Expert opinion: The sea is too wild, especially for a small ECA
By Josef Jirkal, Prague Club Committee Chair and Director International Relations Department, EGAP.
The buzzwords of today´s economic reality are those of increasing inflation, increasing prices of inputs and the generally increasing instability of the socioeconomic environment. One of the significant contributors, and even a starter of these adverse processes, has been the invasion and military actions in the territory of Ukraine. Surprisingly, we can also read about the impacts of such steps in terms of an increase of instability on the other side of the globe, because of outages in the deliveries of grain or raw materials produced in this region or transported through it. This also impacts energy commodities.
Their lack in many countries results in a venomous cocktail for local economies as well as for the global economy. Generally, a high level of instability and fragility does not seem to be a short term issue, because there are also noticeable disruptions in the supply value chains and trade. An insufficiently informed external observer may have a feeling that such situation of generally increased instability can only be beneficial for ECAs and their export credit insurance business. The truth is, however, different.
ECA business likes some level of uncertainty based on a given framework when export or trade business credit insurance is needed. The probability of the appearance of default more or less follows given patterns. The situation we face now puts the important part of international trade itself in danger and there is either no related export finance to be insured or the risks are so volatile that nobody is able to insure them. When risks are too high, you simply cannot take them, their pricing is too high and it is also difficult or even unable to work with them on portfolio basis. This is a common issue for many small ECAs, especially nowadays. The analogy of this situation is that of having big and small ships going to sea. When the sea is too wild it may even be difficult for big ships that were considered to be practically unsinkable and small ships have to wait in the harbour and hope that it is safe enough for them.
Real economic life in international trade leads to a situation that business activity is shrinking and volume of the business is falling for a variety of reasons. Difficulties on the production side, due to missing components and sub-deliveries, is one such reason, and others included the fear of buyers that the economic situation may further deteriorate. This may lead to shrinking or cancellation of orders, etc. Small, open economies are often somewhere in the middle of the supply value chain and it limits space for their, also usually small, ECAs.
From an ECA perspective, nobody can change the external economic and business environment – the sea for our ECA ships. The only chance is to work on conditions and the way that ECAs can approach exporting companies in their countries and how they do their business. Reaction to this situation can be also in terms of a more active and innovative approach. Opportunities can also lie in active communication and work with existing clients and finding new ones. Solutions may be hidden in the possibility of transforming their actual business needs to product modifications, or even new products that may give a chance to generate new insurance business.
The life of small ECAs is not easy now but because they are small, it may be easier for them to transform their internal processes and use niche segments that they had not paid sufficient attention to thus far. Let´s hope that all ECAs get out of today´s difficult times in good shape, and even stronger, and are able effectively to support financing of export transactions, so each country can contribute to international business on a global scale.
A version of this article first appeared in the Berne Union Yearbook 2022