Since 1964, the size of
world merchandise exports has been multiplied almost 114 times.
Recently, exports have dropped, in 2009, by 23 %, due to the global
financial crisis. However, this drop has been canceled immediately by
significant export increases in the 20 % range in 2010 and 2011.
In this context, public
export support schemes can be seen as both consequence and cause of
global export growth.
In 1978, the OECD has
adopted its first Arrangement on officially supported Export Credits.
This gentlemen's agreement has been updated numerous times since
then, most recently on January 11, 2013. The basic idea of the
arrangement is to foster a level playing field for official export
support and to ensure that exporters compete on quality and price
rather than on the best financing scheme.
Scope of application
On the merits, the
arrangement applies to export credit support and tied aid.
Export credit support can
take the form of
- a guarantee;
- an insurance;
- a direct financing;
- a refinancing;
- an interest rate support.
Tied aid touches upon
government support to countries, sectors, or projects with little or
no access to financial markets. However, it excludes non-governmental
aid programs.
Export credit support and
tied aid for military equipment and agricultural commodities are also
out of the arrangement’s scope.
Currently, Australia,
Canada, the European Union, Japan, Korea, New Zealand, Norway,
Switzerland, and the United States participate in the OECD
arrangement.
Export credit support
The OECD export credit
support framework comprises the following:
- Down paymentThe purchaser is bound to pay 15 % of the contract value prior to the export credit support. However, the contract value does not necessarily include the premium paid for the export credit, which might be financed or insured at 100 %.
- Export credit capAs a general rule, export credit support is only allowed up to 85 % of the contract value, thereby excluding the above described 15 % down payment. Exceptionally, credit insurance and guarantee schemes can cover such down payment, but only regarding pre-credit risks.
- Local costsOfficial support for local costs can be granted, but only if it doesn’t outstrip 30 % of the export contract value.
- Repayment TermsThe arrangement sets a cap for the repayment terms: Depending on the importing country’s gross national income, the cap is either 8.5 years (for high income countries) or 10 years (for low income countries). In addition, repayment terms usually comprise equal installments at least every 6 months.
- Commercial Interest Reference Rate (CIRR) / Minimum Premium Rate (MPR)Interest refers to annual or semi-annual bank charges paid throughout the repayment period. This does not include insurance / guarantee premiums, fees and commissions, and withholding tax imposed by the importing country.According to the OECD arrangement, interest must be charged at least at the sum of CIRR and MPR. CIRR compensates for market risk and MPR for credit risk.
Interest rate
calculation
The
interest rate calculation can be summarized as follows:
CIRR calculation
Depending on the maturity
of the export credit support, the CIRR
base rate is
- either the 3 year government bond yield in case of maturities up to 5 years
- or the 5 year government bond yield in case of maturities beyond 5 years.
MPR calculation
MPR calculation is a
rather complex task. Its main parameters are country risk, time at
risk, buyer risk, political risk, and commercial risk.
The above outlined
calculation steps are summarized hereinafter:
- The country risk is classified along a scale from 0 (lowest risk) to 7 (highest risk) and depends on the likelihood of the country to serve its external debt. The classification is based on a quantitative assessment (payment experience, financial and economic situation) as well as a qualitative assessment (political and other risk factors).
- Depending on the country risk classification, Annex VI of the OECD arrangement sets country risk coefficient and country risk constant.
- The same is true for the buyer risk coefficient, which, in addition, depends on the buyer risk classification.
- The buyer risk classification is a function of the buyer's senior unsecured credit rating and varies from CC5 (worst) to SOV+ (best).
- The horizon of risk depends on the disbursement and repayment period of the export credit. Its calculation depends on the repayment profile and is specified in Annex VI of the OECD Arrangement.
- The local currency factor is between 0 and 0.2 and can be increased by using offshore escrow accounts or local currency financing.
- The credit enhancement factor is between 0 and 0.35 and can be increased by assigning receivables, providing securities over assets, or using escrow accounts.
- The product quality factor relates to the quality of the export credit, not the underlying good or service. The OECD Arrangement distinguishes below standard products (= The insurance does not cover interest for the period between the due date for the obligor’s payment and the due date for the insurer’s reimbursement or only covers this period in return for a premium surcharge.), standard products (= The insurance covers the above described period without premium surcharge.), and above standard products (= Export credit is granted in form of guarantees). The product quality factor then is as function of the country risk classification (see Annex VI of the OECD Arrangement).
- The cover percentage factor depends on three variables, e.g. cover percentage of buyer risk, the cover percentage of country risk, and the country risk classification. Details are described in Annex VI of the OECD Arrangement.
- If the buyer is classified SOV+, the better than sovereign factor is 0.9. Otherwise, this factor is 1.
Tied aid
Under the OECD
arrangement, tied aid must respond to three imperatives – country
eligibility, project eligibility, and minimum concessionality level.
Sector Understandings
Sector understandings
govern 5 sectors:
- Ships (Annex I)
- Nuclear Power Plants (Annex II)
- Civil Aircraft (Annex III)
- Renewable Energies and Water Projects (Annex IV)
- Project Finance (Annex X)
In their respective
sector, they complement the OECD Arrangement and, thus, provide for
details or amendments to the above described general regulations on
export credits and tied aid.
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