Export credits are a type of financing tool used to support international trade by providing loans or guarantees to companies exporting goods or services. These credits are often offered by governments, either directly or through export credit agencies (ECAs), and are typically used to fund the export of high-value goods such as machinery, aircraft, and infrastructure projects. Currently, it is the Organisation for Economic Co-operation and Development (OECD) that plays a major part in the rule making for export credit. The OCED has been involved in this area of finance since 1963.
Country Risk Classifications
One important factor in determining the availability and cost of export credits is the country risk classification of the importer’s country. Country risk classifications are assessments made by rating agencies, such as Standard & Poor’s, Moody’s, and Fitch, which measure the level of risk associated with investing or doing business in a particular country. These ratings take into account a range of economic, political, and social factors, such as GDP growth, inflation, corruption, political stability, and regulatory environment.
Countries are typically grouped into different risk categories, such as high-risk, medium-risk, and low-risk, with higher-risk countries generally being subject to greater scrutiny and higher interest rates when seeking financing. This is because lenders perceive higher risk countries as more likely to default on their loans, which increases the potential for financial loss.
The impact of country risk classifications on global business is significant. For example, companies in high-risk countries may find it more difficult and expensive to secure financing for exports, which can limit their ability to compete in international markets. On the other hand, companies in low-risk countries may be able to obtain more favourable financing terms and access to larger markets.
In addition, country risk classifications can affect the overall flow of trade and investment between countries. For example, countries with high-risk ratings may be subject to trade restrictions or embargoes, which can limit their ability to import or export certain goods. This can also impact other countries that rely on these goods or have significant trade relationships with the high-risk country.
To mitigate the impact of country risk classifications on their business, companies may need to take steps to improve their own creditworthiness or seek out alternative financing options. This may involve building relationships with local banks or finding private sector lenders who are willing to take on more risk.
A Closer Look at Country Risk Classifications
The classifications for the list on country risk range from zero to seven. Zero means there isn’t any risk of default on external debt and seven indicates the highest risk. Two groups of countries are not given a risk score – the first are high income OECD countries that participate in the OECD’s Arrangement on Officially Supported Export Credits (the “Arrangement”). They are Australia, Canada, the European Union, Japan, Korea, New Zealand, Norway, Switzerland, Turkey, the United Kingdom and the United States.
The other group of countries that don’t receive a risk classification are small countries that don’t provide export credits to help their businesses trade with foreign partners. These include Vanuatu, Tonga, Sao Tome and Liechtenstein.
Recent Winners and Losers
The risk classification list is updated every year. The latest update was in January 2023. It can be found on the OECD’s website. Movement in country risk classifications is one way to assess the direction of travel for specific countries. This is useful for credit insurers and trade financiers looking to assess appropriate levels of risk.
Bosnia and Herzegovina and Croatia are the only two countries that have been deemed to be a lower risk than in the previous year. This is what the gov.uk website writes about Bosnia and Herzegovina that went from a rating of 7 to 6:
“In February 2022, Standard & Poor’s affirmed its sovereign credit rating of “B” with a stable outlook. The economy is underpinned by a convertible currency with fixed parity to the Euro. As a result, the convertible mark is one of the most stable currencies in Southeast Europe. The banking sector in Bosnia and Herzegovina remains reasonably liquid and well capitalised. Foreign banks account for over 90% of total assets in the financial system, but the banking sector has not been subject to large credit outflows to parent banks.”www.gov.uk
In the case of Croatia (that went from a rating of 4 to a rating of 3), the economy has bounced back strongly after the retraction caused by the Covid-19 pandemic. In addition, in January 2022 Croatia was invited to join the OECD candidate country program. This is an important endorsement for Croatia.
In terms of the bottom line, Bosnia and Croatia now enjoy lower minimum premium fees for official export credits.
Those countries that are deemed more likely to default on external debt as represented by export credit are: Egypt and Ukraine. Egypt’s score went from 5 to 6 and Ukraine’s rating went from 6 to 7. Obviously, the on-going war which shows no signs of ending soon has adversely affected Ukraine’s credit risk classification score. Egypt’s credit rating was recently downgraded by Moody’s Investors Service as liquidity buffers and foreign reserves have dwindled, leaving the nation vulnerable to shocks.
Overall, export credits and country risk classifications play an important role in global business, influencing the availability and cost of financing for international trade. Companies need to be aware of these factors and take steps to manage their risk exposure, while also seeking out opportunities to expand their business in new markets.
Export credit facilitates international trade. If a company cannot secure local bank funding for its exports it can apply for export credits. By successfully doing so a guarantor for the payment of exports is secured thereby allowing the trade to be financed and insured. Where there is bank reluctance to get involved in foreign trade, governments can use export credit to facilitate trade with foreign companies.
There is a geopolitical dimension to export credits and country risk assessments. Clearly those countries within the OECD’s “Arrangement” benefit from the lowest premiums for export credit. Joining this privileged group is of huge economic significance, like getting promoted to the English Premier League. It is clear that the EU’s notion of trade competing on a ‘level playing field’ doesn’t apply to trade with countries outside the EU.
It is also notable how smaller countries, especially in the South Pacific region are either eschewing the policy of providing export credit facilities or are struggling to access funding to help their business communities move into foreign markets. Moreover, a poor country risk assessment score makes imports more expensive which impacts standards of living in those countries.