The COVID-19 pandemic is having profound effects on healthcare systems and economies across the globe. As governments are implementing WHO recommended public health measures, the implications on the global economy are wreaking havoc for financial institutions worldwide as they scramble to provide support, or merely maintain their own balance-sheets. Government backed financial institutions such as Export Credit Agencies (ECAs) or National Development Banks (NDBs) are being called upon like never before to help smooth over the sharp ridges in the market created by the pandemic and its effects.
As a leading multilateral ECA, ICIEC considers supporting its 47 member countries part of the Corporation’s mandate and is one of the key players in the Islamic Development Bank (IsDB) Group’s strategic response. Seeing as the challenges faced by this pandemic are unprecedented, the Corporation has taken an interest into what outlook national ECAs in the OIC have taken and their efforts towards mitigating the effects of the pandemic in their respective countries.
To be best informed on the actions and views of peer ECAs, the Corporation took various approaches to assessing the ECA landscape. On July 13th, 2020, ICIEC CEO, Mr. Oussama Kaissi, participated in a webinar co-hosted by ICIEC and the Islamic Centre for Development of Trade (ICDT). The webinar hosted various ECAs from the OIC region, giving each the chance to give an overview of their institution’s response to the COVID-19 as well as respond to a set of panel questions. A survey was sent to Aman Union members by the committee regarding their response to COVID-19. The survey responses were anonymized and used to inform this article.
The Impact of COVID-19 on credit risk
When asked how the pandemic is affecting credit risk in their particular country, as well as on a global scale, the majority of ECAs surveyed reported a similar outlook on global impact. They reported that amid an already weak growth environment, the global economy has entered into recession driven by supply chain and demand disruption on a global scale. This disruption arises from shutdowns around the world that are a result of the necessary public health measures to stem the COVID-19 pandemic. The economic slowdown is causing fiscal shocks that are having a severe effect on the global economy.
The latest estimates from the WTO predict a fall in merchandise trade between 13% and 32% for 2020 while UNCTAD is predicting a drop of up to 40% in foreign direct investment. GDP is estimated to contract by 4.9% with a cumulative loss of 12 trillion dollars between 2020 and 2021. The GDP for the OIC region specifically, based on IMF estimates, is only estimated to contract by 2%. Despite that optimistic percentage in comparison to the global average, recovery for OIC countries is expected to be prolonged, leading to further growth in government and corporate debts.
The OIC region is also facing a sharp decline in remittances, which typically make up a sizable contribution to GDP in OIC countries. The World Bank predicts remittances will decline by up to 20% – largely due to loss of employment and lower wages for immigrants and migrant workers. Remittances to low income countries is projected to fall by 19.7 percent to $ 445 billion, representing a loss of a crucial financing lifeline for many vulnerable OIC households. COVID-19 is expected to cause the first increase in global poverty since 1998 which highly increases the vulnerability toward defaults and increased claims for ECAs.
Many ECAs are anticipating that the global credit risk conditions will severely deteriorate due to supply chain and demand disruptions arising from shutdowns around the world as a result of the COVID-19 pandemic. The magnitude of the credit risk curve is believed to depend on economy and sector vulnerability, government policy measures and individual capitalization levels. The sharp global recession is expected to continue throughout the rest of 2020, followed by a less drastic U-shaped recovery in 2021.
The ECA Role
ECAs were created to be countercyclical tools, meaning they play an important role in growing and maintaining the economic environment in the regions in which they preside. In times where the private sector generally lacks the appetite for new initiatives and is underserving a significant element of the economy due to perceived risk or low profitability, ECAs step in to fill the market gaps so that the national economy doesn’t suffer. ECAs employ the principles of demonstration effect to help address these market gaps in the long-term. They do this by demonstrating to commercial and private entities that despite risk, there is a profit to be made in traditionally underserved areas. Once the private sector begins to crowd-in to fill the aforementioned gaps on their own and the market normalizes, ECAs begin to phase out their support for the structural market gap.
As counter-cyclical risk-mitigation tools, credit insurance is inherently designed to support trade in risky environments and under challenging conditions – helping to manage risk and liquidity. In that sense, ECAs simply maintaining the availability of these instruments is a positive support to banks financing exporters and even directly to exporters themselves during the current crisis. It would only hurt the market further for ECAs to also minimize their risk-appetite.
Currently, many national ECAs are being called upon and considered a critical element of their government’s immediate response measures. In many countries, the ECAs have stepped in as important policy tools to fill the market gap and meet short term funding needs of the companies. As private credit insurers lower their credit limits or even withdraw coverage for some countries entirely due to commercial concerns, ECAs can play a critical role in filling the gap by expanding the capacity and the scope of their insurance support and attempting to ease the burden on existing policyholders. ECA support is crucial for exporters to continue their export and manufacturing activities through this highly uncertain environment.
The Impact on claims
Though the majority of peer ECAs in the OIC region believe that it’s still a bit too early to make sound and quantifiable predictions, they do expect to feel the impact of the pandemic in their own institutions. It is generally assumed amongst peer ECAs that all credit insurers should anticipate significant increases in payment delays and insolvencies for 2020. The reported outlook is that the decline in commodity prices that result from the supply chain disruptions and decreased demand will lead to a fall in both export and fiscal revenue for commodity exporters – reducing foreign exchange flows, increasing perceived risk, and increasing payment difficulties for both sovereign and corporate clients. In Turkey alone exports have decreased almost 15% as of the end of June. Sectors hit the hardest are the automotive, tourism, and construction industries.
The impact of the COVID-19 pandemic is expected to disproportionately affect small and medium enterprises and companies – especially so in the countries taking the hardest hit from the virus, as well as in countries with high perceived risk. The economy in many OIC countries is heavily reliant on SMEs and many OIC countries fall under one or both of the aforementioned criteria. Turk Eximbank reports that approximately 70% of their client base are SMEs and that volumes have already increased by 18% due to the increased financial pressure on Turkish exporters, but overdue notices also have increased by 200% and claims have increased by 29% already so far in 2020.
OIC ECAs should expect an influx of claims from their Small and Medium sized Enterprise (SME) clients and should place special attention to assisting them through the effects of the crisis. The critical approach reported by OIC ECAs right now is to balance – balance filling market gaps while also maintaining their own portfolios. ECAs should expect to receive a significant increase in claims for the rest of 2020
Projection for ECA Business Growth in 2020/2021
One fundamental and significant implication of the crisis on ECAs business performance is that the systemic risks that emanate from the pandemic have the potential to severely affect ECAs soundness indicators – meaning the economic difficulties and liquidity crunch could create pressures from international rating agencies that may affect the ECAs rating, effecting their perceived credibility. The severity of the effect on rating would depend on economic vulnerability, the government and regulator response to the pandemic, and an individual institution’s performance.
As far as quantitative business performance is concerned, many ECAs, including ICIEC, anticipate negative growth for 2020. While the volume of claims is expected to grow drastically, the number of successful recoveries is expected to decline. It’s predicted across OIC ECAs that there will be an overall drop of 15 to 25% to the total business insured for 2020 in comparison to 2019. It is believed that 25 to 30% of that decline will come from the short-term effects on the trade sector. ECAs are therefore shifting priority towards strategic planning and in some cases, restructuring operations. The outlook for 2021 is that it will be a slow growth year – especially if the pandemic persists through the second half of 2020.
The ECA Focus
In addition to providing support to policyholders and exporters in general, ECAs are needing to address certain areas of particular concern with special consideration and focus. As mentioned earlier, ECAs should have a particular focus on their SME clients during any times of crisis. SMEs are the most vulnerable to the implications of the pandemic as they do not have enough capital to survive the sudden drop in economic activity and demand. Therefore, ECAs increasing the availability of short-term funding will play a critical role in the SMEs ability to continue their operations.
In addition to SMEs, there are certain areas that require more attention from ECAs in times of crisis. For example, ICIEC CEO Mr. Oussama Kaissi, notes that member country ECAs have different needs. “Some entities are more technically advanced and developed than others,” he claims, “while some are still new entities, and others have not evolved as far technically over the years of their operations. “
He went on to say that “commodity dependent economies will also need ECA focus as they face more serious macroeconomic issues due to the drop in prices – specifically oil dependent OIC countries. Risks of the pandemic will also be higher in countries where the lockdown measures are implemented the longest and where little government measures have been taken to support the economy.”
One example of the role an ECA can take is that as member of the Islamic Development Bank Group (IsDBG), ICIEC is engaged in a platform to assess each Member country’s needs in terms of the Group’s support. The IsDB Group pledged USD 2.3 billion toward member country recovery – including ICIEC’s pledge of USD 150 million. The Corporation’s support is being provided through the provision of insurance solutions to supply medical equipment and essential commodities across 47 member countries.
The ECA action plan
When deciding how to strategically respond to the COVID-19 pandemic, ECAs have many paths and elements to consider. National ECAs with government oversight may have been given specific tasks or focus areas by their ministries. Other ECAs may be left to sort out for themselves what areas to focus on. The various responses across the ECA industry are focused on easing the burden on policyholders, supporting the market capacity, boosting liquidity, and minimizing defaults.
According to our surveyed peers, the OIC ECA focus is prioritizing easing the pressure on policyholders through a range of measures, including having an expedited approval process and extended validity period; extended time for notification and claims filling; special claims handling processes; concessions and waivers on premiums and various fees; and discretionary powers for policyholders to extend credit terms to buyers without additional consent. The hope is that if the pressure is lightened for policyholders, the number of defaults can also be minimized.
In addition to supporting policyholders, many OIC ECAs have also moved to bridge market gaps in available insurance cover by expanding their scope, capacity and line limits. At the most basic level, this means maintaining cover policy and country limits at pre-crisis levels, but in most cases, this is accompanied with an overall increase in available capacity, new product lines and a higher % cover – designed for the specific needs following the crisis.
With pressure on cash-flow being one of most pressing challenges seen through the COVID-19 implications, a significant number of ECAs have boosted their programmes to support working capital, inclusive of direct lending and guarantees. Some ECAs have introduced entirely new lines, while others have extended the scope of existing products with, e.g. longer credit periods, relaxed eligibility requirements, increased % cover. Other forms of new or increased support introduced include extended cover for pre-shipment risks, domestic supply cover to exporters and import guarantees for specific industries.
During the webinar hosted by ICIEC and ICDT, all of the participating ECAs shared the sentiment that although COVID-19 is presenting many challenges to the global economy, dynamism and flexibility are key to the ECA response and that organizations can be using this period of crisis as an opportunity.
“COVID can be utilized for change,” claims Mr. Tarig Khalil Osman, Chairman of the United Insurance Company of Sudan. He went on to say, “[our organization has implemented new initiatives that] have changed the dynamics of the company. We’ve become focused on data driven innovative changes – such as a new software and we are aligning ourselves to the UN’s SDGs.”
Mr. Sheikh Khalil Al-Harthy, the Chief Executive Officer of the Export Credit Guarantee Agency of Oman (Credit Oman), echoed this sentiment in his statement that Credit Oman is, “trying to maintain a nimble operation and trying to leverage technology the best we can. Otherwise we are using this COVID time to look inward and reflect and revise on what we can do better to [get through] this lockdown situation.”
In addition to taking the opportunity to change, Mr. Enis Gûltekin, Deputy General Manager of Turk Eximbank discussed the opportunity to engage with clients – stating, “we want to stay connected with Turkish exporters at this time through our branches and listen to their needs especially on the loan side of our business. We’ve also been working on new products and we’ve launched some during this period – for example the letter of credit confirmation insurance has been launched.”
Additional initiatives were also mentioned by peer ECAs – including partnering with peers to increase both institutions’ capacity, and working within the MENA region and with other countries that highly depend on oil exports for GDP to assist in strategically prioritizing and supporting projects that help to diversify their economies.
