13 November 1998

Trade slowdown fuels rise in bank, exporter claims

The following article is excerpted from "The Journal of Commerce" edition of 13 November 1998.

Need evidence trade is slowing? Just check the claims exporters and banks are filing against their credit insurance.

Canada's Export Development Corporation, which provides credit insurance for export sales and investments by Canadian companies and banks, expects in 1998 to exceed the almost 1,200 claims it paid last year.

"We already have paid out more than 1,000 in the first three quarters, with the important fourth quarter yet to come," said Eric Siegel, executive vice president, in an interview.

"Beyond that, overdue accounts reported to us are markedly increased over last year -- about $98 million ($64 million) 10 months into this year, against $59 million this time last year," he said.

"We've seen a steady increase in overdues this year. In Latin America, we see about $20 million in overdues, up $5 million from the end of August. So it's building."

"These potential claims are showing up not just in our exporters' coverage but in our bank coverage, which in the past has been viewed as carrying no or minimal risk," he said.

The ... agency provides coverage to banks that run credit risks with banks in the importing countries. These banks open letters of credit for foreign buyers of Canadian exports, and EDC provides letter of credit insurance.

"Maybe as much as 20% of the overdues we are seeing (the $98 million so far this year) represent bank risk. Of course, we don't know what amount will result in claims," Mr. Siegel said...

Mr. Siegel said it was "not surprising" to see more difficulties arising on the banks' side, with banks going under in Russia, Asia and Latin America, and even the Guangdong Investment Trust defaulting on interest payment on a bond in China.

"There's a trend, and the trend is upwards," he said. It is not isolated to one region, and apart from the known trouble areas is also found in the United States, where the great bulk of Canada's exports go, Mr. Siegel said.

"The overdues that we are seeing around the world can easily translate themselves into the United States, as well," he said, if consumer interest slackens.

Of more concern for Canada than Asia is Latin America, which apart from exports takes a lot of Canadian investment supported by the EDC. Exports of capital goods for projects, such as telecommunications, pulp and paper and mining equipment, are vulnerable areas.

In retail trade, consumer goods, "the robustness of the United States retail market is absolutely critical," Mr. Siegel said. As American consumer interest slackens, "the effect on Canadian exports is immediate and dramatic." But the jury was still out, until the completion of the fourth quarter.

The EDC wrote $20 billion of insurance on short-term credit last year and expects it to be about $23 billion this year.

Overall, when loans and long-term insurance coverages are included, the EDC wrote $28.3 billion last year and will write over $32 billion this year, Mr. Siegel said.

The ... agency operates on a self-sustaining basis, earning its own income. It expects more customers this year than last, part of a growing trend, because of greater EDC support of small and medium-sized business and because more companies are deciding they need protection in these times, he said.