III Recent Developments in Export Credits
- International Monetary Fund
- Published Date:
- March 1998
Officially supported export credits6 represent a large share of the external debt of developing countries and economies in transition. In 1996, they accounted for more than 24 percent of total indebtedness of these countries and for 56 percent of their indebtedness to official creditors. In addition, exports covered by Berne Union members—largely through new export credit insurance and guarantees, but also through direct lending—account for about 13 percent of all exports from the countries of Berne Union members, which in turn account for about 80 percent of world exports. Since export credits are regarded as primarily trade promoting rather than development oriented, they are not included in OECD data on official financing flows to developing countries (discussed in Section II).
Total Export Credits
Total export credit exposure to developing countries and economies in transition declined by 2 percent in 1996 to $466 billion, compared with an average growth rate of 11 percent during 1990–95 (Figure 5).7 Approximately two-thirds of total exposure was due to outstanding export credit commitments, 8 while unrecovered claims and arrears accounted for the remaining one-third. Total export credit commitments outstanding, which had contributed to the rise in total exposure during 1992–95, declined by some 4 percent in 1996 as repayments exceeded new commitments. In addition, unrecovered claims have risen sharply in recent years—the majority of this increase represents payments of insurance claims by agencies in the context of a few large Paris Club reschedulings. Export credit agencies’ exposure is concentrated in relatively few countries—the 10 (20) main recipients accounted for 55 (80) percent of agencies’ total exposure (Figure 6), broadly in line with their shares in trade flows (56 (78) percent) and GDP (51 (83) percent).
Figure 5.Export Credit Exposure
Sources: Berne Union; and IMF staff estimates.
1Arrears and unrecovered claims: Overdue payments by borrowers, classified as arrears if overdue payments have not yet resulted in claims on export credit agencies.
2Medium- and long-term commitments: Total amount of loans by, or guaranteed or insured by, an export credit agency, either globally or to entities in a specific country, excluding amounts that are in arrears or on which claims have been paid. Usually includes principal and contractual interest payable by the importing country on disbursed and undisbursed credits and sometimes includes not only liabilities of the agency but also uninsured parts of the loan.
3Short-term commitment: Commitments that provide repayment within a short period, usually six months. Some agencies define short-term credits as those with repayment terms of up to one or two years.
4The figures reflect an enhanced debtor country coverage by the Berne Union of 20 countries with total exposure that amounted to $9.4 billion in 1994, $35.7 billion in 1995, and $37.7 billion in 1996.
Figure 6.Twenty Main Recipients of Export Credits Among Developing Countries and Countries in Transition, 1992 and 1996
(Percent share in agencies’ portfolio)1
Sources: Berne Union: and IMF staff estimates.
1Berne Union reporting agencies.
2Data for 1992 not available.
Total new export commitments to developing countries and economies in transition reported to the Berne Union fell by 3 percent to about $105 billion in 1996, reflecting a substantial decline in new commitments in a few major markets (Figure 7), This represented the first decline since 1992 in total new commitments, which had risen by 9 percent a year during 1992–95.9 As in the past, new commitments in 1996 were concentrated in a few countries with relatively large export activity, favorable risk assessments, and existing high agency exposure (Figure 8), In fact, the concentration is higher than for total exposure, as approximately 66 (90) percent of all new export commitments were reported to the top 10 (20) countries receiving this form of financing. While six Asian economies (China, Hong Kong Special Administrative Region (SAR), Indonesia, Malaysia, Philippines, and Thailand) continued to receive the bulk of new export commitments in 1996, all but Hong Kong SAR showed substantial decreases from 1995. In general, the slower growth in new export credit commitments represented some slowing down of project financing, which tends to be lumpy, and, in part, growing concerns about macroeconomic imbalances in some Asian countries and the ability of the debtor countries to assimilate previous amounts of export finance. Nonetheless, new commitments to some countries increased in 1996, particularly to South Africa, which accounted for less than 2 percent of agencies’ existing exposure, but received over 7 percent of all new commitments in 1996 following the strengthening of economic performance in the previous year Brazil and Turkey also saw an increase in new commitments.
Figure 7.Officially Supported Export Credits: New Commitments
Sources: Berne Union: and IMF staff estimates.
1Same country coverage as in 1994.
2Figures reflect an increased number of countries (20) covered in agencies reporting to the Berne Union. New commitments to these countries were $18.4 billion in 1995 and $18.8 billion in 1996, over 80 percent of which reflected commitments to Greece. Malaysia, and Thailand.
Figure 8.New Export Credit Commitments in Selected Major Markets, 1993–96
Sources: Berne Union; and IMF staff estimates.
1Data for 1993 not available.
2New commitments in 1994 were small.
By the end of 1996, export credits accounted for, on average, about 27 percent of the total external debt of the 20 largest countries in terms of export credit agencies’ exposure (Figure 9). For several countries (Algeria, Islamic Republic of Iran, and Nigeria), export credits have been their main source of foreign finance in the past, representing some two-thirds or more of their external debt. For other countries with a more diversified base of foreign financing, such as Brazil, India, and Mexico, export credits represented less than 20 percent of their external debts.
Figure 9.Main Recipients of Export Credits Among Developing Countries and Countries in Transition, 1996
Sources: Berne Union; World Bank Debtor Reporting System; and IMF staff estimates.
Financial Performance of Export Credit Agencies
The financial performance of most export credit agencies, as measured by net cash flow, continued to improve during 1996 (Figure 10).10 Of the 41 agencies surveyed, 32 recorded improvements in their cash-flow balances, with 4 large agencies responsible for the bulk of this enhancement. For the first time since 1981, Berne Union members’ combined cash-flow results were in surplus ($1.3 billion) in 1996, compared with a deficit of $0.4 billion in 1995, as premium income and rising recoveries offset new claims payments and administrative costs. New claims payments, which had peaked at $16 billion in 1994, dropped an additional 10 percent in 1996 to about $10.6 billion, reflecting mainly lower payments on the debt of the former Soviet Union that was assumed by Russia.11 At the same time, recoveries on claims previously paid increased by 13 percent, reaching $8.9 billion, while premium income rose by 3 percent to $3.6 billion.
Figure 10.Export Credit Agencies: Premium Income, Recoveries, Claims, and Net Cash Flow
Source: Berne Union.
This improvement in the agencies’ financial position reflected in part debtors’ better ability to service export credits owing much to the high level of world economic activity, as well as to three developments in export credit markets in recent years. First, a number of major debtor countries (particularly Russia) have experienced an improvement in their payment position, and several countries have exited from the Paris Club rescheduling process. Second, recoveries on rescheduled debts have become a significant source of income, particularly for large agencies. Third, many agencies have adjusted their premium schedules to better reflect the risk of transactions covered in recent years. Most export credit agencies expect these trends to continue in 1997.
New Commitments and Cover Policy for Selected Countries
The strong flow of new commitments to Asia—including tied-aid credits—continued in 1996, although at a somewhat slower pace than the record amounts reported in 1994–95. These sizable flows of new credits over the last few years have caused total export credit exposure to Asia to double since 1992. The slowdown in 1996 represented, in part, some deceleration of project financing and, in part, concerns regarding the sustainability of current account deficits of some of the recipient countries as well as possible signs of overheating. However, given the rapid output growth of countries in the region, the large projected need for infrastructure projects, and the corresponding robust demand for capital imports, new commitment flows to this region are expected to remain significant.
All agencies remained open for business, generally without restrictions, in China and Indonesia, the largest recipients of new commitments. In 1996, new commitments to China slowed to $15 billion and those to Indonesia slowed to $10 billion, down 25 percent from their record high 1995 levels. Given substantial inflows of new credits, agencies’ exposure to China has more than doubled since 1992, reaching $45 billion in 1996. Similarly, agencies’ exposure to Indonesia has grown by some 25 percent since 1992. Also, notwithstanding specific concerns regarding the external current account deficits of the Philippines (4.3 percent of GNP in 1996) and Thailand (7.9 percent of GDP in 1996), most export credit agencies continued to hold a positive long-term assessment of these countries and provided over $12 billion in new commitments in 1996, as all agencies were open for all business without restrictions.
New commitments to Russia rose from $2.5 billion in 1995 to $3 billion in 1996. Most agencies were generally open for short-term business in Russia, but with restrictions on some transactions. Some agencies remained off-cover for medium- and long-term transactions, and others were open only with a sovereign guarantee and with limits on new business. No agency was prepared to accept regional government guarantees. Many agencies welcomed the joint work by the European Bank for Reconstruction and Development (EBRD) and the World Bank on deepening the financial sector, under which 30 Russian commercial banks have been accredited. Partly as a result, some agencies were accepting, or considering accepting, guarantees by a small number of commercial banks, largely for short-term business.
Cover policies for the Baltics and the other countries of the former Soviet Union have continued to remain restrictive. Most agencies were on-cover for the Baltic countries, but required a government guarantee. The volume of new commitments to these countries was some $200 million in 1996. For the resource-rich Asian states of Kazakhstan, Turkmenistan, and Uzbekistan, most agencies were open for business only with a sovereign guarantee. New commitments to individual countries were in the range of $300–500 million in 1996.
Despite concerns that the political and economic situation in Turkey has remained vulnerable, new commitments rose to almost $5 billion in 1996. Given that Turkey has been a major market for many agencies and has an excellent payment record, agencies were generally open for cover on all business with very few restrictions. Nevertheless, agencies were watching political developments very carefully, and some had tightened their cover policies recently or had downgraded Turkey in their risk assessments, or had raised their fees. Similarly, in spite of a difficult political and fragile economic environment, most agencies were open for cover with some restrictions in Pakistan because of its good payment record. New commitments in Pakistan have stayed at about $2–3 billion a year since 1994, Also, most agencies were open for all business in India with few restrictions (new commitments in 1996 amounted to $3.6 billion), but required central government guarantees. New commitments in the Islamic Republic of Iran totaled approximately $3 billion in 1996; however, since a German court ruling on state-supported terrorism in the spring of 1997, new business has practically ceased.
Most agencies were off-cover on medium- and long-term business with the Venezuelan public sector, except for a couple of large state-owned mining and oil companies. While many agencies reported some payments on arrears in 1996, significant arrears remained. Most agencies were generally more positive toward operations with the private sector. New commitments to Venezuela have remained at about $600–650 million in the last two years, after reaching a peak of $2 billion in 1993.
Market Developments and Institutional Changes
The market for export credits has developed in recent years within the framework provided by the Arrangement on Guidelines for Officially Supported Export Credits (the OECD “Consensus”).12 The agreement also set in motion new work on areas not covered by the Consensus, including export credits for agricultural products and the setting of pricing mechanisms and premium fees for export credits as well as the stricter application of existing OECD rules on tied-aid credits. A group of experts, chaired by Belgium, worked in 1996–97 toward establishing a consensus on maximum export subsidy levels. A particular sticking point was the different methods used by export credit agencies in setting premium rates for export credit guarantees. Some agencies preferred to set premium rates according to market conditions and associated levels of risk, while other agencies did not traditionally differentiate between markets in setting premium rates. Agreement was reached in June i997 on the “Knaepen Package,” a set of rules on export credit pricing that will help to eliminate subsidies and trade distortions by setting minimum premium rates for country and sovereign risks. A factor that limits the effectiveness of the OECD Consensus is the rapidly growing competition from countries outside the OECD, especially emerging markets in Asia.
An ongoing development in the market for export credits has been the growth in agencies’ business devoted to investment insurance. Agencies have reported that the demand for investment insurance has surged in recent years in the context of growing external finance for developing countries from private sources, including foreign direct investment, and the transfer of a number of public enterprises to the private sector through privatization programs in these countries.13 Berne Union members reported an increase in demand for investment insurance cover to more than $15 billion in 1996 from $8 billion in 1995, while at the same time the value of investment insurance claims paid fell by almost 50 percent. In addition, members’ investment insurance portfolios rose by 28 percent from 1995, to approximately $43.5 billion. Traditionally, export credit agencies have supplied insurance against political risks other than the usual transfer risks, including host government actions that might interfere with the performance of private sector projects.14 The uncertainties in many developing countries about the future of the political, legal, and regulatory regimes governing foreign direct investment more generally, and project finance in particular, are often intractable from the point of view of prospective foreign investors. The investment insurance offered by official bilateral and multilateral agencies has helped developing countries catalyze more private finance for projects in recent years.
A new development in recent years has been the growing participation of private insurers in the export credit insurance market, as well as the privatization of some export credit agencies.