ASEAN cooperation needed in credit finance and insurance

Title

Language

English

Source

Business Day Special Report March 27, 1974

Year

1974

Rights

In Copyright - Educational Use Permitted

Fulltext

Rage 30 March 27, 197h ASEAN cooperation needed in credit finance and insurance This report envi sages the expansion of the export trade of the ASEAN countries both to the outside world and to each other. The principal pro blems that are likely to arise fall into four broad groups: (i) the provision of short term export cre dit; (ii) the provision of medium term export cre dit; (iii) the problems of export credit insurance and reinsurance; (iv) the problems of increasing the availability of the necessary credit information. Short term export credit Most of the exist, ing exports from ASEAN member coun tries are settled within 120 days and nearly all within 180 days. Export ers' demands for credits vary considerably from country to country. Ex porters rely for pre- and post-shipment export credit on commercial banks which are in some cases assisted by prefer ential central bank redis count facilities. In Indonesia finan cial support for exports has been restricted and confined to pre-shipment credit; in the short run exporters must do busi ness on a cash basis and this has proved an obsta cle to the development of new non-traditional exports, particularly of light manufactures. As the balance of payments position improves, it is hoped to extend def erred payments to foreign customers. It is sometimes possible to finance exports by ob taining foreign exchange credits from foreign banks on terms related to interest rates abroad. But in general, interest rates for exporters (these are slightly higher than those for producers) were of the order of 2-1/4 per cent a month early in 1971 and there were cases of exporters of non-traditional pro ducts paying 4 to 6 per cent a month during the period of inflation. Bank Indonesia re-finances export credits on preferen tial terms. Malaysian exporters have had far less dif ficulty in obtaining cre dit, and the commercial banks have ample funds for both pre-shipment and post shipment finan cing; the latter is con centrated on primary ex ports. Commercial banks usually hold trade bills to maturity or discount them abroad. Interest rates have been around 9 per cent per annum in recent years. In the Philippines export-oriented indus tries have been exempt ed from some of the res trictions imposed for balance of payments rea sons. But in 1970—71 exporters were encoun tering difficulties in ob taining adequate export credit. Interest rates reached about 12 to 14 per cent. The commer cial banks can rediscount with the Central Bank which offers special faci lities for exports. Singapore exporters have access to ample pre- and post-shipment credit. With increasing exports of light man ufactures, foreign com petition has made necessary an increased conces sion of short-term de ferred payment terms to foreign buyers, usually with maturities of up to 120 days. Commercial banks either hold the ex port bills or discount them abroad. The Mone tary Authority of Singa pore does not at present offer preferential redis count facilities on such bills. Thai exporters of (Reprinted from UN report on “Economic Cooperation for ASEAN”) agricultural products do not normally have diffi culty in obtaining fin ance for production and if necessary for exten sion of credit to foreign buyers. Exporters of non-traditional products, such as light man ufactures, may find fin ancial obstacles to the development of an ex port, particularly if they need first to establish a good credit rating and prove their export capa city. Medium term credit export The need for me dium term export credit is likely to grow as ASEAN countries begin to diversify industrial production into those branches of industry that produce capital goods and durables that are usually sold on long er credit terms. Medium term ex port credit is ordinarily for 180 days to five years. Hitherto there has been relatively little de mand for it from ASEAN exporters. The Asian Development Bank is at present studying the problem and the role that it might play in its provision. Export credit insurance The same factors which will lead to growth of demand for both short and medium term export credit will also call for export cre dit insurance. If trade in manufactures is rapidly increasing, both with the extra-ASEAN world and in the intra-ASEAN markets, there will be more traders engaging in trade with customers whose credit worthiness is less familiar than that of the houses through which the traditional trade in primary pro ducts has been conduct ed. The risks involved are both to the -traders themselves and to the banks from whom they are seeking credit. The risks fall into two main categories: a) risks arising from the possible in solvency of the buyer, his default ing on a payment or his refusal to accept the goods shipped; b) 'political' risks arising from such factors as war, dis turbances in the buyer's country, cancellation or non renewal of an export license, delay or failure in the country of the buyer in providing foreign exchange to cover imports, unforeseen or additional charges resulting from diversion or interruption of the shipment of goods. The principal problems that arise with any new credit insurance agency are these: a) Will the potential volume of exports, particularly of manufactures and semi-manufactures, provide a sufficient premium income to make an agency economic? b) Can the exper ienced and highly qualified staff be found to operate the agency? c) Is adequate credit information avail able? Though trade developments may re quire credit information and credit insurance regarding a multiplicity of new countries and new traders,- possibly with high commercial and political risks, the bulk of the business is concerned with the im port markets of wellknown developed count ries. The problems of sufficient premium in come to justify the set ting up of an agency raise again a 'chicken and egg' issue. Premium in come is at present in adequate because the trade is small. The trade is small because the credit risks cannot be in sured. An estimate of the probable premium income for an ASEAN system, on the basis of US$20 to $30 millions of exports declared for cover annually, would be approximately US$100,000 to $150,000. If, as is almost certainly the case, the agency would require to have an office in each national capital, this income could not make it self-supporting without government assistance. There is however, a more fundamental difficulty in setting up a multi-national agency. The political risks of conflict between the i ndividual countries which are joining to set up the agency and be tween which, as trade partners, much of the trade to be insured is flowing. The means of dealing with this pro blem would need to be solved. At a minimum it would need to be esta blished that no political or exchange transfer losses could be accepted from participants in the system - that each country would be liable for any risks resulting from its own policies. These represent difficult but not insol uble problems. It is re commended that the ASEAN governments set up a joint committee to examine the possibility of an ASEAN export credit insurance agency. The committee should consider this proposal in the light of any proposal for a wider regional scheme that may eman ate from the ECAFE study of the problem. Export credit reinsurance As in the case of ordinary insurance, an export credit insurance agency may find a need to reinsure certain com mercial export risks which it cannot itself absorb. It is a serious difficulty of any small" agency that it is likely to have difficulty finding adequate reinsurance cover at moderate cost and may find itself forced to cede more than it would wish of the risks insured in order to obtain reinsurance^ cover. In the circum stances, international re insurance cannot be regarded as a potential means of support for a new credit insurance* institution. Credit information No credit insur ance system can work ’ without credit inform ation. Improvement of credit information facil ities in the ASEAN region can not only facilitate intra-ASEzW trade but could also lent to sales of credit inform ation to exporters ancl credit reporting institut ions in the rest of the world. It js recommend ed, therefore, that re porting services be esta blished in those ASEAN countries in which they are lacking and improved in all countries where they exist, as a necessary step towards closer co operation in trade credit and credit insurance. Since the services can be most effectively pro vided by the private sector, it is important' that from the first re presentatives of the' banks and business com munities be involved in4 any measures to improve ' these services. rmc riverside mills corporation One of the largest and most diversified textile mills Keeping in step with the New Society by earning dollars for our country’s economy.

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