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High risk countries can be potential nightmares for exporters shifting goods. You won’t find cover for trading with Afghanistan or Somalia but some trades are still worth pursuing provided you have good credit, political and economic risk information.

BY: Louise Blockley

“In 2008-2009, governments rescued the economy: In 2010 and beyond, will the people rescue their governments?”  This discussion topic, from an upcoming Moody’s sovereign conference, reflects the current tumultuous political and economic situation around the globe.

High risk countries can be potential nightmares for exporters shifting goods. In a world slowly sinking under the weight of information-overload where do you turn for credible advice? And what kind of risks are you up against?

For the New Zealand Export Credit Office (NZECO), which has a “greater appetite for underwriting political risk” than private insurers, there are certain no-go countries. Unsurprisingly, enquiries about cover in Afghanistan and Somalia have received a firm no, according to its head of business origination, Chris Chapman. 

However, it is supporting clients facing political and economic risk in Fiji.

“That’s where they [exporters] have buyers that want to pay 30 or 60 days after receiving the goods and that is where the New Zealand company is worried, ‘well, what if I send it up there and then something politically happens and my buyer is unable to pay?’,” explains Chapman.

According to the NZECO, political risk relates to a country’s lack of foreign exchange – and therefore its ability to service its external debt – as well as the risks of losses arising from war, civil war, currency inconvertibility, imports or export prohibition. 

Andrew Baker, managing principal of Marsh – insurance brokers and risk management consultants – says it is possible to have a bad market with really good customers in it. 

“In Argentina, when their government restricted the flow of funds out of the country, there were still some really good payers that were able to pay, it was just that the government wasn’t letting them pay.”

Chapman cites a current example where the NZECO is underwriting political risk for a New Zealand exporter to Venezuela. All payments must go through the central bank and as the US dollar is often scarce in Venezuela the government will limit what US dollar transactions the bank can approve.  

International credit and insurance agencies analyse a country’s political and economic risk and apply risk ratings akin to individual or corporate ratings. There are different measures to assess different types of risk.

Sovereign rating

One measure which relates to the Venezuelan and Argentinean examples is a sovereign rating. Standard and Poors (S&P) says its rating service “currently rates 126 sovereign governments and has established transfer and convertibility (T&C) assessments for each country with a rated sovereign. A T&C assessment is the rating associated with the likelihood of the sovereign restricting non-sovereign access to foreign exchange needed for debt service”. These ratings have several rungs starting at AAA through to D often with a plus or minus.

Recovery ratings are S&Ps’ opinion on the extent to which a sovereign government will be able and willing to repay non-official foreign currency debt holders post-default.

Recovery rating

Dun & Bradstreet New Zealand general manager, John Scott, says his agency’s country ratings are different to sovereign ratings. The D&B country ratings analyse the wider issues of political, economic, external risk, commercial risk and the trade environment of a country – how people are paying their customers.  

“We don’t do the sovereign rating type of thing…So our scores are very much focused on where do these people sit in terms of relativity, what is our view? So in many ways there is more granularity than the triple A, double A-down scores.

“Effectively our information is an adjunct. We don’t make recommendations. What we do is give information to people who can then make an informed decision and our report will be one part of a wider decision. The key thing they are taking is independent, unbiased, reputable information from a third party.”

With 16 D&B country ratings downgraded (and five upgraded) in 2010’s first quarter Scott says current economic recovery is “patchy or asymmetric”.

The NZECO uses OECD Country Risk Ratings from 0-7. A 0 rating represents low risk. These measures also relate to the level of cover available for each country.  For example, Algeria with a risk rating of 3 is “on cover” (green); American Samoa, 5, “limited cover” (orange); and Afghanistan, 7, “normally off cover” (brown).

Country intelligence

Baker says the underwriters provide their own country intelligence, using a rating system from A to E where E means uninsurable and A being low to no risk. You get less indemnity cover the lower the country’s grading. For political cover, credit insurers find most situations right themselves over a period of time. An A grade market might have a cover waiting period of 120 days whereas a D grade might have a waiting period of 360 days.

And is there a point in the ratings where exporters should say I am not trading with this country? Baker says that will just come down to an exporter’s appetite for risk.  If it is a big deal they may still want to trade with a D grade market but he recommends they should tighten up on terms of payment with confirmed letters of credit to rule out commercial risk. Chapman agrees that a confirmed L/C is the way to go and in certain countries insuring for political risk, assuming you can get cover, is also prudent. 

There can be a time lag between an event that affects a country’s rating and the rating being downgraded – if it is serious enough to cause a down grade. To keep abreast of factors influencing the eventual downgrading of a country rating, many agencies and risk management companies have weekly risk bulletins and instant alerts. Other sources of information include credible news agencies – the NZECO uses the Economist Intelligence Unit. Government agencies such as NZTE or other exporters who are in that market are also valuable informants.   


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