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31 July 2023

10-year plan: The future of export finance business

Power, Renewables, Transport
Middle East & Africa, Americas, Asia-Pacific, Europe
Managing Director – Global Co-Head of Export Finance at HSBC
TXF spoke with Philip Lewis, global head of export finance at HSBC to discuss how broadening the remit of ECAs allows for a larger impact in terms of energy transition and economic development.

TXF: What is your greatest hope for where the export finance industry will be in the next 10 years?

Philip Lewis (PL): I believe that any commentary about the export finance business over the next 10 years must be informed in part by its evolution over the last five. I’ve been in this industry for longer than I care to recall, and I can honestly say that the pace of change in the most recent period has certainly been greater than at any point in my own career and possibly since the creation of the very first ECAs in the early 20th century.

The changes to which I’m alluding are the perfect storm of events – that I think it would be no exaggeration to describe as ‘black swan’ events – comprising the United Kingdom’s departure from the European Union, the global pandemic and finally the Russian invasion of Ukraine. Whilst these occurrences have had geopolitical, economic and humanitarian consequences ranging far beyond the somewhat niche world of export finance, they have still exerted substantial impacts on our business, in terms both of existing portfolios and of the prospects for financing new projects.

The manner in which ECAs – working in close tandem with the export finance banks – responded to these multiple shocks was nothing short of exemplary in my view. Institutions of civil services and the financial services industry, all of which can be hampered by onerous process and bureaucracy at times – adapted extremely well to the rapidly changing situations, sometimes making decisions in weeks that normally might typically take many months. 

The types of response which I have in mind include UK Export Finance’s Export Development Guarantee scheme (a domestic funding scheme originally designed to support British exporting companies in the face of Brexit); the concerted approach from Bpifrance, SACE, Euler Hermes and Finnvera to allow extended payment deferrals in the cruise shipping sector (which was effectively closed down and massively cash-strapped during the pandemic); and the growth in ‘untied’ export finance facilities from the likes of SACE and the Korean ECAs (which take a broader interpretation of their respective national interests in the context of supporting trade). 

I also believe that the continued expansion of ECA support into deals with better rated borrowers and in developed markets (to complement ECAs’ historical brief in emerging markets) has been a game-changer in terms of mobilising capital in a more comprehensive way across multiple sectors and geographies.

Against this backdrop, my greatest hope for where the export finance industry may be in the next ten years is a place in which the flexibility, adaptability and dynamism born out of these black swan events have not only become the new normal but also been taken to another and even more innovative level. Let not the positives to emerge from these decidedly challenging circumstances be lost over time, and let’s focus on making the lessons learnt a further protection against the next shocks!

TXF: What might change? And what could stop that happening?

PL: In terms of what might change going forward, I would classify the potential developments into two camps – those falling under the auspices of the OECD Consensus (the gentleman’s agreement governing certain terms of ECA support from the participant OECD countries), and those which ECAs and their guardian authorities might implement independently outside of the scope of the Consensus.

The modernisation of the Consensus has long been an objective of many actors in the export finance business, and the OECD has been slow to react. An agreement-in-principle was finally reached in March 2023 that will seek to bring in various new guidelines, including expanded measures in the environmental, social and governance sphere (under the so-called Climate Change Sector Understanding - CCSU) and also enhanced flexibility across the board in other areas (such as repayment periods extended to 15 years for conventional projects and up to 22 years for CCSU-eligible transactions).

Over the next 10 years, my fervent hope is that these amendments will be ratified quickly and used comprehensively. More to the point, however, I think that the rapidly evolving global economic situation, together with the pressing climate emergency, mean that the OECD Consensus will have to demonstrate far greater agility in the future if it is to keep pace with the changing world. The new and emerging technologies associated with the ESG agenda are multi-faceted and complex, and the role for the export finance community in managing the associated risks and facilitating high-profile projects cannot be underestimated.

The factors which could stop these developments happening include the failure by the OECD to keep pace with the ever-evolving economic and climate dynamics, and to adapt its guidelines accordingly and frequently. It is beholden on all of us in the export finance industry to ensure that the Consensus becomes more flexible and agile in order to meet the requirements of a constantly changing global scene.

As regards the changes falling outside of the Consensus, these have historically been more quickly implemented since they stand at the discretion of individual ECAs and their host governments. I’ve already mentioned the domestic support programmes and untied facilities which some ECAs have introduced, and my sense is that schemes of this nature will continue to evolve in the future. 

While tied ECA facilities and traditional buyer credits will remain, I very much hope that the domestic and united programmes will continue to expand, spreading across more ECAs and taking the widest possible view of what the role of an ECA can and should be. The broader that the remit of ECAs can be cast – across importers, exporters, critical raw materials and foodstuffs, and of course climate protection – the more it can be said that they support international trade in the truest sense and ultimately humanity as a whole.

In respect of the potential impediments to these developments, the greatest challenge is probably the political risk of governments questioning the benefit of this broader interpretation of their national interest and reverting to a more traditional and possibly isolationist approach. In other words, you could see ECAs being forced to shy away from the domestic and untied schemes and restricting themselves to the more traditional tied model where the economic value added may be more immediate and obvious. Again, my view is that the export finance community needs to be front and centre in pushing the hopefully more enlightened agenda and demonstrating its benefits.

TXF: What is the greatest opportunity and what is the biggest challenge? 

PL: Looking to the future, my view is that the greatest opportunity and biggest challenge are actually one and the same thing – climate change, and how we navigate the ESG agenda towards a net zero world.

When I contemplate how our business mix has evolved over recent years, and consider the nature of our pipeline of prospective projects, the vast majority of the opportunities relate in some shape or form to the requirements of addressing the climate crisis and facilitating a transition trajectory. Inherent in all of this is massive upside in terms of new technologies and transactions – linked to such topics as sustainable energy generation, clean hydrogen and ammonia, carbon capture and storage, and electric vehicles and battery gigafactories. 

It’s fair to stay that, at no time in the history of the export finance business, has there been such a paradigm shift in the nature of the activity. This is all a huge opportunity for our industry if we collaborate closely with the right partners, and especially the ECAs, in designing and implementing robust financing solutions.

By the same token, I’d say that climate change is equally a significant threat. At the most fundamental level, if we as a business and the world as a whole do not tackle head on the challenges which we face, the consequences for future generations are dire in the extreme. 

And, even if the most extreme scenarios of climate change can be avoided, there remains a tangible threat if the risks if the new technologies cannot be quantified and mitigated – and this is where ECAs have a major role to play in supporting funding plans where there are gaps in the risk matrix which are not commercially manageable. There will inevitably be some failed technologies, or economically unviable technologies, and the ECAs and the financial community will have to be able to bear the costs of those situations.

At the end of the day, I’m basically an optimistic person. I believe that we, as an industry, can be hugely proud of what we’ve achieved in recent years and can be cautiously positive about the next 10. My personal objective is to squeeze in retirement over this period and observe the business from the sidelines, but I’d be happy to join a panel at TXF20 Global Export Finance in June 2033 with a view to reassessing the preceding 10 years!

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