Public capital panacea for exporters in Covid-19 recovery phase
In a new white paper, GE EFS has put forward the idea that public capital can become a primary funding solution for vital projects globally and has tapped into its vast experience with ECAs to make supporting recommendations to the ECA community.
Before Covid-19 became a global pandemic and shut down the world as we know it, I was at New York JFK boarding a flight back to London after a meeting with a lender consortium. Now, my global capital advisory team conducts business virtually as we continue to focus on delivering capital for significant global energy infrastructure.
During the last few months, we have witnessed major disruptions to the world’s integrated global supply chains. These changes happened quickly and have deeply impacted a wide range of business sectors and industries. The pandemic has resulted in a supply and demand shock with far reaching and uncertain ramifications in duration and severity.
Many projects under execution globally have received force majeure notices from suppliers, leading to construction delays and covenant breaches, increasing the likelihood of debt restructurings. The repercussions of the pandemic have also impacted the viability of future projects as capital for new projects is being guarded with greater caution. However, global governments have responded quickly to the pandemic, with a range of economic stimulus packages targeting individual income, commercial liquidity and tax relief.
Many investors are taking a “wait-and-see” approach until the markets settle and valuations stabilise before deploying new capital. The banking sector is better placed to weather the current financial storm than in the 2007-08 downturn, given the recent emphasis on stress testing and capital adequacy from regulators. The initial response of commercial banks to the pandemic has been a “flight to quality”, where caution is taking precedence, while still demonstrating a role in continuing to provide credit.
Although banks are still open for new business, many are prioritising their “key clients” and offering more conservative products, structures and terms, with additional due diligence and analysis on counterparty risk required for deals to be approved. While many private and infrastructure equity investors have an estimated $2.5T (source: Preqin) in dry powder, funds remain cautious due to limited lending and valuation concerns.
In my lifetime, I have not seen a global health event that has nearly paralysed global trade. As seen during the Global Financial Crisis of 2007-08, governmental export credit agencies (ECAs) played a critical role in supporting global project sponsors and exporters in both the developed and emerging markets. In today’s current climate, we find ourselves at a similar crossroads where access to public financing will be a lifeline to many existing and new projects across the globe.
Consequently, Guto Davies, GE EFS Export Credit Agency Leader, and I have produced a white paper, Policy Considerations for Export Credit Agencies in the Covid-19 Driven Downturn. The report aims to engage key government stakeholders and policy decision-makers to consider collaborative ways the ECA community can support global exporters and their supply chains to safeguard critical projects and accelerate economic recovery. It advocates ECAs are well-positioned to deploy capital efficiently, enabling projects to move forward, facilitating exports and securing jobs.
Actions ECAs should take
GE EFS believes public capital can become a primary funding solution for vital projects around the world and has tapped into its vast experience with ECAs to make supporting recommendations to the ECA community. With the proposed revisions to the export trade and finance policies, public finance, guarantee and/or insurance cover is expected to be a short and, possibly, long-term panacea for global export and trade and its supply chain.
To position exporters to come out strong and for key industries to remain on track, five recommendations are made to the ECA community.
- Improving Access to Liquidity: ECAs are best positioned to provide counter-cyclical liquidity through deploying programs such as direct lending and by also providing optimal indemnity coverage to address project/borrowers’ needs.
- Evaluating Credit Impact: In the current destabilized financial market conditions, ECAs should evaluate risk by taking a “through the cycle” credit view on borrowers and lifting exposure limits for countries where support is required.
- Broadening Financial Product Offerings: Companies are experiencing significant challenges in the wake of the pandemic due a rapid decline in activity. ECAs are in position to step up with a broader suite of financial product offerings that complement their long-term financing solutions with products that address short-term working capital needs as well as supporting “bridge” solutions for projects in construction.
- Adjusting Sourcing and Content Requirements: ECA’s can encourage job preservation through adjusting sourcing and content policy revisions, enabling exporters to sustain supply chains.
- Restructuring Existing Loan Portfolio: ECAs can partner with exporters and borrowers to preserve existing projects by taking proactive and pragmatic approach in any restructuring requirements.
ECAs’ role in recovery phase
Commercial banks are unlikely to continue to price market risk given the uncertainty about the duration or depth of financial market dislocation due to the ongoing pandemic. Without the ability to accurately price risk, commercial banks are expected to focus on existing portfolios rather than originating new business. ECAs should look to bridge the market gap and take on potentially higher risk transactions that the private market is unable to price efficiently. Further, by maintaining a fundamental structure and capacity of an interconnected supply chain and trade ecosystem, ECAs can play an instrumental role in the global economic recovery that will preserve jobs and local economies for the near to distant future.
In conclusion, the current Covid-19 crisis will require ECA support, more than ever. It is imperative for ECAs to consider their role in a post Covid-19 recovery phase, evaluate the benefits of revised policy with their respective exporter communities and work together to harmonise policies that will benefit the exporter, global supply chain and key industries.