The importance of export credit agencies (ECAs) in oiling the wheels of international trade and investment is undisputed. With more than 10 percent of global annual world trade covered, the amount of business transactions supported by ECAs outweighs, by far, the amount of development aid, traditional private investment, and other cash flows from developed to developing countries.
Despite the global economic turmoil, the International Union of Credit & Investment Insurers, also known as the Berne Union, estimates the contribution of ECAs to international trade at $1.8 trillion (R14.8 trillion) in export credit and foreign direct investment insurance last year – increasing from $1.5 trillion in 2008.
This demonstrates the demand for risk mitigation products provided by ECAs as the world economy remains in the doldrums. By the same token, ECAs also paid out approximately $15 billion in claims to indemnify losses experienced by exporters and investors since the beginning of the global financial crisis.
Accordingly, governments all over the world have been attaching more importance to the role of credit insurance in boosting exports, promoting investment, and controlling risks. Export credit and investment insurance allows exporters and financial institutions to safely extend credit to buyers abroad, thus enabling trade transactions that would not happen otherwise.
Because most of the projects covered by the ECAs are high risk due to their environmental, political, commercial and social impacts, the private sector is unable or unwilling to take on these risks. Thus, ECAs do not compete with private sector financiers but rather act as “financiers of last resort”, responding to a market failure by providing insurance products that fill gaps in private trade financing.
To this end, this country’s ECA, the Export Credit Insurance Corporation of South Africa (ECIC) facilitates and encourages the creation of capital goods and equipment out of South Africa by underwriting bank loans and investments outside the country. In so doing, the ECA fosters a stronger economy by supporting exports and investment abroad.
Over time, the ECIC’s function has also evolved to not just promote South African exports but also to address competitiveness in the global marketplace, specifically by using what is called an interest make-up as a tool to level the competitive playing field by taking financing terms off the table as a determinant when foreign buyers are choosing whether to purchase a South African or competing country’s product.
In this regard, the interest make-up enables financial institutions to offer globally competitive interest rates on export transactions that are credit insured by the ECIC.
This enables South African exporters to compete in international markets based on their price and quality, and not to lose a potential transaction because a competing country’s government is offering excessively generous financing terms to close a deal.
The ECIC is one of the most successful programmes within the government. Since its inception, the programme has provided R19.6bn worth of export credit cover, which has supported R7.9bn worth of South African exports and added about R11.8bn to the country’s gross domestic product. Given South Africa’s chronic unemployment and the need to pursue job creation under the auspices of the New Growth Path, the programme supported 137 598 job opportunities in the past decade.
It has also been a generator of funding for the government, having returned about R6.3bn in tax revenue to the national fiscus.
In supporting South Africa’s industrial and trade policy objectives, the ECIC programme has been instrumental in building trade and investment relations in the continent.
The sub-Saharan Africa portfolio constituted 63.91 percent of the total ECIC portfolio for the past 10 years. By supporting projects on the continent, the programme has also ensured that South Africa’s exporters diversified their exports basket and markets away from traditional markets to non-traditional markets.
This has cushioned South African exporters against the declining exports to traditional trading markets in the EU and the US, as those countries’ economies remain in the financial doldrums. Despite the enormous part the ECIC is playing in supporting South Africa’s industrial and trade agenda, it is not recognised as a catalyst for manufacturing and export promotion by the current South African trade and industrial policy trajectory.
In contrast, foreign competing ECAs have enjoyed substantial support from their governments since the global economic crisis and have ramped up their efforts to win custom in global export markets. In fact, these ECAs are investing extensively more in export credit and investment assistance as a share of exports than South Africa does.
For example, las year, Turkey provided 23 times more assistance to its manufacturing exporters as a share of goods exports than the South African ECA, while India and Russia provided 12 and six times more, respectively, than South Africa’s ECA. South Africa supported just 0.4 percent of its exporters with export credit and investment assistance during the same period.
Moreover, the cumulative values in new export credit and investment covered from 2008 to 2011 in these emerging countries far outstripped that of South Africa – reflecting aggressive support to their exporters.
For example, from 2008 to 2011, Russia and China respectively issued $43.5bn and $25.4bn of new insurance cover, amounts 58 and 34 times that issued by South Africa in the same period.
South Africa’s cumulative value of new cover was only $1.1bn during the period.
It is clear that South Africa’s competitors have made export credit and investment insurance assistance a focal point of their industrial and export promotion strategy by launching the most aggressive assistance campaigns since the global economic crisis. The upshot of all this is that South African producers of manufactured goods will find it very hard to compete.
In an environment characterised by a depressed global market and increasing trade dependence, export and investment insurance products as government measures to improve South Africa’s industrial and trade competitiveness cannot play second fiddle to other instruments. South Africa must leverage every tool at its disposal to lift its exports and cross-border investments, and export credit and investment insurance have been shown to play a key and increasing role in this regard.
Failure to expand our efforts will see South Africa losing vital export and investment transactions to competing countries, especially in sub-Saharan Africa.
Thus, the ECIC’s activities and efforts must be significantly expanded as competitor countries increasingly turn to export credit and investment insurance to enhance the competitiveness of their exports.
Tsidiso Disenyana is the senior economist at the Export Credit Insurance Corporation of South Africa.