Our domain is export outside EU (E15)

Friday, 25. November 2011

It is usually very difficult to get rid of any dependency in life. It requires big effort to leave the accustomed stereotypes, to be persistent and to walk new ways step by step. Nevertheless, we do not get rid of some dependencies at all and it is not necessary. I have in mind the dependency of our economy on export. That is on contrary what we should pamper, because domestic consumption locally cannot be the main drive of economic development in the long term. We depend on export and that is something we cannot do anything about, just accommodate and try to get the maximum from this focus of our economy.

However, what is definitely not good is the fact that we depend too much on export to European Union countries, which means to markets that have not been experiencing staggering dynamics for a long time. Growing opportunities nowadays are somewhere completely different. For example in Russia, which stands on the threshold of overall innovation, is close to us in terms of language and culture and more and more often is looked for by Czech exporters. Competition there is and will be very tough but the experience of last years shows that we do not have to definitely get lost there.

Probably not within the same range but very similarly we can look at other countries of CIS (Commonwealth of Independent States), for example Kazakhstan or Azerbaijan. Turkey seems to be very perspective too. It is a country almost around the corner and with huge hunger for new power and production capacities. Arabian countries are definitely worth mentioning, especially in North Africa, which surely have a big trade potential.

Complex insurance protection

The truth is that exporters must face bigger risks there, among which the risk of not being paid for their goods or services is number one.

Shall the reason of not paying be some political upheaval, legislative measures, disorder and other phenomena in the country of debtor, which we in summary call political risks or due to a financial insolvency or unwillingness of the debtor to pay, which are purely commercial risks, both are usually non-acceptable and therefore non-insurable risks for standard credit insurance companies operating on our market.

That is where EGAP, the state credit insurance company, plays irreplaceable role, because it can provide complex insurance protection for all stages of financing a business case, when the buyer and future debtor are situated in a country with higher risk than is the standard. It starts with insurance of credits for prospecting foreign markets and continues through insurance of pre-export financing, all types of export credits up to insurance of bank guarantees issued in connection with obtaining or implementing export contracts.

For large and small

The interest in our services has been increasing recently. We offer them to all banks financing export and to all exporters no matter their size, legal title and export volume. In the first place we insure export buyer credits with the due date longer than two years, which means the bank credits for financing export of capital investments, power, engineering and technological equipment, road constructions and investments. Next to large companies focused on this type of export also small and medium size companies use our insurance products. In cooperation with banks we offer a significantly simplified and fast option of insurance of pre-export credits and bank guarantees to them.

This year we expect to insure export credits, bank guarantees and investments abroad worth the insurance value of up to 54 billion Czech Crowns. At first sight it could seem that it is a recession from the won positions but in reality we in principal hold the trend that we started after 2005. The results of years 2009 and 2010 were affected with global financial crisis, which, although it sounds paradoxically, increased the demand for our services. However, here fully showed just one of the basic roles of a state credit insurance company – to act counter-cyclical and anti-crisis and help export companies in difficult times when the risk grows and banks make the conditions, on which they are willing to finance the export, stricter.

We accepted many temporary actions, from which the most significant was a radical reduction of deductible of the insured banks; also competitors left some markets, for example Russian ones, afraid of further development, we recorded the highest insured volumes in the history of EGAP.

Consolidation of insurance funds

Our possibilities to accept risks related to financing of Czech export in countries with higher political and commercial risks depend on the volume of “regulatory capital” available. This has the form of insurance funds and reserves and must reach minimally eight per cent of our insurance involvement, simply said the sum of all “live” risks. With the insured volumes growing and at the same time with growing of the portion of large credit financed business cases that remain within our involvement for a long time until full pay off, there also grow demands for our insurance funds. We can consolidate them from the distributed profit, but one of the basic requirements laid on us is to be beneficial for economy, which means if possible non-profitable, because otherwise we would reduce the competitiveness of our exporters. The other possibility, which is more usual abroad, is state budget subsidy.

We have obtained one billion from the Ministry of Finance recently intended for consolidation of insurance funds. Miroslav Kalousek, the Minister of Finance, said: “Czech Republic is small, open and pro-export, export is crucial for us. One billion Czech Crowns will enable to further increase the support of export projects on part of EGAP. It means thousands of new or maintenance of the existing jobs“.

Better than Germany

From the beginning of its existence, the year 1992, EGAP has been fully paying all operating costs, including indemnifications to damaged clients from the income from own activities and it really operates as self-sufficient but specific and in the long-term horizon non-profitable tool of export support. State resources in the insurance funds have never been used for these purposes so far. They are used very effectively and allocated as a regulatory reserve, which is proved for example by RIA study (Regulation Impact Assessment) regarding the proposal of changes to legislation associated with increase of financial means for Export guarantee and insurance company processed by a prestigious consulting company EEIP.

The study assesses economic impacts of EGAP activities considering the state subsidies in EGAP insurance funds and states the following: One billion Czech Crowns being the state subsidy in EGAP regulatory capital will secure cumulated net income from taxes and obligatory tax of exporters and their employees in public budgets in the annual amount of approximately 1.7 billion Czech Crowns with the average annual newly created employment of about 1750 jobs. From the model of EGAP activity impacts on export of the Czech Republic it further resulted that the support of Czech export brings double effect than the one proved during application of a similar model in Germany.

Awarded innovations

Despite all the above mentioned we still have space to grow in the area of export support compared to industrial economics of Europe. For example in the area of supported export credits per capita we are in the second part of the table far behind Belgium, Finland and Norway, but also behind Denmark or Holland..

In a different European comparison we do better. We belong among the most innovative state credit insurance companies as resulted from the comparison recently processed by British Exporters Association within the discussion about further direction of British export credit insurance company ECGD (Export Credit Guarantee Department). From the maximum of ten points awarded for provided services we obtained nine, while ECGD only five and we got among the three best insurance companies. What the British Exporters Association appreciated the most was a complex and variable offer, which is not missing anything what exporters and possibly investors could need when expanding on foreign markets.

Karel Pleva
Chairman of the Board of Directors
General Director