Export credit insurance 2023 outlook: What does the data tell us?
Following the release of Berne Union's 2022 State of the Industry report and as Berne Union data* feeds through for the first half of 2023, we identify some trends to watch for the rest of the year.
Berne Union members supported a record amount of global trade in 2022, surpassing pre-pandemic levels in the process. Longer tenor products recovered significantly over the year before and business levels were within 5% of 2019, meanwhile short term (ST) export credit business kept its year-on-year growth aided by the recovery in global trade growth and sustained price increases. But what does our latest data reveal about the direction of the export credit industry in 2023? We look at four emerging trends and how they could play out in the remainder of the year.
Return to project finance
In 2022, new medium long term (MLT) business for project finance transactions were $9.7 billion, less than half of the $22.8 billion supported in 2019. Projects were delayed in the wake of the pandemic, and the total amount of global project finance loans dipped substantially in 2020 to below $300 billion. Total loans have since seen strong year-on-year growth, surpassing $350 billion in 2022. This growth, however, has not been replicated by Berne Union members with cover for new project finance transactions gradually declining year-on-year since 2019.
Support appears to have rebounded. Our preliminary data for the first half of 2023 indicates Berne Union members are returning to the project finance market as new business in the first six months of the year has surpassed 2022’s total. Up approximately 20% on H1 2019, it is the highest total yet for a first-half period. We see cover being directed to developed markets in Europe and North America, with substantial increases in the manufacturing and transportation sectors as some members reported that projects halted during the pandemic have now come back online. Likewise, in the latest edition of the Berne Union Business Confidence Index (BCI), members noted that they had seen an increase in applications for project finance coverage in Q2, as projects which had been delayed due to the pandemic and economic uncertainty.
The question remains whether these levels will be maintained throughout the year. The latest UNCTAD World Investment Report is pessimistic regarding foreign investment levels for 2023, reiterating downward pressures from slowing economic and trade growth. Tighter financing conditions and a high interest rate environment create headwinds for international project finance, which have shown weak global trends in Q1, but so far this year Berne union members have gone against the trend and grown their presence in the market demonstrating the anticyclical nature of our industry.
Bridging Africa’s infrastructure gap
The growth story for longer tenor products in 2022 was the manufacturing sector. New longer tenor business in the sector was up 54% year-on-year, reaching $35.8 billion, reflecting the efforts of businesses to diversify their supply chains and production operations. What might define 2023, however, is growth in the infrastructure sector, which has been subdued since the pandemic. Early indications from our H1 data show a large expansion of business in this sector, overtaking transportation as the largest sector by volume. Driven by cover for sovereign and sub-sovereign clients in sub-Saharan Africa, and to a smaller extent MENA, new business is on course for a strong year, up 65% on the same period last year.
The high levels of sovereign support for infrastructure investment in sub-Saharan Africa may come as a surprise at the surface level given the heightened sovereign risk across the continent but, broken down by institution type, multilaterals make up a significant share of the new business as they tackle the infrastructure gap in Africa. High levels of multilateral support contrast to ECA and private insurers’ support for public investment cover in the region, which saw losses through sovereign defaults in Zambia and Ghana, with Mozambique entering default this year.
Despite the increased risk environment, several Berne Union members stated in the latest BCI that they are seeing high demand in Africa, particularly for large infrastructure projects and expect an uptick of requests in the coming quarters. Amid the increase in sovereign credit risk on the back of the pandemic, lenders are seeking cover for capital flows into emerging markets with overseas buyers requesting longer tenors to mediate interest rate impacts.
How resilient is short term export credit?
Short term business continues to grow year-on-year with aggregate credit limits for revolving cover surpassing $2 trillion in 2022. Data for the first half of 2023 has short term export credit insurance on track for its highest half period yet as trade volumes rebounded in Q1. All regions look set to have similar growth rates in H1 (+15%), implying inflated global price levels have made a significant contribution to elevating short term demand volume.
The rest of 2023 may prove challenging for short term trade credit insurance as providers and exporters attempt to navigate current and impending macroeconomic conditions. Current projections by the WTO indicate a slowdown in global trade growth, from 2.7% in 2022 to 1.7% in 2023 (albeit up from October’s 1% annual growth forecast for 2023), as below average economic growth, tighter global financial conditions, geopolitical tensions, and the ongoing pivot of consumption towards services depress merchandise trade. Slower global trade growth may translate into lower demand for Berne Union members. As well as this, the effect of price increases on new business volumes will start to recede as headline inflation falls in advanced economies.
Conversely, the riskier macroeconomic and political environment will support demand [from exporters], in place of slower merchandise trade growth and the feeding out of price increases, as exporters look for cover to protect themselves from the increased risk of non-payment. The tightening credit environment is putting pressure on businesses as corporate bankruptcies in the US this year have already surpassed 2022 totals, while in the EU bankruptcies have increased for the sixth quarter in a row reaching the highest level since 2015. This thus increases the likelihood of commercial risks faced by exporters. Whichever effect is felt strongest in the market will steer the outcome for the rest of the year.
Political claims have been taking an increasing share of total claims since 2020, but have always been the minority, counting for 20% in 2022. What stands out in the data for the first half of 2023 is the share of political and commercial claims reversing, with political claims counting for approximately 70% of longer tenor claims. The change in the composition of longer tenor claims is an outcome of the post-pandemic recovery of the transportation sector cooling the volume of commercial claims, and a surge in political claims in the infrastructure sector feeding through from the sovereign defaults of Ghana, Sri Lanka, and Zambia.
For the remainder of 2023, insurers can expect further claims paid in these developing and emerging economies as weak currencies, high inflation, debt restructurings, and political instability continue to make sovereign positions delicate. Arrears have increased in the same markets that have seen an uptick in claims paid this period, suggesting additional losses are inevitable in the second half of the year. Rating agencies are already reporting stabilising overall sovereign credit quality in the second half of the year. However, there remains a number of distressed economies with currently 12 sovereign bonds trading at spreads of more than 1,000 basis points, according to the IMF, which means caution must be maintained around sovereign risk.
*data for H1 2023 has been controlled for non-submissions and changes to member reporting methodology.