Emerging markets have been enormous drivers of global economic change in recent years. China’s stratospheric growth, Southeast Asia’s regional integration, Latin America’s ever-more open economies, the return of former troubled states to the fold and the Middle East’s efforts to diversify away from hydrocarbons are just some of the drivers of new export flows around the world.
However, precipitous drops in commodity prices have radically reduced the export revenues of many commodity-producing emerging countries, while a global political trend toward protectionism is also weighing on trade. Slowing economic growth has cut demand, while international regulations pose increasingly severe challenges to the provision of finance.
Despite this, there have been several bright spots in 2017 thus far: aggressive infrastructure upgrade plans in markets such as the Middle East and India have resulted in the continued need for export finance support across big-ticket items such as power plants, as well as petrochemical facilities and refineries. The gradual unlocking of new markets, from Myanmar to Iraq, has opened up the potential for new trade flows. Amid macroeconomic challenges, new opportunities are emerging for exporters and the financial institutions that support them.
From Sri Lanka to the Philippines, the key area involving huge investments is in infrastructure. Toll roads, mass rapid transit, power plants and renewables are all areas involving multi-billion-dollar investments and where export credit agency (ECA) funding will play a role.
The main game changer has continued to be China. As it moves up the value chain, not only are its exporters increasingly buying domestic intermediate inputs and relying less1 on imports from its Asian neighbors, they are also becoming a formidable competitor in the power, telecommunications and transportation space. Participating in projects as an exporter, equity investor and debt provider, China is not just seeking to expand the economic role it plays in its immediate surroundings. Prashant Pillai, APAC Head of Export Finance at J.P. Morgan, notes further Chinese influence in countries along the much-talked-about “One Belt, One Road” initiative. This has driven countries such as South Korea and Japan to seek new export markets both within and outside the region, helped along by ASEAN integration.
Direct funding from export credit agencies (ECAs) is already a major piece of the financing puzzle in Asia, with institutions such as South Korea EXIM Bank filling the funding gap for corporates, while Chinese development banks are almost solely financing the initial portion of China’s “One Belt, One Road” initiative. “Asian ECAs have broader parameters in terms of what they support. While, for example, European ECAs or U.S. EXIM are more driven in terms of export and local content philosophy, many of the Asian ECAs operate more broadly in terms of national interest. They do not just lead on the export side, they also lead on investments,” says Pillai. With growing rhetoric around trade protectionism in global trade, countries such as China, South Korea and Japan will continue to exert their influence in trade and investments that will also drive ECAs from these countries to play an even greater role.
“Asia will continue to see growth in infrastructure investment in markets, including Indonesia, Vietnam, India, Bangladesh, the Philippines and Sri Lanka and hence are key from an ECA financing perspective. The new markets that are attracting a lot of interest are Pakistan and Myanmar as they definitely require new infrastructure investment and are receiving increasing attention from ECAs and agencies,” says Pillai.
Brazil initially languished at the start of the year following a turbulent 2016, which saw its GDP contract by over 3% amid political upheaval, a surprise rate cut by the central bank and recent governmental reforms led the International Monetary Fund (IMF), among others. Today, according to the IMF2, “Brazil’s deep recession appears close to an end.” The Fund predicts GDP expansion of 0.3% for this year, up from a prediction of 0.2% in April. With healthy expansion coming from Brazil’s two major trading partners, China3 (which receives 19%4 of Brazil’s exports) and the U.S.5 (which receives 13%), the Latin American giant posted a trade surplus of $5.18 billion6 in September, more than the median expectation for a surplus of $5 billion.
But the big story in Latin America is Argentina. “When it comes to export credit agency (ECA) financing, this is the absolute hot market in Latin America, and 2017 has thus far seen solid GDP growth for the country with a year-on-year growth of 2.7% in Q27,” says Patrick Gang, Americas Head of Export Finance at J.P. Morgan. “Argentina is recently emerging from a default situation, and we are seeing increased interest in the country from our exporter clients.” He points out that although for the better part of a decade, there has been slow foreign investment in the country due to nationalizations by the Kirchner administration, Argentina remains the second-largest economy in South America. “The infrastructure and the know-how from international companies continue to be pivotal for growth plans. In terms of the number of power projects, infrastructure projects, transportation, from locomotives to airplanes, Argentina is one of the most asked-about export finance markets in the world, not only in South America,” he adds. And while there is appetite among local Argentinian banks, funding is also coming from the international bond market – as an oversubscribed 100-year bond offering in June demonstrated – and private equity in order to support the country’s growth.
While lower oil prices have weighed on Latin America’s top oil exporters, with some harder hit than others, oil importers have seen budgets freed up for spending on public infrastructure projects. “In certain countries across Central America, it’s been a bit more of an interesting discussion in terms of larger scale CAPEX and where feasible investment plans are headed,” says Gang.
Over in the Middle East, lower oil prices have resulted in reviews of projects such as petrochemical plants as gas becomes less competitive, impacting equipment exports from suppliers. Saudi Arabia’s aim8 to raise the share of non-oil exports in non-oil GDP from 16% to 50% by 2030 could well boost intraregional trade. However, Euler Hermes, the German export credit agency (ECA), forecasts9 that the resultant expansion of tourism and manufacturing sectors in the Kingdom will improve commercial inter-connectedness in the Gulf. In turn, the German ECA believes this will promote UAE's position as a regional trading hub, with more products and services being exported and re-exported through Dubai and Abu Dhabi.
Although in the past, cash-rich Middle Eastern corporates have not traditionally been major users of export credit agency (ECA) finance or guarantees, a recent trend has emerged of multi-billion-dollar ECA support of projects in the region, as corporates seek diversified means of funding. Clarine Stenfert, Global Head of Infrastructure Export Finance at J.P. Morgan reports, “We have seen an uptick in ECA financing in the Middle East. The Middle East is far and away the leader in terms of export finance volumes, and some of the Middle Eastern corporates and entities have had to get a little more creative in the way they fund themselves, with ECA funding being a good alternative.”
The absence from the market of U.S. EXIM Bank has created pent-up demand, with the potential for some projects which have already been started to be retrospectively covered if the export credit agency is fully functional. “U.S. EXIM has been a significant export credit agency for many years, and the fact that it has been out of business effectively for almost two years now has created a huge backlog of pending investments that will need to be driven in a certain direction very soon” says Patrick Gang, Americas Head of Export Finance at J.P. Morgan. “It is unlikely the private sector can fill the entire funding demand, so whether projects will be scaled back or local corporates and sponsors will direct additional contracts to competitors with export credit agency (ECA) access remains to be seen.”
Although some of the largest ECA customers in the past have been airlines in both emerging and developed markets, today this trend is changing. While in the past, airline customers of Boeing and Airbus have financed over 30% of annual deliveries with ECA support, this has fallen to single-digit levels over the past few years. The primary reason for this is the glut of liquidity in the market, compounded by low U.S. dollar interest rates resulting in many more investors seeing aircraft as an attractive investment. “It is a good thing that there is so much liquidity in the market and it is a great time to be an airline or lessor,” says John Meakin, Global Head of ECA Supported Aircraft Finance, adding that although Boeing and Airbus are currently unable to access their traditional ECAs to support aircraft, it is hoped that the ECA support will return to provide cover in the future.