Gulf Export Credit Agencies Can Thrive in the Horn of Africa
Redeploying export credit toward the Horn of Africa can help Gulf economies meet their diversification goals.
By Ezana Tedla
As the crisis in the Strait of Hormuz drags on and companies shift supply chains away from the region, Gulf countries are growing more dependent on their oil sectors, threatening the progress made in shifting away from hydrocarbon exports. Extending export credit toward the Horn of Africa can help Gulf economies regain momentum towards their diversification goals.
Export credit agencies (ECAs) help countries expand exports of their products and services, especially where commercial banks are unwilling to assume the risk alone. Protections range from short-term financing to farmers to decades-long infrastructure projects. ECAs provide loans to exporters as well as insurance coverage against non-payments. These agencies are essential for companies who wish to sell to emerging economies. The guarantee against sovereign risk, political insurance, and other disruptions smooths commerce, backstopping more than 12% of global trade.
In the Horn of Africa, Ethiopia’s rapid growth is fueling demand for agricultural inputs and industrial goods, and its desired products align with the sectors Gulf economies are trying to pivot toward. Trade financing issues, however, limit the scale of imports into the Ethiopian domestic market because, even when there is sufficient demand and payment capacity, the country’s designated country risk rating raises credit costs.
Under its National Electrification Program, Ethiopia is targeting 25 gigawatts of renewable energy over this decade, and Gulf states are already involved in the transition. The plans for the largest wind farm in the country are being developed by an Emirati-based company. While Chinese manufacturing dominates clean energy production globally, Gulf states are carving a role in its management and operation. Saudi and Emirati companies have the experience of managing and rapidly scaling up solar and irrigation projects. This expertise is especially valuable to Ethiopia. Over half of its population works in the agriculture sector, which supplies more than 80% of exports. Both regions share water supply challenges, so Gulf knowhow is especially relevant to Ethiopia.
Driving Expansion
Gulf companies in green energy technology are pursuing international expansion. The UAE’s Masdar, a government owned renewable energy company, has operated internationally and beyond the Middle East. Expanding the export credit coverage such companies can receive in the Horn of Africa can accelerate expansion in a large potential market.
Saudi and Emirati ECAs have identified the region as a priority export market. However, the involvement of export credit agencies has so far been indirect. The financial coverage and investment these agencies provide are usually made in cooperation with regional and Africa-wide developmental banks. Export credit agreements between the two regions are unlike other joint projects where central banks, sovereign wealth funds, and banks have made direct contributions.
Within sub-Saharan Africa, Gulf export credit agencies have committed on the opposite ends of coverage. Insurance is directed towards quickly rotating loans towards agriculture and project-finance. The gap in the middle is in the products that are amenable to trade anchoring without heavier commitments. A railway project, for example, involves overlapping layers of government support and guarantees. These types of projects face prolonged currency exposure as well as sovereign risks.
Export credit can anchor trade beyond direct trade coverage. When the U.S. wound down its Export Import Bank (EXIM) in the mid 2010s, the loss of export value was nearly five times greater than the drop in EXIM financing. The anchorage that agencies provide seeps into wider parts of the supply chain from financial draw-in to employment and investment decisions. While there is little publicly available information about the current composition of Gulf export credit agencies, none have ever reported modifying allocations for future diversification goals.
Flexible Terms
Gulf ECAs are younger and more flexible than their Western counterparts. Only Oman’s agency is more than 10 years old. The U.S. EXIM and other members of the Organization for Economic Cooperation and Development (OECD) have more constrained mandates than their Gulf equivalents. Within the OECD, there are agreements to prevent a race to the bottom of export protections. Multiyear loans have minimum production requirements, minimum interest rates, and other rules. Within the agencies, there are further limits on the risk they can take, as well as origination restrictions. The U.S. EXIM has sourcing requirements that reach up to 85%, while its Saudi equivalent carries no such domestic-content floors as part of its mandate.
In promoting non-oil growth, Saudi Arabia has a roughly even split between financing and insurance, and most of the coverage goes to industrial and mining exports still adjacent to oil production. Most of these businesses are larger and more established. In the UAE, however, a majority of beneficiary shares goes to small and medium enterprises.
Prioritizing medium-term financing in the Horn of Africa ties into supply chains that already exist between the two regions. There is clear demand for green technology in the region because it is a resilient source of electricity and does not rely on national infrastructure. Demand for solar batteries in developing countries does not require state support. For example, many households in Pakistan took advantage of a Chinese supply glut over the last few years to purchase solar panels without government involvement. While Gulf states do not lead in solar power production, they have experience managing the service side of these projects. Saudi Arabia, through its own sovereign wealth fund, has built solar cells in joint ventures with Chinese companies. The UAE also has state-run companies in the operational management of wide-scale solar facilities.
Increasing credit allocation towards exports is part of the anchoring process that draws in demand, as well as the corresponding services for both sides. Gulf agencies can also mitigate risk with the types of exports it covers. Lending to importers that are not backed by the government sidesteps the agencies getting embroiled in sovereign debt issues between Paris Club members and Chinese creditors. Additionally, bilateral commitments between exporters and importers also mitigates jurisdictional issues between private companies and can better adapt to local market conditions.
Export credit agencies are an important, if overlooked, part of trade finance. The protection these agencies provide can be part of the broader post-war development of the Gulf and Horn of Africa regions. The vision programs of Qatar, Saudi Arabia, and the UAE all aspire to a post-petrol future. Adjusting the coverage of their own agencies should be part of this transition.
Ezana Tedla is an analyst for the Bourse & Bazaar Foundation. He focuses on macroeconomics and trade in emerging markets, with field experience in the Middle East and Horn of Africa. He graduated from Yale University with degrees in History and Economics.
Section: (rihla-initiative) Photo: Tsion Molla