in the Seventies. With a wider, interlinked world came bigger challenges: more exporting countries, advanced products, new industries, diversified and more demanding customers. The time has come for the Export Credit universe to 108 adapt to this changing environment. Berne Union 2018 conducted along the following pillars: demonstrated thus far, one should also EXPERT ANALYSIS 1. Preservation of the level playing recognize that the endeavor is challenging field: the success of the exporting and reaching an agreement in the short term, companies should be determined by the covering all related aspects will be extremely competitiveness of their offer and not by difficult. the financial conditions provided by the The negotiations between OECD supporting institutions; members and non-members countries are 2. Avoidance of a crowding out effect: rendered more complex by the fact that official support should not interfere with countries implement different practices and the functioning of the markets ousting at times different definitions and/or criteria in private players from the export credit their business activity. In more general terms, business; OECD countries share the same rules which 3. Identification of the minimum common have been negotiated at length and adjusted denominators: the new set of rules should throughout the years. For this reason they arise from converging positions in order are reluctant to abandon the framework to determine the underlying requirements of the Arrangement that has worked well of Export Credit transactions, without in the past. Contemporaneously, emerging jeopardizing practices of any one economies are approaching the IWG exercise member country. with a much wider perspective: they are The IWG Participants generally agree with involved in the discussions on the new rules these underlying principles for the purpose in their twofold capacity as both suppliers of elaborating proposals and progressing the and recipients of capital goods, which may negotiations. Although the themes under require additional flexibility. discussion are complex, and positions often A major effort is required by all heterogeneous, we are on the right path. Participants in order to establish a new set Exchange of opinions has been profound of rules. It is a complex goal, yet not an and intensive, and the inter-sessional work impossible mission, and initial results are (i.e. between Plenaries) has been productive. positive. In those working groups where Members actively participate by sharing discussions are more advanced, specific their internal practices and providing their terms are already debated. comments on specific issues raised by the The IWG Participants and the Secretary Secretary General. Areas of convergence and General remain fully committed and focused. divergence have been mapped out, with the While we work towards a progressive erosion different positions identified. of the prerogatives of certain institutions, we The work during the past few months remain confident that this group of countries focused on seven Working Groups related to representing the most significant world different themes, as well as work on a Sector economies, may elaborate fair, shared and Understanding (i.e. Shipping). lasting rules that may regulate the services The IWG is currently outlining areas of offered by both ECAs and EXIMBANKs operation and forms of support as well worldwide on an ever-expanding set of as common definitions in order to arrive businesses. Upgrading Export Finance tools at a shared platform and understanding to a wider and interconnected world has thus on major themes. Notwithstanding the become a major priority. strong commitment of the Participants The negotiations between OECD members and non- members countries are rendered more complex by the fact that countries implement different practices and at times different definitions and/or criteria in their business activity. 109 Berne Union 2018 In for the long haul: Export finance and financial regulation By Henri d’Ambrières, Advisory Services in Export, Trade and Project Finance, HDA Conseil The unintended impact of financial regulation on the export finance market remains a concern for the industry, and mitigating these consequences calls for flexibility and dialogue with regulators. Like Export Finance, financial regulation is quality of the loans or a long-haul activity. As a consequence of their covers, nor that the financial crisis which began in 2008, of their guarantees. in December 2010 regulators published Several solutions a document named Basel III: A global were proposed: regulatory framework for more resilient 1. with the ICC Trade banks and banking systems. A finalized Register, banks have version was distributed in December 2017; it collected data since will be implemented between 2022 and 2027. 2011 on the efficacy A new version, which would consider new of ECA covers. This Henri d’Ambrières rules for Sovereign exposures, might appear confirms the low-risk later. nature of Export Credits. The Export Credit Group of the European 2. in Europe most export credits are Banking Federation (EBF) already expressed offered by commercial banks. Several in 2011 its concerns about the unexpected European States have developed refinancing consequences for Export Finance. The solutions for export credits through capital introduction of the Leverage Ratio was markets or public banks. This allows identified as the most critical one. The commercial banks to sell export credits convergence of financial regulation with the and hence reduce their needs for funding IFRS 9 might also have a severe impact on and equity. The need for similar solutions provisions linked to export credits. Last but was less stringent in Asia or America, as in not least, changes in the consideration of these regions some public banks have been sovereign exposures might also badly hurt very active providers of export credits for Export Finance. decades, and very often these banks are not regulated by Basel 3. The Leverage Ratio and Export The exemption of the Leverage Ratio for Credits Export Credits in Europe would help public The introduction of this Leverage Ratio banks and commercial banks regulated by was an answer to the poor quality of some Basel 3 in the delivery of export credits. guarantees, which were considered as good The first proposal made to the European ones to cover some risky loans at the time Commission in 2016 was restrictive as the of signing of the loan agreements, but which exoneration was limited to export credits were sometimes ineffective at the time of a issued in the currency of the ECA. According default. The Leverage Ratio, which compares to data collected by TXF on large deals over 110 the equity of banks to the gross amount of 2015-2017, 68% of the export credits were the loans, does not consider the financial issued in US dollars and 27% in Euros. While Berne Union 2018 30 to 40% of the export credits would be the exoneration of the Leverage Ratio to EXPERT ANALYSIS exempted for Euro-zone ECAs, most loans all export credits, whatever the currency, covered by other EU ECAs would not benefit for ECAs rated AAA or AA. This reference from any exemption as their domestic to a rating might be considered as strange currency is seldom used. This would give an as the Leverage Ratio is decorrelated from advantage to exporters based in the Euro- the quality of the assets in terms of risk. zone versus other European exporters. It creates a third category of ECAs within The second proposal, which is a Europe for which all export credits, including compromise agreed in 2017 at the European those signed in USD, would be exempted Council among members states, extended (see chart). Exemption for: All currencies € Only Other domestic currency only 111 Berne Union 2018 In 2018, the European Parliament loans1 which will apply to the 118 large considered that the exemption should be European banks regulated by the SSM. granted to all EU export credits whatever the Later in March 2018, the Commission country of ECA and whatever the currency, wrote a project of Revision of the CRD 42 but it did not amend the text proposed which would apply to the remaining 6,500 by the Council and now supported by the banks operating in Europe. In both cases, Commission. a progressive 100% provisioning on all defaulting loans is requested, even if the delay and the pace vary (see Table 1). For an export credit, with a 95% The importance of non- comprehensive ECA cover, this means that: performing exposures z the unsecured portion (5%) would be in the balance-sheets of provisioned at 100% in two years z the secured portion would be gradually some European banks provisioned from year one or two, until is often seen as a threat year seven or eight. This rule does not consider the normal practice of ECAs to the success of the which indemnify defaulting loans according European Banking Union. the contractual repayment schedule (with repayment periods ranging from three to 18 years for renewable energies), while To reach this objective, the EBF and the nobody questions the capacity of an ECA ICC proposed to exempt all export credits (or its Sovereign) to honor its commitments covered by an ECA participating in the OECD over the long-term. Arrangement. In such a case, all European This might affect the capacity of some countries would appear in green in the above banks to book and hold export credits, even chart, and all European exporters would be performing ones. The consequence might on level-playing field. be a reduced appetite for these low-risk Without a similar proposal, the EU will activities. have three categories of countries: the well Solutions might be: rated ones for which a global exoneration will z To impose on ECAs a revision of their apply, other Euro-zone countries for which practice with a global indemnification the exoneration would only apply to the a few months after the first default. loans extended in euros, and other European Consequences might be the prevention countries for which the exoneration would of debt restructuration, higher only apply to the few export credits signed in indemnifications for the ECAs to cover their domestic markets. some breakage costs, a higher fiscal impact at the beginning for ECAs Provisions on Secured Defaulting z To amend the rule to check if the Loans guarantor behaves as scheduled. When The importance of non-performing a guarantee is enforced, as long the exposures in the balance-sheets of some guarantor pays according to the terms of European banks is often seen as a threat to its guarantee, either with a global payment the success of the European Banking Union. or according to the original schedule, As a consequence, in March 2018 the ECB there should be no need for a provisioning issued a new guidance on non-performing of the secured portion. Table 1 End of Year 1 2 3 4 5 6 7 8 ECB - 100% Unsecured Portion CRR 35% 100% ECB – – 40% 55% 70% 85% 100% Secured Portion 112 CRR 5% 10% 17.5% 27.5% 40% 55% 75% 100% Berne Union 2018 Possible changes in the regulatory In addition, other suggestions on the need EXPERT ANALYSIS treatment of sovereign exposures to limit exposures on governments were For years, there has been a debate among made. regulators and ministries of finance as Most probably, the Basel Committee will not to whether to revise the preferred status agree on a proposal over the coming years. granted to Sovereign Exposures in the However, this proposal questions the nature of balance sheet of commercial banks. ECA business for commercial banks as: Since Basel I, an exposure on a Sovereign z Loans extended in US dollars and covered entity does not require any equity by US Exim or issued in Euros and covered z for claims on OECD governments (and by an euro-zone ECA would be given related entities) whatever the currency a clear advantage which would favor z for claims on other governments in their exporters in these countries if they can domestic currency convince their clients to use their domestic Basel II introduced in its Standardized currency Approach a 0% risk-weight for claims on z The status of ECAs varies. The few governments if they are in the currency of countries which deliver a guarantee of this government or whatever the currency their government would be given an for well-rated countries (AAA or AA). advantage. z The ceiling on exposures on a sovereign might affect ECA covers which are less liquid than Treasury Bonds For years, there has Basel 3 was not proposed with the been a debate among intention of dealing with Export Finance, which is a small activity for commercial regulators and ministries banks, but is critical for some producers of finance as to whether and buyers of capital goods and related to revise the preferred services. Regulators often recognize that its unintended consequences can harm status granted to international trade and that they do not Sovereign Exposures know our practices. Hence, we need to dedicate the required resources to explain to in the balance sheet of them our business. And if we adapt some of commercial banks. our practices, they will most probably listen to us. In December 2017, the Basel Committee issued a discussion paper on the regulatory Notes treatment of sovereign exposures which 1 ECB: “Addendum to the ECB Guidance to banks questions these principles. As the members on non-performing loans: supervisory expectations for prudential provisioning of non-performing of the Basel Committee were unable to agree exposures” issued 8 March 2018 (https://www. on a common proposal, the Committee bankingsupervision.europa.eu/ecb/pub/pdf/ssm. raised some suggestions such minimum npl_addendum_201803.en.pdf) 2 European Commission “Regulation Of The risk-weight higher than 0% for exposures in European Parliament And Of The Council the domestic currency, a much higher risk- Amending Regulation (Eu) No 575/2013 weight for exposures in foreign currencies or As Regards Minimum Loss Coverage For Nonperforming Exposures” issued on 14 March ‘18 a difference to be made among the Treasury (http://ec.europa.eu/finance/docs/policy/180314- and other sovereign entities (see Table 2). proposal-regulation-non-performing-loans_en.pdf) Table 2 Rating AAA to A- BBBs Below BBB- domestic currency [0%-3%] [4%-6%] [7%-9%] Central Government foreign currency 10% 50% 100% Other Sovereign Entity 25% 50% 100% 113 Berne Union 2018 Political risk likely to moderate returns By Simon Coote, deputy director, Oxford Analytica New research from Global Analysis and Advisory firm Oxford Analytica points to a period of lower foreign direct investment (FDI) and returns for multinational corporations. In a recent study with Willis Towers becomes most Watson, Oxford Analytica found that 55% evident among of companies with USD 1 billion or more North American and in revenues have suffered a political risk European companies. loss, with 43% of those exceeding USD 100 z Perceived risks in million. Losses primarily relate to instances of non-core markets – exchange transfer risk, political violence and such as an emerging import/export embargo, as well as increases markets crisis and instances of (creeping) expropriation. creeping expropriation Such losses are an important reason why – will reduce appetite Simon Coote 68% of companies have recently scaled to invest in emerging down operations in a country because of and frontier market; and rising political risk concerns. This strategy is z Pressure from populist trends requires focused on avoiding, reducing or lowering companies to demonstrate that priority and investment and corporate profile in ‘risky’ core markets are more than revenue centres, regions, such as Africa, Eurasia and Latin by investing in local environments and America. This will inevitably mean divesting people. assets and operations, as well as turning z Equity-based compensation, which is down risk-increasing projects with a positive relatively high by global standards, will net present value outside of fundamental, influence risk aversion dynamics of senior priority and core markets. This tendency decision-makers. Avoiding investment because of political risk concerns 114 Source: Oxford Analytica Berne Union 2018 In 2015, for example, equity-based EXPERT ANALYSIS compensation comprised an average of 62.2% Lower risks, lower returns of reported CEO compensation for the S&P Capital withdrawn from emerging 500. Equity-based compensation is intended, markets is likely to be reallocated to in part, to award managers to overcome share buy-backs and a series of vertical risk aversion and induce optimal risk-taking. mergers and acquisitions, which will However, this can have the opposite effect by circumvent regulatory pressures but increasing the sensitivity of managements’ lower returns. wealth to firm share price performance. Such growth-diminishing activities are especially likely in sectors Value-destroying M&A exposed to regulatory and trade risk, Risk averse, but cash-rich, firms may also including technology, healthcare and turn to mergers and acquisitions (M&As). pharmaceutical and industrials. Equity- Target companies would seek to cash out based compensation and inadequate sooner rather than later, particularly as geographic reporting standards will vesting periods have generally increased accentuate these shifts. since the financial crisis, while acquirer companies would seek to complete Impacts acquisitions before their stock loses some of z Calls will grow for enhanced ESG its overvaluation. and political risk reporting standards Research suggests that if this happens, among leading MNCs. combined shareholder returns will be 1.9%, z Perceived rise in geopolitical pointing to a period of relatively low returns. risk could present prime buying Under such conditions, even in mergers conditions for risk tolerant investors where bidding shareholders are worse off, such as the Chinese. bidding CEOs are better off three quarters z Scrutiny of corporate losses to of the time. This means a period of value- political risk will increase for destroying M&A. companies. Burgeoning trend Early signs are that such risk mitigation strategies are underway. For example, among publicly listed Risk radar (note: ranked by number of mentions) companies in the G7, merger and acquisition (M&A) activity has become less domestically focused, with foreign M&A as a proportion of total M&A rising from 50.3% in 2012 to 59.6% in 2017. However, during this period, acquisitions valued above 1 billion dollars have become more focused on key markets, with the top 10 and 20 countries accounting for 90.6% and 97.4% of all global M&A deals in 2018, up from 85.1% and 94.3% in 2012. Moreover, while political risk is not the only factor at play, it is notable that 94.5% of all M&A equal to or greater than 100 million dollars in 2018 by UK-based public companies has been in Europe, primarily Germany, Netherlands, Spain and United Kingdom. Between 2012 and 2017, UK investment across Europe averaged 60.1% of all M&A, reaching a low of 22.0% in 2015. During this same period, M&A activity of Chinese, German and UK public companies in the United States peaked in 2016, the same year Donald Trump was elected president. This shift is being enabled by multiple factors: Source: Oxford Analytica 115 Berne Union 2018 i. Political pressure for economic rate, net inflows of FDI decrease 12%. Rising deglobalisation sovereign spreads will therefore be an In North America and Europe, political important contributor to a potential decline emphasis on reducing economic and social in FDI. fragmentation is rising. If this continues, corporates will face increasing pressure Moderated returns to align more closely with consumer and This would in turn moderate returns for government values, especially on increasing shareholders, due to: local jobs, investment and content. Partly due z reduced exposure to riskier, but typically to Trump’s tax reforms on cash held overseas higher-growth emerging market and and the ‘demarcation lines’ created by a developing economies that the IMF potential trade war, this is already in evidence expects to grow on average 5.0% annually in the United States. between 2020 and 2023; and, z greater investment through M&As or share ii. Inadequate geographic reporting buy-backs in lower-risk but lower-growth standards advanced economies projected to grow Even large multinationals have inadequate 1.6%. geographic reporting standards that allow management largely to avoid questions from Demands for change investors about geographic capital allocation In response to moderated returns, some and performance. Rather, sovereign spreads activist investors are likely to demand greater are widely used as a proxy for country risk disclosure requirements related to corporate (see Better risk pricing can unlock billions in global footprint and exposure to geopolitical investment, April 5, 2018). risk; most listed companies currently only report on performance in a few key markets and within firm-defined regions. In response to moderated Improvements in the understanding of geographic capital allocation could well returns, some activist become part of efforts driving the growth of investors are likely to investments oriented towards environmental, demand greater disclosure social and governance (ESG) gain. requirements related Outside the western hemisphere to corporate global Outside North America and Europe, corporates with global ambitions may chart footprint and exposure to a different course, especially from countries geopolitical risk... such as China, Japan and South Korea where equity-based compensation is lower, and incentives – not just among state owned The last six months have seen an uptick in enterprises – tend to be more closely aligned sovereign spreads – the difference between to government objectives. the yield on a country’s bond issue and For example, Beijing’s financial support for the yield on a comparable bond issued by the Digital Silk Road will be pushed forward a benchmark country such as the United by companies such as Alibaba. While the States – across a broad basket of European overseas tie-ups of private firms such as and emerging markets, including Brazil, Alibaba and JD will advance Beijing’s Digital Colombia, India, Indonesia, Italy and Turkey. Silk, the government may also acquire stakes This is attributable to many developments, in firms (including possibly Alibaba itself) notably strengthening of the dollar, concerns directly to advance its strategic priorities. about a global trade war, Middle East Such an approach is consistent with how tensions and the state of the ‘European many governments align private and public project’. In coming months, sovereign objectives, including Gazprom in Russia, spreads will further widen, in turn, reducing Japan Post and Embraer in Brazil. In a telling the number of estimated net present value sign thus far in 2018, 75.7% of all M&A activity (NPV) positive investments, or increasing the valued at 100 million dollars or more by time horizon for a return on investment. Japanese public companies was in Europe, According to a 2015 study, for every single up from an average of 16.2% between 2012 116 percentage point rise in FDI project discount and 2017. Berne Union 2018 Trade at war EXPERT ANALYSIS By Jean Francois Lambert, founding partner at Lambert Commodities A complex interplay of trade disputes, sanctions, and tariffs may signal that globalization has turned a corner and we face a more uncertain and harsher world. Jean Francois Lambert explores the shaping of a possible new normal. 2018 may be remembered as the year unemployment, when trade went to war. Sanctions, tariffs, unsolicited withdrawals from the nuclear agreement immigration and with Iran and the Trans Pacific Partnership, stagnation of the threats to NAFTA, criticism of the WTO… Is middle classes’ this merely a temporary episode caused by a income. change of administration in the leading world The 2008 crisis economy, or a harbinger of a new economic exacerbated such (dis)order? critics and here we Hopes are for the former, but analysis are today: Brexit; Jean Francois Lambert unfortunately inclines to a more pessimistic political crisis in Italy; stance: we may have turned the page of a stalled Europe with the French-German a prosperous globalisation to enter into a engine sputtering; anger in Hungary, Poland, much more uncertain and harsher world. Catalunya; and the election of a new POTUS, whose agenda is to make America great A tougher world again, even if at the expense of its hitherto History has consistently showed us that allies, shaking the post war world order. economic crises take a long time to be We have entered into a tougher world and overcome. Whilst economies might rebound this is should not come as a surprise. in a few years only, the negative psychology of societies at large, which suffered during De-globalisation? How? crisis lingers and growing frustration could If globalisation is increasingly seen as a eventually translate into votes of discontent, threat rather than a blessing, at least in the and the election of populist leaders, ably Western democracies, does it mean this is surfing of the wave of anger. This was true in the end of it? Is our economic ecosystem the 1930’s, and it plunged the world into the bound to shrink back to our old nations darkest possible times. frontiers? The prospect might tempt several The good news is that the world has populist regimes, but how is this even considerably improved during the second possible? part of the 20th century. A new, peaceful, We live through a web of global supply order was built, and thanks to technology, chains, where a product is designed in one communication and transportation, a truly country, assembled in three others, with globalized economic world materialized. parts coming from ten different places, New urbanised and educated middle classes themselves made of components designed emerged from Asia to Latin America, in two or three countries, and made out of from Eastern Europe to the Middle East. raw materials and assembled in another ten… Undeniably, the world has grown wealthier some being already involved in the process and more prosperous during that period. at an earlier stage! However, in the developed economies, The times when one could view trade the catch up of emerging markets and as ‘imports and exports’ are over: trade is chiefly China has not always been seen as global and the right question to ask, albeit a having such pervasively positive effect: the much more difficult one to answer is: where perception is that income inequality rose, and is the added value? Are trade deficits such that in many instances, globalisation opened a concern when the purpose is to make use the door to a new, tougher competition, of cheaper production centres worldwide, leading the Western democracies into a to make a product that was designed in 117 painful deindustrialisation process, rising California and sold all over the places with a Berne Union 2018 significant profit margin by a top American costs. Allies are no more: only competitors. company? And, naturally, the biggest threat to The dislocation of global supply chains America’s leadership is China. through tariffs defeats its own purpose. It is bound to have several unintended Thucydides’ Trap ? consequences such as the likely rise of the The “Thucydides’ Trap” is how Graham final prices to the consumer, and sooner or Allison2 described the inevitable later, will trigger a tit-for-tat domino effect confrontation between a rising power and an which could in no time transform economic already dominant one. Could a trade war be bickering into geopolitical tensions. the harbinger of such fate? Well, if tensions And when this happens, the weapon of between dominant America and rising China, choice is the one everybody forgets, but is are inevitable, a fully-fledged conflict, even if yet at the origin of 100 percent of the world’s around trade, is fortunately very unlikely. merchandise trade: commodities and raw Granted, China’s geopolitical influence has materials. become palpable beyond its sheer economic power, and this challenges America’s Commodities, a weapon of choice supremacy but – and at least for four reasons A quick look back will tell us how time and – US and China will have to maintain a good again, commodities have been at the crux of relationship: geopolitical tensions1: First and foremost, because their z In the 30’s, when the US, worried about economies are closely intertwined Germany’s growing military supremacy, through trade; the chief concern of the US embargoed Helium exports of which it was administration today. However, China is also the sole producer. a prime creditor of the US, being by far, the z In 1973, when OPEC prohibited exports of first holder of US Treasuries at $1.18tn. crude oil to Israel and its allies in the wake Second, the US has grown overly of the Yom Kippur war. dependent on China through the global z In 1979, when the US embargoed the supply chains, notably in the technology exports of 17mio tons of cereals to sector. A link which would prove unrealistic USSR in retaliation for its military role in to severe. Afghanistan. Third, the often-disregarded fact that z In 2010, when China stopped supplying China has today a quasi-monopole in the Japan its rare earth upon territorial production of rare metals and rare earth, disputes on Senkaku islands without which most electronic devices z In 2014, when Russia used its gas to (including military equipment’s) would pressure Ukraine and Poland to endeavour simply not work, and strategic alternative to maintain its challenged influence over energy development would prove simply Eastern European countries. impossible outside China. Interestingly, and we should pay 2018: The Year of Living Dangerously attention, China unlike any other country has This year, commodities are also an important endeavoured to lower its reliance over US tool of the trade-at-war arsenal, with technology companies (Google, Facebook aluminium, steel, oil, soybeans and sorghum etc) in the new economy which are on top of the list. However, where 2018 is absolutely dominant elsewhere and notably in stark contrast with the past, is for the in Europe, by nursing its own juggernauts breadth of the decisions taken by the US such as Baidu, Alibaba, and Tencent or administration. Huawei. Never in peace-time have so many The US is not Athens, and China is not measures been taken simultaneously; shaking Sparta. The economic ties that have been the post-war order where multilateralism weaved are such that they are bound to was formed as a way to turn the page on come to terms. Besides, it is rather easy for two world wars. America was the promotor China, a centralised economy, to open up and architect of this construction. It seems it without putting much at risk, thus taking a has now turned to be its nemesis: UN, WTO, few good-gesture decisions to assuage the trade agreements… nothing holds against US administration and save both parties’ America’s focus, now uniquely centred faces. China is therefore probably safe. But is around its immediate self-interests. Europe? 118 ‘Making America great again’ but at all Berne Union 2018 Venus without Mars? Facebook and Twitter). EXPERT ANALYSIS As Robert Kagan put it: America is from Does this mean that the EU cannot react Mars and Europe from Venus3. For European to tariffs implemented by America? No, but it countries, Mr Trump’s wake-up call is ominous is realistically left with limited capabilities for and happening at the worst possible time, retaliation. when Germany and France struggle to articulate a common project for the future. America too big to shun? The European Union is entirely focussed on Tariffs call for tariffs. Tit for tat. Canada the daunting task of finalising a decent Brexit will strike first; Europe will take more accord with UK, whilst being challenged at time because of its sheer complexity, but its Eastern borders by Hungarian and Polish eventually will react in the same fashion governments, and potentially destabilized by against tariffs on aluminium and steel. Such an improbable Italian coalition. is the implacable logic of protectionism: a Europe is a massive economic superpower game of chicken. To achieve what? This is but remains weak geopolitically as it relies altogether another issue: very little and a lot on policies designed through consensus of harm, unless one of the opponents has between 28 (soon 27) countries which have the means to hurt the other one significantly different agendas. more than it is affected itself. Between the Furthermore, its dependency on the US US and Europe, who has the upper hand? is much larger than it looks: The US is the The outcome is rather uncertain, but a tariff war will primarily hurt the country which does not produce alternative products, Europe is a massive and this is where Europe may prevail over time: US buyers of European steel and economic superpower aluminium are looking for high quality but remains weak specs which are simply not available in the States. This is the supply chain effect where geopolitically as it relies indirectly tariffs are eventually tantamount to on policies designed self-inflicted pain. through consensus A re-balancing act of alliances is another temptation for European countries. As between 28 (soon 27) China’s dominance develops, it might be countries which have of mutual interest to form a special bond between the EU and China. Already, China’s different agendas. Belt and Road strategy aims at tightening links with Eastern and Western Europe. However, re-balancing takes a long time primary destination of EU Exports of goods and will certainly not solve the short- with $435bn in 2017, leaving a surplus of term problems. Besides, whether Western $139bn. The balance of services - what democracies will be willing to shift their Europe sells and gets is more or less even, dependence from the US to an autocratic at circa $250bn on both sides4. But the real nation like China (with Russia in the way) is magnitude of the intricacy of the relationship far from certain. History tells otherwise. is measured through the size of Foreign Meanwhile lets’ brace for probable Direct Investment: European companies’ total escalation, hoping it will not get out of hand. stock of investment in the US up to 2016 Of a bigger concern though is how the reached $3,180bn leaving, when offsetting dollar has become the biggest problem for US interests in EU, a positive balance of Europe and why this situation is not going to $409bn. A web of interest rather difficult to improve anytime soon, as neither Euro - nor disentangle. renminbi offer compelling alternatives. On top of this, two major dependencies are worth highlighting. First, the obvious Our currency, your problem one: besides France and the UK, European When John Connally, President Nixon’s defence hinges quasi exclusively on NATO. Treasury Secretary proclaimed to the G-10 in The other Achilles’ heel is the over reliance of 1971 “the dollar is our currency, but it’s your all European countries on US companies, to problem”, he did not have in mind the absolute cater for electronic communication tools and weapon of ‘secondary sanctions’ which was systems (Internet, Google, Apple, Microsoft, deployed at the eve of the 21st century. 119 Berne Union 2018 Simply put, secondary sanctions would rather than moderating the effects of allow the US to penalise non-US financial sanctions. institutions or corporations which would go Let us think about the consequences of against American interests in dealing with the sanctions taken against Mr Deripaska: a sanctioned company or individual. They it is highly probable that most international would be able to prevent any US citizen institutions are preventively reviewing their or US institutions from dealing with the exposures on Mr Deripaska’s companies thus contravening party. In effect, if penalized, indirectly creating even more pressure for the such party would be unable to do business in Oligarch to relinquish his ownership in the the United States or to deal in US dollars. various companies he controlled. Going one When Europe and the US are in step further, many institutions are probably agreement to implement sanctions against already revisiting their outright exposure a country or any private individual or on Russia amid worries over the possibility corporate, there is obviously no issue. further tensions. However, if there is dissensus between the US and EU on the course of action to follow, New dis-order, New Normality the leeway of European counterparts is The picture is bleak arguably. Maybe therefore extremely limited. – hopefully- tensions are simply the Promoting the use of the Euro instead manifestation of POTUS’ new diplomatic of the dollar is a logical step to take for tactics and will abate. Maybe when national European counterparties – and Europe should security is invoked as a rationale for tariffs have done so for a long time. Yet, in dealing and sanctions, this is just rhetoric and easily with US sanctioned parties, this would only challengeable at multilateral institutions like help counterparties (corporates, financial the WTO. institutions and their staff, potentially) without Yet the current tensions have roots in an any activity in the US or in dollar. When 83 economic crisis we thought we escaped percent of world trade is denominated in relatively unscathed. When the bad genie of dollars5, and when European companies have protectionism is out of the bottle, it takes a such huge investments in America, one can while to put it back in. If this is correct, then measure the challenge and understand why we should brace for further turmoil and trade already large groups such as Total have made is likely to be at war for a while longer. clear that if sanctions are reinstated against With what effect on the business? All Iran, they will have no choice but to halt their this is obviously not good but let’s not investment program there. underestimate the resilience of the global The banking industry is not in a position supply chains. Trade will certainly keep to take any chance either and even if the EU flowing but the question is how is it to be puts a protective program in place allowing supported by nervous financial institutions? European parties to keep their dealings with a A flight to quality and safety is likely, as country despite being sanctioned by the US, it banks will probably prioritize more self- is rather unlikely they will make use of it. liquidating, short term exposures than longer tenors. As to big strategic shifts (from dollar Between the rock and the hard place to Renminbi to Euro, isolation of the US, Banks are indeed in a very difficult position. stronger partnership between China, Russia, Losing their banking licence in America or Europe), they will not happen overnight. being unable to deal with any US bank is Venus and Mars need each other anyway simply not an option. This explains why, often and divorce is an unlikely option. That frustrating their clients in the process, they have leaves both parties to define new rules of become docile and zealous enforcers of any US engagement and all of us to muddle through sanctions, however tight the relation with their in the meantime. customers is: non-compliance risk has become as critical - some will say more critical- than Notes credit risk in banks’ business assessment. 1 See Guillaume Pitron’s La Guerre des Métaux Rares, p124. The tragedy of this situation is that it 2 Foreign Policy June 2017 – The Thucydides’ Trap by induces a very risk adverse culture which Graham Allison. means that in case of any doubts, banks 3 ‘Of Paradise and Power’, Robert Kagan, July 2004. 4 Figures 2017 Source European Union Directorate will often err on the side of caution. In other General for Trade Apr 2018 – converted to dollar at words, banks, because of the severity of the 1.16. 120 non-compliance risk are, de facto, amplifying 5 Source Swift Trade Traffic 2017 as reported in ICC Global Trade 2018. Berne Union 2018 Sovereign debt EXPERT ANALYSIS restructuring and debt swap provisions: enhancing economic resilience By Paola Valerio, head of international relations at SACE SIMEST (Cassa depositi e prestiti Group) The sovereign debt restructuring scene has changed significantly over the past few decades, and the importance of preventing future economic crises, as well as curbing unsustainable borrowing in low- income countries, is examined here Over the course of the past 30 years, the recommendation sovereign debt restructuring scene faced does not represent significant changes. a mandatory clause Experience has demonstrated the as it does not define importance of preventing future economic priority projects for crises by mitigating their impact on debt development. dynamics through the implementation In light of the above of pre-emptive contingent mechanisms. and with the aim On the other hand, new international to further enhance instruments have assisted in the reduction economic resilience, Paola Valerio of unsustainable borrowing as well as the in more recent years recurrence of indebtedness cycles in low- official creditors have been promoting new income countries. sustainable financing mechanisms, which Debt treatments under the HIPC1 initiative, include countercyclical and risk sharing which since 1996 has been providing relief tools as well as debt swap arrangements through debt cancellations to 36 countries, to assist beneficiary countries to restore proved that nominal haircuts do not sustainability. Conversion mechanisms, also represent an efficient solution if they are known as debt swap operations, provide not coupled with fiscal discipline. According opportunities for the allocation of resources to recent literature, debt treatments might to projects that support development. have a significant impact on countries’ The international financial community has economic growth but, at the same time, become more supportive of debt swaps the beneficiaries tend to be less prudent as instruments to combine debt reduction in their fiscal policy compared to countries with new investments, thus improving debt benefitting from a restructuring in net sustainability in the long term. present value terms2. Accordingly, when deciding upon the type of relief to be Debt conversion allows debtor granted through debt restructuring, the countries to save budget resources, official sector seems to face a trade-off which can be redirected to essential between the goal of stimulating growth sectors of the local economy. and fostering fiscal sustainability. As A debt swap is defined as the cancellation of usually envisaged in the framework of a portion of the external debt of a country HIPC agreements, debt cancellations are in in exchange for the debtor’s commitment to principle contingent on the implementation mobilise domestic resources for an agreed of development projects, although such purpose at agreed terms3. Debt swaps have 121 Berne Union 2018 been negotiated in the context of debt important condition (or pre-condition) can be restructuring since the introduction of the represented by the involvement in the project Paris Club debt swap clause in 19904, which of national companies from the creditor provides the basic framework for conversion country. In this manner a debt cancellation of sovereign debt. can also turn into a positive outcome for Such conversion represents a voluntary a creditor country, facilitating national option for both debtor and creditor companies’ operations in emerging markets. Governments, usually provided in combination with a Paris Club multilateral The process needs to follow treatment. a transparent and predefined Under the standard modality for the procedure implementation of a debt swap mechanism, Although the implementation of conversion the official creditor agrees to cancel a mechanisms undoubtedly brings positive portion of the credit denominated in advantages, it also requires accurate due hard currency and requires the borrower diligence and feasibility analysis to reduce to provision the equivalent amount in potential weaknesses and manage the local currency. Such pool of resources is resources efficiently. In this respect, the subsequently assigned to specific purposes, establishment of sound criteria for the previously agreed between the borrower eligibility of projects, to be agreed between and the creditor, and can be used to finance creditor and borrower country, is an essential eligible projects. Conversions are usually precondition to avoid any misunderstanding implemented through the establishment of or potential dispute. The selection process a fund in local currency, where the money is for eligible projects needs to follow a deposited. The possibility to jointly manage transparent and pre-defined procedure the fund, both by the debtor and the creditor, highlighting the required documentation and facilitates the effective implementation of the different steps for approval. Furthermore, predefined projects as well as the efficient the provision of strict KYC criteria for utilization of the available monies. companies to be potentially involved As for the eligibility criteria of projects represents a safeguard for governments falling under such financing mechanism, the when dealing with such mechanisms. Finally, majority refer to social and environmental sound ex-post monitoring mechanisms to programmes, often implemented in verify the execution of the project, also cooperation with international Non- through the analysis of the milestones, are Governmental Organizations. This was key to ensure that resources are utilized in an specifically the case of the innovative “Blue effective way. buyback” scheme agreed in 2015 between Seychelles and the Paris Club. By combining a restructuring from Paris Club creditors with Notes financing provided by an NGO, a portion 1 Heavily Indebted Poor Countries (HIPC) Initiative launched by the International Monetary Fund and of the debt owed to official creditors has the World Bank in 1996. been be redirect to marine conservation and 2 The Macroeconomic Effects of Official Debt climate change adaptation projects. The Restructuring: Evidence from the Paris Club, Cheng et al. (2016). initiative will certainly also assist to develop 3 Lessons Learnt from Experience with Debt-for- key economic activities that depend on the Environment Swaps in Economies in Transition, country’s maritime resources, namely the OECD, 2007. 4 The Paris Club conversion clause was introduced tourism and fisheries industries. It is worth in 1990 in favour of Low-middle-income countries mentioning that, in addition to the priority of and was extended in 1991 to severely intended low- the project for the debtor country, another income countries (SILICs). Although the implementation of conversion mechanisms undoubtedly brings positive advantages, it also requires accurate due diligence and feasibility analysis to reduce potential weaknesses and manage 122 the resources efficiently. Berne Union 2018 Yes, Venezuela has a EXPERT ANALYSIS future: three scenarios By David H. Anderson, president at Anderson Risk Consultants and William Green, founder and managing partner, TDI In the wake of the illegitimate 20 May presidential elections, Venezuela is at an inflection point. The country faces an acute political and economic crisis, and the Maduro government’s long-term viability is low. For outside observers, it is important to consider what comes next in Venezuela, and what signals will determine the country’s path. “Eleven years ago, I was quite gullible. I even mismanagement of believed in a third way; I thought it was this resource are the possible to put a human face on capitalism. primary source of But I was wrong. The only way to save the Venezuela’s political world is through socialism, but a socialism and economic that exists within a democracy; there’s no problems. The dictatorship here.” – Hugo Chavez, 2010 commodity had a central role in “A state too expensive in itself, or by virtue of establishing Venezuela its dependencies, ultimately falls into decay; as the wealthiest its free government is transformed into a David Anderson country in Latin tyranny; it disregards the principles which it America by the 1970s. should preserve, and finally degenerates into In the 1980s, the oil glut and a subsequent despotism.” – Simon Bolivar, 1815 sovereign default led to stagnation and declines in living standards, along with rising As exporters, lenders, insurers, and investors frustration among the poor majority. The look out on the risk landscape, few countries subsequent victory of the populist socialist present as grim a picture as Venezuela. Hugo Chavez in 1998 elections, following Yes, there are other countries that have his earlier attempted coup in 1992, saw recently over-extended themselves in a the politicization of the state oil company high-commodity price environment—Angola, Ghana, Zambia, Chad among them—but none have experienced the kind of economic collapse and political crisis that Venezuela It is well-known that Venezuela is is going through nor have they declined a petrostate—the county has the from such heights of wealth as Venezuela had in the 1970s to the essentially failed largest proven oil reserves in the state it is today. Venezuela thus provides a world, and oil accounts for cautionary tale for risk managers assessing their global exposures and strategies. For 95 percent of export earnings. market participants, it is useful to consider how Venezuela arrived at its current crisis, what paths lay before it, and how new Petróleos de Venezuela SA (PDVSA), developments signal a change in Venezuela’s aggressive domestic social spending, and direction. wasteful foreign policy financing initiatives— It is well-known that Venezuela is a policies that were all dependent on oil prices petrostate—the county has the largest around the USD 100 per barrel mark. proven oil reserves in the world, and Chavez’s “Bolivarian revolution” oil accounts for 95 percent of export bankrupted the country. Heavily influenced 123 earnings. In large part, perceptions and by Fidel Castro and the Cuban model, Berne Union 2018 Chavez complemented his domestic of the regime-controlled Constitutional agenda with a reorientation of Venezuela’s Assembly tasked with rewriting the foreign policy away from its largest export constitution. market, the United States. Chavez’s chosen The military high command, having been successor, Nicolas Maduro, doubled down subject to multiple purges in the officer corps on the same disastrous policies, driving following the 2002 coup attempt, is the away international investment, hampering bedrock of the regime. High-ranking officers economic development, and emptying are rewarded based on political loyalty to state coffers, all while oil prices plunged Maduro, and mass promotions—including the starting in 2014. With its negative impact 2016 promotion of 195 officers to the rank of on good governance and accountability, general—and financial incentives inextricably corruption, which has always been a problem link the top brass with Maduro’s fate. High- in Venezuela, has accelerated dramatically ranking officers hold ministerial positions, among senior military, security, and police manage PDVSA, and are involved in corrupt officials and led to Venezuela becoming a food distribution programs, illicit trade, and key narcotrafficking hub. narcotrafficking with Maduro’s approval. Venezuela’s major economic indicators However, the economic crisis is so grave are calamitous and accompany a growing that desertions have risen to an alarming internal humanitarian crisis and refugee level, and the high command must be aware exodus to neighboring states. Oil production that its ability to deploy is decreasing by has declined from a high of over 3 million the day. How military officers, particularly at barrels per day (bpd) in 2000 to 2.3 million lower ranks, calculate their options is a major bpd in 2016. Since then, production has fallen variable for Venezuela’s future. to about 1.4 million bpd today—1.1 million Meanwhile, foreign governments have bpd is exported, and half of the exports played a substantial role in shaping Caracas’ are used to repay Chinese and Russian outlook. First among these is Cuba— loans, according to Asdrúbal Oliveros at alongside similar social and economic Ecoanalítica in Caracas. With all the problems policies, Venezuela’s leadership has looked to at PDVSA, daily production may fall below 1 Havana as a model authoritarian system to million bpd by 2019. Hyperinflation is well- emulate. Trade in oil and the deployment of entrenched, and the IMF’s current estimate Cuban doctors and intelligence operatives in indicates inflation could rise to 13,000 Venezuela cemented the shared ideological percent this year. outlook. However, by a combination of design and circumstances, Venezuela has never Domestic and international made the full transition from authoritarianism influencers to Cuban-style totalitarianism. The influencers and interlocutors in Early in Chavez’s regime, Beijing and Venezuela are in flux, raising uncertainty Moscow saw both a business opportunity in in an already volatile jurisdiction; however, Venezuela’s oil sector and a useful ideological understanding the motives and capabilities foil against the US. China has provided USD of key factions is central to interpreting 62 billion to Venezuela since 2007 as part future developments. of an oil-for-loans program according to Venezuela is effectively a one-party Washington-based Inter-American Dialogue. state with aggressive security services Since 2016, Venezuela has only made interest (augmented and influenced by Cuban payments. Russia’s state-owned Rosneft intelligence) and a supportive military. The has similarly provided financing to PDVSA, political elite around Maduro are members of secured by shares in PDVSA’s US-based the PSUV party and are largely committed refining and retail subsidiary, Citgo. to Chavez’s populist-socialist policies. The United States, while diminished in The regime was always suspicious of the influence since Chavez’s election and the West and capitalism, but the 2002 failed failed coup, remains an essential player by coup, many mass protests, and ensuing virtue of Venezuela’s dependence on oil economic collapse has encouraged further exports to the US. Approximately 40 percent radicalization among high-level members of Venezuelan exports remain destined for of the regime. Against the regime is the the US. Although there are some sanctions majority-opposition-controlled National on Venezuelan officials, Washington has Assembly, but Maduro succeeded in hesitated to stop purchasing Venezuelan oil 124 containing it in March 2017 with the creation due to the negative impact on Venezuelan Berne Union 2018 EXPERT ANALYSIS TIMELINE Venezuela. 1976 1982 $!!$- # #0+!:)$ !$$"#* !$!$ !&( )& 2#0+!#* $#! 0 *)$ ! #+)*(/2(* # ! !+*#)$,( #+!*4 *(%!$) #0+!894#0+! )* ( )* 1989 $+#*(/ # * #"( 4)*.&#) $#$&+! *4 $,(#"#*##$+#)# $(* $$.$#$" &($ (" #!+ # &( #())2- * *(#)&$(*&( )* 1992 "$)*+#&$&+!(4 5(0$6( $* *4$!4 + $ ,0!) !$+& $+()3 +#()8* $+)#)2/)$" **"&* #(+(/ #)*5#$! (! $+#*)9( !! #* )$((4 &$! )6#$((+&* $#2# ) !4 , )* $ ()!#$* ($+& 1993 **"&* # $,"(# !4 1994 () #*(!$)#()(02- $ # ($# ! * $#2() #* ##$+#* &($ ("2 ) !!(&($#) ,02- $ "& #() #)*$ #)&$! * !"$,"#* #)& ( $((+&* $# ( )4 /* #* 7&# ) (,$!+* $#(/ 1998 !(($"* @G??)2 "$# ,0 )!*&() #* # $! ,(4 1999 !#)! $#)**7#*(2#* 7 $((+&* $#2#* 7&$,(*/&!*$("4 $#)* *+* $#!((#+" ,) ,0 ( * $#!&(* )8)$ ! "+ "$(+* $( */$,(&(, $+)!/ "$(* 9# 8)$ ! ( )* #9 G?K #&##* #)* *+* $#)$* $,(#"#*4 * * (+!#0+!) #* ,0:&&($,!(* # )*G?K4 @HE?)(, (*+!!/$! *(*4 ,0 &($ *)")) # ( )"$( ) &($" ##*!/&$$(&$! * !)4 2002 #0+!#$ !&($+* $#( ) " !! * $#)* * ,0-)&+()+ # # *$B4D" !! $#((!)&(/4 +* $( *( #"$! , !/ #!+#/+# " ")) ,&($*)*)/($) "#*)$ 2003 )$ */2" ! *(/$ ()!+# $+& #)* *()*( !! # * ,02- $-)("$,($"$ $(*-$/) &$! * 0* $#$2 ,0 () $( # ()*$(4 $,(#"#** *!/ @G2???-$( ()#"# ()* #$())* $+&**"&*4 * )**$ ! ("2 !* -$( $(2 ## # * ( #( #* * 2005 ) !&+)($& # #0+!# $,(#"#* *)* (+ &($+* $#,() #4 #$("#*" # )*(* $#($"#0+!4 # )+)'+#*/()2* )+)),(! 2006 !,!$ !)$ # (*!/ #,$!, #(+ ,0) #) civilians and US gulf coast refi neries that 1) Ceausescu Revisited (Slow Implosion): exclusively process Venezuela’s heavy crude. Signals: If sanctions on oil purchases are adopted by z Authoritarian rhetoric and political arrests the Trump administration, Maduro would lose continue; one of his last major cash streams. z Oil price trends up from USD 75 per barrel, and oil technocrats are brought in to Scenarios for the next one to stabilize production; and three years z Caracas manages to successfully In response to the collapsing economy, challenge or delay pending arbitration various players are calculating their positions, enforcement awards and asset seizures by ultimately raising the volatility in Venezuela. ConocoPhillips and other creditors. One aspect is clear—the current system is unsustainable. The Chavez model was based The current selective default becomes a almost exclusively on robust oil prices and general sovereign default on all obligations. the ability to distribute oil revenue to the Caracas is increasingly isolated without the population through social programs. That support of its political and economic allies. revenue stream has diminished substantially. Cuba does not have the security resources Most of the population, which once believed to assist Maduro’s enforcement of his total in the “revolution,” has abandoned the control. Meanwhile, China is not interested government and only about 20 percent in bailing out Maduro. Fearing blame for support Maduro. Likewise, Venezuela has no Venezuela’s complete collapse, the US external partner that is prepared to prop up refrains from enacting a sanctions death the regime. blow. The National Assembly is eff ectively Because of the continued degradation replaced by the Constitutional Assembly, and of the country’s economic and social Maduro controls each branch of government. circumstances, a scenario that sees Meanwhile, military desertions, which Venezuela continue along the same path is already required Maduro to call up retirees untenable. Additionally, a scenario leading to and reservists before the 20 May election, civil war is unlikely and therefore excluded. challenges the regime’s de facto control. Actual events are unlikely to perfectly mirror The regime is able to keep a semblance the below scenarios, but the exercise can of order in Caracas, other major cities, identify key signals that market participants and around oil infrastructure, but outside should consider, whether monitoring physical these areas there is chaos and increasing security developments, loan exposure, or risk desperation. In many areas, citizens respond insurance policies. by emigrating. Current migration rates may Venezuela: Berne Union Members’ Gross Exposure and Claims Paid +""" $'" *""" )""" $"" (""" #'" '""" &""" #"" %""" $""" '" #""" " " $"#" $"## $"#$ $"#% $"#& $"#' $"#( $"#) ! " # !! ! # " " # "# " " # 126 Berne Union 2018 lead to 1.8 million people leaving Venezuela z US declares sanctions on oil shipments; EXPERT ANALYSIS for neighboring states by the end of 2018. and As food and medicine scarcity increases, this z Creditors effectively seize significant rate will rise. Venezuelan assets, including refineries, Russia and China send technical advisors ships, or even parts of Citgo. to assist. Functionally, Maduro retains enough control to formally remain in power Elements in the military, possibly officers and keeps enough oil flowing to buy loyalty below the high command who benefit less from the elite and portions of the military. and less as the proceeds from illicit activities The military oversees and continues to are reserved for senior officers, take matters benefit from truncated oil production and into their own hands. Desperate from the expands its involvement in illicit trade. The economic circumstances and motivated economy continues to deteriorate, and the by promises of a better future, lower ranks humanitarian disaster expands. join. There are two sub-scenarios here: 1) The situation, while dire, resembles the military plans and executes a coup Romania in the 1980s, another oil producing from within, or 2) mass protests or a social economy under a heavy debt load that movement prompts officers to turn on prioritized oil deliveries and repayment, while Maduro and refuse to repress demonstrators. basic goods and food become unavailable. The coup plotters may coordinate with a Even as the system slowly dissolves, the civilian leader, and a junta is likely to restore figurehead (Ceausescu in Romania, Maduro the National Assembly and promise free and in Venezuela) is useful for third parties fair elections. to pursue their economic interests. While Right now, the field is open for a new unsustainable in the long-run, without movement to capitalize on the illegitimacy external intervention or a unified opposition, of the regime. For example, the Frente it continues through the forecast period. Amplio Venezuela Libre earlier this year Implications for credit and investment brought together opposition parties, former insurers: There is no realistic sovereign regime supporters, religious groups, and debt rescheduling or economic program student groups to resist the regime. Neither on the table. Expropriations, widespread Maduro nor the official opposition has protests and violence in different parts of broad support: two-thirds of the population the country, and currency inconvertibility reportedly believes neither the regime nor make almost all risks impossible to write. the opposition can stabilize the country. There is no reasonable way to negotiate with In any case, in this scenario, the military the government unless one is willing to put coup leaders realize that reconciliation new money into the country, which no one and some form of democracy is the most is willing to do. Filing suit and arbitration sustainable path forward for a prosperous are the main avenues here, together with Venezuela. They are ready to cede power coordinating with other creditors and to duly elected civilians under the right pursuing the attachment of Venezuelan circumstances. Some military officers who assets. Creditors with developmental or will be subjected to criminal investigation diplomatic goals (e.g. World Bank) will have quietly leave the country or are arrested. to wait it out. In November 2017, Zimbabwe had a coup removing the long-time anti-Western 2) Mugabe-esque Exit (Coup D’etat): autocrat Robert Mugabe, who presided over Signals: hyperinflation and draconian repression z Mass demonstrations erupt for several of all opposition groups. The Zimbabwean days at a time without security forces government is working toward elections in being willing or able to quell them; 2018, although risks to that outcome remain. z High-ranking military officers begin to Implications for credit and investment make political statements in the media insurers: The military junta soon brings in that are not consistent with normal technocrats to construct a debt strategy “Bolivarian” rhetoric; and a viable economic program, along with z Military desertions currently underway turning around PDVSA. Following elections, evolve into military challenges to the debt is restructured, and creditors are regime in major cities like Caracas, able to recover some of their losses over Valencia, or Maracaibo; the long term. The new government may approach the former owners of expropriated 127 Berne Union 2018 property and may reach settlements. Risk a presidential election to an opposition party remains high, and insurers and exporters will and conducted a peaceful transfer of power. largely stay in a wait-and-see mode for new Implications for credit and investment transactions during the forecast period, but insurers: The impact under this scenario there is some optimism by most observers will be somewhere between the Ceausescu that the country will be able to recover in the and the Mugabe-esque Exit. While political long run. reconciliation may have positive results, the outcome and timing are uncertain. It will not 3) Mexico 2000 (Relatively Peaceful be immediately clear whether a competent Transition): team will lead economic reconstruction. Signals: Street violence continues unabated, as z Maduro starts making very conciliatory economic conditions continue to deteriorate. speeches, moving from his normally If the transition does come to fruition, then divisive rhetoric to unifying and healing the longer-term outcome is similar to that words; of the Mugabe-esque Exit: creditors and z Meetings between Maduro’s circle and investors will wait to see what the new opposition figureheads occur and are government looks like. publicized; or z Political prisoners are released. The future goes beyond oil Although much of our discussion focuses Following the 20 May 2018 election that on what leaders will do in the context of was boycotted by most of the opposition economic collapse, much depends on and declared illegitimate by international the transition that the Venezuelan people observers, Maduro realizes that his levers have gone through. Historically, the effect of power—oil production, oil money, of oil on Venezuela went well beyond the popular support, and military power—are economic “oil curse” of crowding out private disintegrating, and he must negotiate. investment to a cultural belief in oil wealth The main revelation may be prompted by as every Venezuelan’s right. Building a a threat from the upper echelons of the competitive economy and institutions have military, which delivers an ultimatum that been low priorities. he must organize a transition, or he will Now, however, the population of be removed. Possibly, the US threatens oil all income classes has witnessed an sanctions. As a result, Maduro approaches unprecedented economic disaster. This sort the opposition in the National Assembly to of hyperinflation, with every day a struggle initiate negotiations over the creation of a for survival for most people, is forcing many transitional government. to reconsider their assumptions. Perhaps Independent experts from Venezuela the biggest question for Venezuela, then, is have prepared various frameworks on which what conclusion most Venezuelans will draw to base a transition plan, the majority of from this experience. If they conclude that which would see a controlled period of Maduro’s people just have to be punished Maduro formally remaining in power as a and then the “revolution” can proceed under transition government is organized to take new management, then little progress can control. Once an internationally recognized be made. On the other hand, if groups like government obtains power, international the Frente Amplio can gather a consensus assistance, including IMF financing, will around a new, competitive Venezuela with enable Venezuela’s stabilization and the institutions and a social conscience, then pursuit of an economic reconstruction plan stability and prosperity are possible in the that reintegrates Venezuela into the global long term. economy. This will be part of a long-term effort and is likely to feature amnesty for the former regime or military officers. David H. Anderson, President, Anderson Risk In 1999, President Ernesto Zedillo of Consultants, is a credit and political risk consultant to the insurance and banking industries. He worked as a Mexico, in a break with tradition, did not journalist in Venezuela 1993-1995. name a successor from his party, the PRI. The move was a reaction to the Mexican William Green, Founder & Managing Partner, TDI, peso crisis, the PRI’s splintering, and signs provides discreet strategic and tactical guidance to of domestic instability. In 2000, for the first senior business leaders and global investors. He has been working with clients in Venezuela since 2002. 128 time since taking power in 1920, the PRI lost Berne Union 2018 Risk outlook EXPERT ANALYSIS Six months into 2018 the chief economists of Atradius, Euler Hermes and Coface, gave their views on the risks to watch out for going forward. John Lorié, chief Istanbul. The governing AK party has economist, Atradius been spending heavily ahead of the June Watching policies in elections, fanning the flames of an already Washington, Istanbul and overheated economy. Despite recent rate Rome hikes, Central Bank independence is still at ‘A bright sky, for now’ is stake. Foreign investors, critical to finance the title of our most recent the Turkish economy, are increasingly Economic Outlook. As the showing discontent; the lira has depreciated weather remains fair, on a day clouds will 20% in 2018. If money inflows halt, Turkey gather. When and where is unknown, but the is in trouble. Watch the Turkish lira and the odds are it will be Washington, Istanbul or ‘White Palace’. Rome; cities host to populist governments Rome. Italy, the third largest economy with unorthodox economic policies. in the Eurozone, the June elections Washington. The Trump administration is caused turmoil. The Five State Movement getting into the swing of things after and Lega agreed on a program breathing the legislative success on the Tax Cuts and scepticism towards Europe and the euro Jobs Act. A flurry of trade initiatives under while supporting higher government the ‘America First’ banner has increasing spending. The President blocked a raised fears of a global trade war. Both Eurosceptic candidate for the Treasury. policies boost US economic activity, which is Fresh elections, de facto a referendum on already at a high. The possibility of a policy the euro, were in the air. Markets rattled. But error of the Fed, with global repercussions, the crisis was resolved, for now. Watch the has gone up markedly. Watch the Fed and Italian ten-year bond yield and the Palazzo the White House. del Quirinale. Economic Policy Index signals fair weather Economic policy uncertainty index, news-based 129 Berne Union 2018 Ludovic Subran, chief resulting from its quality growth strategy economist, Euler (de-leveraging and reduction of over- Hermes capacities, 6.6% of growth expected in 2018). 2H18 will initiate a new age These diverging trends will be accentuated of de-synchronization by the steady increase of world interest rates 1H18 was marked by following the path traced by the Fed. In this the occurrence of three context, the credit binge observed in the simultaneous shocks, corporate sector of developed economies which will have consequences for the rest and in emerging economies as a whole will of the year and beyond. First an oil price rapidly create losers and winners, as mirrored shock: Brent price hit the ceiling of USD by the recent difficulties of Turkey and 80 per barrel. Second a shock of political Argentina. uncertainty: geopolitics have significantly The most interesting part of this story does deteriorated in the Middle-East (direct not deal with the immediate transmission confrontation between Israel and Iran), while of these shocks but with their long-lasting the arrival of a populist government in Italy, consequences or dimensions. The recent formed on the basis of a coalition between rise of commodity prices will certainly boost the League and the Five Stars movement, inflation in the short-term but central banks reminds us that European fragmentation is will rightly insist on the temporary nature of still a possibility. Third, an interest rate shock: this shock. In our view, the age of persistently US ten year Treasury yield is now evolving low inflation is not over amid abundant supply close to 3%. The next 6 months will therefore of energy, and what we call a “digitalization” see the World economy being shaped in of prices (sharing economy, robotization function of the transmission of these shocks, of services activities and digitalization of leading to diverging growth after a rare supply chains allowing lower costs). More phase of growth synchronization between worrisomely, political risk is likely to last long 2H16 and 1H18. and deteriorate. Europe is facing threats Oil exporting economies, and more of fragmentation internally with the rise of generally resources driven economies (as the populist parties but also externally. President rebound is generalized across commodities), Trump, by explicitly targeting Germany will see their situation improve, whereas because of its trade surplus, will give more economies being commodity – dependent bargaining power to countries such as France (India, Japan, China, European economies) advocating for more redistribution inside are likely to register a deterioration of their Europe. The agenda of those advocating for trade balance and an erosion of profitability more integration (France), those in favor of in the corporate sector. As regard political the status quo because of political blockages risk, the old demons of Europe are back (Germany and Spain) and those who want to with an anti-Europe government, triggering move backward (Italy), will sensibly differ. A a probable surge of the European risk fragmented Europe and the “bilateralisation” premium being accompanied by a shock of foreign policy (China, US and Russia versus on sentiment of investors. The Euro zone the rest of the world) will nurture political could be stuck in a mode of low growth risk in the long-term. At last, we will indeed after a promising recovery (we expect 2.1% experience a regime of higher rates as of growth in 2018); the US will continue its monetary policies will continue to normalize path toward higher growth (2.9% expected amid globally higher political risk premiums. in 2018) amid a persistently aggressive 2H18, will therefore be remembered as policy of de-regulation, while China will enter the start of a long-lasting phase of de- more decisively into a phase of deceleration, synchronization. As regard political risk, the old demons of Europe are back with an anti-Europe government, triggering a probable surge of the European risk premium being accompanied by a shock on sentiment of investors. 130 Berne Union 2018 Julien Marcilly, chief since President Trump might want to use it EXPERT ANALYSIS economist, Coface to mobilize his electorate before the US mid- Risk #1: Coface’s political terms elections, due next in November 2018. risk index rises (again) If the US decides to increase tariffs on all Events like the US’ imports to curb the USD 125 bn trade deficit withdrawal from the Iranian in this sector, Japan (USD 40 bn), Canada Nuclear Agreement, or the (29), Mexico (27), Germany (14), South rise of populism in Italy, Korea (14), and the UK (7) will be particularly reminds us of the importance of political affected. But these direct impacts are only risk and the consequences it can have on the top of the iceberg, as the automotive the global economy. The Coface political sector is the one being the most closely model, created in 2017, combines three main integrated in global value chains, with 23% dimensions of political risk: risk of conflict, of production stages being carried out risk of terrorism, and risk of internal political internationally. In other words, if German and social fragility. The updated scores in exporters are hit by US tariffs, their suppliers June 2018 for the 160 countries shows an based in Czech Republic, Turkey and Spain increase at global level, for the fourth year will feel the pain as well. in a row, mainly as a result of the rise in the Risk #3: Capital outflows from emerging markets, back to 2013? While the recent rise in oil prices offers a While the recent rise in oil breath of fresh air for oil exporting countries, prices offers a breath of it contributes to reducing the trade balance of those who import it. The latter have also fresh air for oil exporting been suffering from international investors’ countries, it contributes reduced appetite for emerging equities and bonds since April 2018. According to to reducing the trade estimates by the Institute of International balance of those who Finance, net purchases of such assets by import it. non-residents from 25 emerging countries fell by USD 12 billion in May, reminiscent of the May 2013 episode following changes to monetary policy expectations in the political and social fragility component, and United States. Monetary easing policies have a greater contribution from the terrorism indeed supported capital flows to emerging index. Regarding social risk, which assesses countries in recent years. According to the the degree of frustration of the population IMF, USD 260 billion of portfolio investment likely to be translated into effective political in emerging countries can be attributed change, Iran, Saudi Arabia, Russia, Egypt, to the unconventional monetary policy Algeria, Brazil and Mexico are in the “Top 20”. conducted by the Fed. Many emerging Among them, Brazil will be in the spotlight in countries have taken advantage of these October, as the presidentialelection can be very favorable external financing conditions the last straw that breaks the camel’s back. to reduce their vulnerabilities (debt reduction and/or accumulation of foreign exchange Risk #2: Will global value chains in the reserves). But for others who have seen their automotive sector be broken? external imbalances continue to widen, the On the 23rd May, The US President Donald current tightening of monetary conditions Trump ordered the investigation into auto makes them more vulnerable to a reduction imports under the Section 232 section of in capital inflows. For the most troubled the country’s 1962 Trade Expansion Act, companies, this complicates refinancing on which enables the Federal Administration the capital markets and penalizes productive to impose tariffs on cars, trucks vehicles investment. Hence, businesses in Argentina and parts, when national security is at and Turkey have been hit. India’s and Sri risk. Recommendations and findings Lanka’s ones could follow suit in the second from the investigation emanating from half of the year: their external accounts are the Department of Commerce are due penalized by robust domestic demand and a in February 2019, at the latest. But these higher energy bill. Last but not least, growing recommendations might be released earlier, political uncertainties will not help. 131 Berne Union 2018 Would gradual de-dollarization boost trade? By Harald Hirschhofer, senior advisor, and Niels Vermeijden, vice president, TCX With trade at the forefront of global political discourse, is it time to reexamine the dominance of the US dollar and move towards more local currency financing? The fairness, sustainability and benefits of Moreover, global trade have moved centerstage in speculating that global political discourse. Protectionism is importers will be able on the rise and the multinational approach to come up with hard to solving disputes has been brought into currency is a risky bet. question. One important aspect of global During the Azerbaijani trade is that it is mostly denominated and currency crisis, the financed in US dollars and a few other manat plummeted hard currencies. The vast majority of the 100% within 12 months US$ 2.3 trillion transaction volume insured following the steep by the Berne Union members in 2017 Harald Hirschhofer decrease in oil prices was denominated in hard currency. This and exports. With dominance of hard currencies, and of the liabilities denominated US currency in particular, has been accepted in US dollars there almost as a natural condition. were numerous However, there is enough evidence of defaults. Turkey and negative side effects. A recent IMF Working Argentina are more Paper1 showed that whenever the US recent examples, with currency appreciates against the rest of the all consequences on world by one percent, a 0.6 to 0.8 percent loan portfolios not decline in global trade is predicted within yet fully known. For the next year. In terms of trade, there is a Niels Vermeijden sure, currency risk clear relationship between the importers’ makes total costs of and exporters’ currency against the dollar funding more expensive in terms of credit exchange rate but not their bilateral margins. Based on the experience from other exchange rate. For example, A Rwandan sectors, local currency financing (combined exporter to India may suffer because his with more comprehensive hedging or her clients will consume less because strategies) improves the repayment capacity the price of the import measured in the of debtors/importers during periods of currency they earn income has become more currency volatility and should reduce total expensive. Both the Rwandan exporter and trade financing costs. the Indian importer/consumer are exposed The question arises whether global trade to US policies and the ongoing tightening would benefit from increasing the share of cycle of the US Federal Reserve. To make trade denominated and financed in local matters worse, the Fed still has a long way currencies? Aside from reducing collateral to go (in particular against the background damage of tightening US monetary policy, of expansionary US fiscal policy), which will it would also improve the sustainability 132 further push up the value of the dollar. and costs of trade financing. Such policy Berne Union 2018 considerations are already more advanced of producers and consumers in developing EXPERT ANALYSIS in the area of development finance, where countries does not seem the most effective policies to actively promote local currency solution. financing are already discussed at G20, and at other very senior policy making levels, in Note the context of achieving SDGs in a financially 1 Source: Global Trade and the Dollar, Emine Boz et al. ,IMF Working Paper WP/17/239 2017. and socially sustainable way. For the Berne Union and its members, a first practical step might be to rigorously About TCX analyze their own data to quantify how much The Currency Exchange Fund (hereafter currency risk had contributed to claims and TCX) was founded in 2007 by a group defaults. Armed with this evidence, a bigger of development finance institutions, effort to advocate local currency financing microfinance investment vehicles and donors could be contemplated. to offer solutions to manage local currency Most necessary conditions to start local risk in developing and frontier markets. It currency financing programs are already also benefits from strong support from both in place. Opportunities to finance and the Dutch and German government. denominate trade in local currencies in TCX plays an important catalytic role adequate amounts are increasing, even in in the development of capital markets by the most exotic frontier countries. Local taking currency risks private markets and and international currency risk markets are commercial banks would not take. Today, growing in depth and tenors. Today, currency TCX offers currency risk protection for 15 risks in almost all emerging and frontier years or longer in almost 80 frontier and market currencies can be hedged. TCX is emerging market currencies. Ticket sizes offering hedging tools for periods of 15 years vary from less than US$1mln to as much as or even longer in more than 70 frontier and US$150mln. Since inception, TCX hedged emerging markets (Box TCX). We are very almost USD 6 bln of local currency loans in pleased to work together with the Bern almost 60 different currencies. Union, its members, and commercial banks TCX offers hedges in frontier currencies to develop new local currency solutions. for any counterparty which is deemed to The shift towards financing international add development impact to a local economy. trade in local currencies is a business For a typical transaction TCX would receive opportunity for the Berne Union members local currency and pay hard currency for and gives their own clients a competitive the duration of the derivative contract on a advantage. A first case is to better non-deliverable basis. Via this mechanism understand and explore a business case TCX enables its clients and shareholders to to insure transactions in local currency. In match their revenues with their liabilities and principle, BU members can reduce their mitigate most of the forthcoming exchange own currency risk from providing insurance rate risk. to local currency financing by asking for TCX manages its own currency risk by (a) the premium to be paid in local currency, diversifying over a very large portfolio with hedging themselves and locking in claims strict single currency and regional limits; at the exchange rate of the date of invoice and (b) having a rigorous risk quantification or the day of the contract. Furthermore, we and pricing framework which allows us to need to improve risk awareness and how learn and gradually improve the quality of best to manage currency risks. This is a our pricing. To stimulate capital markets and challenge especially for the communications manage its own portfolio TCX was even able department that publish newsletters, blogs, to support more than 17 bond issuances of etc. its shareholders in local currency including Improving the sustainability and fairness Myanmar, Armenia, Georgia and Ukraine. of global trade is a noble goal. Reform efforts should also include underlying The views of the authors expressed in this article financing conditions. Today’s market can do not necessarily reflect those of TCX Investment Management Company, TCX and its shareholders. provide local currency financing in rapidly increasing volumes. This opportunity should be recognized and used for the better of global trade and international development. Putting all the currency risk on the shoulders 133 Berne Union 2018 Extending support to Indian MSMEs Mr. Sunil Joshi, general manager, country underwriting and international relations, ECGC Limited Micro, Small, and Medium Enterprises are the backbone of the Indian economy, and ECGC extends critical support to the sector through its varied product range. The Indian Micro, Small, and Medium out in Table 2. Enterprise (MSME) sector is the backbone With around of the Indian economic structure and has 36.1 million units constantly acted as the bulwark for the throughout the economy, providing it resilience to ward off geographical expanse global economic shocks and turmoil. of the country, The micro sector has a predominant MSMEs contribute presence with nearly 94% of registered around 6.11% of businesses, followed by the small (5%) and the manufacturing medium enterprises (1%). Nearly 67% of the GDP and 24.63% of Sunil Joshi MSMEs are operational in the manufacturing the GDP of service sector, while 45% are registered in rural activities. Since the beginning of this decade, areas, and 90% are proprietary units. These the share of MSMEs in the total output of the numbers reflect the large role that MSMEs country has been hovering around 30% (see play in the growth of an economy – in terms Figure 1). of output, employment, entrepreneurship and innovation, thereby assisting in diverse Challenges and opportunities for the economic growth, promoting exports, and MSMEs reducing income inequalities. There is a significant percentage of MSMEs In the Indian context, MSMEs are defined acting as ancillary units that extend support in terms of investments made in plant and to bigger industries by supplying raw machinery (in the manufacturing sector) and material, basic goods, finished parts and investments made in equipment (for services components. Largely these activities can be sector). See Table 1. divided into two – activities common to an The Government of India is considering industry or business specific activities. This redefining the criteria based on annual keen link between industries has induced turnover. The proposal is to classify as set technological advancement and innovation in Table 1 Enterprise category Manufacturing sector Services sector Micro enterprises Does not exceed $35,000 Does not exceed $140,000 (Rs2.5 million) (Rs1 million) Small enterprises $35,000 - $700,000 $140,000 - $285,000 (Rs2.5 million – Rs50 million) (Rs1 million – Rs20 million) Medium enterprises $700,000 - $1,430,000 $285,000 - $700,000 (Rs50 million – Rs100 million) (Rs20 million – Rs50 million) 134 Source: Annual Report of the Ministry of MSME, Govt. of India, for 2016-17 Berne Union 2018 MSMEs. Now, this is both an opportunity and and technology transfer that need to be EXPERT ANALYSIS challenge to the MSMEs. The opportunity addressed for the MSMEs to flourish. is the enormous market that is open for the MSMEs courtesy easier and faster z High cost of bank lending to MSMEs and penetration of internet. The challenge is to a much higher default risk in this sector identify and introduce technology, upgrade dries up easy availability of finance. This at regular intervals, develop manpower, and is accentuated by lack of security or market products. collaterals. Like the large sector, MSME The brick-and-mortar model of business, sector is faced with both peculiar risks like e-commerce, and m-commerce are together increasingly redundant business skills and jostling for market space. Technology has systemic risks like a catastrophic event forced businesses not only to evolve their or changes in the business environment. business models but also incorporate more However, these events have a larger sophisticated organizational structures, bearing on MSMEs due to their inherent including standardization and formalization. business and financial structure. SMEs face challenges directly related to their z Innovation, technology, and scaling up are size. In a global context these challenges areas that identify and define the space are amplified resulting in low survival rates for MSME in the supply chain. of SME. Studies suggest that around 20% of z Resource optimization within the industry new firms go out of business after their first and optimal utilization of business year, and by more than 50% in five years. functions. There are specific issues relating to finance Table 2 Enterprise category Criteria Micro enterprises Annual turnover less than or equal to $ 700,000* (Rs 50 million) Small enterprises Annual turnover between $ 700,000 - $10,700,000* (Rs 50 million - Rs 750 million) Medium enterprises Annual turnover between $10,700,000 - $35,700,000* (Rs 750 million - Rs 2500 million) *approximate USD value as per prevailing rate. Figure 1 Source: Annual Report of the Ministry of MSME, Govt. of India, for 2016-17 135 Berne Union 2018 While the above are indicators of the made by the banks to exporters. operational and competitive business risks, Exporters procure raw materials and there are risks associated with the expansion other inputs, manufacture and then export. of operational space from domestic to Exporters transacting on open account international markets. Non-availability of terms with their buyers have to struggle for information about export opportunities working capital with their liquidity getting increases costs and barriers to entry of entwined with the related outstanding MSMEs in the export sector. These could receivables. The short-term credit by the include lack of reliable data on foreign banks in the form of pre-export financing, market regulatory and legal information, receivables financing or trade finance information on buyer, customs procedures post export, helps in bridging the time among others. gap between expenses incurred and the realization of payment. Working capital – twin disadvantages The credit protection offered by ECGC MSMEs, particularly in the international enables the banks to release funds to the business, suffer twin disadvantages in exporters and ensures adequate flow of working capital management. Firstly, in credit. ECGC has extended vital support obtaining credit at the pre shipment stage to around 40 banks whose share in export and secondly in ensuring prompt realization credits disbursement in the country is around from buyers after extending usual credit 65%. period. It is a well-known fact that MSMEs As an ECA, ECGC ensures commercial face special challenges in obtaining prompt viability along with actuarial assessment of credit sanction from banks and other risk and provides cost-effective pricing to financial institutions due to higher risk its customers. The comprehensive system perception by the institutional lenders. When in the organization has led to an excellent it comes to extending credit to buyers in underwriting standard, a fact that ensures line with the market practice and in ensuring continued support from the reinsurers. payment realization, additional challenges are encountered. In fact, even payment Credit risk protection default in one transaction may bring about Credit risk protection provides an effective lasting damage to the financial position of solution to the transaction related risks the unit. Timely funding and risk protection pertaining to a country and a borrower. addresses the disadvantages. In addressing Credit risk protection also provides updated these twin disadvantages faced by MSMEs, information on markets and buyers, helps in the role of ECGC as an Export Credit Agency risk management by evaluation of risk profile (ECA) as credit risk partner and enabler of of markets and entities based on available funding is a systemic one. financial and non-financial parameters, political instability, currency risks, etc, Enabling credit flow indemnifies the loss and assists in payment ECGC supports working capital lending collection. to the MSMEs by issuing export credit ECGC provides export credit insurance insurance to the banks. The scheme known support to Indian exporters and protects as Export Credit Insurance for Banks (ECIB) them from the consequences of the payment is issued either on Whole-turnover or risks, both political and commercial. ECGC on Individual basis and covers the pre- provides a range of credit risk insurance shipment and post-shipment advances covers to exporters, against payment risks Credit risk protection provides an effective solution to the transaction related risks pertaining to a country and a borrower. Credit risk protection also provides updated information on markets and buyers, helps in risk management by evaluation of risk profile of markets and entities based on available financial and non-financial parameters, political instability, currency risks, etc, 136 indemnifies the loss and assists in payment collection. Berne Union 2018 from the buyers, through its “Policy covers”. commodities under cover were engineering EXPERT ANALYSIS ECGC offers Declaration-based Whole- goods, readymade garments, and chemical turnover Policy for small exporters known as and allied products. Small Exporters’ Policy and Declaration-based Whole-turnover Policy for Medium Exporters Road ahead known as Shipments (Comprehensive Risks) ECGC has been able to extend focused Policy. Micro Exporter Policy and Factoring support to the SMEs through its varied services have also been especially designed product range. While it provides financing for MSMEs. The percentage of cover varies confidence to banks leading to financial from scheme-to-scheme. inclusion; it is also able to help the exporter explore newer markets and regions and assist ECGC support to SME exporters includes: in their absorption in the supply chains and z Higher percentage of loss compensation create a niche place. The ever evolving global on account of default or insolvency or non-acceptance by buyer and / or political risks. ECGC has been able to z Help in setting up exposure on entities and extend focused support markets through its in-depth assessment. z Panel of Debt Collection Agencies (DCAs) to the SMEs through its which assist in collection of defaulted varied product range. payments on success-fee basis only. While it provides financing z The expenses incurred on legal and DCAs are also compensated under ECGC policy. confidence to banks leading z Alerting other exporters regarding non- to financial inclusion; it payment of buyer(s) thereby limiting their is also able to help the exposure on risky profiles. exporter explore newer Business trends markets and regions and The business covered by ECGC in the Short Term – Policy for the MSME’s contribute a assist in their absorption significant portion of the total Risk Value in the supply chains and amounting to 67.7%, 68% and 69% in 2015-16, create a niche place. 2016-17 and 2017-18 respectively (see Table 3). Interestingly, the value of claims in relation to the business covered is quite favorable. market will require a better coordination For the financial years 2016-17 and 2017- between Banks and ECAs to assist MSMEs 18, the percentage of claims paid in this engage well in the global supply chain. sector to total claims paid stood at 14% The support by ECGC is critical in ensuring and 13% respectively. This shows that the healthy growth of MSMEs in international sector is adequately supported by an in- business and the same is buttressed by depth underwriting thereby containing the the fact that the more than 85% of the losses while at the same time assisting the 20,000 clients services by ECGC are MSMEs. enterprises in market expansion. Considering the increasing uncertainties in During 2015-16 to 2017-18, the cover for international trade and the impending threat MSME was extended to their exports to the to orderly growth of international trade, the USA, the U.K and Germany which accounted role of ECGC as an ECA in support of MSME for nearly 28% of the business. The major is bound to grow further. Table 3 Total risk Risk value in Percentage of Year value ($mn) MSME’s ($mn) MSME in total (%) 2015-16 9700.862 6567.30 67.7 2016-17 9924.433 6745.43 68.0 2017-18 9899.789 6844.46 69.1 137 Berne Union 2018 Finally! An Export Credit Agency for Ukraine? By Dr Hans Janus, lawyer and consultant There are no two identical Export Credit passed a Law on the Agencies in the world. Every ECA is unique. establishment of an It is obvious that each ECA must fit into ECA in December the national economic and, if available, the 2016, but until national export promotion system. That the today there is no establishment of an ECA makes much more Ukrainian ECA yet. sense than any kind of subsidies for export The debate about the oriented corporates has been proven by establishment of an scientific research in many countries of the ECA started some 20 world. Creation of jobs, strengthening the years ago and despite Dr Hans Janus competitiveness of national companies on the law of 2016 there is the world markets and facilitating finance for a certain risk that this debate is becoming a exports – there are many good reasons for never ending story. the establishment of ECAs. Acknowledging the fundamental The process of setting-up an ECA is highly weaknesses of the law of 2016 the complicated. Who has ever been part of such Government has intensively worked on a an exercise knows perfectly well how many new law amending the law of 2016 and expected and unexpected difficulties may moving the ECA plans from theory to come up. The process is not only difficult, reality. In February 2018 the First Deputy it usually needs some years and requires a Prime Minister and Minister of Economic great deal of perseverance from those doing Development and Trade, Stepan Kubiv, the job. There is no one blueprint for building informed the media that an ECA of Ukraine up a good ECA, there are several: a private should be established and that this should corporate with or without state guarantee, a happen in the form of a newly founded private corporate mandated and supervised Joint Stock Company. The Minister assumed by the state, a government agency with the approval by the Government within more or less independence, an Eximbank and the month of February and predicted so on. But, finally, those who wished to set the conclusion of the legal process of up the ECA have found the right design for establishing the ECA within the following their country and their country’s exporters’ four months. Again, all these announcements needs. There is hardly any industrialized or elapsed without visible consequences. emerging country without an ECA. Except What makes ECA establishment so much Ukraine. more difficult in Ukraine than in any other Ukraine’s Parliament, the Verkhovna Rada, country? It is neither the geographical The process of setting-up an ECA is highly complicated. Who has ever been part of such an exercise knows perfectly well how many expected and unexpected 138 difficulties may come up. Berne Union 2018 distribution of Ukrainian exports nor the draft amendment law to the 2016 legislative EXPERT ANALYSIS weakness of demand for cover. The opposite act has not yet gotten the approval of is the case. Ukraine had to geographically Parliament. The draft law was passed to redirect the exports in a very significant way the Parliament’s Committee of Financial after the 2014 revolutionary events in the Policy and Banking and the first reading in country, the annexation of Crimea by Russia, Verkhovna Rada is still outstanding. This the outbreak of war in the regions of Donetsk cumbersome process can only be explained and Luhansk and the imposition of sanctions with the difficulties of the Government to by the US Government and the EU and get necessary support in the Verkhovna countersanctions by Russia. This redirection Rada where the Block Petro Poroshenko and of exports has been largely successful and the National Front, the two parties forming today European markets play a much bigger the Ukrainian Government, do not have role for Ukraine than before and exports to the majority of votes. So the Government depends on other parties’ members of Parliament. The good news is, This dilemma has had direct impact on that after lengthy the content of the legislative act of 2016 and discussions Ukraine is also on the fate of the 2017 draft amendment law. The unexplainable limitation of the seriously considering the ECA’s services for a few sectors of the establishment of an ECA. industry representing less than 20 percent of Ukraine’s overall exports shall be erased The first attempt showed with the amendment law of 2017. Both legal a lot of shortcomings and texts, however, contain a partial interest a lack of financing. The rate subsidization scheme, more or less copied from a similar program in Belarus. draft amendment law This instrument, about which neither details is suited to bring some are known nor a feasibility study has been done, is not only expensive, it can also visible improvements. become a possible entrance door for fraud and corruption. In any event conformity Russia decreased substantially. But Russia with WTO Agreement on Subsidies and remains the single most important export Countervailing Measures and OECD market, followed by European countries Consensus needs to be achieved. Ukrainian and some important emerging markets sources confirm that this is the Government’s amongst the top ten export destinations, like clear intention. Turkey, India, China and Egypt. No doubt, The good news is, that after lengthy the Ukrainian export industry and Ukrainian discussions Ukraine is seriously considering investors would benefit from an ECA. the establishment of an ECA. The first The problems can be found more in the attempt showed a lot of shortcomings and a financial and political areas. The ECA Joint lack of financing. The draft amendment law Stock Company shall have a share capital of is suited to bring some visible improvements. (only) 200 million Hryvnia (7.1 million USD). The fact that this draft law has not yet An additional sovereign guarantee shall not gone through Parliament should not be be given. This is a fairly low capitalization seen too negative. It is also an invitation for the new ECA and even taking into to think about the ECA law a third time, consideration a high level of reinsurance together with Parliamentarians. But, due to coverage and having the state as sole owner upcoming Presidential and Parliamentary of the ECA it is highly questionable whether elections in 2019, a delay until next year is the ECA can get a financial rating which possible. With appropriate support from is equal to the sovereign rating of Ukraine. Berne Union, OECD and bilateral partners When the ECA law came into force in Ukraine can, finally and late enough, establish December 2016 not even these 200 million a well functioning ECA. Ukraine’s exporters Hryvnia were put into the national budget for and foreign investors need an ECA and, 2017. Remaining unfunded, the whole process to finish with an optimistic outlook, the of ECA establishment could not even start distance between having nothing and in 2017. For 2018 the ECA capital amount having an operational ECA has narrowed was fixed in the national budget but the considerably. 139 Berne Union 2018 The role of exports in Spain’s post crisis recovery By Beatriz Reguero Naredo, director, chief operating officer state account business, CESCE From a situation close to economic breakdown, to consolidating its position as one of Europe’s leading economies, Spain’s turnaround has been impressive, and exports have played a vital role. Spain’s economy has achieved an impressive internationalization turnaround during the last decade. Over this is here to stay. ten year period, the country has gone from Adjustments made to being on the verge of economic breakdown their production model to consolidating itself as one of the four have allowed many major economies within the euro zone as companies to become well as the second exporter thereof (in intertwined in the terms of exports as a proportion of GDP), global economy. surpassed only by Germany. The dynamism This deep transformation has been largely of exports has induced by the dynamism of exports. Indeed, Beatriz Reguero Naredo contributed to five Spain’s external sector has been a key driver consecutive years and has allowed the economy to stay afloat of GDP growth rates of around 3%, and a during the recent crisis. During the downturn, shift from an external deficit of 10% of GDP over 150.000 Spanish companies went out in 2017 to a surplus of 2% ten years later, of business. The most resilient ones and unprecedented in our contemporary history. those that were able to maintain and even It is, therefore, important that the increase their turnover as well were those necessary policies and measures are adopted that managed to internationalize. in order to ensure that this external impulse The good news is that, in the aftermath does not languish. of the crisis, the export sector continues However, the growth of international to be an of growth. Contrary to past trade is overshadowed by clouds in the experience, external led growth has not horizon. Financial vulnerability associated been a temporary phenomenon vanishing with increasing debt levels in some emerging with the recovery of domestic demand. Most economies, the rise of protectionist analysts agree that that Spanish companies’ tendencies and the stalling or, worse, The dynamism of exports has contributed to five consecutive years of GDP growth rates of around 3%, and a shift from an external deficit of 10% of GDP in 2017 to a surplus of 2% ten years later, unprecedented in our contemporary history. 140 Berne Union 2018 reversing, of liberalization threaten trade. projects will remain at the core of our EXPERT ANALYSIS Other potentially destabilizing elements business, one of our priorities for the next include the rise in interest rates and in oil three years will be to adapt our products and prices; uncertainties related to Brexit; the procedures to better fit the needs of smaller resurgence of Russia and its assertive role in companies. Our plan includes a simplification the Middle East; the rivalry between Saudi of processes, more flexible requirements, Arabia and Iran for supremacy in the region; and the rise of populist and extremist parties in Europe. I do not mean to sound pessimistic. However, I am convinced that it important to In today’s challenging be proactive in maintaining an export friendly world, CESCE recently environment. As the Spanish experience shows this is the road to growth, innovation, approved a three year productivity and employment. client focused Strategic As Berne Union members well know, financing and risk mitigation are key factors Plan, whose main axis in the development of a strong external are internationalization, sector. All countries represented in this digitalization and club have developed officially supported schemes to provide financial support to SMEs support. national exporters and investors. Spain did so 40 years ago through the creation of CESCE which acts as Spain’s ECA and is also the parent of a group of companies that offer integral solutions for commercial strengthening our advisory role and adapting credit Artículo Nuevo Lunes – febrero 2017 our risk-taking policy. The ultimate objective management in Europe and Latin America. is to bring our products and services closer Its mission is carried out by a staff of over to all companies and especially to small 1500 professionals. and medium-sized companies. As part of In today’s challenging world, CESCE this plan, we have recently reshuffled our recently approved a three year client underwriting unit, moving from geographical focused Strategic Plan, whose main axis are distribution to a client based one. We now internationalization, digitalization and SMEs have a unit for larger clients and projects support. and a specialized unit to service small and In its design, we have taken into medium sized enterprises. account the characteristics of Spain’s In three years’ time, we shall measure business network, comprised mainly the success of our strategy, not in terms of by small and medium-sized companies new business underwritten – since larger (98% of all companies) that often lack deals will always inevitably outweigh SMEs the means to cope with the challenges transactions – but in terms of the number of internationalization, whether in terms of exporting companies that get to know of management, information or financial our products and use them to improve risk resources. management and financing of their external Although large exporters and large transactions. In three years’ time, we shall measure the success of our strategy, not in terms of new business underwritten – since larger deals will always inevitably outweigh SMEs transactions – but in terms of the number of exporting companies that get to know our products and use them to improve risk management and financing of their external transactions. 141 Berne Union 2018 Member profile: HBOR Croatia HBOR: 20 years of export credit insurance in Croatia HBOR, as the export and promotional bank of Croatia and the state export credit agency, marks 20 years of operations in the export credit insurance industry. This is an opportunity to look back at the most important moments in the past and to identify new opportunities for the future. Croatia is a Central European country and credit insurance, such as short-term export it has joined the EU as the last of the 28 credit insurance, new forms have been member countries. The joining of the EU five introduced: supplier credit insurance, buyer years ago provided a number of opportunities credit insurance and pre-export finance for Croatia, of which freer movement of insurance that is often used by commercial goods and services is considered one of the banks and clients who lack collateral for the significant advantages additionally widening financing of new export contracts. the areas of exports as more than 60% of Market demands rose particularly after exports goes to the EU market. the 2008 global financial crisis had spread to Almost all developed countries have one the economy of Croatia. In those days, HBOR or more institutions dedicated to finance, developed a guarantee insurance programme export credit insurance, guarantee and other as the banks withdrew from many markets export promotion activities. In 1992, HBOR and stopped offering services to their was established primarily as a promotional clients particularly to those operating in the bank to develop into an export bank and an construction industry. export credit agency by the end of 90’s. To By accepting the EU’s Acquis be precise, HBOR was assigned the mandate Communautaire and by submitting an for export credit insurance activities in 1998. application to join the EU, Croatia assumed In that period, HBOR became a full an obligation to separate the commercial partner of exporters and financial institutions part of export credit insurance activities that support exporters. from the activities performed for and on The range of services offered by HBOR in behalf of the Republic of Croatia, and HBOR the area of export credit insurance has been decided to create a separate company expanded in parallel with the changes to the at the beginning of 2010. In cooperation economic circumstances and the needs of with a partner, a subsidiary company was businessmen. established: Hrvatsko kreditno osiguranje d.d. For example, besides traditional forms of specialising in credit insurance. Today, this The range of services offered by HBOR in the area of export credit insurance has been expanded in parallel with the changes to the economic circumstances and 142 the needs of businessmen. Berne Union 2018 company is 100% owned by HBOR. by state and private insurers. As HBOR EXPERT ANALYSIS Since 2010, HBOR has widened its has been an active member from the very mandate to include the reinsurance of non- beginning of the Berne Union (at the start, marketable political and commercial risks a member of the Prague Club established and it has started offering reinsurance of by the Berne Union as an association of export receivables. This gave an opportunity agencies from Central and Eastern Europe, to credit insurers in Croatia, who insure Asia and Africa), HBOR’s representative has short-term receivables, to expand their offer been elected to the top management body by sharing with HBOR, the state reinsurer, the non-marketable risks which cannot be reinsured in the private reinsurance market. As it became usual in some bigger Over the past few transactions that Croatian exporters entered years, the banks have markets in cooperation with either local partners or suppliers from other countries, increased requests for the previous concept of considering the supporting the clients in projects to be insured on the basis of the the shipbuilding industry, national content in the project was no longer appropriate and the concept of and HBOR covered the insuring export transactions was introduced project of building the focusing on national interest. Currently, the prescribed Croatian content in a project world’s biggest sailing for it to be eligible to be insured stands at ship in a Croatian shipyard more than 40 %. However, there are cases by providing buyer credit where transactions with a lower share of Croatian components are considered eligible insurance. as a result of their being important for the Croatian economy. In this way, we encourage exporters to strengthen their security when of the Berne Union, which is a recognition of tapping new markets, and HBOR seeks the long-lasting HBOR’s contribution to the solutions for the sharing of risks with other development and implementation of export export credit agencies when possible. credit insurance activities. Joint approach together with related In the context of its operations, a institutions in the area of parallel insurance particular focus is put on small exporters and or reinsurance is a very important framework start-up exporters, and therefore, HBOR has created at the international level in order launched a programme of insuring short- to enable businessmen coming from small term export receivables of small exporters, economies like Croatia to participate in major thus providing support to small exporters projects. Reinsurance model implemented in having up to EUR 2 million volume of annual cooperation with other ECAs was used by exports that do not receive offers from HBOR in the case of several major projects in commercial insurers. which Croatian exporters participated either Since the introduction of export insurance as principal contractors or as sub-suppliers. transactions until the end of 2017, HBOR In such transactions, the Berne Union insured and reinsured, as the state export as the global association of insurers is of credit insurer, the volume of altogether EUR immense help, and HBOR has benefited 3.2 billion and supported the transaction from numerous advantages of being its of Croatian exporters towards almost 80 member such as networking with related countries worldwide. institutions and becoming familiar with Over the past few years, the banks have the best practice approaches developed increased requests for supporting the clients Since 2010, HBOR has widened its mandate to include the reinsurance of non-marketable political and commercial risks and it has started offering reinsurance of export receivables. 143 Berne Union 2018 in the shipbuilding industry, and HBOR industries in terms of consumer goods. covered the project of building the world’s Challenges encountered by HBOR as the biggest sailing ship in a Croatian shipyard by national insurer are a consequence of market providing buyer credit insurance. situation in the Croatian economy and of By the end of 2017, the volume of increasing political risks and geopolitical indemnities and related expenses exceeded tensions that the world economy is facing. EUR 20 million. The highest indemnities were In the circumstances of threatening risks paid in the traditional markets of Croatian of possible non-payment under concluded exporters, with Bosnia and Herzegovina export contract or non-performance of being at the first place with the highest export contract or simply when it is not individual indemnity paid per debtor, under possible to collect payment for transaction which successful recourse is expected in the duly performed, both exporters and their next years. banks strive to protect themselves against The focus of HBOR’s activities as an such risks, and the support provided through insurer (ECA) over the past years has the instruments offered by HBOR is of been on developing as close relations with immense significance. commercial banks as possible in both the Due to the fact that Croatia is a small domestic and the foreign markets. Terms economy, HBOR as the state export credit and conditions of insurance have changed insurer approaches clients’ requirements significantly and have been aligned with in an innovative and flexible manner as the banks’ requirements resulting from the there are no trends in similar economies requirements of Basel regulations. advocating narrow specialisation or creation In 2017, the volume of transactions insured of single products applicable to all. Banks by HBOR increased by 20 % on 2016. It is being important partners of exporters expected that activities will continue to remain in the focus as a significant channel increase in the coming years, which confirms for beneficiaries of export credit insurance the facts that export credit insurance is used programmes. Therefore, we continue to pay by banks and exporters as a financial tool to considerable attention to the activities aimed mitigate the risks and that the risks are even at providing information and education higher than previous years in international about HBOR’s export credit programmes. trade. Another challenge resulting from clients’ The total volume of transactions insured requirements relates to the finding of private by HBOR’s subsidiary company, Hrvatsko reinsurers with whom HBOR would share the kreditno osiguranje d.d. that insures domestic risks arising from large exposures, and we and foreign receivables, reached EUR 520 will keep on dedicating our efforts to finding million in 2017, of which 51 % related to solutions for such transactions in the future. domestic receivables and 49 % to export To conclude, considering the strategic receivables. goal of the Republic of Croatia, i.e. growth HBOR Group that is comprised of HBOR in exports, HBOR as a significant participant and HBOR’s subsidiary company, Hrvatsko in the financial market of Croatia will kreditno osiguranje d.d., covered altogether 3 continue to provide support to exporters % of total Croatian exports in 2017. by transferring the part of risk they are not The portfolio of activities covered by export ready to bear themselves to the state, thus credit insurance of HBOR as the state insurer facilitating their access to export loans in is comprised mostly of the activities in the order to enable the export oriented economy shipbuilding, energy, telecom and construction to contribute to the sustainable growth of industries, and in the processing and metal Croatia. Due to the fact that Croatia is a small economy, HBOR as the state export credit insurer approaches clients’ requirements in an innovative and flexible manner as there are no trends in similar economies advocating narrow specialisation or creation of single products 144 applicable to all. Serbia has good news... For several years now, the Republic the World Bank, the 11th largest economy of Serbia has been struggling with in the world), and it was necessary economic stability and this is not a to exploit the potential for improving secret. But, as things stand in recent economic cooperation. The traditionally months, SERBIA HAS GOOD NEWS! peaceful and friendly relations between the two countries have also translated into communication and cooperation with the Ambassador of Mexico Mark Antonia Garcia Blank in Serbia, so there are reasons for plans and cooperation in several directions. The Indian ECA ECGC Limited has The precise plan, work and persistence become part of the AOFI “story” by have changed the long-standing situation signing a cooperation agreement. Multiple in the Serbian economy, which for years opportunities, friendly relations and, had a deficit in the budget. According of course, the common interests are to the latest statistical data, not only has crowned with each of our contracts. We the deficit been reduced -, but there is a are listening, providing services, learning, surplus in the budget of 49.1 billion dinars cooperating and in this way, we strive in the period June-July 2018. to achieve international communication According to experts, it is likely that better, giving our clients the support throughout 2018 will be more than and security to capitalize on their export successful and even record-breaking capacities. Every new contract is our when it comes to GDP growth. new challenge. AOFI’s Moto is IDEAS and Such news and results are the pride of POWER. We need to justify our main idea! all of us who work in the economic sector. That we are on the right path, And AOFI, as the only official export credit agency of the Republic of Serbia, has contributed and impacted the overall the BU community, especially in the success. PCC activity, participation in the work AOFI, whose mission is to improve of the working groups, was probably the economy of the Republic of Serbia, contributed by giving a significant role to has to boast about the achievement of our colleague and Executive Director for cooperation with Chinese SINOSURE and Insurance, Danilo Ćirković, to be elected the signed reinsurance contract, which as the Chairman of the Prague Club will reinsure receivables of all Chinese Committee! This honor and obligation companies established in Serbia. For our is of great importance to the AOFI, the institution, this is a great progress and a Republic of Serbia and all of us who are rare example of cooperation within the aware of the importance of BU for our BU community. We are proud of this kind further professional development. of step forward. We have been entrusted “The election of Danilo Ćirković as the with great confidence, and the need and chair of the Berne Union Prague Club is desire - to bring together two countries a great honor for both AOFI and for him that are not very close neither by its size personally. It did not happen by chance. For years, AOFI as an institution has been nor its geographical distance - are mutual. Dejan Vukotić The significance of this cooperation for an active member of the Prague Club, AOFI is not only personal, but at the confirms the active participation of fostering friendly relations with colleagues level of the country of Serbia, BU and the AOFI in BU gatherings at all levels. We from around the world and unselfishly whole of Europe. are especially honored when we are at exchanging experiences in the field of “The reinsurance agreement with the annual BU meetings, at specialist credit insurance. In AOFI we believe that SINOSURE is a logical consequence of meetings, and when our cooperation only by open and collegial relations with the excellent political and economic and correspondence with both individual colleagues sharing the same values, we relations between Serbia and the People’s members and the BU Secretariat is can go forward” says Dejan Vukotić. Republic of China. With this agreement, extremely good and pragmatic - healthy When the line is underlined, AOFI the Chinese companies that are the professional and human relations. goes in the desired direction giving owners of companies in the Republic of The AOFI hosted the Berne Union opportunities at all levels. Better economy Serbia receive first-class insurance, and Annual General Meeting 2017. There was and economic success are strengthening since those are large companies, the a record number of participants (over our country, and the crown is all about Serbian economy as a whole receives the 250). Already twice before AOFI hosted membership in the BU, because through necessary liquidity and business stability, various BU community gatherings. this kind of trust that has been pointed as well as easier access to new markets According to the objective assessment out to us, our young people see a “says Dejan Vukotić, CEO. of the participants, we showed ourselves better future in Serbia, a great potential Speaking about international as good hosts, and such experience and for international cooperation, and a cooperation, there is another news - a satisfaction made us “obligated” to repeat great opportunity for free movement, contract on cooperation with the Mexican the same and make it even better every perspective and the realization of ECA BANKOMEXT has been signed. next time. “personal dreams”. That’s the ultimate Another non-European country that is The recognition of AOFI as a high- goal for us! economically powerful (Mexico is the 14th quality, serious although a young export- largest country in the world, according to credit agency, a proactive member of Therefore, SERBIA HAS GOOD NEWS! Berne Union 2018 Unlocking the potential of African export credit market for trade and economic transformation By Prof Benedict Oramah, president and chairman of the board of directors, African Export-Import Bank Africa’s exports have remained relatively low, (ECAs) to facilitate largely commodity based and concentrated the development partly due to underdeveloped financial of critical industries system which have limited the capacity of through the provision the private sector to compete with major of affordable credit international corporates in other developing -directly or indirectly and developed markets. With a trade finance through guarantees gap estimated to be between US$90 billion of commercial to US$120 billion annually and banking sector banks-, insurance credit to private sector as low as 15% of and guarantees that GDP, African countries are unable to raise Dr Benedict Oramah enabled them to sufficient export credit needed to induce the export to new and necessary structural changes in the economy relatively risky markets. The experience of to significantly alter the export basket OECD economies and a few developing beyond the range of products that reflect its countries, including China and India, have static comparative advantage. The lack of shown that ECAs are vital for the realization competitiveness of African manufacturing of trade-led structural transformation. and the extent to which the scope for In recognition of this, many African domestic value addition is left untapped countries in recent years are taking steps are characterized by the region’s high to revive existing, to create new national unemployment, poverty and inequality.1 ECAs. The Ghanaian government recently In addition to the already advanced created the Ghana Exim bank to support financial system that provide export finance the country’s industrialization and export to corporates in advanced economies, diversification agenda. Other countries, governments, and sometimes with the are in the process of setting up national support of the private sector, have since the ECAs. There is also a number of existing early 1900s created Export Credit Agencies ECAs such as Nigeria (NEXIM), South With a trade finance gap estimated to be between US$90 billion to US$120 billion annually and banking sector credit to private sector as low as 15% of GDP, African countries are unable to raise sufficient export credit needed to induce the necessary structural changes in the economy to significantly alter the export basket beyond the range of products that reflect 146 its static comparative advantage. Berne Union 2018 Africa, (ECIC), etc. Afreximbank, a Pan- EXPERT ANALYSIS African Multilateral Trade Finance institute The rapid industrial celebrated its 25 years of existence in July expansion and export 2018. However, to level the playing field and growth seen in the OECD ensure that African exporters are able to compete against foreign competitors, there economies during the first is a need to fully harness the opportunity of half of the 20th century galvanizing evolutions of export credit in the region, as competitor countries increasingly coincided with the turn to export financing to enhance the creation of national ECAs. competitiveness of their national and regional exports. National and continental ECAs could strategically and pragmatically creation in the early 1980s, has continued to play this role. make an important difference in ensuring the How Countries have Used ECAs to continued flow of adequate export credit to Successfully Promote Exports Indian businesses. Like ECAs in the OECD and in China, Exim India continue to lead Traditionally, ECAs were created to promote Government of India’s strategic International their own country’s exports and investments intervention in various developing countries. in other developing markets, which would ECAs have recently evolved, taking not otherwise have taken place; to serve as on new functions and shapes to remain instruments for boosting competitiveness of relevant in the modern world where country national exports through government-backed and entity risks have significantly reduced loans, guarantee schemes and insurance to due to improved information flow across corporations seeking business opportunities borders and the willingness of commercial in foreign countries; and to provide cover to banks to take on higher developing country commercial banks to enable them to finance risks. In addition to the export promotion, manufactures and investment goods exports some governments, in both developed and to developing countries. developing economies have restructured The rapid industrial expansion and export the operational structure of their national growth seen in the OECD economies during ECAs to enable them respond appropriately the first half of the 20th century coincided to the strategic policy requirements of their with the creation of national ECAs. Since the country. For example, the UK government 1970s, ECAs emerged in many developing amended their laws to help widen the countries with functions that transcended powers available to U.K. Export Finance the traditional roles they played during the (UKEF). The legislation allows support for first half of the 1900s. The major trade and working capital facilities to companies that economic take-off in China coincided with supply exporters and has enhanced UKEF’s the creation of China Eximbank in 1993 and ability to meet the financing preferences of SINOSURE in 2001. These two institutions overseas buyers that might wish to use an with additional support from the government integrated financing package from UKEF to served as the major drivers of Chinese trade support U.K. prime contractors as well as U.K. and global investments. More recently, China subcontracts through non-U.K. contractors. Eximbank is one of the main instruments As a result of the importance attached to being used to execute the Chinese export credit activities, the government of government’s “one belt, one road” initiative. Finland, approved for Finnvera to amend Further, the Eximbank of India, since its their existing programme and products to ECAs have recently evolved, taking on new functions and shapes to remain relevant in the modern world where country and entity risks have significantly reduced due to improved information flow across borders and the willingness of commercial banks to take on higher developing country risks. 147 Berne Union 2018 help respond to Finlands trade and export to their core markets, leaving a gap that development needs. As result Finnvera domestic banks in African countries are still added guarantees for financing of domestic finding ways to fill. investments with a link to exports. In To counter this, Africa needs to develop addition, Finnvera increased its ability to robust national and continental export subscribe to bonds issued by small and credit structures to address the needs of medium-sized enterprises. With this new the continent and help the exporters on the program, Finnvera can create a market for continent to compete favorably with other bonds issued by medium-sized companies, exporters from other parts of the world. and hence widen their financing options. Most of the time, the exporters from other Activities of other ECAs were either fully or developed economies are usually backed partially privatized. For instance, France’s by their national ECAs with attractive credit export credit activities have now moved from package making it extremely difficult for COFACE to Bpifrance. The rationale offered some exporters in Africa to compete because for this new arrangement was to increase the of financing disadvantage, if the country of competitiveness of French exporters. the exporter does not have an ECA that could provide competitive export credit support Challenges and Gaps in Africa’s for such a transaction, their local exporters Export Credit Market are unable to compete undermining the Africa has enormous potential to exploit its international competitiveness of African natural and human resources by diversifying contractors and exporters. its economies and building innovation capacity and competencies that will turn Afreximbank’s Presence these resources into wealth. However, Afreximbank as a multilateral Pan-African there is currently insufficient trade finance Trade Finance Bank supports and champions capacity to help the continent realise this the evolving interest in export credit matters objective. Despite major improvements in in Africa. Specifically, the Bank is helping that past decade, African banking sector African countries to develop their export is still largely developing. A large trade credit capabilities, on an incremental basis. finance gap exists because of both the As part of the Bank’s Eximplus strategy limited availability and relatively high cost of which aim to offer comprehensive trade capital. Weak credit rating and its negative promotion and facilitation solution to the consequence on fund raising ability and continent, the Bank offers Country Export higher funding cost, inadequate capacity in Programme, (COEXPRO) that combines terms of knowledge, skills and experience advisory services, financing, advocacy, in export and investment credit, trade and cooperation, mentorship and capacity investment policy misalignment, among building to help member countries to others, are issues or gaps that are impeding develop and enhance their trade and export the continent’s ability to effectively expand credit related activities. its exports. For international businesses, low U.S. dollar liquidity in some countries, is also a barrier to trade. There is also another Note challenge. Historically, International banks 1 Because jobs producing exports create twice as many jobs and pay more than jobs producing for have provided the majority of cross-border the domestic market (Lori Kletzner, 2002), Export lending to African countries. But now, under growth will have to accelerate substantially to pressure from regulators and shareholders to boost GDP growth, eliminate poverty and generate new jobs for some 29 million young people who are reduce their risks, these banks are retreating joining African labour markets each year. Afreximbank as a multilateral Pan-African Trade Finance Bank supports and champions the evolving interest in export credit matters in Africa. Specifically, the Bank is helping African countries to develop their export credit capabilities, on an incremental basis. 148 Berne Union 2018 Economic development EXPERT ANALYSIS and protecting trade: the case for credit insurance By Vinco David, Berne Union secretary general Introduction – a staggering amount Trade is an important contributor to indeed, and a figure development – economic development, at composed of added least. In many developing countries and value along all trade emerging markets, growth is driven by chains. Without this, exports. As the national economies are we would have just often too small to propel this growth on over $14 trillion less their own, this also entails imports of capital income across the goods and the construction of infrastructure globe. That amounts necessary to enable export. All these to about $2,000 per Vinco David goods and services crossing international head, every year. It borders are thus testament to economic also has a cross-over effect domestically, as development. Too often, however, these foreign trade spurs domestic trade too, via transactions are not in fact realised, as the the supply chain to exporters. risks – payment risks of the exporter, in The 85 members of the Berne Union – particular – are deemed too high. There are the insurers of credit and investment risk ways to overcome these (perceived) risks worldwide – support and protect some and one important tool in this regard is credit 13% of all cross-border trade. Without their insurance. support, this trade would often not take This article is about the importance of place. As mentioned, the exporters or their cross-border trade, and how it is stimulated financing banks would deem the payment and supported by credit insurance. First, we risk on the importer as too high. The will try to quantify this importance in terms transaction would then simply not occur. of income; subsequently we will explore Trade only happens when paid, and without the role of credit insurance in economic cash or credit it does not take place. development. Following this, we will explore the examples of China and India, and Why credit insurance? lastly, we will try to draw some conclusions Not all trade requires protection against about the relationship between economic credit risk. Payment risk in inter-company development through export and credit trade, or for goods and services paid in insurance. advance, or trade on some spot markets, such as for oil, is negligibly low. But lots of Why trade? goods and services are sold on credit to World cross-border trade amounted to over companies or governments, with tenors $14 trillion in 20161. That is a 14 with 12 zeros ranging from one day to over 20 years. World cross-border trade amounted to over $14 trillion in 2016. That is a 14 with 12 zeros – a staggering amount indeed, and a figure composed of added value along all trade chains. 149 Berne Union 2018 These different credit terms go hand in hand other convertible currency, partly due to the with the economic life of the respective decline in the price of the commodities they goods. Perishable goods, such as fresh exported. meat, vegetables or flowers are typically In addition to credit insurers, banks, sold on terms of a week or less. Large factoring companies and forfaiters can also infrastructure projects or ships require a absorb payment risk for exporters. This all much longer repayment period. Fortunately, comes at a price, of course, and there is many of these buyers do pay (although not some – but not much – price competition between the various instruments. But factoring, forfaiting, letters of credit or the Credit insurance not discounting of bills of exchange do not eliminate every payment risk. What if you only protects exporters are manufacturing tailor made goods and against payment risk – your buyer goes bust before you can supply these? In such a case there will usually thereby contributing to not be any receivable to sell, or any draw- the continuity of these down under a bank’s L/C. If your goods are companies – it also commodities, you can probably re-sell these to another buyer at a reasonable price, but unlocks commercial what to do with customised goods? Or what financing for trade and if your financier has recourse against you in case the buyer does not pay? Furthermore, investment that would in transactions with more complex payment otherwise often not be terms, such as for project finance deals or available. infrastructure, the relatively standardised solutions typical in factoring or forfaiting are often unsuitable. Credit insurance, bank financing for always within the agreed terms). However, export, forfaiting and factoring (including it happens too often that purchases are not supply chain finance) each have their own being paid for. Hundreds of thousands of merits and are more complementary than companies go bankrupt or are otherwise competitive. Credit insurance works well for declared insolvent, every year. Or, depending standard as well as more complex payment on the jurisdiction, they simply can no longer terms, and terms, and can also cover so- afford to pay, without a formal insolvency called pre-credit risk. It is noteworthy that procedure. In the US alone – the world’s many banks and factoring companies also single largest export destination – the make use of credit insurance to protect number of bankruptcies (not including other against payment risks when financing insolvencies such as Chapter 11 filings) was exports. This allows them to protect their close to 100,000 in 2016. In some emerging balance sheet and often also leads to lower markets the incidence of bankruptcy is also regulatory capital requirements. The exporter high. In Vietnam, for instance, more than may not even be aware of this credit 60,000 companies were declared bankrupt insurance at the backdoor of its financier. in 2016 alone2. Indeed, even governments Credit insurance not only protects and state-owned enterprises sometimes fail, exporters against payment risk – thereby often due to lack of hard currency. Recent contributing to the continuity of these examples are Tanzania or Gabon: These companies – it also unlocks commercial countries were strapped of dollars, euros or financing for trade and investment that In addition to credit insurers, banks, factoring companies and forfaiters can also absorb payment risk for exporters. This all comes at a price, of course, and there is some – but not much – price competition between the various instruments. 150 Berne Union 2018 would otherwise often not be available. It EXPERT ANALYSIS is this finance-catalysing aspect of credit Figure 1: Berne Union New Business, Private & Public insurance that is of greatest importance to development. Increasing the growth potential of developing countries requires many capital equipment and infrastructure investments for which reliable financing is essential. Public financing alone is often not sufficient to enable this, and commercial financing supported by credit insurance is therefore an important contributor to close the financing gap for development. What private and public credit insurers contribute to world trade ST: Short Term, insurance for credits up to 1 year MLT: Medium and Long Term: Insurance for credits of 1 year and over Credit insurance can be provided by private INV: Investment Insurance – all figures in USD billions companies, public agencies and multilateral institutions. All three groups of providers are important for development. As time has subsidiaries of multinationals. New online passed, their roles and market shares have opportunities have facilitated this expansion changed. as well. Just over half of the near $2 trillion in In addition, private insurers have stretched cross-border trade that credit insurers the tenors they can support to even beyond support is currently covered by the private 10 years, including for e.g. infrastructure, market. Big names are e.g. EulerHermes, telecom and mining projects in emerging Atradius, Coface, Zurich, Liberty, XL Catlin markets. This appetite for longer tenors had or Chubb, as well as some specialist Lloyds already started before the credit crisis at syndicates. But there are also quite a number the end of the last decade, but really took of other private insurers. Some of these off after that. This was partly a result of the insurers have developed credit insurance private sector’s increasing confidence as they as their specialism (such as the first three gained experience and familiarity with longer companies mentioned, the so-called risks, but risks, but was also encouraged by monolines), others are general insurers – increasing flows of liquidity. This supply of which, by the way, makes them therefore capital, in turn, is partly a consequence of better known with the general public – that the historically low interest rates presently provide credit insurance as just one of their prevailing in developed countries. Investors (many) insurance lines. In total, there are are seeking higher returns than they can get some 60 private providers of credit insurance on traditional assets – government bonds, for worldwide. instance. Investment in credit and political risk insurance – arguably also in other lines of The role of private insurers insurance – can provide these higher returns. Traditionally the role of private credit insurers One may wonder what will happen if interest was limited to the insurance of trade credit rates start to rise again. It may well end – i.e. credits of up to one or two years – for up in less capital flowing to the insurance both domestic trade and for export. These market – including credit insurance – and shorter credit terms typically apply to thus potentially contracting private credit commodities, consumables or other goods insurance capacity in future. However, even with a relatively low unit value. In addition, if liquidity decreased, given the current over- their customer base was usually confined liquidity in the market, there would still seem to companies in developed countries. This to be sufficient capital remaining to meet situation gradually began to change around demand from exporters and banks for the two decades ago as private insurers started foreseeable future (see Figure 1). to expand their business both in terms of customer base and in terms of credit tenors The role of public insurers they could support. Despite the expansion of the remit of private Some of them have, indeed, branched insurers, there is still a large role to play out to emerging markets, setting up offices for public insurers. National export credit to support local companies and local insurers are also referred to as Export Credit 151 Berne Union 2018 Agencies (ECAs). Some of the largest ECAs The role of ECAs in low and middle-income include Sinosure (China), the public arm countries. of Euler Hermes (Germany), NEXI (Japan), Bpifrance (France), SACE (Italy), K-Sure The role of ECAs in low and middle- (Korea) and ECGC (India). An increasing income countries number of developing countries, including The world’s first ECAs were set up in Europe many in Asia, have set up ECAs to support soon after the first World War ended – now their national exports. In addition to ECAs, a century ago. European countries, ravaged but to a lesser extent, some multilaterals or impoverished by war, realised that also provide cover facilities for cross-border supporting their exporters was an effective trade. way to get their economies back on track. Although competition does sometimes By the mid-nineteen sixties, almost all occur between public and private insurers, industrialised countries had a national ECA. their roles are largely complementary. One At that time, only a handful of developing can safely say that cover for short term credit of exporters in developed markets, to buyers in developed markets, is largely in the domain of private insurers. At the Shifting the focus back other end of the trade spectrum – long term to India, a measure to credits for capital equipment transactions promote exports should and infrastructure projects commissioned by buyers in developing countries and supplied be mentioned. In 1957, by companies in developing countries (so- India set up its ECA, the called South-South trade) – only public insurers are really at play. Between these two ECGC. Over the years extremes of the spectrum it often depends ECGC has expanded its on the particular circumstances, who is best portfolio, and it is now fit to provide the cover against payment default. In this context, the balance tends to one of Asia’s largest ECAs, shift to ECAs when tenors are longer and particularly in the trade buyer countries are riskier. It is important to note here that ECAs export credit area (i.e. do not have a development objective per credits up to one year). se. It is rather through supporting trade and investment that they contribute to development. In line with this, they do not countries, including India, had set up an ECA. subsidise the exports they cover. According Although the circumstances today may not to international regulation they are not even be as dramatic as in the aftermath of the allowed to subsidise trade. Premium income first World War, the argument that ECAs are must on the long term at least cover claims an effective way to stimulate the economy payments and administrative costs. This is still holds; and just as much so for low and enshrined in WTO regulation that applies to middle-income countries. This is especially all WTO member countries3. This requirement true for some smaller developing countries is codified in European Union and OECD in which credit insurance from commercial regulation, but it, by virtue of their national providers is not available; or is only WTO membership, also applies to ECAs in available in a very limited way. Indeed, since developing countries and other non-OECD commercial insurers require a certain mass countries. This brings us to the next topic: to make their business financially sustainable, This growth in China’s exports is even more remarkable when it is noted that this period includes the global financial crisis, when in 2009 Chinese exports dropped by a staggering $230 billion compared to 2008, but nevertheless quite in line with the drop in world exports 152 in that year. Berne Union 2018 they may not always be interested in making EXPERT ANALYSIS their products available in these smaller, Figure 2: Prague Club Committee Insured Exports developing economies. (figures in USD billions) Today, most major middle-income countries and some lower-income countries have ECAs. A key stimulus to the establishment of new ECAs was the collapse of Comecon and break-up of the Soviet Union shortly after. Suddenly Central and Eastern European countries and former Soviet states in Central Asia had to adapt their previously centrally led economies to a market economy. That was a huge, difficult and painful transition. With the help of the European Bank for Reconstruction and Development (EBRD) and sovereign donors such as Korea and the Netherlands, ECAs were soon established in a number of Figure 3: RCG (Established Asian ECAs) as a share of these countries. These ECAs were critical to total Berne Union New ST Business – USD billions enable the transition to commercial export in a global, competitive market for former state companies and new start-ups alike. The Berne Union assisted in this process by creating a platform for training and exchange of business information between the newly established ECAs: the so-called Prague Club. Since its inception in 1993, the Prague Club has expanded to become a thriving platform for ECA start-ups and scale-ups worldwide. To date it has 39 members, 11 of which are domiciled in Asia, and as of 2016, it is a fully integrated committee of the Berne Union. The volume of exports insured by Prague Club members has grown fast. By the turn of this century, their figure for annual new Figure 4: RCG (Established Asian ECAs) as a share of business was just $1.2 billion in total. By total Berne Union New MLT Business – USD billions 2016 this insured volume had risen to $37.8 billion – an impressive growth indeed. The largest Prague Club members are Exiar (Russia), ICIEC (a subsidiary of the Islamic Development Bank), SID Banka (Slovenia) and KUKE (Poland). SID Banka is quite large relative to the size of the Slovenian economy, as it has grown strongly over the years and offers a very wide range of services to Slovenian exporters (see Figure 2). ECAs in Asia: China and India as examples Focussing on Asia, we can see a landscape which is different from either Europe or number of more established ECAs, including North America. Although there are some the aforementioned Sinosure, NEXI, K-Sure private or semi-private insurers selling credit and ECGC (see Figures 3 and 4). insurance – such as Tokio Marine, PICC, and The dominance of ECAs in Asia may some credit insurers originally from Europe have many causes. One is that many Asian – throughout Asia, the credit insurance countries – with the notable exception of landscape is dominated by ECAs. In addition Japan – started their industrialisation, and to Prague Club members, there are also a the subsequent economic development leap, 153 Berne Union 2018 policy – more so than in many Western Figure 5: Sinosure new commitments (Short Term countries. Sinosure for example, is one of the credits) 20007-2016 – USD millions policy institutions underpinning the Chinese Government’s Belt and Road initiative. China Let’s take the Chinese example further. Until quite recently China’s economic growth was largely driven by exports. In 2007, exports totalled $1.2 trillion . In 2016, this had risen to $2.1 trillion : A growth of 75% in ten years (disregarding the impact of inflation and currency exchange movements between the dollar and the renminbi)4. This growth in China’s exports is even more remarkable when it is noted that this period includes the global financial crisis, Figure 6: Sinosure new commitments (Medium/Long when in 2009 Chinese exports dropped by a Term credits) 20007-2016, in millions USD staggering $230 billion compared to 2008, but nevertheless quite in line with the drop in world exports in that year. Growth was such that already by 2010 exports had rebounded strongly to achieve record levels. It also includes the years 2015 and 2016, when world trade expressed in US dollar terms decreased, including China’s exports. (Note: this was not so much a drop in the actual physical volume of world trade, but, rather, a drop in dollar prices of these goods.) We can see even faster growth in business covered by Sinosure (see Figures 5 and 6). In 2007, their new export credit insurance volume totalled $33.4 dollars. By 2016, this had risen to $396.3.5 dollars5. Figure 7: Penetration rate of Sinosure cover relative to From this data we can deduct a strong Chinese exports (Left hand scale in millions USD) correlation between export volume at the one hand and export credit insurance volume at the other hand, whereby the share of credit insurance is even accelerating. This can be expressed as the penetration rate of Sinosure cover in China’s exports, which has grown from 2.6% in 2007 to 18.0% in 2016. The growth in export credit insurance is, therefore, a good, even leveraged, indicator of growth in export and, consequently, growth in economic development, at least in this Chinese example (see Figure 7). India India, at least until a few years ago, followed a rather different economic policy to China. later than most Western economies. To catch Although there were measures to stimulate up with industrialised countries, export was exports, much effort was also put into necessary and for this export, ECAs were protecting domestic production. In addition, useful tools in the hands of governments. economic and fiscal policy in India has Another reason may be that in some Asian traditionally been more decentralised than in countries, even after a development leap, China. ECAs continue to be seen as instruments 154 As a consequence, India’s economy is for the execution of national economic Berne Union 2018 more domestically driven. Additionally, the EXPERT ANALYSIS export volume, and its contribution to GDP, Figure 8: ECGC New Business 2012 – 2016 in millions USD is considerably lower than China’s. In 2007, Indian exports totalled $252 billion; in 2016 this had risen to $434 billion6 - a significant rise of 72%, i.e. similar of that of China, but at a lower absolute level. Also, if we consider the contribution of exports to GDP, then traditionally this share was higher for China than for India. In 2007, e.g., this was 36% for China and 21% for India. By contrast, in 2016, the percentage for India is slightly lower, i.e. 19%. While in China, during the same period dropped to 20%, a figure now similar with that of India. This is clearly a sign that economic ST: short term cover to exporters growth in China has shifted somewhat to ST ECIB: short term cover to banks MLT: medium/long term cover to banks domestic consumption, as a result of Chinese government policy to become less dependent on exports (see Figure 8). Shifting the focus back to India, a measure Figure 9: Penetration rate of ECGC new business relative to promote exports should be mentioned. to Indian exports – USD millions In 1957, India set up its ECA, the ECGC. Over the years ECGC has expanded its portfolio, and it is now one of Asia’s largest ECAs, particularly in the trade export credit area (i.e. credits up to one year). Over the last few years, its penetration grade has remained consistent at around 10% of national exports. Compared to China, we can see a drop in export value in 2015, following the decrease in commodity process. However, in 2016 India managed to grow its export value again. A large part of their support is directly from banks that finance exporters. While this is common practice for export finance (i.e. bank financing with tenors over 1 year), ECGC also provides this for shorter trade as a driver for growth and development. credits. As most world trade is on short Credit insurance is an important facilitator for term credit, this instrument has made financially sustainable exports such as higher a considerable impact on India’s export end goods and services. Not only does it performance. With ECGC’s protection, banks protect the exporters’ balance sheet, but can – often wary of financing without meaningful enable essential bank financing for working or concrete collateral – are more willing to capital or during the credit period. Following finance even SME’s exports (see Figure 9). the example of industrialised countries, many low and middle-income countries Conclusion have, therefore, set up public schemes for Trade is an important contributor to export credit insurance. As China and India’s economic growth and thus also economic example have demonstrated, growth of development. Given the small size of exports goes hand-in-hand with growth in domestic markets for many low and middle- credit insurance. income countries, further development of their economies must be undertaken through Notes exports. Especially goods and services 1 UN Comtrade, World Bank and ITC statistics. that add value along the production chain 2 Dun & Bradstreet, Global Bankruptcy Report 2017. (e.g. processed and manufactured goods). 3 WTO Agreement on Subsidies and Countervailing Measures. We have also seen large middle-income 4 World Bank data. countries, like China and India, equally 5 Berne Union data. benefit from exports of goods and services 6 World Bank data. 155 Berne Union 2018 Berne Union 2018 4 Directory Berne Union 2018 Berne Union Members The Berne Union has 83 member companies from around the world, including 5 observers. The membership is diverse – member organisations may be private or state linked, small or large. They represent all aspects of the export credit and investment insurance industry worldwide. As of October 2018, the Berne Union’s 83 members include: 70 ECAs, 9 private insurers and 4 multilateral institutions. 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 ABGF Brazil Bandex Dominican Republic Agência Brasileira Gestora de Fundos Garantidores Banco Nacional de las Exportaciones e Garantias S.A. BECI Botswana AIG United States of America Export Credit and Guarantee Company American International Group, Inc. BPRFRANCE France AOFI Serbia Bpifrance Assurance Export Serbian Export Credit and Insurance Agency CESCE Spain ASEI Indonesia Compania Espanola de Seguros de Credito a la Asuransi Asei Indonesia (Asuransi Asei) Exportacion ASHRA Israel CHUBB Switzerland Israel Export Insurance Corp Ltd Chubb Insurance Company ATI Multilateral COFACE France African Trade Insurance Agency Compagnie Française d’Assurance pour le Commerce Exterieur ATRADIUS The Netherlands Atradius NV / DSB COSEC Portugal Companhia de Seguro de Créditos, S.A. AXA XL United Kingdom AXA Group Insurance Company SE CREDENDO GROUP Belgium BAEZ Bulgaria CREDIT OMAN Oman Bulgarian Export Insurance Agency Export Credit Guarantee Agency of Oman BANCOMEXT Mexico DHAMAN Multilateral 158 Banco Nacional de Comercio Exterior S.N.C. The Arab Investment & Export Credit Guarantee Corporation Berne Union 2018 DIRECTORY ECGC India EXIM HU Hungary Export Credit Guarantee Corporation of India Ltd Hungarian Export-Import Bank Plc. ECGC Z Zimbabwe EXIM J Jamaica Export Credit Guarantee Corporation of Zimbabwe National Export-Import Bank of Jamaica Limited ECGE Egypt EXIM R Romania Export Credit Guarantee Company of Egypt Eximbank of Romania ECIC SA South Africa EXIMBANKA SR Slovak Republic Export Credit Insurance Corporation of South Export-Import Bank of the Slovak Republic Africa Ltd EXIMGARANT Belarus ECICS Singapore Eximgarant of Belarus ECICS Limited FCIA United States of America ECIO Greece FCIA Management Company, Inc Export Credit Insurance Organization FINNVERA Finland EDC Canada Finnvera Plc Export Development Canada GIEK Norway EFIC Australia Garanti-Instituttet for Eksportkreditt The Export Finance and Insurance Corporation HBOR Croatia EGAP Czech Republic Croatian Bank for Reconstruction & Development Export Guarantee & Insurance Corporation 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 JLGC Jordan Export Insurance Agency of Armenia Jordan Loan Guarantee Corporation EKF Denmark KAZAKHEXPORT Kazakhstan Eksport Kredit Fonde Kazakh Export Credit Insurance Corporation EKN Sweden KREDEX Estonia Exportkreditnämnden KredEx Credit Insurance Ltd. Enterprise SG Singapore KSURE Korea Enterprise Singapore Korea Trade Insurance Corporation EXIAR Russia KUKE Poland Export Insurance Agency of Russia Export Credit Insurance Corporation Joint Stock 159 Company Berne Union 2018 LCI Lebanon SERV Switzerland Lebanese Credit Insurer Swiss Export Risk Insurance LIBERTY United Kingdom SID Slovenia Liberty Mutual Insurance Europe Limited SID Inc, Ljubljana LPEI Indonesia SINOSURE China Indonesia Eximbank China Export & Credit Insurance Corporation MBDP Macedonia SLECIC Sri Lanka Macedonian Bank for Development Promotion Sri Lanka Export Credit Insurance Corporation MEXIM Malaysia SONAC Senegal Export-Import Bank of Malaysia Berhad Société Nationale d’Assurances du Crédit et du Cautionnement MIGA Multilateral Multilateral Investment Guarantee Agency SOVEREIGN Bermuda Sovereign Risk Insurance Ltd NAIFE Sudan National Agency for Insurance & Finance of TEBC Chinese Taipei Exports of Sudan Taipei Export-Import Bank of China NEXI Japan THAI EXIMBANK Thailand Nippon Export and Investment Insurance Export-Import Bank of Thailand NZECO New Zealand TURK EXIMBANK Turkey The New Zealand Export Credit Office Export Credit Bank of Turkey ODL Luxembourg UK EXPORT FINANCE United Kingdom Luxembourg Export Credit Agency Export Credits Gurantee Department OeKB Austria UKREXIMBANK Ukraine Oesterreichische Kontrollbank Aktiengesellschaft Joint Stock Company the State Export-Import Bank of Ukraine OPIC United States of America Overseas Private Investment Corporation US EXIMBANK United States of America Export-Import Bank of the United States PICC China People’s Insurance Company of China UZBEKINVEST Uzbekistan Uzbekinvest National Export-Import Insurance PwC Germany Company PricewaterhouseCoopers AG ZURICH United States of America QDB Qatar Zurich Surety, Credit & Political Risk Qatar Development Bank SACE Italy Servizi Assicurativi e Finanziari SEP Saudi Arabia 160 Saudi Export Program International Union of Credit & Investment Insurers 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