Country Risk Analysis

Thanks to 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 Risks

Political 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 buyer
All 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 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

1997: The Knaepen Package

the Knaepen Package set out guiding principles for setting premium fees for official export credit support through minimum premium benchmarks for country and sovereign risks. An agreement was concluded by the Participants in June 1997, following nearly three years of technical work in the Working Group on Premia) and this reflected two basic principles: first, pricing should be risk-based so that the premium fees charged are not inadequate to cover longterm operating costs and losses (in accordance with the WTO obligation) and second, pricing should converge and, from the exporters perspective, reflect the differing quality of officially supported export credit products.

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 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 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

INSURED EXPORTER

RISKS BUYER/ COUNTRY

Risks Covered by ECGC under ST Policies

POLITICAL RISK (Open Cover & Restricted cover COMMERCIAL RISK

COUNTRY BUYER BANK LC TRANSACTION

NON LC

Risks Covered Under ST Policies

COMMERCIAL 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 Underwriting
that assesses buyer risks

and

Country Underwriting
that assesses country risks

With the help of these two, ECGC controls the commercial and political risks

Country Underwriting
Evaluating a Country
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

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 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 Country
Late Payment Experience International Rankings

ECGC
Experience

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 Methodology

Economic 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 Classification

Risk 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 Classification
as on 1st April 2004
Country 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)

26
59 28 30 25 17 10

0
0 0 1 5 7 7

0
0 1 0 0 1 5

26
59 29 31 30 25 22

Total

195

20

222

Distribution of Country Risk Ratings

Very High Risk High Risk
D C2 C1 B2 B1 59 A2 26 A1 22 25 30 31 29

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

Country
USA China Russia Kenya Serbia & Montenegro Uganda Iraq

GDP (US bn)

10987.9 1446.9 433.5 13.2 19.8 6 19.9

CAD/GDP
0.05 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 Indicators

Country 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

China
Russia Kenya Serbia & Montenegro Uganda Iraq

5549.67
970.45 1550.86 22.13 414.31 1355.56

Nil
Nil Nil Nil 607.2 4025.97

Stable
Relatively Stable Relatively Unstable Relatively Unstable

-99751.53
31549.48 8237.8 1663.5 3097.38 10343.39

61.52/100
49.02/100 36.11/100 31.5/100 37.8/100 4.28/100

1-3 m
1-2 m 2-3 m 1-2 m 2-3 m 3-4 m

Relatively Unstable
Unstable

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 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.

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

For more details Please visit www.ecgcindia.com