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Country Risk AnalysisA presentation by ECGC
What is Risk?
Uncertainty about the future outcome Lack of knowledge Imperfection in knowledge Possibility of Loss
Export Credit Risk
Exports Goods Services Credit Extending supplier credit: DP, DA, OA Risk Possibility of nonpayment of accounts receivables
Types of Export Credit RisksPolitical Risk Credit Risk
Legal Risk
Export Credit Risk
Exchange Risk
Transfer Risk
Political Risk
Some countries may experience major political instability defaults on payments leading to exchange transfer blockages nationalization confiscation of property
Credit Risk
The risk of Insolvency Default Fraud Unwillingness to accept the goods on the part of the buyerAll resulting in..
Credit risk
Exchange Risk
The possibility of variability in the exchange rate on account of the time lag between the date of contract and actual payment is referred to as 'Exchange Risk'
Transfer Risk..Weakness in economy of Buyer's country, viz. low reserves, BOP problems
Failure of Buyer's Bank affecting payment of outstandings
Exchange or trade controls introduced in Buyer's country
arising from all/any of the above
Legal Risk
Differences in law can be expected in overseas countries These may have an impact in such areas as:
import procedures taxation employment practices currency dealings property rights the protection of intellectual property agency/distributorship arrangements
Export Credit Insurance
Export Credit insurance is cover offered by insurance companies which encompasses the risk of non-payment within export operations
Risks covered by export credit insurers:Commercial Risk Political Risk
Factors Leading to Commercial Risks
Buyers willingness to pay: Behavior of the debtor
Buyers ability to pay: Debtors financial condition
Commercial Risks
Insolvency/ Bankruptcy Breach of Contract
Payment Default Refuse to take delivery of goods
Ability or behavior?
Political Risks
Political risks cover events that occur abroad other than commercial risks such as:The general political riskThe natural catastrophe risk The non-transfer risk
Methods of Political Risk Control by Credit Insurers
Country Risk Classification:
The arrangement on Guidelines for Officially Supported Export Credits is a "Gentlemen's Agreement" among OECD Participants. The Arrangement, including the Knaepen Package, gives a seven fold classification of countries, which is used by many export credit insurers
Methods of Political Risk Control by Credit InsurersThe Country Risk Classification Method measures the country credit risk, i.e. the likelihood that a country will service its external debtIt uses an econometric It takes account of model based on possible qualitative quantitative indicators, factors, e.g. political & e.g. the financial & other economic & economic situation & financial factors not incl. the payment experience in the quantitative of the countries Econometric Model
Methods of Political Risk Control by Credit Insurers
The final classification, based only on valid country risk elements, is a consensus decision of the subGroup of Country Risk Experts that involves the country risk experts of the participating Export Credit Agencies
Role of ECGC as an Export Credit InsurerProviding credit insurance covers to exporters against loss in export of goods & servicesProviding export credit guarantees to banks & FIs to enable exporters obtain better facilities from them Providing Overseas Investment Insurance to Exporters - Indian Entrepreneurs in Overseas Ventures (Equity/Loans)
Maturity Factoring
PolicyINSURER ECGC
INSURED EXPORTER
RISKS BUYER/ COUNTRY
Risks Covered by ECGC under ST PoliciesPOLITICAL RISK (Open Cover & Restricted cover COMMERCIAL RISK
COUNTRY BUYER BANK LC TRANSACTION
NON LC
Risks Covered Under ST PoliciesCOMMERCIAL RISKS
POLITICAL RISKS
Insolvency of buyer/LC opening bank Default of buyer Repudiation by buyer
War/civil war/revolutions Import restrictions Exchange transfer delay/embargo Diversion of Voyage Risk
Buyer & Country Underwriting
The 2 pillars of Export Credit Insurance :Buyer Underwritingthat assesses buyer risks
and
Country Underwritingthat assesses country risks
With the help of these two, ECGC controls the commercial and political risks
Country UnderwritingEvaluating a CountryAssessment and evaluation of political risks associated with countries for the purpose of premium calculation, determining types of cover and terms of cover Country reviews are taken up on a regular basis for up/down grading
Reviewing a Country
Evaluating a Country
Country Underwriting involves assessment of a countrys ability and likelihood to honour its commitments undertaken both, as part of trade as well as sovereign debt The country risk is evaluated on the basis of the politico-economic situation prevailing in a country
Reviewing a CountryPolitical stability/ instability Eco. Structure: GDP, inflation, exchange rates, BOP, import cover, external sector, debt, reserves, FDI Policy Trends: fiscal, monetary policy, structural reforms International Relations: relation with neighbours, IMF, WB, Trade Bodies
Reviewing a CountryLate Payment Experience International Rankings
ECGCExperience
Experience with other credit insurers
Trade Relations with India
Country Evaluation: ECGCs Objective Scoring Methodology
ECGC classifies the countries with the help of an objective scoring methodology Under the rating system followed, the weighted averages of scores on economic risk rating, political risk rating, past experience of ECGC, trade relations with India and experience with other credit insurers are calculated to arrive at the Country Risk Indicator
Country Evaluation: ECGCs Objective Scoring MethodologyEconomic Risk Rating Political Risk Rating Country Risk Indicator Eco-Pol Relations with India ECGC Experience Exp of Credit Insurers
Objective Scoring Methodology
The individual scores are added up as per pre-determined weights Weightage scores are summed up to obtain a total final score on a base of 100 This score is used to derive an overall rating for classifying the countries
Seven Fold Country ClassificationRisk Category Insignificant Low Moderately Low Moderate Moderately High High Very High ECGC Classification A1 (1/7) A2 (2/7) B1 (3/7) B2 (4/7) C1 (5/7) C2 (6/7) D (7/7)
Types of Cover
While underwriting the country risk, ECGC places the country either in
Open Cover
OR
Restricted Cover
The basis for deciding on the type of cover and terms of cover is a host of economic and political factors
Open Cover Countries
Cover with No Restrictions Cover is offered usually on normal terms and conditions i.e. 90% cover, 4 months waiting period for ascertainment of loss and settlement of claims, etc. Currently ECGC places 195 countries under Open Cover
Restricted Cover Countries
Usually those countries where the political and/or economic conditions are relatively deteriorating or have deteriorated and likelihood of payment delays or non-payment are imminent or have occurred Permits selection of risks ECGC wishes to underwrite
Restricted Cover Countries
Divided into 2 Categories Category 1: Countries for which revolving limits are approved normally valid for one year Basis of cover:
ILCs opened or confirmed by banks listed in Bankers almanac or by local banks whose reports are satisfactory. Cover will be 90% Normal cover of 90% on DP/DA terms subject to satisfactory report on the buyer 20 countries under this category
Restricted Cover Countries
Category 2: Countries where Specific Approval will be given on case to case basis on merits Valid for six months Normal waiting Period of 4 months Only 7 countries under this category: Afghanistan, Argentina, Cuba, East Timor, Iraq, North Korea, Somalia
Restricted Cover Countries
Underwriting Options for Restricted Cover Countries
Options exercised to control risk in Restricted Cover countries:
Reduce percentage of cover Increase waiting period for the settlement of claim Provide cover against availability of government guarantee/confirmed ILCs Payment in convertible currency Fix country exposure limit Fix transaction limit per exporter per buyer Fix bank exposure limit
Liberalization of ECGCs Underwriting Policy
222 countries placed in 7fold classification 195 placed in Open Cover 20 countries Restricted Cover and Revolving credit limit basis 7 countries in Restricted Cover case to case basis
Restricted Cover (case by case) Restricted Cover (revolving credit) Open Cover
Country Classificationas on 1st April 2004Country Classification Open Cover Restricted Cover (revolving limit facility) Restricted Cover (case by case) Total
A1 (1/7)A2 (2/7) B1 (3/7) B2 (4/7) C1 (5/7) C2 (6/7) D (7/7)
2659 28 30 25 17 10
00 0 1 5 7 7
00 1 0 0 1 5
2659 29 31 30 25 22
Total
195
20
7
222
Distribution of Country Risk RatingsVery High Risk High RiskD C2 C1 B2 B1 59 A2 26 A1 22 25 30 31 29
Moderately High RiskModerate Risk Moderately Low Risk Low Risk Insignificant Risk
Risk
Case Study of Selected Countries
A1: USA (Open Cover) A2: China (Open Cover) B1: Russia (Open Cover) B2: Kenya (Open Cover) C1: Serbia & Montenegro (Open Cover) C2: Uganda (Open Cover) D : Iraq (Restricted Cover)
Comparison: Economic IndicatorsCountryUSA China Russia Kenya Serbia & Montenegro Uganda Iraq
GDP (US bn)10987.9 1446.9 433.5 13.2 19.8 6 19.9
CAD/GDP0.05 CA Surplus CA Surplus 0.17 1.1 0.67 CA Surplus
Debt Service Ratio (%)4.8 9.4 10.6 15.3 11.6 0
Import Cover (in months)0.7 12.45 11.64 4.8 5.67 10.96 NA
Comparison: Other IndicatorsCountry ECGC RV (2003-04) in Rs.mn Transfer Delay Claims Paid (Rs.mn)Nil
Political Situation
India Trade Balance (2002-03) in Rs. Mn
Euro money Score
Forex Delays
USA
59124.06
Stable
311571
96.64/100
0-1 m
ChinaRussia Kenya Serbia & Montenegro Uganda Iraq
5549.67970.45 1550.86 22.13 414.31 1355.56
NilNil Nil Nil 607.2 4025.97
StableRelatively Stable Relatively Unstable Relatively Unstable Relatively Unstable Unstable
-99751.5331549.48 8237.8 1663.5 3097.38 10343.39
61.52/10049.02/100 36.11/100 31.5/100 37.8/100 4.28/100
1-3 m1-2 m 2-3 m 1-2 m 2-3 m 3-4 m
ECGC Initiatives for MoC Focus Regions
Focus LAC
Review of all countries carried out in June 2003. Mexico, Panama and Venezuela upgraded by 1 step, Brazil by 2 steps ECGC continues to closely monitor the situation in these countries and reviews the gradings as and when the opportunity arises Argentina is the only country placed in the RC; the Corporation is constantly monitoring the ecopolitical situation in the country
ECGC Initiatives for MoC Focus Regions
Focus Africa
South Africa, Tanzania, Botswana & Mauritius upgraded. All countries under 1st phase of Focus Africa Programme placed in Open Cover Revised and lower premium rates introduced from April 2003 ECGC ratings at par or better than OECD gradings and also grading given by other Berne Union members ECGC continues to closely monitor the situation in these countries and reviews the gradings as and when the opportunity arises
ECGC Initiatives for MoC Focus Regions
Focus CIS
Underwriting policy liberalized. Azerbaijan, Kazakhastan, Russia, Ukraine placed in Open Cover from Restricted Cover Georgia and Moldova upgraded Corporation is considering upgradation of Armenia and Belarus and placing them in the Open cover from Restricted Cover
ECGC Initiatives for MoC Focus Regions
Focus East Asia
All countries in ASEAN as well as Australia & New Zealand placed in Open Cover Revised and lower premium rates introduced from April 2003 ECGC ratings at par or better than OECD gradings and also grading given by other Berne Union members
ECGC Schemes
Schemes for ExportersMaturity Factoring Schemes for Banks/ Financial Instns Special Schemes
Schemes for Exporters
Short Term Cover: Payment within 180 days
SCR or Standard Policy: To cover risks
in respect of all shipments on short term credit by exporters with anticipated annual turnover of more than Rs.50 lacs
Turnover Policy: A variation of SCR policywith additional discounts and incentives available to exporters who pay a premium of not less than Rs. 10 lacs per year.
Schemes for Exporters
Short Term Cover: Payment within 180 days
Small Exporters Policy Similar to SCR Policy, but for exporters with anticipated annual turnover of Rs.50 lacs or less Specific Shipment Policy (Short term) To cover risks in respect of a specific shipment or shipments against a specific contract
Commercial & Political Political Only LC Commercial and Political
Schemes for Exporters
Short Term Cover: Payment within 180 days
Exports (Specific Buyer Policy) To cover risks in respect of all shipment to one or a few buyers Commercial & Political Political Only LC Commercial & Political Exports of Services Policy To cover the risks of insolvency and default and political risks for services rendered Without Recourse Export maturity Factoring Undertaking to pay the amount due for a shipment on the maturity of the credit period.
Products in the offing
Consignment policy :to cover consignment exports where goods are shipped and held in stocks overseas ready for sale to overseas buyers , as and when orders are received
stockholding agent policy global entity policy
Products in the offing
Exposure policy
where premium would be charged on the basis of the expected level of exposure single buyer policy: covering the risks on a specific buyer multi buyer policy : covering the risks on all buyers
Bancassurance
ECGC has signed Corporate Agency Agreements with a number of banks so as to use the Banks network of branches to market its policies Under this arrangement, exporters can buy their policies and pay premium through various branches of these banks ECGC offers commission to the banks for the policies and premium secured ECGC has currently signed corporate agency agreements with 10 Banks
E-Connectivity
Re-designed portal www.ecgcindia.com Explanation of our schemes and Q&A by e-mail Online facilities to our exporters : - premium calculator, - online status of applications, - online premium adjustment status, - List of defaulted buyers, - downloading application forms - online submission of applications and decls. - payment of premium, fees through payment gateway
It is so easy with ECGC
For more details Please visit www.ecgcindia.com