Q&A: ECIC - JSE MAGAZINE

Q&A: ECIC

Kutoane Kutoane, CEO of the Export Credit Insurance Corporation of South Africa, on the risks of doing business, financing development and addressing issues through facilitation

Q&A: ECIC

Q: What is the background behind the creation of the ECIC?
A:
For more than 40 years, up until 2001, all export reinsurance requirements fell to the Department of Trade and Industry (dti) and the Credit Guarantee Insurance Corporation of Africa Limited. When the private sector entered the credit agency market, the short-term transaction market was amply catered for, but medium- to long-term export transactions still had a need for a dedicated export credit agency, which was when the ECIC was established. Acting as an ‘insurer of last resort’, the ECIC steps in when commercial lenders are either unwilling to accept long-term risks or unable to. While the ECIC is part of a broader government policy, it remains an independent limited liability company but with the government as its sole shareholder and enabled under the amended Export Credit and Foreign Investments Insurance Act of 1957.

Q: Why is export credit an imperative?
A: The nature of capital exports is that they are long-dated assets. It is customary for firms to finance such exports with bank debt for cash flow-management purposes. Export credit financing is therefore an important and key aspect of international trade. Access to competitively priced export credit creates the ability for our local contractors to bulk up and compete more effectively in foreign markets. With the ECIC in support of such transactions, the SA export market is enabled and contractors become more credible. This has a far-reaching impact on fostering a stronger economy and drives domestic job creation, contributions to fixed-capital formation and GDP, as well as the generation of fiscal revenue.

By the end of March 2015, the ECIC had signed export insurance policy transactions totalling R6.7 billion, which translated into 10 508 job opportunities, of which a substantial number was for semi and unskilled labourers in SA. In the host countries, a further 14 943 job opportunities were created during the construction/delivery phase, with a further 17 662 expected to be sustained over a 20 year period.

Q: Which sectors benefit from this underwriting, and what is the ECIC’s footprint in Africa?
A:
From the ECIC’s perspective, we underwrite bank loans for financing of export of SA capital goods and services. The sectors that benefit the most are mining, power, oil and gas, defence, aviation, transportation and other infrastructure. While mining projects constitute some 36% of our portfolio, we have extensively supported the agriculture and energy sectors, specifically projects in Mozambique, Sierra Leone and Ghana. The bulk of our portfolio – at almost 90% – is in the sub-Saharan region, with 25% in Zambia, 16% in Zimbabwe and 15% in Ghana. Our strategy is to grow our insurance footprint on the continent to be the preferred insurance partner. We see Africa as a natural base. Our current marketing reach is focusing increasingly on East and West Africa.

Q. Why is the ECIC so successful, and how does it support its clients?
A:
Export credit insurance is unique and traditionally offered by official export credit agencies (ECAs) backed by their national treasuries. Potential exporters need an enabling environment to successfully tender on capital projects that require significantly large financial packages. With the cost of finance further impacted by a range of factors, including sovereign ratings – which, in SA’s case, is in the lowest bracket of investment grade – exporters need a boost to remain as equally opportunistic as their international competitors. The ECIC’s interest on loans is benchmarked on the commercial interest reference rates, as determined by the OECD or the Libor. This is the benchmark rate that the leading global banks charge among themselves for short-term loans.

Q: What’s the current state of the market with regard to volatility, and how do exchange rates affect the ECIC’s ability to comprehensively cover clients?
A:
The ECIC has a large portion of capital reserves in US dollars and we issue policies denominated in that currency. We have therefore been largely insulated from the effects of the rand’s volatility against the dollar. Volatility has, however, been a factor for client banks that need to raise foreign currency liquidity in the global capital markets for export credit extension.

Q: How does the ECIC anticipate market trends and develop new products?
A:
Along with our major shareholder, the dti, we make use of market research tools and separate business development units to develop new insurance products that are in line with the government’s export promotion policy objectives. Performance bond insurance cover, which we launched last year, is one such example. Currently we are working on covering credit lines and return of plant and equipment. We also continue to motivate for the release of increased lending capacity by financial institutions by entering into agreements with other ECAs. In this way, we create a framework for re- and co-insurance, such as we are doing with sister BRICS ECAs, with which we recently adopted a comprehensive plan of action aimed at actualising co-operation programmes for mutual benefit.

Q&A2-PQ

Q: What are the risks associated with not having export credit insurance?
A:
The biggest impact is the increase of credit risk when participating in international trade. Such a risk might be the foreign buyer’s inability to honour a deal that in turn leads to a default scenario. An exporter is also vulnerable on settling bank debts, which is particularly risky during times of adverse political events in the country of destination.

Q: What do you see as ECIC’s greater role being in promoting trade in Africa?
A:
Our vision and mission is a commitment to sustainable business growth through innovative products, operational excellence, business development and strategic partnerships. In enabling frontier markets to optimise production, we are motivating a positive socio-economic impact. Through our association with the Africa Investment and Integration Desk (AVID), we drive the unlocking of investment opportunities that might otherwise be difficult to overcome. AVID, a Nepad-structured foundation, assists financiers and investors to overcome bottlenecks in the process of project investment and development.

Country-scoping visits are undertaken regularly to ensure we’re in the space of identifying new investment opportunities as they birth, and in particular those nations that are emerging from years of conflict, such as South Sudan and Eritrea. In other words, countries that are going to be rebuilding and developing much needed infrastructure. Further, we aid in narrowing the skills gap with a number of initiatives related to education, skills development and volunteerism. Beneficiaries have included Penreach in Mpumalanga, the Rehoboth Trust in KwaZulu-Natal, the Maths & Science Leadership Academy in the Northern Cape, and DeafSA in Limpopo.

Q: What is the ECIC’s export valuation on natural and mineral resources in Africa, and what other markets are you watching?
A:
Given that some 77% of Africa’s total exports are natural resources, of which 42% contribute to government revenues, we understand that to maintain a sustainable growth and development path, the extraction of mineral resources remains an imperative but must be supported by a mineral transformation process across the continent.

There are four major obstacles – access to capital markets; transfusion of technological knowledge; lack of supporting infrastructure; and political will. ECIC export business is mainly on mining extraction activities and processing plants, and other ancillary projects such as power generation, as well as transport and telecoms – the latter two identified as being on an upward projectory path. We’re also keeping our focus on Africa’s largely undeveloped oil reserves (which currently contribute 8% of the world’s reserves) and natural gas. We see some of our major growth coming from the SME export sector, rail transport, aviation and agro industries.

Q: What differentiates the ECIC from its competitors?
A:
Given that the ECIC is an African-based and structured organisation, we are best placed to understand the dynamics of the problems our leaders, financiers and investors face. We therefore play an important role in addressing obstacles through facilitation, and by aiding in the release of funding required for the construction of infrastructure, which as we all know is of particular concern to international companies seeking to have an African presence.

We are also able to price African risk more effectively, given our indigenous status even though demands are universally similar. Ideally what we ensure is the provision of cost-competitive cover and the honouring of claims when they arise. Further we are dedicated to deepening regional integration particularly across a diversification of the domestic industrial base so that nations can tap into the increasing demand of a growing middle-class consumer base.

By Kerry Dimmer