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Country Risk Analysis

A presentation by 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

Legal
Risk

Credit
Risk

Export
Credit
Risk

Transfer
Risk

Exchange
Risk

Political Risk

Some countries may experience


major
political instability
defaults on payments leading
exchange transfer blockages
to
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

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..

Failure of
Buyer's Bank
affecting
payment of
outstandings

Weakness in
economy of
Buyer's country,
viz. low
reserves, BOP
problems
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 nonpayment within export operations

Risks covered by export credit


insurers:
Commercial
Political Risk
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

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
sub-Group 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

NON LC

LC
TRANSACTION

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

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

Reviewing
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

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
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

Reviewing a Country
Late
Payment
Experienc
e
ECGC

Internation
al Rankings

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

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


No Restrictions

Cover with

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


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

Country Classification
as on 1st
April
2004
Open
Restricted
Cover

Country
Classification

Cover

(revolving
limit facility)

Restricted
Cover
(case by
case)

Total

A1 (1/7)

26

26

A2 (2/7)

59

59

B1 (3/7)

28

29

B2 (4/7)

30

31

C1 (5/7)

25

30

C2 (6/7)

17

25

D (7/7)

10

22

Total

195

20

222

Distribution of Country Risk


Ratings
Very High Risk
High Risk

Moderate Risk
Moderately Low Risk
Low Risk
Insignificant Risk

Risk

Moderately High 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

GDP (US bn)

CAD/GDP

Debt Service
Ratio (%)

Import Cover
(in months)

USA

10987.9

0.05

0.7

China

1446.9

CA Surplus

4.8

12.45

Russia

433.5

CA Surplus

9.4

11.64

Kenya

13.2

0.17

10.6

4.8

Serbia & Montenegro

19.8

1.1

15.3

5.67

Uganda

0.67

11.6

10.96

Iraq

19.9

CA Surplus

NA

Comparison: Other
Indicators
Country

ECGC
RV
(2003-04)
in Rs.mn

Transfer
Delay
Claims
Paid
(Rs.mn)

Political
Situation

India Trade
Balance
(2002-03) in
Rs. Mn

Euro
money
Score

Forex
Delays

USA

59124.06

Nil

Stable

311571

96.64/100

0-1 m

China

5549.67

Nil

Stable

-99751.53

61.52/100

1-3 m

Russia

970.45

Nil

Relatively
Stable

31549.48

49.02/100

1-2 m

Kenya

1550.86

Nil

Relatively
Unstable

8237.8

36.11/100

2-3 m

Serbia & Montenegro

22.13

Nil

Relatively
Unstable

1663.5

31.5/100

1-2 m

Uganda

414.31

607.2

Relatively
Unstable

3097.38

37.8/100

2-3 m

Iraq

1355.56

4025.97

Unstable

10343.39

4.28/100

3-4 m

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

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

It is so easy with ECGC

For more details


Please visit
www.ecgcindia.com