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September 2017

Contents

Published by TXF Ltd on behalf of the Berne Union. ©TXF Ltd 2017 & the Berne Union. All rights reserved. The contents of thispublication are protected by copyright. No part of this publication may be reproduced, stored, or transmitted in any form or by anymedium without the permission of the publisher and/or the Berne Union. The content herein, including advertisements, does notrepresent the view or opinions of TXF Ltd or the Berne Union and must neither be regarded as constituting advice on any matterwhatsoever, nor be interpreted as such.

CGIF’s construction period guarantee –kick-starting green-field project bondsKiyoshi Nishimura, CEO at CGIF examines the innovativesolution to mobilise long-term savings in local currenciesin developing Asia to finance green-field infrastructureprojects through project bonds.

Editor-in-chief: Jonathan Bell

Editor: Lucy Palfreeman

Sub-editor: Carl Morris

Production editor: John Smith

1 Introduction By Paul Heaney.2 Cover story5 Local currency finance: local support in a global

marketplaceBy Paul Radford, chief economist at UK Export Finance.

7 Innovative ways to invest in IndiaBy Bill Brown, regional vice president, Asia, Export DevelopmentCanada (EDC).

11 How political risks have disrupted trade across the MENAregionBy Karim Nasrallah, general manager of LCI.

14 The new normal of higher political riskBy Rouben Nizard, economist for sub-Saharan Africa, Coface’s Economic Research Department.

17 Taking SME support to the next levelBy Katja Keitaanniemi, executive vice president responsible forSMEs at Finland’s Finnvera.

19 The importance of credit insurance for national SMEsBy COSEC.

20 Surety market developments – from local market players toongoing globalisationBy Rob Nijhout, executive director – International CreditInsurance & Surety Association (ICISA).

22 The new landscape of sovereign debt restructuringBy By Paola Valerio, head of international relations at SACE(Cassa depositi e prestiti Group).

25 Oil price developments and prospectsBy Dr Rouben Indjikian, Webster University, Geneva.

28 Risk aversion, financing and real servicesBy Professor Andreas Klasen, Offenburg University, and DrSimone Krummaker, University of Westminster.

32 Radical innovation in trade financeBy Christophe Spoerry, co-founder of the Euler Hermes DigitalAgency.

on international trade, finance and investment from the export credit and political risk insurance industry

This newsletter is sponsored by:

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Berne Union Newsletter, September 2017

Dear Readers,

Themes for this month span the full scale of international finance; from small business to big infrastructure – fromlocal currency to global economic policy.

The newsletter itself is a bumper edition, foreshadowing our 2017 Yearbook with a selection of 12 articles from BerneUnion members and industry experts. The topics themselves paint a telling picture of the relative pressures andpriorities in effect on the industry today.

SMEs continue to attract the interest and energies of many. In one of two articles on the subject (the other presentedby COSEC), Katja Keitaanniemi looks beyond a simple focus on products and processes, outlining Finnvera’sapproach to educating and informing smaller exporters – an expression of the growing trend towards an integrated,cooperative and full-service provision for SME clients.

At the other end of the scale, infrastructure projects occupy both the largest investments, and also the some of thelargest financing gaps.

Kiyoshi Nishimura, CEO of ADB-sponsored CGIF, tells us that emerging Asia alone will require $26 trillion investmentin infrastructure over the next 15 years – and other emerging economies face a similar challenge. These kinds ofinfrastructure projects present a complex challenge where the goal of frictionless finance requires both innovation– within the products, deal structures and partnership options – and pragmatism – in recognition of the realities ofsocial impacts, project cash-flow, debt sustainability.

Local currency financing provides a good example of these considerations. UKEF’s Paul Radford explains howmatching the financing currency to that of project revenue helps reduce uncertainty for borrowers and expandsbusiness opportunities for their exporting clients. In a concrete example of such policy in action, Bill Brown gives anaccount of EDC’s ground-breaking Rupee financing of Indian infrastructure developer IL&FS – the so-called ‘MasalaLoan’ – which will open up a lucrative new foreign connection for Canadian suppliers.

ICISA’s Rob Nijhout presents an alternative perspective on infrastructure financing; assessing the development ofglobal markets for surety bonds and Paola Valerio of SACE closes on a related theme; assessing the developmentof sovereign debt restructuring, development sustainability and the role of the Paris Club and IIF in coordinating thespheres of both public and private creditors.

Moving to global trends, in an insightful piece on MENA, Karim Nasrallah (LCI) assesses the wave of politicaltransformation, economic turmoil and conflict which have been testing the business climate in the region. Oneelement of this, the historical nadir of oil prices, is the starting point for Dr Rouben Indjikian’s analysis of expectationsfor this commodity, assessing the development of supply and demand under the influence of OPEC pricing, therising US shale gas industry and growing pace of technological innovation. In his article, Christophe Spoerry, co-founder of Euler Hermes Digitial Agency also observes an acceleration in the influence of technology on trade acrossthe board, and while these disruptive forces are transforming the industry, he sees opportunities to enhance business,rather than a challenge of adaptation.

Indeed, we are in an environment with many moving parts, and high uncertainty – a state which is not likely tochange any time soon, given current vulnerabilities, according to Coface’s Rouben Nizard, in his article on the ‘NewNormal of Political Risk’. But it’s not always straightforward to say that more risk translates to more demand for riskinsurance. In an interesting piece of research, based in part upon the results of their Global CEO Survey, ProfessorAndreas Klasen and Dr Simone Krummaker examine the factors influencing demand for credit insurance. They remindus that risk and finance move together in a complex interdependent system, where a range of more subtle factorsare also at play. This can be seen in the growing demand for firm-specific ‘real services’ and highlights a markeddifference between SMEs and larger companies.

Having come full-circle in this month’s trade finance-microcosm, I would like to close by thanking all of our excellentcontributors to this edition of the BUlletin. I hope you find the content interesting and continue to explore our world!

Introduction

Kind regards,Paul HeaneyBerne Union Communications

The challenges of financinginfrastructure with local currency savingsDeveloping Asia, like other emergingeconomies, faces a daunting challenge tomeet its huge infrastructure investmentneeds. Developing Asia will need to invest$26 trillion from 2016 to 2030, or $1.7 trillionper year, in order to maintain the region’sgrowth momentum, eradicate poverty, andrespond to climate change, according to theAsian Development Bank (ADB)’s latestforecast. To meet this challenge, privatesector participation is now more crucial thanever. The ADB estimates private sector

financing in 24 Asiandeveloping countrieswill have to increasefrom $63 billion a yeartoday to $250 billiona year during 2016-2020 to fill this gap.

Furthermore, abulk of private sectorfinancing will need tocome in local

currencies to avoid the currency mismatch,because many of the infrastructure projectsrely on local currency revenues to pay backtheir debt. Even when foreign currencyindexation mechanisms are available forrevenue streams, the sustainability of suchmechanisms is questionable in the event of acurrency crisis, as some Asian countrieslearned the hard way during the Asianfinancial crisis in the late 90s. The realsolution should be to fund infrastructureinvestment in local currencies.

CGIF is a new multilateral institutionestablished by 13 Asian countries comprisingof all ten member countries of theAssociation of Southeast Asian Nations(ASEAN), and their ‘Plus 3’ partner countrieswhich are China, Japan and Korea, togetherwith the ADB to help overcome thesechallenges. The CGIF provides guarantees tolocal currency bonds issued by corporatesand projects mainly in the ASEAN countriesto help facilitate their access to bondmarkets.

While the CGIF can support corporates orprojects in a wide range of sectors/industries,

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CGIF’s construction periodguarantee: kick-startinggreenfield project bondsConstruction risk has long been an impediment for the use of projectbonds to finance greenfield infrastructure projects. The CreditGuarantee and Investment Facility (CGIF) recently introduced aninnovative solution to mobilise long-term savings in local currencies indeveloping Asia to finance greenfield infrastructure projects throughproject bonds, discusses CGIF’s CEO, Kiyoshi Nishimura.

Kiyoshi Nishimura

Figure 1: Infrastructure investment gaps

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its guarantee support is particularly useful forinfrastructure projects. This is because one ofthe solutions to overcome the challengesabove is to facilitate the channeling ofdomestic long-term savings in emergingeconomies to finance infrastructure projectsdirectly via project bonds, particularly at the

greenfield stage. On the back of steadyeconomic growth, and the rise of incomelevels with growing middle incomepopulation, many ASEAN countries are nowwitnessing rapid accumulation of localcurrency long-term savings in their pensionand insurance funds. These long-term savingsinvariably need long-term investmentopportunities, and the stable cash flows ofinfrastructure projects would be ideal forthem.

The CGIF has been working with theASEAN governments, regulators, ratingagencies and bond investors for several yearsto boost the flows of domestic currencyfunding into infrastructure projects in theASEAN countries, in particular green-fieldprojects. Mobilising long-term savings inpension and insurance funds in thesecountries may be the most efficient model offinancing infrastructure by long-term localcurrency funds, only a few countries in theregion have successfully pursued thiscapability. A critical impediment againstmobilising long-term savings is the low riskappetite of pension and insurance fundmanagers and, in particular, their aversion toconstruction risks.

Construction Period GuaranteeFacility (CPG) The CGIF’s Construction Period Guarantee(CPG) facility is aimed at allaying domestic

bond investors’ concerns about constructionrisks. It ensures the completion ofconstruction works and the commencementof the operations phase in a project, whichwill be financed by project bonds issued inthe local currency bond market in the region.

Under this facility, the CGIF irrevocablyand unconditionally guarantees non-paymentof scheduled payments for the project’sbonds occurring prior to the commencementof commercial operations. If a project’scompletion is delayed, the CGIF shall ensurethat the project bonds are adequatelyserviced on a timely basis. In the unlikelyevent that it cannot be completed, the CGIFshall accelerate the guaranteed bonds andpay in full the principal and accrued interestamounts to bondholders.

Generally, the CPG facility will cover theconstruction period as well as a reasonablebuffer period to allow for possible delays inthe project’s construction. Therefore, thetenor of the CPG facility is expected to be fora three to five year period or so at the outset,but if the construction is further delayed, theCPG cover will continue until the projectmeets the completion milestone. Dependingon the nature of the project (e.g. the initialramp-up period is necessary before beingfully operational) and investors’ requirements,the CPG facility could also be extended tocover the initial operation period until theproject actually demonstrates its ability togenerate stable cash flows. Such flexibilityembedded in the CPG facility is important toaddress bond investors’ concerns aboutpossible construction delays.

When the ratings agencies assessgreenfield infrastructure bonds, their ratingscan be seriously constrained by construction

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Figure 2: CPG’s Rating Uplift

CONSTRUCTION PERIOD STABILIZED OPERATIONAL PHASE

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STAND ALONE RATING OF GREENFIELD BONDS (penalized by construction risks)

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Developing Asia will needto invest $26 trillion from2016 to 2030, or $1.7trillion per year, in order tomaintain the region’sgrowth momentum,eradicate poverty, andrespond to climatechange, according to theAsian Development Bank.

risks. This is despite the fact that the projectsmay have stable and robust cash flows duringthe operational period, and even though theconstruction period is far shorter than theoperational period.

There are many elements of risks duringthe construction period which are highlycomplex to assess. The investors, therefore,need pricing of the bonds that ultimatelyreflects these risks. This generally makesbond financing for such deals economicallyunviable when the long-term bonds arepriced considerably higher based on riskswhich are likely to be overcome in a relativelyshort period of time. By removing risksduring the construction period entirely fromthe transactions, the CGP facility eradicatesany rating penalties arising from such risks,allowing bond investors to focus only on theoperational risks of the projects, and enablinglower fixed interest rates to be applied fromthe onset.

Changing project financinglandscape in ASEANThe CPG facility is anticipated to boost theuse of local currency project bonds for newprojects in the region by eliminatingconstruction risks for bondholders investingin greenfield projects.

While local bank lenders in the ASEANcountries are liquid and usually very keen tofinance infrastructure projects, even on aproject financing basis often at attractivepricing, bond finance can bring certainty toproject sponsors with fixed interest rates,which is a common feature of bond finance.Moreover, while local banks can lend for up to12 years or so, bond investors can providelonger tenors of up to 20 years or evenlonger in some countries.

Stretching a finance tenor will improve theproject’s economics and create room toreduce the tariff levels. Finally, projectsponsors will be able to diversify theirfunding sources. This is especially vital toovercome single group exposure limitsimposed on bank lending In the Philippines.For example, there are only a small number ofleading domestic conglomerates engaged ina wide range of infrastructure projects, andsingle group exposure limits hinder thedevelopment of greenfield infrastructureprojects. The CPG facility will unlock a greatvariety of benefits of bond finance to green-field infrastructure projects.

In the developed economies, majorinstitutional bond investors such as global

insurance companies and leading pensionfunds, have their own internal expertise andmanpower to supplement the project financebanks in funding greenfield infrastructureprojects. But in the emerging economies ofthe ASEAN, there is little internal capacityamong domestic bond investors, such aspension and insurance fund managers. It willbe very costly and time-consuming todevelop expertise in-house.

The CGIF has developed a comprehensiveassessment framework that allows these risksto be measured and managed. Componentsof this framework will allow for expertjudgement of the various risk factors relatingto the construction works as critical inputs inthe assessment. Risks are also managed bythe CPG’s boilerplate requirements for thevarious contractual agreements and riskmitigants that are consistent withinternational project finance practices.

While domestic bond investors in theASEAN countries may first rely on the CPGfacility, the CGIF plans to share itsassessment tools with these bond investors.Replicating the CGIF’s assessmentframework, they will become familiarised withthe assessment of construction risks and willdevelop their own capacities in the future tounderstand, evaluate and mitigateconstruction risks to acceptable levels. Thiswill allow them to invest in greenfield bondsindependently even without the CPG’ssupport. If this happens, it will fundamentallychange the landscape of project financing inthe ASEAN countries. This may take sometime but CGIF is committed to bring thischange to the region. �

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. . . a bulk of private sectorfinancing will need tocome in local currencies toavoid the currencymismatch, because manyof the infrastructureprojects rely on localcurrency revenues to payback their debt.

A major part of the role of an export creditagency (ECA) is to ensure that its country’sexporters are able to meet the demands ofan overseas buyer in a competitive globalmarket place. As the world’s first ECA, withits centenary coming up in 2019, UK ExportFinance (UKEF) has always seen this as itsguiding mandate.

One of our strategic priorities is thereforeinnovation and flexibility. This is evident in anumber of our recent major transactions.These include the hybrid project finance/reserve-based lending structure for a GE Oil& Gas contract with Ghana’s Offshore CapeThree Points project, and the first ever ECAloan to the Kurdistan Regional Government ofIraq in support of a Biwater contract.

Widened supportThe UK Government’s 2016 AutumnStatement was another major milestone. TheChancellor of the Exchequer not onlydoubled our risk appetite limit to £5 billionand increased our capacity for individualmarkets by up to 100%, he also announcedUKEF’s significantly widened local currencyfinancing offering.

So why is this important? One of the mainways ECAs support exporters is byguaranteeing loans to an overseasbuyer/borrower to finance the purchase ofcapital goods and/or services. Traditionally,these loans tend to be in the main tradingcurrencies, such as US dollars, sterling

and euros.However, many

major projects, forexample water, powerinfrastructure, andlocal transport, do notgenerate foreigncurrency revenues,meaning that theoverseas buyer orborrower may prefer

a loan in its home currency.Local currency financing (LCF) helps to fill

this gap. Under a local currency scheme, theECA guarantees the loan in the overseasbuyer or borrower’s home currency. Thishelps the buyer or borrower reduce foreigncurrency risk and eliminate a source ofuncertainty over the cost of servicing theloan. Furthermore, the OECD permitspremium discounts of up to 20% from its setminimum premium rate (MPR) fortransactions in local currencies, under certainconditions.

That is why UKEF has expanded its localcurrency offering, quadrupling the number ofpre-approved currencies supported from tento 40. Local currency financing is nowavailable as standard for buyer credit loanswhere the value of the contract is at least £5million. And we are constantly looking toupdate our list of eligible currencies; indeed,we can consider any currency on a case-by-case basis if it satisfies our risk standards.

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Local currency finance:local support in aglobal marketplacePaul Radford, chief economist at UK Export Finance, talks about why –and how – the UK’s export credit agency is allowing overseas buyers tobuy British and pay local.

Paul Radford

Many major projects, for example water, powerinfrastructure, and local transport, do not generateforeign currency revenues, meaning that the overseasbuyer or borrower may prefer a loan in its homecurrency. Local currency financing helps to fill this gap.

Local currency financing in practiceThe attractiveness of this offering is evidentwhen you look at some of the transactionswe’ve supported.

Take, for example, UK coach manufacturerAlexander Dennis’s delivery of 90 buses toMexico City’s transport authority Metrobus.These lightweight, fuel-efficient buses willdrive along the Paseo de la Reforma, theiconic ‘Champs-Élysées’ of Mexico City,easing overcrowding in a city of 20 millionpeople.

Earlier this year, UKEF was able toguarantee a loan in Mexican pesos (MXN) tosupport the MXN 1 billion contract. This is thefirst transaction UKEF has supported inMexican pesos, and helped ensure that thebuyer looked to the UK to procure the buses.

In 2015, UKEF became the first non-Chinese ECA to guarantee a loan in offshorerenminbi when it supported an aircraftdelivery to China Southern Airlines. Theoffshore renminbi is one of the most usedcurrencies in trade finance. This capabilitysupports the UK Government’s widerambitions to strengthen trade ties with Chinaand consolidate London’s position as thelargest offshore renminbi centre outside Asia.

So UKEF’s local currency financingoffering is clearly good news for UKexporters.

Managing the riskHowever, from a risk perspective, it posessome interesting questions. Just like astandard ECA-backed guarantee, there is therisk of default – something we analyse, take adecision on and manage as a matter ofcourse.

Risks around the currency play a role, suchas currency convertibility and currencyvolatility. We have to consider whether thereis a suitable bank that can fund and lend inlocal currencies for the required term andwhether there is sufficient stability andliquidity in the banking sector in the overseasbuyer/borrower’s country. There are also theusual considerations around any political riskin the country.

To manage these risks we can take anumber of factors into account. For example,we can use the country’s local currencycreditworthiness to assess the risk of default.Appropriate due diligence, includingconsideration of the credit ratings of thebanks helps us to identify the stability of thebanking and financial sectors as well asidentifying organisations that have the

capacity or capability to lend for the termsand amounts required. The World Bank’s Ruleof Law Index can provide a good indicationaround governance indicators andinformation on currency convertibility isreadily available.

Finally, to mitigate the risk of currencyvolatility, we can include a crystallisationclause as a condition of support. This clauseis used to convert outstanding claims into theECA’s host currency at a pre-determinedfixed exchange rate. However, it can be

difficult to verify beforehand whether or not acorporate or bank in the overseas country willaccept such a clause. Furthermore, it mightnot be possible for the overseas borrower toincur foreign currency denominated debt,meaning that we would not be able toinclude a clause. Regardless of how volatilethe currency is, it may be prudent to add acrystallisation clause if legally possible.

Despite these additional technicalconsiderations, we believe our local currencysupport can help UK exporters make theiroverseas offering even more attractive, andwe look forward to supporting transactions ineverything from the Brazilian Real to theZambian Kwacha.

Conclusion The UK Government has been clear in itsambition for the UK to be a champion for freetrade, addressing barriers and advocating foras frictionless a global trading environment aspossible. By offering financing in any of 40currencies at the buyer’s choice, UKEF isplaying its role in helping the UK’s exportersaccess a truly global marketplace. �

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Earlier this year, UKEF wasable to guarantee a loan inMexican pesos (MXN) tosupport the MXN 1 billioncontract. This is the firsttransaction UKEF hassupported in Mexicanpesos, and helped ensure that the buyerlooked to the UK toprocure the buses.

India’s economy is booming and isforecasted to do so for the foreseeablefuture. The growth of the middle class - andthe massive urban transformation that comeswith it - creates unprecedented opportunitiesfor international business in the infrastructuresector. The country needs about $1.5 trillionof investments in the infrastructure sector inthe next ten years, according to the TheEconomic Times Indian Infra Summit. Theopportunity is undeniable, but how can anexport credit agency help its companies tapinto that business? The only way is by findinginnovative ways of being relevant to themarket and giving those businesses whatthey need.

EDC, the Canadian crown corporationmandated to provide financing, insurance,bonding, trade knowledge and matchmakingconnections to Canadian companies seekingto export and invest abroad — wanted tohelp its customers gain access to thisgrowing market. In November, EDC took theunusual step of providing the rupee (INR) theequivalent of $50 million in financing toMumbai’s Infrastructure Leasing & FinancialServices (IL&FS), one of India’s largestinfrastructure developers. The deal is knownby both parties as the Masala loan, so namedfor an Indian spice mixture.

The loan isconsidered anexternal commercialborrowing (ECB)loan. These are loansmade by non-residentlenders. They arecommon in India as away to facilitate muchneeded access toforeign money by

Indian corporations and public-sectorentities, which are the lifeblood of India’sexplosive economy. ECBs are broad and caninclude commercial bank loans, buyers’credit, suppliers’ credit, securitisedinstruments such as floating rate notes andfixed-rate bonds, credit from official exportcredit agencies and commercial borrowingsfrom financial institutions. Some sources sayECBs have been responsible for between20% and 35% of India’s total investmentflows into the country.

This deal stemmed from a regulatorychange in ECBs by the Reserve Bank of Indiafor transactions in the infrastructuresegment. The bank imposed a minimumtenure of ten years on transactions, a tenureconsidered by EDC and most commercialbanks to be too long as its own average

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Innovative ways toinvest in IndiaFor the first time in its history, Export Development Canada provided a loan to an Indian infrastructure leader, in India’s own currency. Bill Brown, regional vice president, Asia, Export Development Canada(EDC) talks through the achievements and challenges of the loan, andif there is more to come.

Bill Brown

India’s economy is booming and is forecasted to do sofor the foreseeable future. The growth of the middleclass - and the massive urban transformation thatcomes with it - creates unprecedented opportunities forinternational business in the infrastructure sector.

standard transaction length is generally fiveto seven years.

The other challenge was that EDC did nothave an Indian rupee bank account, whichlimited the ability to raise rupees through itsbonds. As a foreign lender, EDC had tocreate a unique structure with an embeddedderivative to allow it to do a currency swap,converting its US dollar accounts for rupeesand thereby reducing currency risk. EDCsucceeded in doing this by partnering withthe Bank of Nova Scotia. It was a solutionthat overcame both obstacles EDC faced inits efforts to help Canadian companiesaccess lucrative infrastructure contracts inIndia.

Entering uncharted territoryOnce it came together, it was a deal of firsts:it was the first time EDC had dealt withIL&FS; it was EDC’s first rupee deal, and thefirst ECB deal under the revised guidelines inIndia.

As smaller Canadian suppliers compete inthis globalised industry, they haveincreasingly asked EDC to help them makenew connections with foreign buyers. Thegoal with the IL&FS deal was to respond tothe needs of Indian companies and make iteasier for Canadian suppliers to win newinfrastructure business. Canadian companiesare well known for their capabilities ininfrastructure projects of all kinds and sizesand IL&FS can give them a foothold in thelucrative Indian market. Now that this deal isdone, the broader goal is to effectivelydevelop the solution so EDC can offer it to awider customer base.

IL&FS, with its large global supply chainand base in growth-rich India, was at the topof the wish list of those companies. This waspartly because it has a strong interest inworking with Canadian companies. IL&FS’sdistinct mandate involves catalyzing thedevelopment of infrastructure in the country.It has focused on the commercialisation anddevelopment of infrastructure projects and

the creation of value-added financialservices.

Since 2013 – long before the new financingfrom EDC – IL&FS has procuredapproximately $2 million in goods andservices from Canadian companies. WithEDC’s financing help, it is hoped that this

number will skyrocket to more than $4million per year.

Nathan Nelson, EDC’s former chiefrepresentative in India, noted at the time ofthe deal that IL&FS had met with more than50 Canadian companies over the previoustwo years and was planning to meet withanother 25 in November when the group wasto travel to Canada for a trade mission. Hesaid IL&FS was part of an important valuechain in the Indian market with a clearinterest in doing more business withCanadian companies, particularly those thathave expertise in surface transport, powerand urban infrastructure and mapping.

Ramesh Bawa, IL&FS’s CEO and managingdirector, said EDC’s loan has showedconfidence for his company. He noted thatEDC’s support through the Masala loan wascrucial as it enabled IL&FS to eliminatecurrency risk entirely and deploy fundingdirectly into the various requirements for itsinfrastructure projects without having toconvert foreign funds to Indian rupees. He

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Once it came together, itwas a deal of firsts: It wasthe first time EDC haddealt with IL&FS; it wasEDC’s first rupee deal, and the first ECB dealunder the revisedguidelines in India.

EDC’s support through the Masala loan was crucial as itenabled IL&FS to eliminate currency risk entirely anddeploy funding directly into the various requirementsfor its infrastructure projects without having to convertforeign funds to Indian rupees.

said having a reputable institution such asEDC, partner with IL&FS, on not only its firstMasala ECB, but also its first funding from aCanadian institution, speaks to theimportance of the work that his companydoes in India.

EDC targets companies such as IL&FS,whose procurement needs match upnaturally with Canadian expertise. Once EDChas a detailed understanding of a company’ssupply chain and business goals, its agentsprovide introductions to qualified Canadiancompanies with well-matched expertise.IL&FS is specifically interested in Canadiancompanies that can help it innovate andreduce costs in upcoming road, port, power,sanitation, waste management and waterprojects.

A winning contractCanada’s IBI Group was one such companyto succeed in getting a contract: “IBI sawIndia as a tremendous growth market,” saidDeepak Darda, director, India and South Asialead, IBI Group, Canada. “It provided us hugeopportunities where we could actually bringour Canadian expertise into the market,whether it was the national highwayprogramme in India, or the tremendousgrowth that the Indian cities wereexperiencing.”

Darda said they learned about the IL&FSopportunity when they approached EDC forconnections with large-scale infrastructureplayers.“ As a result, we have been awarded acontract where we are providing ouradvisory services to evaluate a toll highwayasset for IL&FS,” he said.

Anita Ferreira, head of InternationalBusiness Group at IL&FS Financial ServicesGroup India, said her company is delighted tobe working with Canadians. “The thing thatset the Canadian companies apart is thatlevel of professionalism and their area ofexpertise and that they were willing to tailor

the solution to our requirements,” she said.“You need solutions that work for the projectyou are doing. There was a lot of outside-the-box thinking that they were willing to do.”

Another foreign currency dealBased on the success of its experience inIndia, EDC opened a local peso account thatoffers new opportunities in Mexico. Until thisyear, when an EDC customer was doingbusiness in Mexico needing to complete atransaction in Mexican pesos, it had to go toEngland. EDC responded to that quandaryby opening its first peso account in Mexico.This marked the first foreign currencyaccount to be located within its localterritory, outside the major internationalfinancial centres.

The account was opened in partnershipwith Scotiabank Inverlat Mexico andrepresents an important milestone for EDCMexico to establish new relationships anddiversify its borrowing base.

Having an account based in the exportingmarket facilitates existing business andopens the door to opportunities that maypreviously have been missed. By providingthe same borrowing currency as local bankswith a same-day settlement period, EDC canbetter serve current and future customerswho need that flexibility. To remain relevantin an increasingly competitive market, itneeds to be able to match local bankfinancing and respond to Mexican customerand prospect needs.

If the peso account is successful, EDC maylook at exploring other local currencyaccounts in markets, such as Singapore,Chile, and India. The bottom line is that toremain relevant in today’s global economy,financial institutions and export creditagencies must be creative with theirofferings in order to meet the needs of itscustomers and foreign markets. �

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Based on the success of its experience in India, EDC opened a local peso account that offers newopportunities in Mexico. . . . If the peso account issuccessful, EDC may look at exploring other localcurrency accounts in markets, such as Singapore, Chile, and India.

In a geographical zone where oil and exportsdominate inter-regional trade figures, theglobal fluctuation in oil prices and decreasingdemand have dampened the economicoutlook of many countries in the MENAregion. However, the ripples of change arenot solely tied to oil, or oil rich nations per se.The MENA region has experienced a wave oftransformations in the past few years and therepercussions are still surfacing. Frompolitical turmoil in numerous countries,ongoing wars which have resulted in agrowing regional, and to a lesser extent,international, refugee crisis, along with theboycotting of one country (Qatar), thebusiness climate is being tried and tested. Allindustries have been impacted and riskmanagement strategies are evolving on a dayto day basis, adapting to a new wave ofchanges.

On an international scale, markets can nolonger function in solitude, rather, a globalmarket place has surfaced and occurrences inremote areas now impact businesses acrosscontinents. This interconnected marketplacehas both advantages and disadvantages.Today, risks that companies are exposed toare diverse and are shared by all entities andmust be proactively dealt with to preservebusiness interests.

In terms of trade,trends have botharisen anddisappeared withinthe same week insome cases. The flowof trade has alsodiverged, withdisruption happeningat numerous phasesin the cycle.

Accordingly, credit insurers are paying closeattention to both safeguard their clients’businesses and mitigate risk.

At present, the global outlook on traderemains uncertain. Brexit’s repercussions arecoming into the spotlight, with companiesmoving their headquarters out of Britain. GulfCooperation Council (GCC) nations areshifting from being oil-dependent economiesto diversified ones, and indications made bythe current US administration that thecountry is shifting towards protectionism aremaking headlines. Political transformations innumerous countries along with thequestionable state of security – all thesefactors impact trade in different ways.

For companies operating and trading insuch a dynamic and challenging marketplace,tailoring solutions as well as diversifying the

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How political risks havedisrupted trade acrossthe MENA regionKarim Nasrallah, general manager of LCI assesses the evolution ofpolitical risks and trade disruption in the MENA region.

Karim Nasrallah

On an international scale, markets can no longerfunction in solitude, rather, a global market place hassurfaced and occurrences in remote areas now impactbusinesses across continents. This interconnectedmarketplace has both advantages and disadvantages.

spread of risk to create a well-balancedportfolio are required.

When it comes to the MENA region, themost notable changes over the past fewyears that have disrupted trade, are theboycotting of Qatar and the dampening ofthe economy in Saudi Arabia. Egypt too haswitnessed a currency devaluation that hasdampened trade and the economy. Each ofthese shifts has brought about political risksthat have impacted the way companies aretrading.

In the case of Qatar, in mid-2017, tensionbegan to rise between Saudi Arabia, theUnited Arab Emirates, Bahrain and Egypt –against the small oil rich nation, with aneconomy that relies heavily on globaldemand for petroleum and liquefied naturalgas (LNG). Qatar is the world’s top exporterof LNG, with key markets including Asia andEurope. Qatar also depends heavily on foodimports, due to unfavourable agriculturalconditions locally. Nearly 40% of Qatar’s foodimports were from Saudi Arabia before theboycott, with a total of 80% of Qatar’s foodrequirements coming from other Arabnations.

However, tensions intensified due topolitical pressures. Within 48 hours, the entiredynamic of the GCC region had changed.Qataris were given mere hours and days toleave the United Arab Emirates, and SaudiArabia ceased all shipments to the country.Qatar Airways was banned from flying overcertain airspaces. Qatar responded byexploring other routes to obtain resources.

This incident has impacted Qatar innumerous ways, with local companiesexperiencing slow collection rates to obtaintheir trade receivables from theaforementioned countries that formed acoalition against the nation. Banks in theUAE, Saudi Arabia, Bahrain and Egypt nowenforce tighter due diligence before anytransfer is made, when dealing with Qataricompanies. This measure went as far as

banks checking and verifying if thetransaction was made before the date of theembargo. In one case, companies in the UAEwere transferring funds via other countries, insmaller installments, to avoid the banksblocking the transfer.

Along with the importing of foodstuffs toQatar, other shipments were also prohibitedfrom entering the small nation. Companiesthat have clients in Qatar responded by

shipping via other nations that were notimpacted by the embargo. Businessesoperating in Qatar have been heavilyimpacted by this move, in particular, thoseexporting goods to GCC nations, and cashflow issues have been at the forefront of theirchallenges.

Shifting to the West, Saudi Arabia perhapswitnessed the greatest transformation, froman oil-rich economic player, to one with adampened economy and negative economicoutlook. The country’s credit rating was cutby Standard & Poor, with the agencyindicating that the decline in oil prices willincrease the budget deficit in a country that

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When it comes to the MENA region, the most notablechanges over the past few years that have disruptedtrade, are the boycotting of Qatar and the dampeningof the economy in Saudi Arabia. Egypt too haswitnessed a currency devaluation that has dampenedtrade and the economy.

The repercussions of thepolitical risks that havemade headlines of late, areexpected to surface overthe coming months.Businesses across theregion have adopted a ‘wait and see’ approach and are takingconservative measures,provisioning for any futuredisruptions.

relies heavily on energy exports, which makeup around 80% of its revenues. The Kingdombrought in top consultants from the worldover, to work on a 2030 version, the goals ofwhich are focused on diversifying itseconomy.

Prior to the decline in oil prices, the SaudiArabian government became both directlyand indirectly involved in two wars, thegrowing turmoil in Syria, in addition toigniting a war in neighbouring Yemen. Bothcases heavily impacted the country’seconomy due to mounting costs related tosustaining / fueling these wars.

These changes have impacted the numberof overdue and claim notifications in 2016, aswell as early 2017, spiking figures. In addition,this repercussion reflects the cost cuttingstrategy that the Saudi Arabian governmentimplemented to salvage the economicdownturn.

In the United Arab Emirates, andparticularly in Dubai, an emirate that madeunfavourable headlines in the 2008 economiccrash that brought its economy to a nearstandstill, many changes have been recordedin recent months. Whilst some positivemovement has been reported in specificsectors of the economy, not all the news isgood.

On the one hand, the number of defaultingand runaway cases, which became the normwhen the financial crisis swept through thecountry, decreased in the first half of 2017.However, the Emirate is still exposed to havemore runaway cases that will result insignificant losses in the coming months.

Moving to the most populous country inthe Arab world, with a population of over 90million, Egypt witnessed trade disruptions asa result of growing political risks in recentyears. Having the third highest GDP in theMENA region, just over $336 billion (2016),the country has been facing many ongoingeconomic challenges.

Egypt’s real GDP, as estimated by

Standard & Poor’s is projected to continue togrow at a moderate rate of just under 4% onaverage, until 2020. One of the majorchallenges that Egypt faced was theunavailability of foreign currency, which led tothe Egyptian Central Bank devaluing theEgyptian pound, resulting in the slowdown ofimports of different types of goods andimpacting trade. However, the market stillshows great potential in the industrial andagricultural sectors, both major contributorsto the GDP. Other key industries in Egyptinclude textiles, food processing, chemicalsand pharmaceuticals.

The Levant region witnessed disruptions intrade as well, due to wars, turmoil andpolitical instability in Syria and Lebanon inspecific. Due to the closing of land bordersbetween Lebanon and Syria, Lebanesebusinesses were forced to ship goods via sea.However, the falling oil prices actually keptshipping costs at bay, which did not dampenexports greatly. However, the outlook for theeconomy remains unstable, with little growthforecasted in the coming months. Trade inSyria came to a near standstill due to theongoing war spanning across the country.

The way forwardThe outlook of trade in the MENA region, aswell as globally, will continue to be uncertainfor the foreseeable future. The repercussionsof the political risks that have made headlinesof late, are expected to surface over thecoming months. Businesses across the regionhave adopted a ‘wait and see’ approach andare taking conservative measures,provisioning for any future disruptions.Growth in the trade sector is unlikely to berecorded in the coming months and willremain relatively stable well into the nearfuture.

Companies need to work on safeguardingtheir assets and insuring their tradereceivables to ensure they stay afloat in timesof turmoil. �

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These changes have impacted the number of overdue and claim notifications in 2016, as well as early2017, spiking figures. In addition, this repercussionreflects the cost cutting strategy that the Saudi Arabian government implemented to salvage theeconomic downturn.

Coface published a study called ‘The rise andrise of political risks’1 in March, presenting anew quantitative model of political risk. Butrecent developments, both in emergingeconomies and developed markets, pushedCoface to review its methodology of politicalrisk assessment because of the potentialdisruptions to business activity that theyentail.

In the past 18 months there have beenelections or referendums in the UnitedKingdom, the United States, Italy, Spain, theNetherlands and France, which have grabbedthe attention of investors, exporters andcountry risk analysts. This has fuelled a lot oftalk about political risk. These political eventsare liable to shift radically the economicorientation of the countries involved. But theywere often restricted to emerging economieswith less robust institutions.

Nevertheless, as a return to growth hasfailed to offer equal opportunities to alleconomic participants, the past decadereminded us that social exasperation couldgrow indistinctively both in developedeconomies and in emerging markets.

Detecting socialfrustration,identifyingpoliticalvulnerabilitiesSocial frustration canlead to a popularupheaval in emergingmarkets. It is on thisintuition that one keymodule of the Coface

political risk model is built, based on the fullscale example given by the Arab Springdemonstrations, both in its violent and non-violent demonstrations.

The model also builds on the assumptionthat cracks in the foundations of the politicalsystem, which may lie in the nature of theregime, in the design of the institutions, in thedegree of political freedom or in thecohesiveness of the population, expose all themore a country to risks.

Venezuela, plagued by corruption,inequalities, cronyism and corruption, was12th in our 2016 ranking of the riskiestcountries (see graph 1) in terms of social andpolitical fragilities – behind the likes of Syria,Central African Republic, Afghanistan andLibya.

The constitutional crisis and theconstituent assembly elections happened tospark mass protests. The Coface political andsocial fragilities index indicates thatsignificant emerging countries could also bepotential tinderboxes in the near future,including Brazil, Russia and South Africa.Notable events are a general election inBrazil, a presidential race in Russia and JacobZuma’s succession as the head of SouthAfrica still loom over us.

Much of the literature on political risksstresses that it is unpredictable and poorlydesigned policies which represent the mainthreat to business operation. The political andsocial fragilities pillar in the Coface model aims

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Graph 1

The new normal ofhigher political riskRouben Nizard, economist for sub-Saharan Africa, from Coface’sEconomic Research Department, discusses the rise in political risk, andhow political risk assessment must be sharper in the coming years.

Rouben Nizard

to detect weak signals leading to this type ofeconomic mismanagement. It was, indeed,observed in emerging countries. For exampleofficially motivated by the idea of eliminatingtraces of colonialism, Zimbabwe’s ‘Fast-TrackLand Reform’ in the early 2000s, whichtranslated into the violent expropriation ofwhite landowners without compensation, waspart of a larger scheme meant to maintainRobert Mugabe and ZANU-PF in power. TheZimbabwean case embodies the idea thatnationalisation, burdensome regulations,expropriations, trade protectionism and so onoften respond to the only objective of holdingon to power. Raising the spectre of thesepolicies might as well serve to cease power.

Why measuring a surge in populistrhetoric became necessaryDesigned to appeal to citizens in dire straits,flawed policies serve a populist rhetoric.Populism, equally from the far-right and thefar-left, often promotes nationalistic policiestargeting and, therefore discriminatingagainst, foreign businesses. Donald Trump’sprotectionist stance during his US electioncampaign sent chills through the businessworlds.

Now in power, he will have to translaterhetoric into actions to please his ownelectorate. Despite all the checks andbalances of the American institutions, thePresident has the legal means to pursue hiseconomic agenda. This often seem to bedictated by Trump’s gut feeling rather thanpolicy effectiveness. Far from reassuring, thefew legal achievements registered in the firstmonths of his presidency only fuel uncertaintyof the business operating environment.

Uncertainty has a price, as demonstratedby the post-referendum United Kingdom.Even though more diffuse than most hadanticipated, the impact of the vote in June isnow undeniably being felt on privateinvestment and consumer confidence,pushing the Bank of England to downgradeits short-term GDP growth forecast (seegraph 2).

One of the most dynamic countries inEurope in the aftermath of the Eurozonecrisis, the United Kingdom, is now set to fall inline with its neighbours by 2018. Coface’spopulism index supplements the collection ofrisks already covered by the political andsocial fragilities. Relying on a databasederived from the textual analysis of politicalparties’ manifestos in 50 countries (ManifestoProject2), our populism index intends to

apprehend emerging tensions relating to apopulist rhetoric. Such rhetoric can be seenat play in the UK, the US, the Netherlands andFrance.

At the height of a political violencecycleA measure of risk relating to political violenceis also included in Coface’s politicalassessment. A conflict3 index and terrorismindex has been developed, based on theobservation of past events. Strikingly, theyboth highlight a concurrent surge in conflictoccurrences and terrorist attacks.

The number of conflicts multiplied by 1.5between 2007 and 2015 (see graph 3). Notonly does the number of conflicts increasebut their intensity, as measured by the lossesthey incur, is also on the rise. In 2014 and2015, the 100,000-death threshold wasexceeded for the third time in the past 25years. The current period – with conflicts in

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Graph 2

Graph 3

Syria, Libya or Yemen – compares with 1991 atthe height of the Gulf War or 1999-2000, withthe Ethiopia-Eritrea conflict responsible forapproximately 40,000 deaths per year. Datafor 2016, not yet fully available, suggest this100,000-death threshold will be exceeded forthe third year in a row. Simultaneously,terrorism linked essentially to Islamistterrorism, is spreading as a form of politicalviolence. The global terrorism index compiledby Coface multiplied by 2.8 between 2008and 2016 (see graph 4), confirming a rise interrorist activities perceived in Syria, Nigeria,Afghanistan, or Iraq, as well as France, Spain,Germany, Belgium, the UK and the US.

Political violence, while not alwaysconsidered the main barrier to businessoperation in the literature on political risks,

does raise business concerns. Full-scaleconflicts can potentially annihilate the entireeconomic fabric of a country, meaning theyare relevant in a political assessment. Indeed,a surge in political violence can proveundeniably harmful to business activity.

Some are directly vulnerable to politicalviolence: an unequal allocation of the country’soil resources in Nigeria, aggravated by ethnicfractionalisation4, which is at the core of theconflict in the Niger Delta, targets specificallyoil production facilities. Groups such as NigerDelta Avengers (NDA) even declare that theywant to reduce Nigeria’s oil production to zero.By targeting tourists in Soussa, Tunisia, Paris,or Barcelona, terrorists attacked one of thedriving forces of the local economy.

Political risk behind us, political riskbefore usThe past 18 months were rich in high-profilepolitical risks. This may implicitly send themessage that the bulk of the problems arenow behind us. But Coface political indexindicates that political risks might persist:vulnerabilities remain and upcoming events inthe next 18 months might trigger politicalcrisis of great concern for business operation.High-stakes elections in Italy, Mexico andBrazil will draw close attention. Recep TayyipErdogan in Turkey and Russia’s VladimirPutin, who will once again be candidate to hisown succession next year, embark theircountries on an unpredictable authoritarianslope. Conflicts and terrorism will continue todisrupt business activity, not only in theMiddle East and Africa but also in Asia,Europe and in the Americas. Theseobservations leave us with no doubt thatpolitical risk will linger on and remain aconcern for businesses. �

Notes1 http://www.coface.com/News-

Publications/Publications/The-rise-and-rise-of-political-risks

2 Volkens, Andrea / Lehmann, Pola / Matthieß, Theres /Merz, Nicolas / Regel, Sven / Weßels, Bernhard(2017): The Manifesto Data Collection. ManifestoProject (MRG/CMP/MARPOR). Version 2017a. Berlin:Wissenschaftszentrum Berlin für Sozialforschung(WZB).https://doi.org/10.25522/manifesto.mpds.2017a

3 Conflict index is calculated using databaseestablished by the Department of Peace and ConflictResearch at Uppsala University (Sweden) under thename of Uppsala Conflict Data Program (UCDP):http://ucdp.uu.se/

4 Ethnic fractionalization is a measure of ethnicdiversity, resulting from the work of Roberto Alesina(2003).

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Graph 4

Diagram: Coface Political Risk Index

Ensuring that profitable projects do not faildue to lack of financing, is an important partof Finnvera’s mandate as a state-backed riskfinancier. Small and medium-sizedenterprises (SMEs) have become animportant part of our export credit agency(ECA) mandates. We all like to (repeatedly)state this in our strategies and in ourcommunications, both internally andexternally. Certainly, many ECAs havestreamlined their products and processes tobetter serve their SME clients.

Finnvera too has ‘upgraded’ its productstargeting SMEs or small transactions ingeneral. The group recently launched ‘ExportReceivables Guarantee’ aimed at theexporter and ‘Receivables PurchaseGuarantee’ aimed at banks financing exportinvoices. Finnvera has also introduced a ‘Billof Exchange Guarantee’ for markets wherebills of exchange work well as a simple wayof documenting an export credit. In the tradecredit business, these new modified creditinsurances and buyer credit guarantees servethe short-term credit insurance withrelatively small amounts. However, there hasbeen some discussion about longer creditterms and about the possibility to offerdirect cross-border export credits for smalltransactions – a business area where banksseem to have lost interest due to ever-increasing transaction costs resulting fromtightening regulation.

Many ECAs have inrecent yearssuccessfullyintroduced productssuch as WorkingCapital Guarantee.From our perspectivethis seems curious asFinnvera has beencombining domesticSME financing and an

export credit agency from the beginning andhas always had Working Capital Guarantee inits product portfolio. Providing creditenhancement for the working capital needsof SMEs, has been bread and butter in ourbusiness model since the 1960s.

When working with SMEs, one must usesimplified policies and procedures. MostECAs have by now introduced SME-friendlyapproaches to process applications quicklyand efficiently and to offer products with aminimal amount of ‘fine print’.

But what else can be done for SMEs apartfrom improving products and processes? Inits risk policy, Finnvera has introducedincreased flexibility, a more aggressiveapproach to taking risk in SME exporters’small transactions compared to largerexporters’ transactions. This may be shown,for example, in accepting a lower level ofinformation required on the buyer. We haveexperienced a tendency where SMEs often

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Taking SME supportto the next levelKatja Keitaanniemi, executive vice president responsible for SMEs atFinland’s Finnvera, explains what special measures the group takes tolook after smaller businesses.

Katja Keitaanniemi

When working with SMEs, one must use simplified policiesand procedures. Most ECAs have by now introduced SME-friendly approaches to process applications quicklyand efficiently and to offer products with a minimalamount of ‘fine print’.

sell or export to other SMEs – and the buyercredit information tends to be insufficient orvery scarce. In such cases, Finnvera can bemore flexible. The experience so far isencouraging. If loss ratios turned out to behigher, one could argue that the impact ofthese transactions for SMEs is very high andthe SME-related buyer credit portfolio is onlya small fraction of Finnvera’s overall portfolio.

Focusing merely on products is clearly notenough - and may even be a bit old-fashioned. SMEs may not know whichproducts they need or want. And clientmanagers in commercial banks working withgrowth oriented SMEs and mid-caps mayhave gaps in their knowledge of financinginstruments used in foreign trade. To bridgethese gaps Finnvera has been organisingtraining programmes both for growthoriented companies and their bankers. It isnow considering the next step: offering tradefinance-related consulting services for SMEs.

As a domestic SME financier, Finnveraoffers a product palette that covers loansand guarantees from investments andworking capital to financing changes ofcompany ownership, environmentalguarantees, start-up -guarantees,internationalisation guarantees, etc. Untilrecently the products on offer also includedearly stage Venture Capital ‘Seed Financing’for innovative growth-oriented SMEs. Thespecial focus is to offer a palette that coversfinancing needs from the start tointernationalisation. And for the customer, itdoes not really matter which product isbeing used: they just need financing or riskcover.

Finnvera focuses specifically on SMEsaiming at growth and internationalisation.Our target clients are growing andglobalising enterprises - or ‘global’companies. The special unit that covers thismarket segment offers both domesticfinancing needs and export credit products.It is absolutely essential that our clientrelationship and credit managers can offersolutions on a larger scale of financing needsso that domestic SME financing and exportcredit guarantees as operational functions donot work in silos.

This of course requires some expertisefrom the personnel as they need to master awider range of products. These particularclient managers focusing on growth-orientedand export-oriented customers are veryexperienced and have worked on both thedomestic and the export finance side of

business. The same specialisation is neededon the credit manager side as Finnvera hasseparated its credit function from its clientfunction. Finnvera has some 1,000 clients inthis customer segment taken care of byaround 20 highly skilled customerrelationship managers, and the yearlyoffering reaches to several hundreds ofmillions of euros.

Combining domestic financing solutionswith export credit agency offerings is not all:Finnvera is part of ‘Team Finland’, whichgathers various official actors together to

find synergies when serving customers. TeamFinland members include other importantstate-backed agencies or entities promotinginnovation and growth such as TEKES(organisation for financing research,development and innovation), Finpro(Finland’s export promotion agency helpingSMEs to export), and TESI (equity / venturecapital provider). These groups share thesame premises in the same office building. Intotal, 600 experts from four separateorganisations now share a modern openplan, multi-space office focusing on theirjoint customer base of growth and export-oriented companies.

We are quite sure that the next megatrendin public SME financing will be in externalfocusing and cooperation, not any more ininternal concentration: how to combineforces with your colleague organisations toserve SMEs better. This requires a newattitude, but Finnvera is determined toremain in the frontline in finding new andbetter ways to support SMEs. In the end, it isresults that matter: we need more ‘global’companies! �

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In its risk policy, Finnverahas introduced increasedflexibility, a moreaggressive approach to taking risk in SMEexporters’ smalltransactions compared to larger exporters’transactions.

COSEC’s board of directors lead an importantrhetoric for the relationship between creditinsurers and SMEs, focusing on theopportunities won and lost in Portugal, andthe introduction of a new tool.

The financial crisis of 2008 wasdetrimental to the Portuguese economy andled the Portuguese companies to betterassess the relationship with their customersand the risks that may arise from launchingnew business abroad. The approach ofPortuguese companies to a risk mitigationtool, reflects the advantages of creditinsurance, namely protection against financiallosses (customer debts) and the safemanagement of their financial needs.

In an increasingly competitive market, it is ofparamount importance to create favourableconditions for the development of SMEbusiness, with solutions tailored according totheir needs. Portugal is a country that hasseveral opportunities, support and incentivesthat stand out for the quality and accuracy ofanalysis, so that it is ensured that theinvestment made will bring real returns both tothe exporting companies, or to the ones thatintend to develop their internationalisation, aswell as to the supporting entities (state,banking, insurance companies).

During this period, COSEC has madeintensive efforts to better support SMEs andto spark their interest by launching the newexport credit insurance solutions into themarket. Credit insurance is a fundamentaltool to avoid possible defaults, both in caseswhere trade is carried out domestically, andin transactions involving the export of itsproducts or services to market and non-marketable risk countries.

Not surprisingly, a study on SMEsconducted at European level by ourshareholder Euler Hermes, concluded thatmost companies using credit insurance

export on average to twice as many countriesas those without such insurance. Thesecompanies are increasingly aware of the needto protect commercial credit risk and alsopolitical risk, when exporting to non-marketable risk countries, where thecommercial and political risks are significantlyhigher than those encountered in marketablerisk countries.

Considering the challenges that thePortuguese SMEs are facing in the credit riskmanagement, and taking into account thespecificity of the SMEs market, COSEC offers,together with the banking sector, simplifiedand standard solutions that supportcompanies in the management and control ofcredits in the internal and external markets.

Although nowadays most banks offershort and mid-term financing, tailored to theneeds of each SME, the truth is that access tofinance remains one of the major challengesfor these companies. The role of banks is veryimportant, since through the diversity of theirdistribution network, they not only promote,but also facilitate companies’ access to thesetypes of solutions. In our experience, thecomplementarity of banking with creditinsurance is very relevant for SMEs. COSEC’scredit insurance has allowed many SMEs theaccess to bank financing. Through theendorsement of the export credit policies,banks are more willing to support exporttransactions for SMEs. This type of solution isnot only highly valued by the companies, butalso contributes to the enlargement of themarket: for instance, COSEC has grown, inthe past years, 25% in the number of new clients. �

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The importance ofcredit insurance fornational SMEs By COSEC

Bonds and guarantees are normally requiredunder the terms of a construction orengineering contract, or in accordance withmandatory legal requirements, to secure theobligations of the principal debtor against thebeneficiary. They guarantee the performanceof a variety of obligations, from constructionor service contracts, to licensing and tocommercial undertakings. Almost any sale,service or compliance agreement can besecured by a surety bond. Most OECDcountries have their own legislation underwhich bonds can be required. The bondingindustry was, therefore, traditionally countryspecific and not cross border.

Bonding market – current & outlookThe most recent ICISA survey among suretymembers reported a strong overall decreasein claims over 2016, with an increase inwritten premium and in insured exposure. Butresults vary per company and depend partlyon the state of recovery of leading sectors,such as construction and transport, whichcan differ per country. With a premiumincrease of 13.7%, an insured exposureincrease by 5.4% and a decrease in claims by-15.4% over 2016, the market has in mostcountries improved.

“One major trend in the current suretymarket is for sure the ongoing globalisation,”Nijhout reports. “It means that large andsmaller underwriters are crossing borders andexpanding into other countries. They do thisthrough acquisitions or by establishing newoperators, this leads to more players andconsequently to increasing competition inmost regions.” He notes, however, that “oftenenough this rise in players is notaccompanied by an equal growth in theoverall market premium”.

A second trend -which is aconsequence of thefirst, is a moresensible competitionlevel in the differentmarkets. “Thesecompetition levels arenot only seen in lowerprices, but also inlooser policywordings,” he says.

This is a problem “as more and moreobligations apart from the pure performancerisk are passed on to sureties”.

ICISA surety members commented thatthe industry now faced a challenging taskbecause of these developments, Nijhoutnotes. “This leads to a big challenge for thesurety industry to find growth in thisenvironment.” Nijhout observes that this isdone very successfully in some areas byentering new segments or developing newproducts. “Cooperation with banks isincreasing; however, banks remain the maincompetitor of sureties.”

But there are also regional or countryspecific challenges to overcome beforesurety can become a household financialproduct. “There are still a lot of large regions,for example East Asia, Middle East, Africa andEastern Europe, where the surety product isunderdeveloped. This means a lot of potentialfor this line of business and a great task foran organisation such as ICISA in promotingthe benefits of the product. At the same timegovernments need to be lobbied to createthe right environment and level playing fieldfor sureties to develop”, Nijhout explains. “Alack of surety legislation is, in most of theunderdeveloped surety countries, the key20


Surety market developments- from local market players toongoing globalisation Rob Nijhout, executive director - International Credit Insurance &Surety Association (ICISA) – on how surety members are seeingnowadays an increasing number of international companies operatingcross border

Rob Nijhout

reason the product cannot mature. Overall,the surety market continues to offer largecapacities and excellent security and is verywell positioned to take up competition withbanks. The more we are able to share thismessage with lawmakers and beneficiaries,the more surety will penetrate the markets.”

Surety data“Global surety premium is estimated to bearound EUR 9 billion”, Nijhout says. “Membersof ICISA account for around EUR 5 billion inpremium income with a loss ratio of 16.3% in2016. Insured exposure grows year on yearand, in 2016, this was reported at EUR 460billion.”

Among the largest surety markets are theUS, Korea and Italy, while the Chinese marketis growing rapidly. “Surety members of ICISAare active on all continents. Asia and Africaare particular growth markets, althoughsupporting legislation and regulation is stilllacking in many countries. Similarly, a lack ofadequate insolvency legislation in somecountries in the Middle East and North Africaregion holds back the growth of surety incertain countries.” Nijhout predicts a positiveoutlook for surety bonds. “With an improvedeconomic outlook and a focus oninfrastructure in leading economies, thedemand for surety bonds is expected toincrease. Ample capacity and risk appetiteadd to this,” he says.

Surety and banksSurety bonds and bank guarantees are oftenseen as similar products, with competitionbetween the two product lines as a result.Nijhout notes that “this is a generalisation anddoes not apply to every country. Bankguarantees and surety bonds also differ inwording and conditions of cover. Suretybonds are typically conditional while bankguarantees are normally on demand”.

Differences between surety bonds arecountry specific. “In the US, for instance, suretybonds are required by law for governmentfunded projects. In Europe the market is oftendivided between banks and sureties. Adetermining factor in this distinction is theamount covered by a surety bond, where inthe US 100% bonds are common, while inEurope this percentage is much lower,depending on the country involved.”

Legislation and regulation also play a part,as does the bank’s appetite for bankguarantees, Nijhout explains. “In somecountries banks have pulled back from this

market, while in other countries they continueto compete with sureties.”

What kind of surety bonds does asurety insurance company issueThe secured contractual obligation can havemany forms, for example, constructing abuilding or being compliant to legislativeregulations. Nijhout likes to give twoexamples of surety bond contracts: “The firstone is the failure of a contractor (principal) to

complete a contract in accordance with itsterms and specifications. But also the failureof an enterprise to pay taxes or customsduties to a government or department(beneficiary) can be a situation covered by asurety bond.” Nijhout says the most commontypes of surety bonds can be categorised inseven types. “There are customs, tax and/orsimilar bonds, bonds concerning concessionsand licenses, judicial bonds, bondsconcerning purchases of goods and/orservices, bonds concerning leases, bondsconcerning construction and/or supplycontracts and, last but not least, financialbonds. But this list is not complete, there aremany types of other bonds as well.”

Nijhout concludes by reiterating how thebonding industry is now developing is a verypositive way. “In most OECD countries theproduct is now seen as a valuable alternativefor insuring large infrastructural projects and asolid alternative for bank guarantees. Thedevelopment of multi-country players willprobably speed up the developments incountries where the surety industry is not yeta household product and surety bondlegislation needs to be improved. But I dare topredict that the ongoing process in theindustry will continue over the next five to tenyears. The industry will continue growing fromlocal market players to more global players.” �

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The most recent ICISAsurvey among suretymembers reported a strongoverall decrease in claimsover 2016, with an increasein written premium and ininsured exposure.

For more than sixty years, the Paris Club hasbeen engaged in the coordination ofsovereign creditors’ recovery activitiesgranting considerable debt treatmentstowards more than 90 countries, for anaggregate amount of debt equal to $583billion. Export credit agencies (ECAs) havealways played a significant role in suchrestructurings, since a substantial portion ofclaims held by the 22 Paris Club creditorstates refers to credits owned by theirrespective ECAs.

Along with the standard reschedulingagreements, additional major actions havebeen implemented to allow relief in the long-term period and to restore debt sustainabilityof highly indebted countries. One of the mostrelevant examples is represented by the so-called HIPC Initiative1, jointly launched by theWorld Bank and the International MonetaryFund back in 1996.

Under this initiative, the internationalfinancial community, governments and ECAshave worked together on the same side toensure that the most indebted poorcountries, especially in the African continent,could maintain sustainable debt levels. As aresult, various countries benefitted fromsignificant restructuring agreements andcancellation treatments. To date, debtreduction packages under the Initiative havebeen approved for 36 countries, 30 of whichare in Africa, providing $76 billion in debt-service relief2. During the period 2005-2016,SACE took part in almost 20 of thesemultilateral agreements for theimplementation of the HIPC Initiative withinthe Paris Club framework, providingbilaterally 100% debt cancellation. TheInitiative is currently coming to an end:nowadays, only few additional countriesremain eligible for HIPC assistance.

More generally, strict sustainability

requirementsimposed on localgovernments bymultilateralinstitutions have led inthe past decade to alesser recourse tosovereign guaranteesfor export credittransactions. Thistendency has – in turn

– translated into a revised role of the ParisClub. Debt cancellation, in fact, currentlyrepresents a minor portion of Paris Clubactivities however in parallel new challengesand topics are raised.

Sovereign debt restructuring is facingsignificant evolutions which implyconsiderable challenges and require new solidinstruments to promote development anddebt sustainability.

The outreach success and bestpractices The sovereign debt restructuring landscapethese days is facing a significant evolution interms of participation. New sovereigncreditors have joined the international arena,such as South Korea and Brazil3. Furthermore,subject to the agreement of permanentmembers as well as debtor countries, the Clubmay also invite ‘ad hoc members’ which canfollow the discussion during the monthly ‘TourD’Horizon’ and participate in specificnegotiating sessions. The scenario would notbe complete without mentioning theincreasing role of private creditors, which setsnew challenges for coordination.

Recent discussions, as the ones thatannually take place during the meetings ofthe Institute of International Finance (IIF) andthe Paris Club, which are used to gatherofficial and private creditors, demonstrate

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The new landscape of sovereign debtrestructuringBy Paola Valerio, head of international relations at SACE (Cassadepositi e prestiti Group).

Paola Valerio

that synergy among actors is more crucialthan ever. The boundary between officialsand private creditors is becoming less andless defined. The widespread issuance ofsovereign bonds by emerging countries andtheir subsequent purchase by both privateand sovereign entities are putting thespotlight on the need to reinforcecoordination among these two spheres.

Another emerging issue is the enlargedbasket of solutions proposed within the ParisClub. Creditors are becoming aware of thenecessity to build up and implementsustainable development instruments whichshould be as resilient as possible. To thispurpose, new financing instruments havebeen developed recently to promotesustainability and avoid future sovereign debtcrises, allowing beneficiary countries to reactand rebuild their macroeconomic indicatorsin the medium and long term. Moreover, newsustainable financing schemes have beenpromoted during these years within the Clubwith the purpose of encouraging high–returninvestment projects in debtor countries. Byway of example, in February 2015 the ParisClub agreed on an innovative proposal by theauthority of Seychelles for financing marineconservation through a debt repaymentoperation named ‘blue buyback’.Notwithstanding previous experience on pre-payments within the Paris Club, this initiativehas been internationally recognised as one ofthe most successful and best-sustainedeconomic reform programmes conductedwith the support of the IMF.4 The Seychelloispre-payment was partially financed by anNGO while profits would be used in the nearfuture for the development of environmentalprotective projects.

In a similar spirit in November 2015 a debtrestructuring agreement was offered to theCaribbean island of Grenada. For the firsttime in the history of Paris Club treatmentsthe agreement included the ‘hurricaneclause’, a provision which allows vulnerablestates to obtain a rapid additional debt reliefin case of environmental shocks, which mightseverely affect their economies.

Finally it is worth mentioning that in thepast few years, as a counter-trend, sovereignrisk has re-emerged in ECA-backedtransactions. Taking into account SACE’sexperience, back in the 1990’s sovereign riskrepresented a substantial portion of theportfolio which sharply declined over thefollowing 10 years. However, increased risklevels in certain emerging markets, also due

to the commodity crisis as well as thedevelopment of large infrastructure projects(e.g. dams, railways, power plants), havecontributed to the resurgence of sovereigndebt and sovereign guarantees on public orsemi-public buyers. At this stage the involvedcountries are not requiring recourse to theParis Club, however this might be the case inthe distant future.

Path for new challenges aheadFurther discussions on other contingentinstruments are ongoing within the Paris Clubforum with the aim of preventing theoccurrence of debt distress. The prevailingobjective is to avoid vicious circles ofindebtedness, whereby economic treatmentis postponed to when no other options areavailable or the debt sustainability is alreadyjeopardised. On the other end, the utilisationof the aforementioned contingentinstruments might mitigate the cyclical natureof indebtedness, reinforcing the economicrecovery of external debt levels5.

In this spirit, the Paris Club and itsmembers, with the support of the majorfinancial institutions, are engaged in a strictmonitoring of countries’ conduct andeconomic performance. ECAs play a veryimportant role since they can rely on updatedinformation on payment track record.

Nowadays several emerging countries arefacing a critical situation due to externalcontingences such as, among others, thedrop in commodities prices. This holdsparticularly true for those African countriesthat structurally depend on the export ofcommodities. The debt ratio of thesecountries is now approaching the pre-HIPClevels and this worrying trend of debt re-accumulation might suggest the need for anew debt relief initiative.

All these issues bear considerablechallenges. A robust coordination amongcreditors along with their strong engagementis more important than ever and theimplementation of sustainable mechanisms tosupport emerging countries is, without anydoubt, a win-win strategy for all players. �

Notes1 Heavily Indebtness Poor Countries.2 Debt Relief Under the Heavily Indebted Poor

Countries (HIPC) Initiative, IMF Factsheet, April 17,2017.

3 Korea join Paris Club in July 2016 while TheFederative Republic of Brazil on November 2016respectively as 21st and 22nd member of the Club.

4 Paris Club annual report 2015.5 IMF paper “Too little, Too Late”, 2013.

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After dramatically halving oil prices to around$50 per barrel during the last three years,crude oil continues to be the biggestinternationally traded commodity. Crude andoil products produced from it still representthe most important part of global energy,despite the decline seen in its share from the1970s to become one third of the currentworld energy consumption. It is paramountthat we continue to observe and understandthe dynamics of crude oil and the productswithin the market.

The evolution of oil markets and priceregimes were among the most exiting partsof the economic history of last century,reflecting changes in the roles of its mainactors and arrangements. The golden age ofpost-war capitalism was characterised bystable key prices of oil and the dollar (linkedto gold). However, in the 1970s, that stabilityceased to exist. Low oil prices had beendefended for so long by cartels of theinternational oil companies; the ‘SevenSisters’. An increase in pricing has also beenpushed by developing oil-exportingcountries-members of OPEC in 1970s. Theabandonment of supply managementpolicies by OPEC (principally Saudi Arabia),brought about two dramatic declines ofprices starting in 1986 and 2014, followed byprolonged periods of low prices. At the sametime, the price increase during the last

decade were mainlyexplained by growingdemand from China,coining the term‘super cycle’, i.e. theever increasing pricesof commodities.

Since the 1980sprice regimes startedto be increasinglydetermined by future

markets, based on the so-called mainbenchmarks, Brent and West TexasIntermediate (WTI). The price of more than100 sorts of crude oil were based on qualitydifferentials around main benchmarks. Thechange in oil price regimes, which has beendominated by suppliers and pricesdetermined by future markets, were alsodictated by the need to give market responseto price instability and fluctuations. However,the digitally advanced futures marketspermitted to stabilise, through hedgingexpected prices on an individually transactedlevel, but could not manage to tame overallinstability and volatility of market prices. Also,accumulation of strategic and commercialstocks in main importing countries, whilemaking domestic supply of oil products moresecure, were not flexible or large enough toseriously contribute to the stabilisation ofprices.

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Oil price developmentsand prospectsAs the world’s most internationally traded commodity, it is no wonder a dramatic drop in price has sparked concern. Dr RoubenIndjikian, Webster University, Geneva, takes us through what to payattention to, as well as taking a reflective view of what we can learnfrom past decisions.

Rouben Indjikian

When prices increase, producers will also need toconsider new investment decisions, while projects inturn will need a few years for realisation. Whether newstreams of oil will enter the market with high prices orat least in contango is a big question.

Supply and demand instabilityFundamentally, the slow response of supplyand demand in the short term, wascontinuing to be the main reason of priceinstability and volatility. However, majorspikes and falls in prices during the last fivedecades also reflected the policy changes inthe OPEC price and supply managementinitiatives. The build-up of stocks partlysoftened these effects as stock drawdownsand replenishments were moving against theincrease and decline in prices. The excess oftax imposed on oil products such as gasoiland diesel in importing countries, and exporttax on crude oil in exporting countries, alsoinfluenced supply and demand. Taxmechanisms, international trading practices,domestic economic policies are among thefactors altering crude prices.

The elasticity of low prices for crude oilsupply and demand is also an importantfactor. It explains why prices after increase orfall do not adjust quickly to the market level.For example, consumers do not react toincreased petrol prices by the similardecrease in consumption, if at all. Yet crudeoil producers continue to sell supply in spiteof a fall in prices. Massive cuts in investment,especially new projects, took place with atime lag due to price declines after 2014.

When prices increase, producers will alsoneed to consider new investment decisions,while projects in turn will need a few years forrealisation. Whether new streams of oil willenter the market with high prices or at least incontango is a big question. Short-termelasticity of supply is very low and can increaseonly if there are under-used productivecapacities. The developments in crude oilmarkets reflect the geography of productionand the main players, as well as the state ofeconomic cycles and geopolitical events.

The impact of shale oil and gasThe question today is what main forces aredetermining current prices – which have beenrelatively stable since last year. Shale oil andgas, along with the emergence of the US asone of three biggest oil producers, with a

relative decrease of its crude oil imports, willmake OPEC supply management policies lesseffective. It depends on OPEC and non-OPEC oil exporting countries cooperatingand how future markets develop. Forinstance, the expected demand for oilproducts and the supply of crude oil, giventhe energy policies, climate changerestrictions, technological innovations andcuts in investments in current andperspective oil fields.

Hosts of organisations and experts arefollowing price developments on a daily basis.Prices are still gravitating around $50 in themain commodity exchanges which determinethe current spot and future prices. Marketparticipants are actually hesitating between aquite flat contango (expectation of increasingprices in future) and backwardation (thecontrary expectation). In spite of the conflictsand political risk in the Middle East andVenezuela, market participants considersupplies and stock enough that they do notneed to react to events, which historicallywere considered as important game changers.Specialised press follows and tries to explainthe small fluctuations in price and changes indifferentials between Brent and WTI spot andfutures pricing. Thus, there was around a 3%increase in the price of Brent crude on August19, 2017, subsequently characterised as a‘jump’ in price by the media.

Let us look at the long and short-termdeterminants of the current relative stabilityof oil prices at around $50 per barrel. Thespread between future prices of September2017 and say April 2018, will become muchlower compared to the August 2016 priceexpectations for September 2016 to April2017. The dramatically lowered spreadsuggest that markets do not expect muchchange in the supply and demand balance.

The supply and demand balance in themid-term has the potential to differ and couldcreate conditions for price increases due tothe growth of the world economy, especiallyemerging economies such as India, Indonesiaand others. It is also relevant to note thatChina continues to import crude oil, with a

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The short-term prospects and market expectationssuggest very small changes in pricing, albeit volatilityaround existing price levels may persist. The mid-termprospects could suggest a potential for considerableprice increases.

view to increase its stocks in an environmentof relatively low prices. In spite of the country’sefforts to develop electric cars, an increasingmiddle class in those countries will use morehybrid models with lower petrol/dieselconsumption rates, still increasing demand forthose products in absolute terms.

The progression of infrastructure toproduce electric cars needs investment, whilehybrid cars will continue using existing petrolstations. In this sense, expectations ofinvestors for electric cars could be provedexcessive, at least in a mid-term. Also in spiteof climate change commitments of mostcountries, the inertia in structural changetowards gas and renewables, as well as thepace of energy consumption will probablynot permit governments to meet the Parisclimate accord commitments – as a result ofpolicy measures. So an increase in demandwithout enough increase in supply, due to theexplained time lags, may bring aboutconsiderable increase in crude oil pricing. Thisis the most probable scenario, consideringthat technological breakthrough and drasticpolicy measures will affect the sector in thenext two to three years.

For the long term, the big unknown is the

pace of technological innovation and, moreimportantly, its diffusion. Apart from electriccars, innovations such as the Internet of things(IoT) may permit to better management ofenergy consumption and waste avoidance.Better construction materials used inresidential areas and industrial complexes canalso contribute to energy conservation. Goodnews may in addition come from technologiescapturing Co2 and other emissions, whileproducing crude oil and oil products andconsuming the latter. Technology solutionscould seriously limit the level of Co2 emissions,protecting the environment.

To conclude, the short term prospects andmarket expectations suggest very smallchanges in pricing, albeit volatility aroundexisting price levels may persist. The mid-term prospects could suggest a potential forconsiderable price increases. At the sametime, it is difficult to predict prices in thelong-term due to the pace of technologicalchanges and dynamics of the world economy.Looking at the last decade, the global crashof 2008 reflects how the governance ofglobal monetary policy and financialarrangements still cannot predict and tamefuture boom and bust cycles. �

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M.A.H. is a global leader in Export Debt Collection & Trade Dispute Resolution Services. Our head office is located in Stans, our group law office in Zurich. We specialise in resolving cross-border cases swiftly and amicably (99% of our cases are settled out of court).

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Website: www.mah-international.com

The global economy would not exist but for acomplex series of institutions and rules, whichgovernments, international organisations, andprivate bodies have created over the previousdecades of globalisation. Since the 1950s,many multilateral organisations have adopteda rule-based approach that have given statesincreasing confidence to liberalise theireconomies and reduce tariffs, quotas, andother barriers to trade. As a result, theexpansion of international business activitiesthrough a multilateral trading systemprovided a major pillar for growth enjoyed bymany countries in the last century.

However, firms are exposed to severaldimensions of risk when they export theirproducts and services or set up foreignmanufacturing operations: Political risk,commercial risk, currency exposure as well ascross-cultural risk. In addition, internationaltrade is embedded in a well-developed andfunctioning financial environment. Financingis crucial for trading partners in order tobridge the time lag between export orderand payment for goods and servicesproduced. Scholars strongly support theargument that companies need adequateprovision for their export transactions.Factors such as export transaction volumeand credit period can considerably increasecosts of financing.

As a consequence, firms require coverfrom private credit insurers and governmentexport credit agencies (ECAs) for politicaland commercial risks linked to exporttransactions. ECAs are also important to

mitigate negativetrade effects offinancial constraintsdue to market failures.

Main objectivesand research gapThe Global CEOSurvey was launchedin 2015 by researchersfrom OffenburgUniversity, theUniversity ofWestminster and theLondon School ofEconomics andPolitical Science (LSE)to better understandwhat factors influenceexporters’ demand forcredit insurance.Although somescholars discussed

aspects of corporate insurance demand withregard to exporters, there is limited researchconcerning the demand for export creditinsurance associated with firm-specificfactors.

The study follows an explorative qualitativeapproach and an explanative quantitativeapproach, both informing each other. Datawas collected via surveys with qualitative andquantitative questions, open-endedinterviews, as well as publicly availabledocuments including annual reports. Multiplerounds of qualitative data collection via

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Risk aversion,financing and realservices Risk will always be there, and it is how that risk is covered which willkeep the conversation moving. Professor Andreas Klasen, OffenburgUniversity, and Dr Simone Krummaker, University of Westminster,discuss the how risk and financing will move forward with one another,as well as challenges along the way, looking at results from the GlobalCEO Survey and other sources.

Andreas Klasen

Simone Krummaker

interviews ran simultaneously with thecollection of data via questionnaires. Thisresearch was conducted with CEOs, COOsand managing directors from 35 export creditand political risk insurers in both public andprivate forms. In addition, more than 100interviewees from governments, exporters,project sponsors, buyers, as well ascommercial banks and development banksparticipated. The selection was driven by theaim to include a variety of participants fromdifferent regions in order to coverorganisations from different cultural andnational backgrounds. Full research resultswill be published by the end of this year.

Risk aversion The risk management function of creditinsurance is a significant factor for exporters’insurance demand. This applies for bothprivate credit insurers and governmentagencies. As discussed by Mayers and Smith(1982) the structure of ownership affects thefirm’s risk aversion and consequently theirdemand of insurance. Focusing on publiclylisted corporations, theory assumes that theirshareholders and investors are holding a well-diversified portfolio, thus are neutral withregard to firm-specific risks. In contrast theinsurance purchasing behaviour of singleowners of sole proprietorships can beexplained with their individual risk aversion.Because rather small companies have only alimited number of shareholders, firm size hasbeen connected to risk aversion. Size leads toa relatively smaller diversification regardingthe equity structure and can also lead to arisk-averse attitude of an exporter.

In our research, nearly all intervieweesmentioned that small and medium-sizedcompanies have a higher need than largecorporations to cover risks associated withinternational trade via insurance agreements.According to the empirical data, the size ofthe exporter drives demand for coverthrough three main motives: The transactioncost of risk management, knowledge aboutforeign buyers and markets, and businessdiversification. Interviewees also mentioned

that larger firms have more weight innegotiating the terms of credit insurancefacilities.

Transaction cost of risk management ismost relevant because the effort of buildingup a fully-fledged risk management functionas well as the related knowledge is notincreasing proportional to firm size. Larger

exporters not only have more professionalrisk management functions but also moreknowledge about markets for risk andinsurance products available. Once a growingfirm has installed such a risk function,benefits are that more resources are availableto manage risks efficiently. In addition, mostinterviewees mentioned that risk aversion is akey driver due to a rise of geopolitical risk,and SMEs’ lack of knowledge about buyersand markets. The evidence indicates thatthere is a strong relationship between smallfirms’ demand for coverage against thoserisks and the perceived or actual risks. Privatecredit insurance as well as ECA cover canalleviate some of these issues.

Financing functionFinancing of the specific trade transaction isa key determinant for companies to purchasegovernment export credit insurance. Liquidityfor transactions is a relevant factor of risk andfinancial management including, for instance,hedging. Purchasing insurance can benecessary to safeguard liquidity fortransactions, and insurance enablescompanies to realise financial advantagessuch as more consistent cash flows. This

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In our research, nearly all interviewees mentioned thatsmall and medium-sized companies have a higher needthan large corporations to cover risks associated withinternational trade via insurance agreements.

Larger exporters not onlyhave more professionalrisk managementfunctions but also moreknowledge about marketsfor risk and insuranceproducts available.

especially applies in the export creditinsurance context. It is of vital importance forthe company to structure financially soundexport transactions in order to safeguardcash flows. In addition, firm-level evidenceindicates that exporters cut back exportsmore than other companies if financialinstitutions are not able to provide adequatecredit facilities.

Insurance increases the opportunities forexporters to receive financing fromcommercial banks and mobilises additionalfunds otherwise not being available. Thus, thebank which finances the transaction plays adecisive role in the demand for coverageagainst these risks. The role of the financialintermediaries is also emphasised in the topicof financing for SMEs. Several statements inthe interviews describe that externalfinancing for SMEs is more difficult than forlarger companies, which often have long andactive relationships with several banks. Inaddition, there is often no sufficient offeringfrom commercial banks for ‘small ticket’transactions below €5 million due to limitedrisk appetite and competition. Tight financingconditions also become apparent both forvery large transactions, as well as projectswith longer maturities and in risky markets.

Although interviewees mention thatfinancing is one of the most importantfunctions of credit insurance, there are alsoother findings leading to potentially opposingtrends: less traditional international playersare now active in export finance in general.Many commercial banks’ activities are volatile,and trade and export finance bank strategieschange quite often. Global financialinstitutions have shown less appetite, and alarge number of correspondent bankingrelationships have disappeared. This isrelated, in particular, to the changingregulatory environment including Basel III(some say Basel IV) implications andAML/KYC requirements. As a consequence,direct lending (i.e., funding directly providedby government export credit agencies)becomes much more important now. SeveralECAs enhanced their financing programmes,introduced specific direct loan programmesfor transactions up to €5 million for medium-term projects, or work on a more competitivedirect lending offering for SMEs.

Insurance services Several studies mention insurance services asan additional argument for corporateinsurance demand. Private credit insurers are

able to provide efficient services for theadministration and processing of claims aswell as the prevention of losses due to, forinstance, economies of scale. Governmentexport credit agencies also have a specificknowledge and are well versed in riskanalysis. This includes the assessment ofcountry risks and foreign buyers’ financialratios. Providing real services for theircustomers, insurers have a comparativeadvantage concerning the development aswell as the application of risk management,and have mechanisms to control adverseoutcomes.

Some European ECAs have been pioneersin offering advisory services to exporters.They provide managerial and advisorysupport for the definition and implementationof market-specific international growthstrategies. Insurers also support exporters inidentifying business opportunities incountries with sales potential, proposingfinancial and insurance solutions. Incollaboration with universities and industryassociations, some ECAs developed traininginitiatives and seminars dedicated toexporters. These workshops and trainingsessions allow participants to acquirestrategic and operational skills needed forsuccessful internationalisation.

Other factorsIn addition to risk aversion, financing and realservices, demand for credit insurance isassociated with agency conflicts. Theseagency conflicts between shareholders andoutside creditors are caused by a non-linearity of rights or claims for payment. This

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Some European ECAshave been pioneers inoffering advisory servicesto exporters. They providemanagerial and advisorysupport for the definitionand implementation ofmarket-specificinternational growthstrategies.

is because risk positions with regard toexpenses and income are shifted betweenshareholders and outside creditors. Exportcredit insurance is able to solve theunderinvestment and the asset substitutionproblems.

Agency conflicts can also arise from

different interests of shareholders andmanagers. Shareholders of large exportersintend to have a risk neutral behaviour due tothe diversification of their portfolio whereasmanagers are risk-averse and tend to operateself-interested at the cost of shareholders.Furthermore, there is a different time horizonbetween the managers’ working life and theindefinite life of a corporation. Theorysuggests that managers will therefore try tomaximise expected revenues in a specificfinancial period and will neglect thecompanies’ long-term perspective to increasethe firm value. Buying export credit insuranceis a result of the managers’ risk aversion andtheir behaviour to reduce or transfer risk.

Interviews reveal that many exporters areconcerned about the impact of the risks ofinternational trade on the firm’s balancesheet. The key reason here is to avoidearnings volatility, as this is in generalconsidered to be a feature of risky firms. Thismotive is closely connected with the factorsof signalling to stakeholders. Insurance isassumed to be a means of signalling risk ofthe company to markets and stakeholders, ascompanies with insurance contracts will havea lower earnings volatility due to insurableunsystematic risk.

Government credit insurance in the‘Strategic Econsystem’A driver for demand of government exportcredit insurance is the integration of ECAofferings into a concise national strategic

framework to leverage impact. Governmentsprovide opportunities for technologicaltransformation and sustainable economicdevelopment through the establishment ofcoherent policy goals and innovationsystems. An innovation policy mix includes,for example, the provision of an appropriateinfrastructure, networks of publicly-financedresearch institutes and universities, as well asgovernment financing instruments such asconditionally repayable loans. Effectivelymanaging the interaction of governmententities involved in innovation, tradepromotion and export credit support is key tocrafting sustainable and responsiveeconomies.

This supportive economic environment,the coherent interplay in a ‘StrategicEconsystem’, is capable of adapting to thedemand of exporters. Interviewees mentionthat it is crucial that innovation funds, tradepromotion agencies, export credit agenciesand investment promotion organisationswork closely together. Innovative andintegrated government financing instrumentsmeet exporters’ demand and have thepotential to substantially support thecompetitiveness of companies in the globaleconomy.

ConclusionResults show concepts emerging from thedata which enrich the current theoreticallandscape on firms’ demand for export creditinsurance. There is empirical evidence thatrisk management, financing and real servicesare key drivers for export credit insurancedemand. In addition, motives includesignalling effects. It is important to mentionthat the context of risk management andfinancing for SMEs differs significantly fromthose in larger or even multinationalcompanies, in particular with regard torestriction on access to finance andlimitations on the sophistication of riskmanagement and knowledge. The role offinancing institutions is crucial, and regulatoryissues have to be addressed in an appropriatemanner. However, regulatory effects have anegative impact on export credit insurancedemand as well leading to deflexion ofdemand towards direct lending fromgovernment agencies. A further importantfinding of this research is that governmentsfollowing the approach of a coherent‘strategic econystem’ seem to have acompetitive advantage meeting exporters’demand for credit insurance. �

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A driver for demand of government exportcredit insurance is theintegration of ECAofferings into a concisenational strategicframework to leverageimpact.

Digital technologies and innovations arereshaping the world of trade finance. Whileless prominent than in business to consumer(B2C) financial services, our industry and itscustomers’ expectations are changingdramatically – at a rapid pace neverexperienced before.

Credit insurer Euler Hermes established itsown internal, yet independent, digital agency(EHDA) two years ago to further its digitalleadership in tomorrow's global B2B data andfinancial services. In considering three keyquestions about the ‘most likely’ radicalchanges expected in the next five years,EHDA has created a snapshot of theirpotential impact and how their combinedeffects could further accelerate change:

1. Big data & artificial intelligence (AI)Our clients increasingly have access tosignificant volumes of meaningful data,analytics and artificial intelligence. What willthe role of a trade insurer be if clients canself-insure and make informed credit riskdecisions themselves?

2. Platformisation of B2B commerceIn a world where a significant proportion ofgoods and services are traded on digitalplatforms, including electronic contracts, e-invoices, smart payments, and full access tothe behavioral patterns of all buyers andsellers across the platform, where does creditrisk insurance come into the picture? Whatabout other trade-related risks?

3. Product substitutionTrade finance is on the verge of theexponential change many other sectors –mobile phones, media and transport – havealready faced. After years of limitedinnovation in trade finance instruments, slowadoption of invoicing networks and sluggishsupply chain progress, a new door is openingto a future full of creative financial solutionsubstitute products. When game-changing

technologies andcatalysts such as bigdata, blockchain,cheap funding andthe cloudrevolutionise ourindustry, who will stillbuy credit insuranceand under whatconditions?

Time to throw in the towel?Quite the opposite – it’s a time of immenseopportunity! As a global market and thoughtleader, Euler Hermes is actively pursuingdeep digital transformations to digitise itscore offering, enhance its business model andexploit the many new opportunities that lieahead.

To capture the opportunities, when EulerHermes created the EHDA in July 2015, it wasinitially an innovation lab co-founded by LouisCarbonnier and Christophe Spoerry, reportingto the group CEO. EHDA works closely with awide range of leading experts inside andoutside the business, particularly focusing onexceptionally innovative start-ups in datascience, blockchain and supply chain finance.EHDA’s central aim is to reinvent trade financeand position Euler Hermes as the digitalleader in B2B trade and financial services.

EHDA was founded with three coremissions:

1. Monitor and evaluate trends, especiallynew technologies and potential disruptions

2. Establish a competence center withexpertise in digital transformation

3. Create an incubator for digitalinnovation and experimentation

Over the past two years, EHDA has begunidentifying promising new opportunities –including new technologies, services,processes and partnerships – that will helpshape the future of credit insurance and thetrade finance sector.

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Radical innovation intrade financeBy Christophe Spoerry, co-founder of the Euler Hermes Digital Agency.

Christophe Spoerry

As an industry, we can better serve clientsand sustain profitability by changing the waywe distribute and develop products, predict,price and underwrite risk. Ultimately, thequestion is whether this can lead to solutionsserving a wider portion of B2B trade than thecurrent 5% of businesses leveraging creditinsurance?

Believing in reinventing existing serviceswhile also investing in disruptive servicesincluding ‘plug and play’ data and serviceplatforms, EHDA is forging partnerships withinnovators. The goal: position Euler Hermesas the preferred facilitating partner, frominvestment to market access, for B2B fintechstart-ups and data platforms.

To better support the global accelerationof Euler Hermes’ digital transformation, EHDAhas grown rapidly with experienced teamsnow in France, Hong Kong, the UK and theUS. Their activities include:� The Innovation Lab: Incubates disruptive

ideas for trade finance, with a globalnetwork of innovators and start-up partners

� The New Business Factory: Verticallyscales successful experiments validated inthe Innovation Lab, and transforms theminto sustainable new tech-powered lines ofbusiness in partnership with Euler Hermes’business units

� Spinoffs: Vertically scales selectedsuccessful experiments validated in theInnovation Lab, to enable them grow withthe support of leading externalentrepreneurs

� The Data Lab: Leverages artificialintelligence and advanced data science;identifies new data sources to improveEuler Hermes’ grading, underwriting andmarketing activity

� Digital Culture: Fosters digitaltransformation and awareness across thecompany.

How does Euler Hermes attractinnovators?It took EHDA just 12 months to build thefoundations for a sustainable innovationplatform by creating two-way porositybetween the world of credit insurance andthe ecosystems of innovation. While the tradefinance industry could be seen to traditionallyoperate in something of a vacuum, EulerHermes views its industry as a greatecosystem, full of opportunities. EHDA’s firstpriority, therefore, was to create porosity tolet positive innovators infiltrate the ecosystemand, step-by-step, enrich and develop it.

Creating two-way porosityDuring its first year EHDA explained thefundamental concepts of credit managementand insurance to hundreds of innovators.Listening to customers, we designed valuepropositions with them and for them,unleashed the teams’ creativity, opened APIsinto Euler Hermes assets and made companydata accessible in innovative ways. We also

created many partnerships in Silicon Valleyand other innovation hubs in countriesincluding France, Germany, Hong Kong,Sweden, the UK and the US. Providing thefoundations of a scalable platform forinnovation accelerated positive porositywithin the trade credit ecosystem.

Getting innovators interested in thatecosystem was not enough in itself — EHDAalso had to interest the broader Euler Hermesemployee base in the world of innovators.The founding Digital Agency team threepeople acted as translators and interpreters;adding scalability was key to maximising thenumber of ideas tested and to interactingmeaningfully with the external world. A raft ofproof of concepts (PoCs) and prototypes,largely in the US and Western Europe, rapidlymaterialised. But behind the scenes was agreater story … a deep-rooted relationshipbeing created between the world ofinnovators which is key to Euler Hermes'platform for innovation.

From EHDA to Euler HermesOne on hand, the EHDA platform forinnovation provides several services whichare relatively standard in corporate innovationlabs and start-up studios. These includedeciphering market trends and technologyshifts, connecting with innovator networks,ideating and validating ideas through PoCsand prototypes, and being digital culture

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Getting innovatorsinterested in thatecosystem was notenough in itself — EHDAalso had to interest thebroader Euler Hermesemployee base in theworld of innovators.

ambassadors across the Euler Hermes overall.What is less common, especially in

regulated industries, is the level of autonomythat Euler Hermes management gave EHDAfrom the outset. This freedom has been key indriving innovation throughout the company.It has enabled everyone to speak a commonlanguage, uniting the worlds of innovatorsand trade credit while working at aninnovator’s pace.

Building on this platform, scalability wascreated through a de-centralised, yetcohesive, network of internal and external

innovators. EHDA acts as a connectormatching tech solutions to client needs,bringing its trusted internal and externalnetwork together to solve problems andmaximise resources. A typical EHDA initiativewill mobilise an external partner start-up, adata lab, a couple of developers and aninternal business owner over a few shortweeks. Accelerating this cycle of ideating,assembling, testing and disbanding createsscalability for Euler Hermes. In explorationphases such as this, velocity is important:large corporates can often be tempted torevert to the deceptive security of moretraditional and structured approaches.

Increasingly, EHDA is becoming a ‘newbusiness factory’. Ultimately, the objective isto create and test products that supportEuler Hermes customers. Although at thebeginning of this journey, the ability to bringproducts to market and scale them up as amini-business unit brings significant potentialfor the business. As a result, hundreds ofexternal innovators are now simultaneouslyengaged on a wide range of initiatives,connected with hundreds of colleagueswithin Euler Hermes and the wider tradefinance industry. This is the central ingredientof the EHDA platform – a rich dynamic cycleof open innovation – creating and building

positive porosity in trade credit.

Powering the future of tradeThe Euler Hermes platform for innovationtransforms connections and ideas intotangible business that benefits the widertrade finance industry in several ways. Theporosity between trade finance andinnovation ecosystems fosters deeperexchanges and a more forward-lookingunderstanding of client needs. This in turnleads to the creation of fundamentally bettertrade services. Better trade services areclearly beneficial for the overall economy aswell as the trade finance industry, despitesome change being potentially disruptive tocurrent offerings. For instance, despite awidespread need for risk protection, less than5% of receivables are currently insured;better, more accessible trade credit serviceswill unlock the potential of a huge market.The same is true for receivables financing andother trade finance services.

EHDA is also a significant new businesslead generator. The innovation – andtechnology-first approach deepens client andpartner relationships, increasing both trustand mutually beneficial deals. In addition,bringing together the best trade financeexperts and leading external innovatorscreates a unique perspective on futuredevelopments. With EHDA’s New BusinessFactory, Euler Hermes is actively buildingtechnologies and services that will power thefuture of trade.

What next?At Euler Hermes, the creation of EHDA andthe acceleration of the group’s digitaltransformation has been a rapid and intensejourney. A large number of opportunitieshave already been unlocked. The platform forinnovation is a significant achievement whichwill continue to open many moreopportunities for the business and the widerindustry. However, the journey has just begunand the path is paved with new challenges.Sustaining a high level of innovation over thelong term is not easy, particularly on a globalscale. In adjusting the design of EHDA’splatform to achieve equal innovation at globaland local levels, we must also continue toattract top innovators to our ecosystem andbring in tangible new business. Trade financeis undoubtedly a fascinating ecosystem, witha virtually unlimited potential. We have onlyjust begun to scratch the surface of whatmay ultimately be possible. �

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... despite a widespread need for riskprotection, less than 5% of receivablesare currently insured; better, moreaccessible trade credit services willunlock the potential of a huge market.The same is true for receivables financingand other trade finance services.

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