Country Risk Analysis

1. Country Risk Analysis A presentation by ECGC

2. What is Risk? • Uncertainty about the future outcome • Lack of knowledge • Imperfection in knowledge • Possibility of Loss

3. Export Credit Risk • Exports • Goods • Services • Credit • Extending supplier credit: DP, DA, OA • Risk • Possibility of non-payment of accounts receivables

4. Types of Export Credit Risks

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

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

7. 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'

8. 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

9. 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

10. 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

11. Factors Leading to Commercial Risks Buyer’s willingness to pay: Behavior of the debtor • Buyers ability to pay: • Debtors financial condition

12. Commercial Risks • Insolvency/ Bankruptcy • Breach of Contract • Payment Default • Refuse to take delivery of goods Ability or behavior?

13. 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

14. 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

15. 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

16. 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

17. Role of ECGC as an Export Credit Insurer Providing credit insurance covers to exporters against loss in export of goods & services Providing export creditguarantees to banks & FI’s to enable exporters obtain better facilities from them Providing Overseas Investment Insurance to Exporters - Indian Entrepreneurs in Overseas Ventures (Equity/Loans) Maturity Factoring

18. Policy INSURER ECGC INSURED EXPORTER RISKS BUYER/ COUNTRY

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

20. 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

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

22. 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

23. Evaluating a Country • Country Underwriting involves assessment of a country’s 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

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

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

26. Country Evaluation: ECGC’s 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

27. Country Evaluation: ECGC’s Objective Scoring Methodology

28. 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

29. Seven Fold Country Classification

30. 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 OR Open Cover Restricted Cover

31. 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

32. 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

33. 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 Banker’s 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

34. 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

35. Restricted Cover Countries

36. 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

37. Liberalization of ECGC’s 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

38. Country Classification as on 1st April 2004

39. Distribution of Country Risk Ratings Risk

40. 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)

41. Comparison: Economic Indicators

42. Comparison: Other Indicators

43. 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 eco-political situation in the country

44. 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

45. 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

46. 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

47. ECGC Schemes • Schemes for Exporters • Maturity Factoring • Schemes for Banks/ Financial Instns • Special Schemes

48. 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.

49. 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

50. 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.