The protection of trade receivables from the risk of customer payment default is vital for these businesses. Three out of five businesses interviewed reported that they have used trade credit insurance during the pandemic and a significant percent indicated they intend to employ credit insurance next year. This is a clear indication that businesses in Eastern Europe are taking a strategic approach to credit management during the pandemic, which is vital as the global recession continues to pose new and unforeseen challenges.

Business challenges ahead

The majority of Eastern European businesses surveyed said that a decrease in demand represents the greatest challenge to their business. Other challenges to business profitability include maintaining adequate cash flow, collecting outstanding invoices and containing costs.

Not all businesses in Eastern Europe faired the same. Businesses in Bulgaria and Slovakia experienced devastating blows to revenue and cash flow, while businesses in Turkey reported the smallest negative impacts on revenue, cash flow, and sales volume in the region.

Part of the secret to Turkey’s success is a strong, proactive approach to credit management in past years, but especially this year. Businesses in Turkey explicitly stated that they will continue using trade credit insurance in the coming years, which is a distinctive feature of Turkey’s success in the Eastern Europe economic region.

The Payment Practices Barometer has enabled us to evaluate business confidence both before and during the pandemic and recession. Some of the benchmark indicators are shocking, like an 88% rise in overdue invoices, and severe revenue shortfalls felt by almost 60% of businesses in the region during the pandemic.

The toll on industry sectors

The industries across Eastern Europe feeling the greatest shock include hospitality, tourism, and non-essential services. Certain food industries and chemicals are faring slightly better across Eastern Europe if they were able to continue production during lockdowns.

Businesses surveyed in the agri-food, chemicals, steel-metals and ICT/electronics industries mostly shared an optimistic outlook about the future of the domestic economy in their country. Those operating in the electronics industry reported 63% of respondents expecting an improvement in the domestic economy in the coming months while Hungarian businesses in this sector were the most optimistic.

Hope for 2021

Businesses in Eastern Europe are approaching 2021 with cautious optimism. After months of various lockdown measures, reduced consumption and supply-side shocks wreaked havoc on emerging and developed economies alike, a significant proportion of businesses expressed optimism and hope about the coming year. This was most clearly expressed by businesses discussing the future of their domestic economies. Businesses in Turkey and Hungary were particularly upbeat in their assessments of their respective domestic economies in 2021.

The opinion about the global economy is less bright, with 43% of survey respondents predicting a decline in the coming year. For businesses worldwide, the next months are critical. Continued lockdowns may have a severe impact on economic development and rebuilding credit.

Outsourcing credit risk management to external professionals gives businesses a powerful tool that helps securely grow revenues in an unstable time. Credit insurance is designed to help businesses trade safely with more profits while mitigating the risk of customer payment default and other financial pitfalls that can be devastating to an already struggling business.

Much of what the next six months hold is unknown. Around the world, varying degrees of shut down and business as usual are shaping the future for business in each region. With the virus not yet under control in many key economies, it is too soon to say which countries will see strong rebounds and in which industry sectors. What we can see, however, is the strategic approach to credit management in Eastern Europe helping industries securely grow their business while protecting their assets in the uncertain months ahead.

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Silvia Ungaro is a Corporate Communications Manager at Atradius, a global trade credit insurer. She is responsible for the Payment Practices Barometer survey of B2B payment behavior.

The post Businesses in Eastern Europe Enter 2021 Battered – But Hopeful appeared first on Global Trade Magazine.

However, we must emphasize the fact that foreign trading comes with risks. Currency, credit, intellectual property, transport, logistics, ethics… you’ll be dealing with a lot throughout this journey. Being aware of these risks and taking steps to minimize them will ensure the success of your brand’s international trade management.

10 Tips on How to Minimize Foreign Trade Risks 

Make Sure Your Products Are Allowed for Distribution

This is the first thing you need to check: are you allowed to trade with your products in the respective country? For example, the EU has strict regulations that prevent many goods from China from being imported. Each country has its rules, which your business must respect. Otherwise, you would waste a lot of time and resources planning an impossible expansion project. 

You can get familiar with the rules by reading relevant laws and regulations or contacting the customs services.  

Focus on the Legal Aspects of Business Expansion

Each country has its own regulations regarding businesses from abroad. Legislators set the legal framework and conditions for FFcustomers, sales, and particularities regarding the industry. It’s important to be aware of all these details ahead of time. When designing your strategy and drafting the initial contracts, you should make sure you stay within the legal framework of the country where you expand the brand. In addition, you should be aware of potential legal disputes and their solutions. 

Most business owners hire lawyers in their respective countries. A lawyer from your own country can also make connections and give you the details you need.   

Get Shipping Insurance

Everything looks well on paper. You consider the costs of production, transport, marketing, sales, and everything else related to selling your goods abroad. But there’s a risk that business owners often forget: damage during shipping. Items may break or get lost during transport. Your shipment may become a subject of theft or even vandalism. Accidents and contamination happen during transport all the time. If you don’t get good insurance for your shipment, you risk losing a lot of money. 

Proper insurance is not cheap. You should talk to several agencies to get the best offer on international shipments. We recommend using the best finance apps to plan all costs, including insurance over a longer period of time. These apps will help you calculate a decent budget and determine a final price that won’t leave much space for losses. 

Consider All Currency-Related Things

When planning foreign trade financing, you’re guided by the official currency in your own country. You focus on evaluating the risks related to credit, but as most business owners, you might forget about one thing: currency conversions may initiate losses, too. 

The COVID-19 crisis hasn’t been kind in this aspect. In March 2020, emerging-market currencies faced losses of up to 30%. That’s something that nobody could have predicted. However, you can analyze the movement of relevant currencies and estimate potential losses. You might need to work with a financial expert to make these evaluations.  

Evaluate the Risk of Protectionism

Trade protectionism is a policy for protecting domestic industries from foreign invasion. If, for example, a particular country stimulates the domestic flour milling industry, it will impose import quotas, tariffs, and other handicaps on foreign traders. Governments do this because they don’t want foreign products to drop the market prices and get the domestic industries in trouble. 

If you plan for global exposure, you have to learn about these policies. You must take the additional expenses into consideration, so you’ll evaluate a realistic final price. Will it be acceptable for the living standard of the respective country?

Register the Corporate Names and Trademarks

When doing business abroad, you risk violating another brand’s intellectual property rights. You can avoid that by registering your brand’s names and trademarks. If that process goes undisturbed, you can feel free to offer the products on the respective market. 

Consider the Risk of a Changing Market Environment

No market situation is stable and rigid for all times. You will develop a general strategy, which will be based on solid international risk management. But no matter how well you predict potential risks and future circumstances, you cannot be 100% sure that you did it properly. 

In Deloitte’s Global Trade Management Survey, none of the Swiss chief financial officers who participated thought that the global trade environment would become less complex. Only 15% of them said they expected the conditions to remain the same. 

Your company must continuously review the strategy and make the needed adjustments as the market circumstances evolve.   

Evaluate Foreign Ethical Standard

When offering your products on a global market, you should think about the differing ethical standards that you’ll face. For example, Israel has a thriving vegan culture. It might not be a good idea to trade fur there before evaluating the risk of getting your brand dragged through discussions as an unethical one. 

Get well informed about the customs and social conditions in the country where you plan to expand. 

Invest Time and Resources on Collaboration

Business owners often neglect the need to get comprehensive advice through collaboration with foreign lawyers and governmental services. They want to save time and money, or they simply forget that getting insider information is crucial before international expansion. 

You need to talk to experts who will explain the laws and regulations. You might need finance experts from abroad as well. In addition, you have to collaborate with industry insiders who know the market and can help you build a solid network of connections.

Get Acquainted with Foreign Business Customs

You may be used to a direct, friendly approach with a bit of humor in the mix. But in a foreign country, such an approach may be considered unserious or even offensive. Intercultural differences are a major factor in foreign trading success. 

You have to get acquainted with business etiquette when entering a new market. You can find this information online, but it’s best to hire a business advisor from the country in question. You’ll get proper guidance from someone who knows the target region and the communication etiquette in the particular industry. 

The country’s culture, politics, and economy are also important. Learn as much as possible, so you can start and maintain a productive conversation with potential partners. 

Foreign Trade Is a Complex Endeavor

Yes, it will be a rewarding experience for you as a business owner. With the right approach, you’ll take your brand towards substantial growth. However, you have to conduct basic research regarding the risks you’ll face during the expansion. This is a process that requires thorough planning, so don’t rush through it.

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James Dorian is a technical copywriter. He is a tech geek who knows a lot about modern apps that will make your work more productive. James reads tons of online blogs on technology, business, and ways to become a real pro in our modern world of innovations.

The post Minimize Foreign Trade Risks with These 10 Tips appeared first on Global Trade Magazine.

Late Payments Run Rampant

The survey, which included firms in China, Hong Kong, India, Indonesia, Singapore, Taiwan and the United Arab Emirates, found that late payments affect more than half (52%) of the total value of B2B invoices issued in Asia, largely due to liquidity restraints.

China and Singapore both are trending better than the region’s average, but India and the UAE are in the opposite boat. Late payments there amount to 66% and 72%, respectively, of the total value of B2B credit sales, locking up a significant portion of working capital for weeks at a time. Payment terms in both India and the UAE are significantly longer than in other countries surveyed (UAE has the longest, with 57 days on average). Companies operating in either India or the UAE need to be aware of the situation, as it can be a notoriously difficult and long process to recover outstanding receivables through local courts.

Across the board, late payments have a negative cascading effect for Asian firms: When businesses don’t receive timely payment, they in turn delay payment of invoices to their own suppliers or turn to domestic supplier credit for short-term trade financing. Chasing overdue invoices also ends up eating up a large portion of a company’s time, resources, and funds. One silver lining here: firms in Hong Kong, Taiwan, and China appear to be quite successful in their collection efforts, indicating an overall benign business environment in these markets.

It is important to note that the survey was conducted in March 2020 and conditions have only further worsened since then. Supply chains have been thrown into chaos by the global spread of COVID-19. Major portions of the economy have been shut down for months, and it’s impossible to immediately resume normal supply chain operations. Every part of the production process is cloaked in uncertainty, causing enormous liquidity pressures. To make matters worse, after being less than fully operational for weeks or months, companies are also seeing a downgrade in their creditworthiness, making it difficult for them to obtain funding lines from banks.

Minimizing Credit Risk in the COVID-19 Era

Undoubtedly as a response to the current challenging environment, companies across Asia have expressed an increased commitment to tighter credit management.

To protect their accounts receivables, many Asian firms are increasingly turning to credit management tools and tactics, such as reducing single-buyer concentrations, self-insurance, credit insurance or demanding cash payment, letters of credit or payment guarantees. Self-insurance remains preferred for many companies in the region, especially India.

Many companies rely on a variety of tactics, and the popularity of each varies by country. In the UAE, for instance, bank guarantees and letters of credit are popular, whereas Hong Kong firms prefer to use self-insurance and trade credit insurance and Chinese businesses heavily rely on guarantees of payment prior to a credit-based sale.

Open account credit for B2B transactions is gaining popularity for Asian firms overall, as evidenced by a trend toward lengthening payment terms. The UAE leads the pack among surveyed countries in terms of percentage of the value of B2B sales made on credit (64%) and payment terms (57 days). For comparison, the regional average is 56% and 43 days.

A shift toward open account credit may be in part due to businesses wanting to offer more competitive sales terms amidst the U.S.-China tariff uncertainty or to better negotiate supply chain and trade challenges created by the pandemic. This is likely the case in Taiwan, for instance, where there was previously reluctance to use open account credit – now, credit-based B2B sales make up 54% of the total value of B2B sales, compared to 43% last year. China has also seen a reversal of typical payment practices and now more than half of B2B sales in the country are made on credit.

A Reason to Hope?

Even considering the challenging economic conditions and deteriorating payment practices, firms across Asia express optimism in the future, with many survey respondents expressing belief that both sales and profits in their industry will improve in the near term. But again, that was in March, and we have every reason to believe that this optimism has since faded.

While the total impact of the global pandemic remains murky, what is clear is that businesses throughout Asia would benefit from coherent credit management strategies that have buy-in from all parts of the business, including sales. It’s more important than ever for companies to know their customers, keep tabs on their customers’ financial standing and regularly review both their credit management strategies and the liquidity positions of trading partners.

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Gordon Cessford is the president and regional director of North America for Atradius Trade Credit Insurance, Inc.

The post Payment Practices Deteriorating Across Asia appeared first on Global Trade Magazine.

A smart risk management strategy begins with a solid foundation in research that takes a macro look at the market and a micro look at your trading partner and their sector. For the former, the World Bank’s ease of doing business index can provide valuable information on business regulations in nearly 200 economies. Trade credit insurers can also help you keep tabs on specific markets and sectors.

To better understand your trading partner, start by researching the cultural elements of doing business in that market. Making a mistake can negatively affect or even end your relationship with your trading partner. Ask colleagues about any business culture etiquette you should be aware of, and review your notes before making the initial introduction. Getting this part correct will help you forge a strong relationship moving forward.

Next, take your time before signing any contracts. It may be tempting to quickly jump into a new opportunity, but if you rush through the documentation process, neglect to have a lawyer review the terms of your agreement or fail to validate your trading partner’s sound financial standing, you could end up with major headaches in the future.

Once you have an agreement in place, figure out how to maintain a close relationship with your trading partner. You don’t want to find out too late that your trading partner is in distress – you want to be aware of the first signs of trouble so you can take steps to protect yourself against late payment or nonpayment. Some of the classic signs of a company headed for insolvency include sudden late payments, pushing back for discounts or a drop-off in communication.

If your customer is overseas, don’t assume email and phone calls will be enough. A local presence is advised, as this is the only real way to understand the subtle shifts occurring in the local market and with your trading partner. How you establish the local presence will depend on the size of your opportunity. Large business deals may require establishing a foreign office, while appointing a local agent or having an employee visit frequently may suffice for smaller opportunities.

Finally, have contingency plans in place to cover any and all likely scenarios, including disruptions to trade via major events (such as the coronavirus shutting down production facilities in China or the trade wars suddenly making input materials more expensive) or delinquent customers. For the former scenario, you’ll want to understand how political or economic developments will impact your costs and know how you’ll pivot, if needed.

For delinquent customers, your first step should be establishing the facts and uncovering what’s actually going on. If the customer proves slippery and evasive, consider engaging a third-party expert to mediate. Review your contract terms to make a list of options available to you – can you recover your goods? Or is it time to start the legal collection process?

Strategic risk management is really about preparing for the worst but hoping for the best. A thorough understanding of the market, the sector and your trading partners, paired with detailed plans for how to react to any likely scenarios will minimize the risks to your business and help you feel confident conquering new markets.

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Gordon Cessford is the president and regional director of North America for Atradius Trade Credit Insurance, Inc.

The post Strategic Risk Management Means Preparing for the Worst but Hoping for the Best appeared first on Global Trade Magazine.

Figure 1. S&P 500, 2009 to 2020

The GFD US-100 Index provides coverage beginning in 1792. By our calculation, there have been twenty-four bull and bear markets since 1792 with four occurring in the 1800s, seventeen in the 1900s, and three in the 2000s. The worst bear market was in 1929-1932, led by an 89% decline in the Dow Jones Industrials. Two prior bear markets in this century both had declines of 50% in 2000-2002 and 2007-2009. By comparison, previous bear markets, such as those occurring in 1987 and 1990, only lasted a few months before a bounce-back.

What is interesting about this current bear is how quickly and how sharply it hit markets throughout the world in response to the spread of the Coronavirus. This was a quick, simultaneous financial pandemic in every nation of the world. In many countries, the 2020 bear market is simply a continuation of the bear market that began in 2018.

The extent of the bear market in 22 countries and for global indices is provided in Table 1 which uses data from the GFDatabase. The table shows the date of the market top, the value the index hit on that date, the change from the previous market low, the current value of the market, and how much each market has fallen since the top in 2018 or 2020. The only major market in the world which has not fallen into a bear market this year is the Chinese market, the country where the coronavirus originated. However, the Chinese market had already been in a state of decline since 2015.

Figure 2. Shanghai Stock Exchange “A” Shares Index, 2010 to 2020

So far, global markets have fallen by around 30-40%. The question is, how much more are the markets likely to fall?  Will this be a short-lived bear market as occurred in 1987 and 1990 or a more extended bear market as occurred in 2000-2002 and 2007-2009?

Figure 3. United States 10-year Bond Yield, 2010 to 2020

It should be noted that fixed-income markets have already hit their bottom in the United States. This occurred on March 9 when the 10-year bond fell below 0.5% as we had previously predicted in the blog “230 Years of Data Show Rates Will Soon Hit 0.50%.” Yields have slightly risen since then. Moreover, the Shanghai Index bottomed out on February 3, 2020, when the stock market reopened after the Chinese New Year and has not participated in the worldwide sell-off. Both of these indicate that this bear market will not continue for an extended period of time. We will update Table 1 on a regular basis so our readers can follow the changes in this COVID bear market.

Table 1.  COVID Bear Market Statistics for 22 Countries and 4 Regions

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Dr. Bryan Taylor is President and Chief Economist for Global Financial Data. He received his Ph.D. from Claremont Graduate University in Economics writing about the economics of the arts. He has taught both economics and finance at numerous universities in southern California and in Switzerland. He began putting together the Global Financial Database in 1990, collecting and transcribing financial and economic data from historical archives around the world. Dr. Taylor has published numerous articles and blogs based upon the Global Financial Database, the US Stocks and the GFD Indices. Dr. Taylor’s research has uncovered previously unknown aspects of financial history. He has written two books on financial history.

The post The Bear is Back: A Global Pandemic appeared first on Global Trade Magazine.

Trade credit insurance (sometimes called accounts receivable insurance) protects sellers against a buyer’s non-payment of debt, up to a certain percentage – typically 80 to 90 percent of the bill.  Most trade credit insurance policies include a “waiting period” after a bill is due before a policyholder can make a claim, and 180 days is typical. It is expected that the first wave of COVID-19 trade credit claims will arrive by early summer and continue throughout the year. The anticipated surge in trade credit claims will likely be met with forceful efforts by insurance companies to get out of paying claims.

PUTTING TRADE CREDIT CLAIMS IN CONTEXT

Economists predict that the country’s GDP will shrink by 34% in the second quarter of 2020. One of the largest trade credit insurance companies estimates that in a typical market, 1 in 10 invoices go unpaid. Even less than a year ago, an industry association counting the world’s largest trade credit insurance companies among its members (ICISA) reported an 8% increase in amounts covered by insurance, coupled with a 1.5% increase in claims paid.  In other words, more accounts were being insured, leading to more claims for insurance companies to pay.  This increase in paid claims, ICISA noted, occurred “despite favorable economic conditions.”

Economic conditions have certainly taken an unfavorable turn since then.

With a worldwide pandemic that has brought the global economy to a nearly grinding halt, sellers in every industry will be unable to pay bills as they come due. Trade credit policyholders will be making more claims – and they will be making those claims to insurance companies whose investment accounts are suddenly worth much less than they were three months ago.

Insurance companies selling property and liability insurance have already staked out their positions on why policies supposedly will not cover COVID-19 losses. There is good reason to believe their trade credit counterparts will respond similarly.

BE PREPARED FOR INSURANCE COMPANY CHALLENGES TO YOUR CLAIM

Trade credit policies generally promise to indemnify a buyer for a specified percentage of unpaid amounts that become due and payable during the policy period. Trade credit insurance is intended to protect a seller from non-payment caused by many things, including a buyer’s default, insolvency, or inability to pay because of catastrophe or acts of God.  Policyholders will have strong arguments that buyers who default on payments because of COVID-19 impacts are amounts that the trade credit policy promises to pay.

But policyholders should be wary of insurance company efforts to break those promises. The following are some expected challenges based on concepts addressed in many trade credit insurance policies.

Non-disclosure

Trade credit insurers often raise the defense of “non-disclosure” to avoid paying claims.  The argument goes that if the insurance company had known about some fact or another, it would not have sold you the policy it did.  In some jurisdictions, insurance companies can void policies altogether if they successfully prove that a representation or omission in the application process was “material,” meaning it caused the insurance company to take a position it would not have taken otherwise.

In the COVID-19 context, policyholders should expect challenges to what they knew about the creditworthiness of the buyer at the time of contracting.  Insurance companies may blame a buyer’s failure to pay on facts about the buyer that are unrelated to coronavirus, arguing that the policyholder failed to disclose things about the buyer that would have changed the insurance picture.  Some insurance companies analyze and investigate a buyer’s creditworthiness before underwriting the risk.  In those cases, an insurance company will have a harder time using non-disclosure to avoid its obligations.

But in response to any non-disclosure challenges, policyholders will want to look to the insurance company’s prior conduct in similar circumstances. Had they insured contracts involving the same seller before? Has the newly “material” information been asked of the seller before? While it is fact-intensive and likely time-consuming to establish, an insurance company’s previous conduct or silence can go a long way toward discrediting a non-disclosure argument.

Prior Knowledge

Depending on the specific policy period and payment dates, trade credit insurance companies may attempt to raise a “prior knowledge” defense to get out of paying a trade credit claim.  Insurance covers risks that are unforeseen at the time the contract is made. Insurance companies will likely seize on the evolving nature of the coronavirus pandemic to argue that sellers had “prior knowledge of facts or conditions” that would alert them to a buyer’s nonpayment.

Any response to the argument that a seller was aware that COVID-19 would impact the buyer’s ability to pay will need to take into account the dates of key pandemic events, both global and local. The dates of COVID-19 actions in the buyer’s home state or country will also likely be at play. As with a response to a “non-disclosure” defense, combatting a “prior knowledge” defense is highly fact-specific.

Policyholders may find that the “reasonable expectations” doctrine of insurance interpretation aids them in this scenario. In many jurisdictions, insurance policies must be interpreted to give effect to the reasonable expectations of the average policyholder. It is fair to say that most policyholders reasonably expect their insurance policies to respond to the losses following the sudden and unprecedented spread of COVID-19, whose impact was not appreciated at the time the policy was entered.

Challenges to the Underlying Sales Contract

While the defenses of non-disclosure and prior knowledge rely largely on what was said, done, or known during the application and underwriting process, policyholders should also anticipate challenges to the insured sales contract.

Trade credit insurance policies contain several provisions that limit insurance company obligations if the underlying sales contract is not compliant with the insurance policy.  Successful challenges to the validity of the contract – such as that it was never properly executed or that the transaction at issue was not covered by the insured contract – may jeopardize coverage. Some policies specifically exclude coverage if there is any “express or implied agreement . . . to excuse nonpayment.”

To avoid or rebut a challenge about the sales contract itself, trade credit policyholders should take special care to follow and apply the payment terms and credit control provisions in the contract. While there is no policy exclusion for being a conscientious seller, be prudent in your communications with buyers about your payment expectations.

Like so much about the legal impact of COVID-19, coverage for trade credit insurance claims stemming from COVID-19 losses will be fact-specific and potentially hard-fought. Trade credit policyholders should give prompt notice of their claim, document their losses, and prepare to respond to any insurance company challenges with the assistance of their broker or trusted insurance expert.

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Vivian Costandy Michael is an attorney in the New York office of Anderson Kil P.C. and a member of the firm’s Insurance Recovery Group. Through jury trials, summary judgment, mediation, and settlements, Vivian has helped to recover millions of dollars in insurance assets under liability and property insurance policies sold to corporate policyholders

The post Trade Credit Insurance & COVID-19 appeared first on Global Trade Magazine.

The 2017 report, produced with support from ICC’s project partners, The Boston Consulting Group and Global Credit Data, draws on information from 22 member banks to present a global view of the credit risk profiles of trade and export finance transactions. It is based on over $10.5 trillion of exposures and more than 20 million trade finance transactions from 2008 to 2016. The trade finance products in the register are Import Letters of Credit (L/Cs), Export L/Cs, Loans for Import/Export, and Performance Guarantees, and the 2016 Trade Finance data set includes approximately 40 percent of global traditional Trade Finance flows, excluding Loans for Import/Export.

“The 2017 Trade Register reiterates what we have seen year on year since the project was initiated in 2009: that trade finance is a reliable and low risk asset class and should be looked upon favorably by regulators, industry stakeholders, and institutional investors,” said Daniel Schmand, Chair of the ICC Banking Commission. “As the regulatory treatment of trade finance evolves, fact-based and data-supported advocacy around the characteristics of trade finance continues to be crucial.”

The latest trade finance findings reveal that the expected loss of trade finance products continues to compare favorably against other similar asset classes such as large corporate and small/medium enterprise lending. Obligor-weighted default rates from 2008 to 2016 are low across all products and all regions, at 0.38 percent for import L/Cs, 0.05 percent for export L/Cs, 0.80 percent for loans for import/export, and 0.47 percent for performance guarantees. This is coupled with short times to recovery and relatively similar loss given default rates to comparable asset classes.

Export finance also presents a very low risk for banks, with low expected losses deriving from a combination of low loss given defaults (LGDs) and probability of defaults (PD). Export finance’s particularly low LGD is partly because most transactions are covered by OECD government-backed ECAs at approximately 95 percent of their value, minimizing the sum a bank may need to pay out. In 2016, export finance saw a slight increase in expected losses driven by small growth in annual default rates, consistent across all asset categories except financial institutions.

The post Trade and Export Finance Maintains Low Risk Profile appeared first on Global Trade Magazine.

Traditionally, credit insurance has been used by organizations to protect their balance sheets against the threat of a default on their trade receivables. While this is still the predominant case, it is increasingly used as a proxy for a financial guarantee to enable policyholders to gain access to bank lending and optimize their working capital needs. By ensuring adequate corporate risk management, credit insurance has become an essential ingredient for proper corporate governance, required by investors, banks and rating agencies alike.

In order to understand the dynamics of the credit insurance market, what drives purchasing decisions, the supply and demand picture, and whether products satisfy buyers’ needs, XL Catlin commissioned a global credit insurance survey. The Global Credit Insurance Monitor compared attitudes and opinions of policyholders to those of credit insurers and examined the evolution of buying behavior and ways of growing the global credit insurance market. An independent research consultancy interviewed insurers, credit insurers, and corporate risk managers from across the globe representing revenues of more than $500 billion.

Although the majority of credit insurers and policyholders agree that the level of insurance coverage currently purchased is adequate, policyholders tend to exclude certain risks from their credit insurance purchasing. A lack of risk awareness might be one reason for this.

Purchasing decisions may be driven by a desire to keep the good risks and only insure the higher-risk business. SMEs in particular tend to exclude domestic risks, for example. When margins are tight, the cost of credit insurance can be crucial when deciding whether or not to transfer the risk. However, the complexity of the policy – the contract wording, its interpretation and its practical applications – can also be a deterrent for smaller insurance buyers. Large global sellers, by contrast, who choose credit insurance primarily for financing purposes, retain a portion of the credit risk on their balance sheet and manage it through their tighter payment terms and conditions.

According to the results of the survey, both insurers and policyholders see significant potential to expand credit insurance protection and therefore generate additional revenues for insurers and support policyholders in building their franchises. Interestingly, credit insurance buyers believe the current suite of products does not fully meet their protection needs and/or that policies are too rigidly applied. Larger companies would prefer to have the ability to differentiate between different types of risks. These results suggest more flexible and tailored products may bring about new business opportunities for insurers and open access to previously untapped client segments.

Credit insurers agree that there is significant opportunity to capture this additional credit insurance demand. In order to tap into this, many suggest reducing product complexity, enhancing client servicing, improving the reliability of credit insurance solutions and adopting a more bespoke approach to pricing.

The post Research Identifies Growth Potential for Trade Credit Insurance appeared first on Global Trade Magazine.

The report, based on market surveys and analysis of BPL Global’s own portfolio, also highlights that there is significant capacity for non-trade related credit risks and project finance business. For non-trade credit business the majority of total capacity – $1.5 billion – is available for policies with tenors of up to seven years, although there are still meaningful volumes ($700 million) remaining for risk tenors of 10 years.

“Our report shines a spotlight on the fact that appetite for the CPRI class is on an upwards trajectory – both in terms of capacity and tenors,” said Sian Aspinall, Managing Director, BPL Global. “Furthermore, analysis of market data clearly shows that it adapting its capabilities to match natural return on investment for areas such as project finance structures, providing coverage for up to 25 years. Also notable is the jump in capacity for non-trade related credit insurance to over $1.5 billion–an area previously constrained by Lloyd’s regulatory requirements–and increasing levels of coverage for transactions in OECD countries.”

Analysis of BPL Global’s portfolio–which can be considered reflective of the market as a whole – shows the volumes of exposure the market is willing to absorb: in Africa ($7.75 billion), the Middle East ($6.45 billion), and Latin America ($5.46 billion). Total exposure in BPL Global’s portfolio stands at $41.1 billion.

BPL Global’s total exposure in Europe stands at $3.65 billion, reflecting increasing coverage for project finance and non-trade business in OECD countries.

Since the global financial crisis (2007-2017), the market as a whole has experienced 438 claims made by banks and financial institutions, with 422 paid in full to the value of $2.57 billion. The largest values of claims handled by BPL Global have been on contracts covering Ukraine ($509 billion), Russia ($195 billion) and Brazil ($187 billion).

“The value of insurance is only demonstrated at the point of claim,” said Aspinall, “and the market as a whole has made great strides to provide collated data illustrating this, helping to validate the purchase of the product, particularly when used for capital relief by banks and financial institutions.”

The post Credit and Political Risk Insurance Market Capacity Up appeared first on Global Trade Magazine.

Six months later, the latest Atradius report sees the signs of firm growth becoming evident. Economic growth has kept solidifying across the regions, forcing a series of upward forecast revisions (including those of Atradius). Global GDP growth is forecast to expand 2.9 percent, an acceleration from the 2.4 percent growth of last year. The 2018 outlook is stable, with 3.1 percent growth expected. Eurozone growth has been stronger than expected and is expected to end the year 2.3 percent growth. The US is forecast to see a 2.2 percent expansion while the UK is expected to slow to 1.5 percent this year and next.

Latin America is forecast to expand 1.1 percent and further to 2.5 percent in 2018. Growth in Eastern Europe is expected to pick up to 3.1 percent this year before moderating to 2.3 percent in 2018. Emerging Asia leads growth with a six percent forecast this year and 5.9 percent next year.

Economic policy uncertainty, in Atradius’ assessment, “has fallen off a cliff in 2017.” The US has become more assertive in trade, but “fears for large-scale US protectionism have faded,” according to the report. In Europe, voters have kept populist parties out of the mainstream, triggering at least a whiff of optimism regarding further European integration. “We are definitely in calmer waters, finally,” says the report.

The key risks to Atradius’ global outlook include misguided Fed policy, a hard landing in China, US protectionism, oil price volatility, geopolitical risk, and financial market correction.

Despite Atradius’s upbeat tone, “complacency is precisely what we do not need at this stage,” the report warns. “What deserves full attention now is awareness that in calmer waters we will certainly not remain. The current upswing, being largely cyclical, will undoubtedly be succeeded by a downturn.”

Atradius wants to the right monetary policy in place to keep the global economy above water, and for the moment, concludes that those economic tools will be available. The Federal Reserve in the US is tightening monetary policy and the European Central Bank will follow suit, Atradius believes. Interest rates are being hiked and money taken out of the market gradually and that tightening should create the correct environment to address the next downturn.

But, the report warns, “At some point in time acceleration will become inevitable. At the same time, accelerating the next downturn by that very tightening should be avoided. The waters we are in are calm, and we should enjoy them. But they are also uncharted.”

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