Country Risk Analysis A 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 non- payment of accounts receivables

Types of Export Credit Risks Export Credit Risk

Political Risk Some countries may experience major political instability defaults on payments exchange transfer blockages nationalization confiscation of property leading to…

Credit Risk The risk of Insolvency Default Fraud Unwillingness to accept the goods on the part of the buyer Credit risk All resulting in…..

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.. Exchange or trade controls introduced in Buyer's country Weakness in economy of Buyer's country, viz. low reserves, BOP problems Failure of Buyer's Bank affecting payment of outstandings …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 RiskPolitical 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 risk The 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 Insurers The Country Risk Classification Method measures the country credit risk, i.e. the likelihood that a country will service its external debt It uses an econometric model based on quantitative indicators, e.g. the financial & economic situation & the payment experience of the countries It takes account of possible qualitative factors, e.g. political & other economic & financial factors not incl. in the quantitative 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 sub- Group of Country Risk Experts that involves the country risk experts of the participating Export Credit Agencies

Role of ECGC as an Export Credit Insurer Providing credit insurance covers to exporters against loss in export of goods & services Providing 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

Policy INSURER ECGC RISKS BUYER/ COUNTRY INSURED EXPORTER

LC TRANSACTION POLITICAL RISK (Open Cover & Restricted cover COUNTRY BUYERBANK NON – LC COMMERCIAL RISK Risks Covered by ECGC under ST Policies

Risks Covered Under ST Policies COMMERCIAL RISKS Insolvency of buyer/LC opening bank Default of buyer Repudiation by buyer POLITICAL RISKS War/civil war/revolutions Import restrictions Exchange transfer delay/embargo Diversion of Voyage Risk

Buyer & Country Underwriting The 2 pillars of Export Credit Insurance : and With the help of these two, ECGC controls the commercial and political risks Buyer Underwriting that assesses buyer risks Country Underwriting that assesses country risks

Country Underwriting Assessment 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 Evaluating a Country 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 Country Political stability/ instability International Relations: relation with neighbours, IMF, WB, Trade Bodies Policy Trends: fiscal, monetary policy, structural reforms Eco. Structure: GDP, inflation, exchange rates, BOP, import cover, external sector, debt, reserves, FDI

Reviewing a Country Late Payment Experience International Rankings Trade Relations with India ECGC Experience Experience with other credit insurers

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 Methodology

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 Classification Risk CategoryECGC Classification Insignificant A1 (1/7) LowA2 (2/7) Moderately LowB1 (3/7) ModerateB2 (4/7) Moderately HighC1 (5/7) HighC2 (6/7) Very HighD (7/7)

Types of Cover While underwriting the country risk, ECGC places the country either in The basis for deciding on the type of cover and terms of cover is a host of economic and political factors Open CoverRestricted Cover OR

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

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 7- fold classification 195 placed in Open Cover 20 countries – Restricted Cover and Revolving credit limit basis 7 countries in Restricted Cover – case to case basis

Country Classification as on 1st April 2004 Country Classification Open Cover Restricted Cover (revolving limit facility) Restricted Cover (case by case) Total A1 (1/7)2600 A2 (2/7)5900 B1 (3/7) B2 (4/7) C1 (5/7) C2 (6/7) D (7/7) Total

Distribution of Country Risk Ratings Very High Risk High Risk Moderately High Risk Moderate 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 Indicators CountryGDP (US bn)CAD/GDP Debt Service Ratio (%) Import Cover (in months) USA China1446.9CA Surplus Russia433.5CA Surplus Kenya Serbia & Montenegro Uganda Iraq19.9CA Surplus0NA

CountryECGC RV ( ) in Rs.mn Transfer Delay Claims Paid (Rs.mn) Political Situation India Trade Balance ( ) in Rs. Mn Euro money Score Forex Delays USA NilStable / m China NilStable / m Russia970.45Nil Relatively Stable / m Kenya Nil Relatively Unstable / m Serbia & Montenegro22.13Nil Relatively Unstable / m Uganda Relatively Unstable / m Iraq Unstable / m Comparison: Other Indicators

Focus LAC Review of all countries carried out in June 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 eco- political situation in the country ECGC Initiatives for MoC Focus Regions

Focus Africa South Africa, Tanzania, Botswana & Mauritius upgraded. All countries under 1 st 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 Exporters Maturity 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 policy with additional discounts and incentives available to exporters who pay a premium of not less than Rs. 10 lacs per year.

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. Schemes for Exporters – Short Term Cover: Payment within 180 days

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 Explanation of our schemes and Q&A by 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

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