EXPLANATION
Ducroire | Delcredere's mission is to protect its clients against risks of international transactions, mainly in emerging markets and developing countries.
The financial situation of Ducroire | Delcredere depends heavily on the management of country risks. A highly accurate quantitative and qualitative assessment of those risks is therefore fundamental. As a result of this analysis, premium categories, country insurance ceilings and, if necessary, certain particular terms of cover are set for each country and the various types of insured transactions.
1. Premium categories for the insurance of export transactions
2. Cover capacity by country
3. Particular terms of cover
4. Market size indicators on www.ducroire.co.uk
1. PREMIUM CATEGORIES FOR THE INSURANCE OF EXPORT TRANSACTIONS
Countries are classified into seven categories (from 1 to 7) reflecting the intensity of political risk. This risk encompasses all events occurring abroad that are cases of force majeure for the insured or the buyer (foreign currency shortages, wars, revolutions, natural disasters and government actions). Category 1 comprises countries where political risk is the lowest and category 7 countries with the highest political risk.
Countries are classified into three categories (from A to C) according to the intensity of commercial risk. This is the risk of default by a private foreign buyer, i.e. the risk of a buyer being unable to meet his financial obligations or not honouring them without any legitimate reason. Commercial risk not only depends on the situation of the buyer at micro-level, but also on macroeconomic and systemic factors impacting on the repayment capacity of all the buyers in a country. Category A comprises countries in which systemic commercial risk is the lowest, and category C countries with the highest risk.
1.a. POLITICAL RISK ASSESSMENT
The premium category for political risk is always decided by the Executive Committee based on a technical risk analysis. To this end, Ducroire | Delcredere has developed a quantitative model, which essentially focuses on changes in the liquidity situation of the debtor countries. The aim is to appreciate the capacity of each country to honour its payment obligations. The model must enable Ducroire | Delcredere to quickly change its cover policy, following any deterioration/improvement in the situation of the debtor countries. It is therefore based on a limited number of indicators that can be frequently updated and have stood the test of time. The set of indicators and the way they are combined to produce a classification, is confidential. Three standard liquidity indicators, usually at the core of such models, are short-term external debt, foreign currency reserves and the current account of the balance of payments. The model also includes an indicator of risk appreciation, i.e. confidence, by the financial markets, providing information about the refinancing possibilities of the country as well as some other information that is not captured by standard economic indicators. The technical result of the model is systematically tested by reality through Ducroire | Delcredere's and other OECD credit insurers' payment experience. Finally, a correction is made in the event of an exceptionally risky political situation (e.g. war) or on the basis of factors not included in the model.
Premium categories for political risk are updated at least twice a year for all countries. Intermediary updates can be made at any time for countries with a quickly changing situation.
1.b. COMMERCIAL RISK ASSESSMENT
Commercial risk assessment primarily involves a "micro-economic" analysis of the buyer and his sector of activity on a case-by-case basis. This analysis determines the acceptance of a risk on the buyer and the possible inclusion of special terms of cover. Certain circumstances, however, influence the commercial risk at an aggregate level, thereby affecting the repayment capacity of all buyers in a country. Examples of this are sharp devaluation, high real interest rates, a recession, a context of widespread corruption, etc. It is precisely that "macro-economic" or systemic aspect of commercial risk that is part of country risks.
The model used for the assessment of these risks is composed of three types of indicators:
> economic and financial indicators affecting all companies in a country due to their impact on corporate results and balance sheets (e.g.: devaluation, real interest rate, GDP growth rate, inflation rate,...);
> indicators reflecting the country's payment experience for commercial risk;
> indicators characterising the institutional context in which local companies operate (e.g.: corruption index, transition economy,...).
Countries in category A present a low commercial risk, those in category B a “normal" risk and those in category C a high risk. Unlike the political risk classification, the commercial risk classification does not depend on the credit period.
The systemic commercial risk classification is updated at least twice a year, with possible intermediary reviews if necessary.
2. COVER CAPACITY BY COUNTRY
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3. SPECIAL TERMS OF COVER
In some cases, when political risk is considered to be too high, Ducroire | Delcredere does not provide cover, with the exception of special financing structures that largely mitigate transfer risk. Ducroire | Delcredere is always “off cover” for countries classified in category 7 for political risk.
Ducroire | Delcredere can also include special terms of cover or restrictions in its country cover policy. The most common examples are the following:
> A distinction can be made between the cover policy applying to private buyers and to public buyers. For example, for countries facing heavy fiscal problems, cover on public buyers could be excluded, while cover without restrictions would still be available for private buyers;
> The size of individual transactions may be capped or the cover possibilities may be limited to Belgian goods when the country ceiling is likely to be reached fast or for very risky countries;
> For high-risk countries, Ducroire | Delcredere can reduce the guaranteed proportion for commercial and/or political risk. Ducroire | Delcredere, in some cases, prefers not to issue credit limits on buyers but chooses to decide contract by contract, contrary to the usual practice of comprehensive policies;
> Although Ducroire | Delcredere's main activity consists of providing open account cover, i.e. without requiring a guarantee, in some specific cases a bank guarantee (often an ILC) or a sovereign guarantee (Minister of Finance/Central Bank) can be required, the most common cases being the following:
>> when the risk of non-payment by private or public buyers in a country is considered as particularly high;
>> in case of limited availability of foreign exchange in a country or when the exchange system is malfunctioning;
>> when the use of ILCs is made compulsory by a country's rules on imports.
4. MARKET SIZE INDICATORS ON www.ducroire.co.uk
For user's information, Ducroire | Delcredere has selected four macro-economic variables providing an indication about the size of the market in the country under consideration. The selected indicators are:
> population of the country (in millions)
> annual value of imports of goods and services (in millions of USD)
> gross national product (GNP) (in millions of USD)
> the average annual growth rate of the gross domestic product (GDP) over a longer period (2000-2008)
The information given is the latest information available from selected sources for a full year. The consulted sources are:
> International Monetary Fund:
World Economic Outlook (half-yearly publication)
> World Bank:
World Bank Atlas and
World Development Indicators (yearly publication)
> Foreign Trade Agency:
Belgische Buitenlandse Handel/Commerce extérieur de la Belgique (monthly publication).
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N.a." is used when an information is not available.