Historically, trade patterns were such that emerging markets exported their raw materials to OECD countries and in turn, OECD countries used the raw materials to manufacture capital goods, and then exported these finished goods back to the emerging markets and to other OECD countries.
As capital goods are typically large ticket items with a relatively long useful life expectancy, few buyers pay cash for capital goods (whether in developed or in less developed economies). However, while developed economies have deep and diversified capital markets which enable buyers of large ticket items to raise financing domestically, buyers in less developed countries usually are forced to rely on the provision of capital by overseas financiers, typically from the OECD. Hence the raison dtre of the ECAs.
During the past decade, traditional export-trading patterns have changed dramatically and many believe that the time has come to examine the official export financing schemes. First, many emerging markets now manufacture capital goods and export them to other emerging markets and to OECD countries. As an example, Brazil manufactures commuter jet aircraft and very successfully competes with manufacturers in Canada and Western Europe on both technical strengths and price. China manufactures ships and telecommunication equipment. India also manufactures aircraft. These and many other emerging market countries have aspirations for continued export growth. However as Embraer, the Brazilian aircraft manufacturer, will attest, providing export financing that is competitive with that provided by ECAs from OECD countries is a stumbling block for growth.
For example, Canada can support exports by its manufacturers to emerging markets such as the Philippines for terms up to ten or twelve years in accordance with the OECD consensus. Such financing can typically result in better tenor and pricing (about 2.5 per cent per annum) than a buyer in the Philippines could obtain had he sought to raise financing on its own without ECA support. This can translate into a saving of $1.2 million per annum on a $50 million transaction.
EDC, the Canadian ECA, can fund itself for its own account at rates comparable to the US Treasury Bill rate. By comparison, should the Indian government choose to support one of its own exporters by providing financing on similar terms to those provided by OECD countries such as Canada, it would have to dig more deeply into its treasury since Indias cost of capital exceeds Canadas (for example) by approximately one per cent per annum on the basis of comparing the respective capital markets.
Trading patterns have changed and countries like India have rapidly industrialised and now have a skilled workforce and a large middle class. Therefore, Indian companies can be very competitive in the export markets, but yet cannot compete on financing terms.
One solution would be to emulate what the World Bank (WB) has done for investment insurance under the Multilateral Investment Guarantee Agency and to establish a multilateral Export Credit Agency. India and other countries could then seek guarantees and/or direct loans from such an agency to support exports from their countries. In the above example, an Indian exporter to the Philippines could support its bid to supply aircraft to the Philippines by offering a triple-A rated guarantee provided by the WB or other multilateral agency. In so doing, the playing field would truly be levelled with respect to financing.
The advantages to India and other emerging markets would be enormous. Not only would a multilateral ECA encourage export led growth, but it would also foster foreign investment. Further, manufacturers in Europe and in the US could outsource sub-assembly work thereby reducing their manufacturing costs. In such example, the WB would share out (through reinsurance programmes) the non-European and American content, once the finished product is sold and exported. This would mean that when the European ECAs support the export of (for example) an Airbus aircraft to another country, the European ECA could provide a guarantee for 85 per cent of the value of the aircraft and reinsure with the multilateral ECA those portions representing content from emerging markets.
The main beneficiaries in India would be the manufacturers of capital goods in such industries as aerospace, telecommunications, heavy equipment manufacture, utility and construction equipment sectors, and also in the now hi-tech industries supplying computers and related services including software, design and installation.
Clearly any such initiative would be met with its detractors who would be expected to put all their political forces to work in order to prevent the establishment of a multilateral ECA. Labour groups in OECD countries would be concerned about jobs being exported to emerging markets, who, they would maintain, already have a competitive advantage due to lower labour costs.
Both of these arguments can, however, be refuted. First, while the fear of exported jobs will undoubtedly result in short-term structural adjustments by accelerating growth in emerging markets, it is now widely accepted that the growing middle class in these markets creates new opportunities for American and western European products. Second, the argument that low labour costs in emerging markets provides a sufficient competitive advantage to level the playing field with OECD countries, does not hold muster on closer examination. Large ticket contracts have to be financed over longer periods and as such the support of ECAs is required for those exports. Whether the Philippines were to pay $20 million or $25 million for a new gas turbine, it would not seek to purchase such item unless it could obtain financing on economically feasible terms.
In summary, perhaps the time indeed has come when we must examine the entire export credit system and rebuild it based on a new foundation that will enable the exporting emerging markets to more fully participate in a system which has so successfully supported OECD exporters for many years.
(The author is Standard Chartered Banks Global Head of Structured Export Finance. The article has been edited for space)