EXPLANATION
Ducroire | Delcredere SA.NV's mission is to protect its clients against risks in connection with international transactions, mainly in emerging markets and developing countries.
The financial situation of Ducroire | Delcredere SA.NV depends heavily on an optimal management of country risks. To this end, a most accurate quantitative and qualitative assessment of those risks is fundamental. The result of this analysis is, for each country and the various types of insured transactions, the setting of premium categories, country insurance ceilings and, if necessary, some particular terms of cover.
1. Premium categories for the insurance of export transactions
2. Cover capacity by country
3. Particular terms of cover
4. Market size indicators on www.ondd.be
1. PREMIUM CATEGORIES FOR THE INSURANCE OF EXPORT TRANSACTIONS
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 government actions). Category 1 includes those countries for which political risk is the lowest and category 7 groups 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 its financial obligations or not honouring them without any legitimate reason. Commercial risk not only depends on the situation of the buyer at its micro-level, but also on macroeconomic and systemic factors impacting on the repayment capacity of all the buyers
in a country. Category A groups countries in which systemic commercial risk is the lowest, while category C groups countries with the highest risk.
1.a. POLITICAL RISK ASSESSMENT
The premium category for political risk is always decided upon by the Executive Committee and based on a technical risk analysis. To this end, Ducroire | Delcredere SA.NV developed a quantitative model, essentially focused on the evolution of the liquidity situation of the debtor countries. The aim is to appreciate the capacity of each country to honour its payment obligations. The model must allow for quick changes in Ducroire | Delcredere SA.NV's cover policy, following closely any deterioration/improvement in the situation of the debtor countries. For that reason, it is based on a limited number of indicators permitting frequent updates and the relevance of which has been historically tested. The set of indicators and the way they are combined to produce the score leading to the classification, is confidential. Three standard liquidity indicators, usually at the core of such models, are short-term external debt, foreign exchange reserves and the current account of the balance of payments. The model also includes an indicator of risk appreciation, i.e. confidence, by the financial markets, providing information about the refinancing possibilities of the country as well as some other information that is not captured by standard economic indicators. The technical result of the model is systematically tested by reality through Ducroire | Delcredere SA.NV's and other OECD credit insurers' payment experience. Finally, a correction is made in case of an exceptionally risky political situation (e.g. war) or upon factors not taken into account in the model.
Premium categories for political risk are updated at least twice a year for all countries. Intermediary updates for countries with a quickly changing situation are possible at any time.
1.b. COMMERCIAL RISK ASSESSMENT
Commercial risk assessment consists primarily of case-by-case "micro-economic" assessments of the buyer and its sector of activity. 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 repayment capacity of all buyers in a country. Examples of this are the effects of a sharp devaluation, high real interest rates, a recession, a context of widespread corruption, etc. It is precisely that "macro-economic" or systemic aspect of commercial risk that is part of 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 groups those for which it is “normal" and category C are those presenting a high risk. Unlike 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, with possible intermediary reviews if necessary.
2. COVER CAPACITY BY COUNTRY
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3. PARTICULAR TERMS OF COVER
In some cases, when political risk is considered to be too high, Ducroire | Delcredere SA.NV does not provide any cover possibility, with the exception of particular financing structures that mitigate transfer risk to a large extent. Ducroire | Delcredere SA.NV is always “off cover” for countries classified in category 7 for political risk.
Ducroire | Delcredere SA.NV 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, Ducroire | Delcredere SA.NV can reduce the guaranteed proportion for commercial and/or political risk. Ducroire | Delcredere SA.NV, in some cases, prefers not to issue credit limits on buyers but chooses to decide contract by contract, in contrast with the usual functioning of the comprehensive policies;
> Although Ducroire | Delcredere SA.NV'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.
4. MARKET SIZE INDICATORS ON www.ducroiredelcredere.be
For user's information, Ducroire | Delcredere SA.NV has selected four macro-economic 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 (2000-2008)
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 an information is not available.