The success of New Zealand's export credit scheme, launched in July 2001, has so far been limited. In the year to July 2002, the Export Credit Office (ECO) received inquiries for support for 18 transactions, for exports valued at about NZ$550 million ($274 million). Despite the interest in the scheme, as yet, no applications have been successful, though several are still being processed and some have been re-submitted for approval. Some critics have suggested that the lack of approved transactions is because the parameters of the scheme have been too rigid and limited. However, a recently completed 12-month review of the scheme seeks to address any such problems and proposes far-reaching improvements. It is hoped that the revamped scheme, which widens the pool of eligible transactions and the level of cover provided, will give the ECO more flexibility and that, as a result, it will be easier for exporters to meet the necessary criteria to have an application for export credit insurance approved.
The New Zealand government set up the ECO as part of a drive to improve export growth. The scheme was developed following research that identified gaps in the export credit insurance market available to New Zealand exporters. It is designed to fill those market gaps rather than compete with private sector insurers. Like other export credit agencies around the world, the ECO aims to assist New Zealand exporters by providing short and medium-term export credit insurance allowing the exporter to offer finance to buyers that are themselves high risk or that are domiciled in high risk destination countries.
The export credit scheme is run through the ECO and managed by the Treasury, with Eksport Kredit Fonden (EKF), the Danish governmental export credit agency, acting as the ECO's agent. EKF is responsible for processing applications, portfolio management, collections and recommendations on risk management and pricing. Using an agent allows ECO to benefit from EKF's export credit expertise and avoid many of the costs associated with setting up and running an export credit agency.
Before this year's revamp of the scheme, the ECO offered two products: short-term reinsurance for higher risk countries, to be used when insurers would otherwise remove their cover of exports to such countries; and medium to long-term (MLT) trade credit insurance for exporters. As a result of the review, the medium to long-term product will be made more flexible, while the short term product will be temporarily shelved.
In its original form, the MLT trade credit insurance product permitted the government to insure only 60% of the value of an export contract. At least 25% of the remaining 40% had to be taken up by a commercial insurance provider. This level of cover from the government was less appealing than that offered by credit export agencies in other countries (such as Australia and the UK), which commonly insure around 80% to 90% of the value of an export contract. The ECO has now announced that it will increase the level of cover its products provide. It will now insure risks of a political nature (meaning risks linked to the country of destination) for up to 95% of the value of an export contract, and risks of a commercial nature (meaning the credit risks of the buyer) for up to 90% of the value of the export contract.
The definition of medium to long-term will also be broadened. Before the review, export contracts had to be between two and 10 years to apply for MLT trade credit insurance. Now all export transactions for a period greater than one year and up to 15 years are eligible, assuming other relevant criteria (such as local content) are met.
Other changes to the MLT trade credit insurance product include removing some of the operational criteria requirements for exporters and adding an ability to provide insurance cover in foreign currencies. Risk sharing arrangements have also been revised. The ECO will now only share risks with either the bank or the exporter, not both. These adjustments aim to make the product easier to use for both exporters and banks. In conjunction with the amendments to its products, the ECO will launch new marketing and education initiatives to ensure that government agencies, exporters and banks are aware of the export credit scheme.
The ECO's short-term (under 12 months) reinsurance product will be temporarily shelved. World Trade Organisation guidelines require this product to meet its costs, which it will be unable to do unless global markets change dramatically. There is also evidence that the short-term insurance market is already well serviced in New Zealand. The short-term reinsurance product may be reintroduced at a later date. In the meantime, the Treasury is examining the viability of other short-term products.
Though the changes to the export credit scheme will widen the pool of transactions suitable for export credit insurance, experience in other countries with similar schemes shows that the market will still take time to develop. With the revamped scheme, the ECO hopes, within the next few years, to insure three or four export transactions per year. If the ECO can achieve that target, which remains to be seen, it will have succeeded in its aim of assisting New Zealand exporters to expand into high-risk countries and projects.
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