ABN AMRO bank Export Credits & Political Risks, London February 2003 Structured Trade & Investment Finance A Multilateral Emerging Market ECA: A Key Driver.

Export Credits & Political Risks, London February 2003

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Structured Trade

&

Investment Finance

A Multilateral Emerging Market ECA:

A Key Driver for Sustainable Development

Paul Mudde Senior Vice President Reputation Management & Sustainable Development

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I. Introduction

II. The Rationale for EMECA

III. The Role of EMECA

IV. EMECA & Co-operation with the Market

V. Summary & Conclusions

Agenda

Structured Trade & Investment Finance

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Main Considerations:

1. Debt Constraints Emerging Markets

2. Official Flow Constraints

3. Ambitious UN new Millennium Goals 4. Importance of Private Capital Flows

5. Support for Exports from Emerging Markets

6. Support for Intra-Regional Trade

7. Level Playing Field OECD Exporters & Exporters

Emerging markets

8. No Dedicated Program to support Trade between

Emerging Markets

II. The Rationale for EMECA

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0

100

200

300

400

500

600

700

800

900

1970 1980 1990 2000 2001

Europe & Central Asia

Latin America &Caribbean

Middle East & North Africa

South Asia

Sub-Saharan Africa

East Asia & Pacific

Debt Constraints EMYear 1990 2000 2001Total 1458.4 2492 2442.1

II. The Rationale for EMECA

Source: OECD & World Bank

Stock of Total Debt Developing Countries by Region in Bln. US$m

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0

500

1000

1500

2000

2500

3000

1970 1980 1990 2000 2001

Total

LT

LT Public

LT Private

ST

IMF Credit

MLT Export Credit Debt to BU Members

1999 2000

324.1 334.6

Source: OECD & World Bank

Composition of Debt of Developing Countries in Bln. US$m

II. The Rationale for EMECA

Debt Constraints EM

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Debt Constraints EM: Debt Indicators All Developing CountriesEDT /XGS: NPV External Debt as a % of annual Exports Goods & Services EDT/GNI: NPV External Debt as a % of annual Gross National Income

0

50

100

150

200

1970 1980 1990 2000 2001

EDT/XGS

EDT/GNI

Source: World Bank

II. The Rationale for EMECA

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35% Other Dev. Countries

8% HIPC

10% Brazil

4% India

3% Thailand

6% Russian Fed.

5% Korea Rep.

5% Turkey

6% China

6% Mexico

6% Indonesia

6% Argentina

Top Ten Debtors in 2000Percentage of Total Debt Developing Countries

Total Debt US$ 2,492 Billion

Heavily Indebted (HIPC) Severely Indebted Moderately Indebted Less Indebted

II. The Rationale for EMECA

Debt Constraints EM

Source: World Bank

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Main Consequences of Debt Problem Emerging Markets:• Financial Crises in various EM (Asia, Brazil, Russia, Turkey, Argentina)• Local Currency Devaluation• Payment Defaults & Private Sector Bankruptcies • Loss of Jobs and large Social Damages • EM Governments enhance process of Liberalisation & Privatisation

Response of Financial Markets:• Credit Crunch• Increased Pricing• London Club Rescheduling• Commercial Work-outs

Response IMF, ECAs, MLAs, Bilateral Donors• IMF / MLA Support combined with Conditions re. Liberalisation & Privatisation• Bilateral Aid Loans (e.g. Balance of Payment support)• Technical Assistance• Paris Club Rescheduling (Since 1983: 352 Agreements covering US$ 406 Bln.) • HIPC Debt Relief & Chapter 11 for Sovereigns

II. The Rationale for EMECA

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050

100150200250300350400

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Total

Official

Private

Net MLT Capital Flows to Developing Countries in Bln. US$

Source: World Bank

Official Flow Constraints & Importance of Private Flows

II. The Rationale for EMECA

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0

5

10

15

20

25

30

35

40

90 91 92 93 94 95 96 97 98 99

America

Africa

Asia

Ocenia

Europe

90 91 98 99Total 74.1 72.8 78.3 79.2

Source: World Bank

Gross Official Flows to Developing Countries in Bln. US$

II. The Rationale for EMECA

Official Flow Constraints

Gross Official Flows in Bln. US$

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Source: IMF

0

20

40

60

80

100

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2Source: OECD, BU & IMF

Stock of Debt Developing Countries to IMF in Bln. US$m

MLT Export Credit Debt to BU Members

1999 2000

324.1 334.6Official Flow Constraints (IMF)

II. The Rationale for EMECA

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0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1999 2000

ODA

OA

Total

Top Ten Recipients

Amounts in Million US$

1 Indonesia 2,456

2 China 2,097

3 Russia 1,495

4 Egypt 1,442

5 India 1,438

6 Thailand 1,187

7 Vietnam 1,153

8 Israel 1,000

9 Philippines 990

10 Bangladesh 825

LLDC

Other Low-Income

Lower Middle-Income

Upper Middle-Income

High-Income

Unallocated

Total Aid all DAC Members in Mln US$

11,739

10,886

1,839

11,358

7,789

32

Source: OECD

Official Flow Constraints (OECD DAC)

Bilateral Aid 2000: Total US$ 43.3 Billion

II. The Rationale for EMECA2000

Bilateral OECD DAC Aid by Income Group

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0.00

0.20

0.40

0.60

0.80

1.00

1.20

UN Target 0.7

OECD Average: 0.39

2000: Net ODA as a % of GNI

II. The Rationale for EMECA

Official Flow Constraints (OECD DAC)

Source: OECD

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UN Millennium Development Goals:1. Eradicate extreme Poverty & Hunger2. Achieve universal Primary Education3. Promote gender equality & empower Women4. Reduce Child mortality5. Improve Maternal Health6. Combat HIV / AIDS7. Ensure Environmental Sustainability8. Develop Global Partnership for Development

WB Estimate: US$ 40 - 60 Billion of additional Aid per AnnumInternationally Agreed Aid Target: 0.7% of GDPActual Average OECD DAC Countries: 0.39% of GDP (2000) To meet Millennium Goals: 0.49% of GDP

II. The Rationale for EMECA

Ambitious Development Goals for the new Millennium

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-50

0

50

100

150

200

250

300

350

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Total

Banks

Bonds

FDI

Other

Net MLT Private Flows to Developing Countries by Source in Bln. US$

Source: World Bank

Importance of Private Capital Flows to Emerging Markets

II. The Rationale for EMECA

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II. The Rationale for EMECA

Key Developments re Private Capital Flows:• Importance of FDI (approx. 30% mergers & acquisitions)

• Volatility of Debt Flows (Bank Loans / Bonds)

• Concentration in Financial Markets

• BIS II Solvency Rules (2006)

Importance of Private Capital Flows to Emerging Markets

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Concentration in Financial Markets

Mergers & Acquisitions in the:• Bank Sector

» Europe (e.g. Germany: Landesbanks) » Bad Loan problems (e.g. Japan)

• Insurance Sector» General Insurance: Allianz, AXA, AIG, ING» Credit Insurance: Gerling / NCM, Euler / HERMES,

COFACE, Lloyds, ACE, CHUBB, AIG

1 + 1 = ?

• Concentration Constraints• Less Competition• Funding and Mitigation Capacity will likely become more expensive

II. The Rationale for EMECA

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II. The Rationale for EMECA

BIS II Solvency Changes for Sovereigns BorrowersOct. 02 Current New

Country S&P Solvency SolvencyEstonia A- 8 1.6Chili A- 8 1.6Malaysia BBB+ 8 1.6Latvia BBB+ 8 4Lithuania BBB 8 4Thailand BBB- 8 4South Africa BBB- 8 4Bulgaria BB 8 8India BB 8 8Romania B+ 8 8Brazil B+ 8 8Ukraine B 8 8Uruguay B 8 8Pakistan B- 8 8Turkey * B- 0 8Indonesia CCC+ 8 12Ecuador CCC+ 8 12Argentina SD 8 12

* Turkey = OECD Country

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0

500

1000

1500

2000

1990 1995 1996 1997 1998 1999 2000

Developed countries

Countries in EasternEurope

Developing countries

Year Total Dev. EE DC

1990 887.4 556.1 41.9 270.0

1997 1798.0 1013.3 88.2 651.0

2000 2284.7 1622.0 81.9 519.6

Source: Unctad

Exports from Developing Countries by Destination in Bln. US$

II. The Rationale for EMECA

Supporting Exports from Developing Countries

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0

10

20

30

40

50

60

70

1990 1999

Food

Agricultural RawMaterials

Fuels

Ores & Metals

Manufactures

Other

Composition of Exports Developing Countries in % of Total Exports

54%

66%

Supporting Exports from Developing Countries

II. The Rationale for EMECA

Exports of Manufactures have become more Important !

Source: Unctad

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II. The Rationale for EMECA

Supporting Exports from Developing Countries

Focus on Private Sector Development in EM• Private Sector is the engine for Sustained Economic Growth• Private Sector is main source for job creation & employment• Employment is main Route to combat Poverty & to Improve Living Standards• Private sector is main source of (tax) income for Public Sector Expenditures in Health, Education, etc.

Focus on the Support of Exports • Exports Income is key for GDP Growth of Developing Countries• Exports Income is key in solving Debt problem of Developing Countries• By Supporting Exports Future Crises can be Prevented

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0

20

40

60

80

100

120

1993 1994 1995 1996 1997 1998 1999 2000

Total

Exports

Investments

1993 1999 2000

Total 84 76 84

Exports 78 62 71

Investments 6 14 13

Berne Union Members MLT New Business Covered in Bln. US$

Source: Berne Union

BU New MLT Business in Bln. US$ II. The Rationale for EMECA

ECAs play a Key role in supporting Exports to EM & Development of EM

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0102030405060708090

100

N. America L. America W. Europe

CEE/CIS/Baltics

Africa M. EastAsia

intra regional trade inter regional trade

II. The Rationale for EMECA

Supporting Intra Regional Trade: Key for Regional Development

%

Source: World Bank

2000

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Bottlenecks for MLT Finance of exports from EM:• MLT Finance in Local Currency Not Available• MLT Finance in Hard Currency Hardly Available No adequate MLT Insurance / Guarantee Facilities for Financing Banks

There is no ECA There is an ECA, but adequate coveris not Available.

Most EM ECAs are only / mainly involved in ST Supplier Credits.

II. The Rationale for EMECA

Level Playing Field OECD Exporters & EM Exporters

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II. The Rationale for EMECA

Level Playing Field OECD Exporters & EM Exporters

ECA Counter- Party Risk: A Comparison of two ECAs

United Kingdom: AAA Argentina: SD

Philippines: BB+

Bank Bank

ECGD CASC

SovereignBuyer / Borrower

Exporter Exporter

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• Zero Solvency • No Country Risk Provisioning

• 8% Solvency • Country Risk Provisioning

ECA Counter- Party Risk: A Comparison of two ECAs United Kingdom: AAA Argentina: SD

Philippines: BB+

ECGD CASCSovereignBuyer / Borrower

MLT Finance Available

MLT Finance Hardly Available

or (too) Expensive

II. The Rationale for EMECA

Level Playing Field OECD Exporters & EM Exporters

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ECA Counter- Party Risk: A Comparison of two ECAs

United Kingdom: AAA

Philippines: BB+

Bank

ECGD

SovereignBuyer / Borrower

Exporter

Result: • No Level Playing Field• Argentinean Exporter will not be able to win the Export Contract

II. The Rationale for EMECA

Level Playing Field OECD Exporters & EM Exporters

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Exporting EM Importing EM

Exporter

Bank

ECA

Importer

EMECA

1.

2.

3.

4.

1. Export Contract2. Export Finance Contract3. Export Credit Insurance4. EMECA Counter Guarantee5. ECA / EMECA Co-operation Agreement

5.

ECA Counter- Party Risk: EMECA as Counter-guarantor

III. The Role of EMECA

AAA rated Country

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Exporting EM Importing EM

Exporter

Bank

Importer

EMECA

1.

2.

3.

1. Export Contract2. Export Finance Contract3. Export Credit Insurance

No ECA in EM: EMECA the Solution

III. The Role of EMECA

AAA rated Country

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II. The Rationale for EMECA

No Dedicated Program to support Exports from Developing Countries

Main Characteristics of the Official Financial Support to Developing Countries:• Bilateral & MLA Support is mainly provided to Public Sector in Developing Countries• Limited Support for Private Sector Development (Mainly IFC, MIGA)

Some MLAs are explicitly not allowed to be involved in ECA Exports Business Examples: EBRD & MIGA

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III. The Role of EMECA

Mandate: Act as ECA & provide insurance / guarantees to Banks, EM exporters, Capital Market Financiers to support Trade between EM

Location: EMECA should be located in AAA rated country

Main Business Principles:• Support within framework International Rules (OECD Consensus, WTO Break even)• No Competition, but active Co-operation with the Market (Banks, EM Exporters, PRIs, Capital Market Investors)• Active Co-operation with other Official Agencies (MLAs, OECD ECAs & ECAs in EM, DAC Donor Agencies, Governments)

Main Business Area:• Non Marketable risks (MLT): Main Role act as Insurer / Guarantor• Marketable risks (ST < 2 Year): Main Role act as intermediary for PRIs

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Benefits for Emerging Markets (EM):• Trade is Sustainable Aid• Support Private Sector Development (e.g. EM Exporters)• Support Private Capital Flows to EM Borrowers• Enhance Trade & Investments between Emerging Markets (e.g. Intra Regional Trade, South / South Trade)• Increased Access to Stable MLT Finance• Improvement of Financial Infrastructure in EM - Local ECA & Bank Business / Expertise - Implementation of sound commercial business practices• Increase Local Knowledge re. Export Finance / Insurance• Positive Developmental Impact in two EM Exporting EM: Increase Hard Currency Income,

Sustainable Jobs, Additional Tax Income

Importing EM: Decrease of Import Costs • Increase Independence & Decrease Aid Dependency

The main Benefits of EMECA

III. The Role of EMECA

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Benefits for EM Exporters:• Level Playing Field with OECD Exporters• Financial Stability (exports = Hard Currency Income)

Benefits for Banks:• Allow Banks to Finance MLT Trade Transactions between EM• Incentive for Banks to Originate Export Business in EM• Improved RAROC for Business with EM clients

Benefits for Private Risk Insurers:• Co / Re - insurance opportunities with EMECA (e.g. MIGA CUP)• “Umbrella”- Protection EMECA

Benefits for OECD Donor Countries:• Instrument to achieve Sustainable Development & UN Millennium Goals• Increase Aid Efficiency

III. The Role of EMECAThe main Benefits of EMECA

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III. The Role of EMECA

0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

70,000.00

1990 1995 1996 1997 1998 1999

1 Malaysia

2 China

3 Thailand

4 Philippines

5 Brazil

6 Russia

7 Indonesia

8 Turkey

9 Argentina

10 South Africa

Ranking Emerging Markets & Capital Goods ExportsNo. 1 - 10 (Average Exports 1995 - 1999)

Exports of Machinery and Transport Equipment in million US$ (SITC 7)

Source: Unctad

1996 1997 1998 1999140,057.25 158,156.71 171,088.56 180,587.34

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III. The Role of EMECA

Ranking Emerging Markets & Capital Goods ExportsNo. 10 - 20 (Average Exports 1995-1999)

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

1990 1995 1996 1997 1998 1999

11 India

12 Belarus

13 Romania

14 Croatia

15 Oman

16 Tunisia

17 Lithuania

18 Estonia

19 Bulgaria

20 Venezuela

Exports of Machinery and Transport Equipment in million US$ (SITC 7)

Source: Unctad

Average 95 - 99

10,248.39

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III. The Role of EMECA

Ranking Emerging Markets & Capital Goods ExportsNo. 20 - 30 (Average Exports 1995-1999)

0.00

200.00

400.00

600.00

800.00

1,000.00

1990 1995 1996 1997 1998 1999

21 Chile

22 Morocco

23 Kazakhstan

24 Saudi Arabia

25 Yugoslavia, Rep.

26 Sri Lanka

27 Kuwait

28 Latvia

29 Uruguay

30 Nigeria

Exports of Machinery and Transport Equipment in million US$ (SITC 7)

Source: Unctad

Average 95 - 99

2,434.49

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III. The Role of EMECATop 30 EM Capital Good Exporters & OECD ECA Rating / OECD Aid / IMF CreditOECD Aid in 2000 IMF Credit Oct. 02 OECD Aid in 2000 IMF Credit Oct. 02

No. Country Rating in Mln US$ in Mln US$ No. Country Rating in Mln US$ in Mln US$

1 Malaysia 2 181 0.00 16 Tunisia 3 223 0.002 China 2 1,735 0.00 17 Lithuania 4 99 122,638.16

3 Thailand 3 641 578,676.88 18 Estonia 3 64 0.004 Philippines 4 578 1,675,794.22 19 Bulgaria 5 311 1,051,622.87

5 Brazil 6 322 17,334,335.23 20 Venezuela 6 77 0.006 Russia 5 1,565 6,637,688.75 21 Chile 2 49 0.00

7 Indonesia 6 1,731 8,742,679.33 22 Morocco 4 419 0.008 Turkey 6 325 21,487,972.03 23 Kazakhstan 6 189 0.00

9 Argentina 7 76 13,995,395.14 24 Saudi Arabia 3 31 0.0010 South Africa 4 488 0.00 25 Yugoslavia, Rep. 7 1,135 551,462.53

11 India 3 1,487 0.00 26 Sri Lanka 5 276 301,573.3212 Belarus 7 40 54,086.99 27 Kuwait 2 3 0.00

13 Romania 6 432 446,087.34 28 Latvia 4 91 17,649.6414 Croatia 4 66 93,428.21 29 Uruguay 6 17 1,763,244.97

15 Oman 3 46 0.00 30 Nigeria 7 185 0.00

Total for these 30 Countries in % of TotalOECD Aid US$ 12.9 Billion approx. 20%IMF Credit US$ 74.9 Billion 81.90%

Source: OECD & IMF

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Some examples of Public & Private Sector risk Participation:

1. Equity participation by public & private sector2. Treaty Re-insurance3. Partial Credit Insurance4. Partial Risk Insurance 5. Country risk specific risk sharing Public / Private Sector6. Risk participation by the Insured (private sector)

These risk sharing arrangements do show the Huge leverage potential of EMECA

IV. EMECA & Co-operation with the Market

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EMECA

Shareholders

1. Risk Participation: Equity.

Public Sector:• Emerging Market countries• High Income countries (OECD)• Multilateral Development Banks• Bilateral Development Banks

Private Sector:• Banks• Insurance companies• Re-insurance companies• Investors • Exporting companies

IV. EMECA & Co-operation with the Market

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1st re-insurance layer provided by Public sector participants

2nd re-insurance layer provided by Private sector (re-)insurers

3rd layer of risk takers: Equity

EMECA

Treaty Re-insurance

2. Risk Participation: Treaty Re-insurance.

IV. EMECA & Co-operation with the Market

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3. Risk Participation: Partial Credit Insurance.

Tenor of the loan

Stretching the Market Tenor (syndicated loan / PRI market)

Amount at Risk

Private SectorParticipation

Public SectorParticipation

Year 4 Year 8

Can be arranged through:• Re-insurance• Co-insurance

IV. EMECA & Co-operation with the Market

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Public Sector Participants

Political Risks

Private Sector Participants

Commercial Risks

EMECA

4. Risk Participation: Partial Risk Insurance.

Can be arranged through:• Re-insurance• Co-insurance

IV. EMECA & Co-operation with the Market

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5. Country risk specific risk sharing Public / Private Sector.

OECD Country risk category

% Share in Risk

0

20

40

60

80

100

120

1 2 3 4 5 6 7

Private

Public

IV. EMECA & Co-operation with the Market

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EMECA

Borrower

95% Insurance

6. Risk Participation: Participation by Insured (private sector).

Bank

EMECA Covered Loan

Tied Commercial Loan

(15% down payment)

Total Risk Participation Bank:• 5% uncovered portion of the EMECA loan• 15% down payment loan

IV. EMECA & Co-operation with the Market

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IV. Summary & Conclusions

EMECA is Key for Sustainable Development

of Emerging Markets

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Severely Indebted Low-Income (33)Angola Madagscar

Benin Malawi

Burundi Mauritania

Cameroon Myanmar

Central African Republic Nicaragua

Chad Niger

Comoros Nigeria

Congo, Dem. Rep. Of Pakistan

Congo Rep. Of Rwanda

Cote d Ívoire Sao Tome

Ethopia Sierra Leone

Guinea Somalia

Guinea-Bissau Sudan

Indonesia Tajikistan

Kyrgys republic Tanzania

Loa PDR Zambia

Liberia

Annex I

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0

100

200

300

400

1970 1980 1990 1999 2000

Total

LT

LT Public

LT Private

ST

IMF Credit

Severely Indebted Low-Income Countries Debt in Billions US$m

Annex I

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0

50

100

150

200

250

300

350

1970 1980 1990 1999 2000

EDT/XGS

EDT/GNI

Debt Indicators: Severely Indebted Low-Income CountriesEDT /XGS: NPV External Debt as a % of annual Exports Goods & Services EDT/GNI: NPV External Debt as a% of annual Gross National Income

Annex I

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Severely Indebted Middle-Income (8)Argentina Guyana

Brazil Jordan

Ecudaor Peru

Gabon Syrian Arab Rep.

Moderately Indebted Low-Income (16)Burkina Faso Mongolia

Cambodia Mozambique

Gambia Senegal

Ghana Togo

Haiti Uganda

Kenya Uzbekistan

Mali Yemen

Moldova Zimbabwe

Annex II

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0

100

200

300

400

500

600

1970 1980 1990 1999 2000

Total

LT

LT Public

LT Private

ST

IMF Credit

Severely Indebted Middle-Income Countries Debt in Billion US$

Annex II

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Debt Indicators: Severely Indebted Middle-Income CountriesEDT /XGS: NPV External Debt as a % of annual Exports Goods & Services EDT/GNI: NPV External Debt as a % of annual Gross National Income

0

100

200

300

400

500

1970 1980 1990 1999 2000

EDT/XGS

EDT/GNI

Annex II

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Moderately Indebted Low-Income Countries Debt in Billion US$

0

10

20

30

40

50

60

1970 1980 1990 1999 2000

Total

LT

LT Public

LT Private

ST

IMF Credit

Annex II

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Debt Indicators: Moderately Indebted Low-Income CountriesEDT /XGS: NPV External Debt as a % of annual Exports Goods & Services EDT/GNI: NPV External Debt as a % of annual Gross National Income

0

50

100

150

200

250

1970 1980 1990 1999 2000

EDT/XGS

EDT/GNI

Annex II

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Annex III

Moderately Indebted Middle-Income (27)Algeria Mauritius

Belize Panama

Bolivia Papua new Guinea

Bosnia & Herzegovina Philippines

Bulgaria Russia

Chili Samoa

Colombia St Vincent

Croatia Thailand

Estonia Tunesia

Honduras Turkey

Hungary Turkmenistan

Jamaica Uruguay

Lebanon Venezuela

Malysia

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Moderately Indebted Middle-Income Countries Debt in Billion US$

0100200300400500600700800

1970 1980 1990 1999 2000

Total

LT

LT Public

LT Private

ST

IMF Credit

Annex III

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Debt Indicators: Moderately Indebted Middle-Income CountriesEDT /XGS: NPV External Debt as a % of annual Exports Goods & Services EDT/GNI: NPV External Debt as a % of annual Gross National Income

020406080

100120140160

1970 1980 1990 1999 2000

EDT/XGS

EDT/GNI

Annex III