EXPLANATION
ONDD is the Belgian public credit insurer. ONDD insures companies and banks against political and commercial risks relating to international commercial transactions, mainly regarding capital goods and industrial projects, as well as contracted works and services. For these risks, ONDD can also work alongside banks through risk sharing schemes. ONDD also insures against political risks relating to foreign direct investments and directly finances commercial transactions of limited proportion..
As ONDD’s financial situation depends heavily on an optimal management of country risks highly accurate quantitative and qualitative assessment of these risks is fundamental. For each country and the various types of insured transactions, the result of this analysis is used as the basis for setting premium categories, country insurance ceilings and, if necessary, special terms of cover.
1. Premium categories for the insurance of export transactions
2. Premium categories for the insurance of direct investments abroad
3. Cover capacity by country
4. Special terms of cover
5. Market size indicators on www.ondd.be
1. PREMIUM CATEGORIES FOR THE INSURANCE OF EXPORT TRANSACTIONS
ONDD makes a distinction in its cover policy between the following types of export transactions:
> the cover policy for medium-/long-term credits applies to transactions with a credit period of more than two years;
> the cover policy for short-term credits including special cash transactions. Special cash transactions are mainly contracting works and projects with long realization periods but payable on a cash basis as the work progresses.
Countries are classified into
seven categories (from 1 to 7) reflecting the intensity of political risk. This risk encompasses all events occurring abroad and assuming a case of force majeure for the insured or the buyer (foreign exchange shortages, wars, revolutions, natural disasters and arbitrary government actions). Category 1 includes those countries for which
political risk is the lowest and category 7 contains those 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 foreign private buyer, i.e. the risk of a buyer being unable to meet his financial obligations or simply backing out of them without any legitimate reason.
Commercial risk not only depends on the situation of the buyer on a microlevel, but also on macroeconomic and systemic factors impacting the payment capacity of debtors located in a country. Category A contains countries in which the systemic
commercial risk is the lowest, while category C contains countries with the highest risk.
1.a. POLITICAL RISK ASSESSMENT
Medium-/long-term:
The
premium category for political risk related to medium-/long-term export credits is largely dependent on ONDD’s obligations within the framework of the
OECD Arrangement. Within this
Arrangement,
minimum premium rates for the insurance of
medium-/long-term political and
sovereign risk for about 70% of the countries in the world are decided upon by a group of country risk experts representing the different export credit agencies. ONDD presides over this working group and runs the quantitative model on which the common country classification is based.
In general, ONDD's premium classification is aligned with the OECD classification but its Board of Directors can always decide on a higher premium rate if it considers the risk to be higher. For countries not listed in the
OECD Arrangement ONDD determines its own
premium category.
By contrast, ONDD’s
cover policy and country ceilings are exclusively based on its own assessment of the
medium-/long-term political risk, with the Board of Directors always taking the final decision. ONDD developed a quantitative model measuring the
countries’ solvency.
It combines an assessment of the economic and financial situation, an assessment of the political situation and a payment experience analysis for each country.
The assessment of the financial situation is based on the external debt ratios, for which critical values have been fixed based on econometric estimates. Some liquidity indicators such as the level of foreign exchange reserves are added. A country's economic situation is evaluated using three sets of indicators: indicators of economic policy performance such as fiscal and monetary policy, external balance and structural reforms, indicators reflecting the country's growth potential such as income level and savings and investment quotes and external vulnerability indicators like export diversification and aid dependency. Risks related to the political situation are also based on quantified indicators. Payment experience data used in the model are from both ONDD and other OECD credit insurers, reflecting the experience on current
commitments as well as under rescheduling agreements concluded in the
Paris Club. Finally, corrections can be made based on elements that are not captured by the model.
Each country is reviewed each time significant new information is available or
at least once a year. Payment experience data are usually reviewed on a quarterly basis. In this case too, the situation can be reviewed at any moment if necessary.
Special cash transactions:
The
premium category set for political risk related to special cash transactions is the result of a combination of ONDD's classifications for respectively
short-term and
medium-/long-term risks.
1.b. COMMERCIAL RISK ASSESSMENT
Commercial risk assessment consists primarily of case-by-case microeconomic assessments of the buyer and his business sector. This analysis conditions the acceptance of a risk on the buyer and the possible inclusion of special terms of cover. Some factors, however, have an influence on
commercial risk at a country level, thereby affecting the payment capacity of all buyers in a country. Examples are the effects of a sharp devaluation, high real interest rates, a recession, a context of widespread corruption, etc. This
macroeconomic or systemic aspect of commercial risk that is part of the 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, ...).
Category A includes countries presenting a low
commercial risk, category B contains those for which it is 'normal' and category C comprises the countries presenting a high risk. As opposed to the
political risk classification, the
commercial risk classification is not related to the credit period.
The systemic commercial risk classification is updated at least twice a year and is subject to intermediary reviews if necessary.
2. PREMIUM CATEGORIES FOR THE INSURANCE OF DIRECT INVESTMENTS ABROAD
In its cover policy for risks related to direct investments abroad, ONDD makes a
distinction between war risk, risk of expropriation and government action and transfer risk related to investment loans, the payment of dividends and repatriation of capital. Distinct classifications apply to these three types of risks.
Countries are classified into
seven categories (from 1 to 7). Similarly, category 1 represents the less risky countries while category 7 contains countries presenting the highest risk. These classifications are based on a scheme testing a set of quantitative indicators against additional qualitative elements.
The classifications are reviewed every three months. Updates are possible at any time if necessary.
2.a. ASSESSMENT OF WAR RISK
War risk means both the risks of external conflict and the risks of domestic political violence. Apart from the extreme case of civil war, domestic political violence also covers risks of terrorism, civil unrest, socio-economic conflicts and racial and ethnic tension.
2.b. ASSESSMENT OF EXPROPRIATION AND GOVERNMENT ACTION RISK
The risk of expropriation and government action not only covers the risks of expropriation and breach of contract by the government, but also risks related to the (dys)functioning of the judiciary system and the risk of a possible negative change of attitude towards foreign investors.
2.c. ASSESSMENT OF TRANSFER RISK
The quantitative assessment of
transfer risk is based on the same principles as the assessment of
political risks related to
medium-/long-term exports transactions.
3. COVER CAPACITY BY COUNTRY
For each country, ONDD sets two different
country ceilings: one for export transactions with
short-term credit periods and
special cash transactions, the other for export transactions with
medium-/long-term and investments.
Country ceilings reflect the total amount of
imputable commitments ONDD can accept for its own account on a country, i.e. its proper insurance capacity per country for
transfer and non-payment risks.
The
amount of the ceiling depends not only on the volume of ONDD's total portfolio and its financial means, but also on the classification of the debtor country. For smaller countries, the dimension of the country measured by current foreign exchange receipts, also affects the amount of the ceiling. The ceilings are regularly reviewed.
The
amounts available under the ceilings represent amounts still available for the insurance of new transactions with a country for the account of ONDD (or for the account of both ONDD and the State for some countries for which explicit mention is made of the existence of a ceiling for the account of the State). Ceilings are "revolving", which means that the amount available under a ceiling constantly increases or decreases depending on received payments and newly accepted
commitments.
Some specific transactions, which are not insured against
transfer and non-payment risks, such as, in particular, import prefinancings or bank guarantees to be provided by the exporter, are not imputed to the country ceilings. In some cases,
transfer risk can also be strongly mitigated by a guarantee provided by an institution located out of the buyer's country. The insured amount is then imputed to the ceiling of the guarantor's country. Such transactions can thus in principle be insured even if the ceiling of the buyer's country is zero or temporarily exhausted.
When the ceiling for "
medium-/long-term and investments" for a country is insufficient to meet the demand for cover on that country or when the risk is deemed especially high, some transactions can be
insured for the account of the Belgian State depending on a case-by-case analysis.
On www.ondd.be the amounts available for new transactions are represented by :
> "none" when the ceiling is non-existent (no cover for the account of ONDD);
> "limited" when they do not exceed 20 per cent of the country ceiling;
> "normal" when they exceed 20 per cent of the country ceiling.
Furthermore, an asterisk (
*) added to the amount available means that demand for cover is particularly high (in practice: when the amount of offers of insurance issued by ONDD exceeds the amount currently available under the ceiling).
4. SPECIAL TERMS OF COVER
In some cases, when
political risk is considered to be too high, ONDD does not provide any cover possibility, with the exception of particular financing structures that mitigate
transfer risk to a large extent. ONDD is always “off cover” for countries classified in category 7 for
short-term political risk, but not automatically for countries classified in category 7 for
medium-/long-term transactions.
ONDD can also
insert 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 is still available for private buyers.
> An indicative
limit on the size of individual transactions or a
limitation of cover possibilities to Belgian goods can apply when the country ceiling is likely to be quickly exhausted or for very risky countries.
> For high-risk countries, ONDD can
reduce the guaranteed proportion for
commercial and/or
political risk.
> Although ONDD'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 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.
Finally, certain
preference or selection criteria can apply. A common clause applicable to countries where
medium-/long-term political risk is very high, stipulates a preference given to "
highly profitable projects, presenting a priority for the economic development of the country and a major interest to the Belgian economy". In order to assess the level of priority of a project, an advice can be requested from an international institution involved in the country's reform projects. Eventually, certain selection criteria can apply on a case-by-case basis, such as, for example, the foreign exchange generating or saving character of a transaction for the buyer country, the sector concerned by the transaction, etc.
5. MARKET SIZE INDICATORS ON www.ondd.be
For information, ONDD has selected four macroeconomic variables providing an indication about the market size of the country under consideration.
The selected indicators are:
> population of the country (in millions)
> yearly value of imports of goods and services (in millions of USD)
> gross national product (GNP) (in millions of USD)
> the average yearly growth rate of the gross domestic product (GDP) over a longer period.
The information given is the latest information available from selected sources for a fully lapsed 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).
"
N.a." is used when a piece of information is not available.