U.S. Export-Import Bank: Issues Raised by Recent Market Developments and
Foreign Competition (Testimony, 10/07/1998, GAO/T-NSIAD-99-23).
Despite the recent downturn in the global economy, the United States
remains the world's largest exporter of goods and services and is the
leader in key sectors ranging from aerospace to telecommunications.
However, questions continue to be raised about the cost and the role of
U.S. export promotion programs, such as those of the U.S. Export-Import
Bank, and how they help exporters compete in emerging market economies.
This testimony (1) reviews recent trends in the cost and the composition
of the Eximbank's financing and (2) highlights key similarities and
differences in international export finance programs.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-NSIAD-99-23
TITLE: U.S. Export-Import Bank: Issues Raised by Recent Market
Developments and Foreign Competition
DATE: 10/07/1998
SUBJECT: Off-budget federal entities
Exporting
Export regulation
International economic relations
Foreign economic development credit
Financial analysis
Subsidies
IDENTIFIER: Asia
Latin America
Russia
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GAO/T-NSIAD-99-23
Cover
================================================================ COVER
Before the Subcommittee on International Economic Policy and Trade,
Committee on International Relations, House of Representatives
For Release on Delivery
Expected at
1:30 p.m., EDT
Wednesday,
October 7, 1998
U.S. EXPORT-IMPORT BANK - ISSUES
RAISED BY RECENT MARKET
DEVELOPMENTS AND FOREIGN
COMPETITION
Statement of JayEtta Z. Hecker, Associate Director, National
Security and International Affairs Division
GAO/T-NSIAD-99-23
Export-Import Bank
(711390)
Abbreviations
=============================================================== ABBREV
ECA - export credit agencies
EDC - Export Development Corporation
ICRAS - Interagency Country Risk Assessment System
IMF - International Monetary Fund
NIS - newly independent states
OECD - Organization for Economic Cooperation and Development
OPIC - Overseas Private Investment Corporation
============================================================ Chapter 0
Madam Chairman and Members of the Subcommittee:
We are pleased to be here today to discuss issues related to the U.S.
Export-Import Bank (Eximbank), particularly in light of the recent
downturn in the global economy. Despite this downturn, the United
States remains the world's largest exporter of goods and services and
is the leader in key sectors ranging from aerospace to
telecommunications. However, questions continue to be raised about
the cost and role of U.S. export promotion programs, such as those
of the Eximbank, and how they help exporters meet the foreign
competition in emerging market economies.
As you requested, our statement today will
-- review recent trends in the cost and composition of the
Eximbank's financing and
-- highlight key similarities and differences in international
export finance programs.
Our comments are based on past GAO reports and testimonies, including
a recent review of how the Eximbank was responding to increasing
risks associated with the economic conditions in Asia. A list of our
recent reports is attached.
SUMMARY
---------------------------------------------------------- Chapter 0:1
The deterioration of international market conditions has already had
an impact on the Eximbank's operations, although the full effect has
yet to be felt. The Eximbank's preliminary estimates indicate that
as of the end of September 1998, it may have to increase its loan
loss reserves by about $2 billion to cover increased risks involving
Asia, Latin America, and Russia. Any additional costs will be
covered through permanent and indefinite budget authority, that is,
they are not subject to the annual appropriations process. A total
of $6.6 billion, or just under 13 percent of the Eximbank's $52
billion portfolio, is being tracked on its internal "watch" list of
deals that are judged to be most at risk.
Some shifts in the composition of the Eximbank's financing began to
appear in fiscal year 1998. One noticeable change was the absence of
any project finance transactions, which support large capital
projects in developing market economies. These had been a rapidly
growing line of Eximbank financing. Another change has been the
increase in short-term financing brought on by private banks'
reluctance to extend credit for exports to Asian buyers. Finally,
while there was some stability in the top 10 country markets and
corporate recipients of Eximbank financing, shifts did occur. For
example, Indonesia dropped off the top 10 list in fiscal
year 1998, while Russia and Uzbekistan rose on the list.
The Eximbank is one of over 70 export credit agencies (ECA) operating
throughout the world to provide export financing. Because of
differences in how these agencies interact with the private sector
and their budgetary and reporting standards, it is difficult to make
meaningful comparisons among them. However, they all help exporters
compete for market share in developing countries. Despite increased
pressure on many economies to use exports as a tool to facilitate
economic growth, progress continues to be made in the Organization
for Economic Cooperation and Development (OECD)\1 to reduce
government subsidies for these export finance programs. The U.S.
government's ultimate objective is to reduce and eliminate such
export financing subsidies, thus assuring that exporters will compete
on the basis of price, quality, and service rather than subsidized
financing.
The significant changes in the environment in which the Eximbank is
operating raise the following issues:
1. Whether the Eximbank will be able to continue to operate in
higher risk markets while respecting its statutory mandate to support
exports only where there is a reasonable assurance of repayment.
2. Whether there are opportunities to expand the available
information on the operating results of foreign competitors within
the context of ongoing multilateral negotiations to assure that U.S.
exporters are not being disadvantaged by their foreign counterparts.
--------------------
\1 The OECD, created in 1960, is a forum for monitoring economic
trends and coordinating economic policy among 29 countries, including
the United States, and serves as the arena for negotiating
limitations on government export credit subsidies and developing
guidelines for export-financing assistance programs. The OECD's
"Arrangement on Guidelines for Officially Supported Export Credits,"
which was established in 1978, sets forth the terms and conditions
for providing official export credits. Although the OECD lacks
authority to enforce compliance with its agreements, member states
generally take upon themselves responsibility for monitoring
compliance.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
Eximbank financing programs include (1) loans to foreign buyers of
U.S. exports, (2) loan guarantees to commercial lenders, (3) export
credit insurance to U.S. exporters and lenders, and (4) working
capital guarantees for pre-export production. The Eximbank is
required to
-- supplement and encourage, but not compete with, private sources
of capital;
-- provide loans only in circumstances in which there is a
reasonable assurance of repayment;
-- provide financing at rates and on terms that are "fully
competitive" with those of other foreign government-supported
export credit agencies; and
-- seek to reach international agreements to reduce
government-subsidized export financing.\2
The Eximbank is subject to the Federal Credit Reform Act of 1990
(P.L. 101-508, Nov. 5, 1990), which requires government agencies to
estimate and budget for the total long-term costs of their credit
programs on a net present value basis.\3 Congress funds the
Eximbank's estimated credit subsidy costs (hereafter referred to as
"subsidy costs") through the annual appropriations process. Subsidy
costs arise when the estimated program disbursements by the
government exceed the estimated payments to the government, on a net
present value basis. Administrative expenses receive separate
appropriations and are reported separately in the budget. Any costs
associated with re-estimates of existing exposure are funded by
permanent and indefinite budget authority and are not subject to the
annual appropriations process.
The market environment in which the Eximbank and other ECAs operate
has changed. The downturn in the global economy, which began in
major Asian markets in mid-1997, has tempered the demand for some
types of Eximbank financing (such as project finance). The
international consequences of the global economic downturn, which
have included large drops in developing country exchange rates and
commodity and equity prices, were recently characterized by the
International Monetary Fund (IMF) as "probably the most far-reaching
of the postwar period." The IMF estimates that world economic growth
is likely to be about one-third less than projected earlier this year
(2 percent rather than 3.1 percent). For Russia, the IMF projects
that the output of goods and services could shrink by about 6 percent
this year and in 1999.
Although trade accounted for over 30 percent of the growth of the
U.S. economy during 1996 and 1997, trade has acted to slow the
economy in 1998. The "National Export Strategy," released by the
interagency Trade Promotion Coordinating Committee last week,
reported that during the first half of 1998, U.S. exports to Asia
fell at an annual rate of 30 percent. Moreover, exports to some
historically high growth markets fell even more precipitously--down
46 percent to Korea and 53 percent to Indonesia.
--------------------
\2 12 U.S.C. sec. 635 (b)(1)(A),(B).
\3 Present value analysis calculates the value today of a future
stream of income or expenses.
RECENT TRENDS IN THE COST AND
COMPOSITION OF EXIMBANK
FINANCING
---------------------------------------------------------- Chapter 0:3
In fiscal year 1998, the program costs of the Eximbank's portfolio
increased as a result of a downgrade in the quality of the portfolio.
At the same time, the composition of the portfolio changed due to a
significant decline in the Eximbank's project financing, an increase
in short-term financing, and several changes in top country markets
and company users.
Overall, Eximbank programs cost on average about $859 million
annually between fiscal year 1994 and 1998 (see app. I). The
Eximbank provided an annual average of about $12.2 billion in export
financing commitments (loans, loan guarantees, and insurance) during
this period. In fiscal
year 1998, the Eximbank provided about $10.5 billion of export
finance support, down from $12.2 billion in the prior fiscal year,
and the lowest level in the last 5 fiscal years.
CHANGES IN THE EXIMBANK'S
EXISTING FINANCIAL EXPOSURE
-------------------------------------------------------- Chapter 0:3.1
The financial instability in Asia, Latin America, and Russia already
has had an impact on the Eximbank. Portions of the Eximbank's
existing portfolio have been downgraded, and specific deals are being
tracked for possible changes in repayment status. The downgrading is
done through the Interagency Country Risk Assessment System (ICRAS).
The ICRAS process was established in 1991 for the executive branch to
uniformly evaluate for the U.S. government the country risk
contained in foreign loans and guarantees. The Office of Management
and Budget chairs the ICRAS process, and the Eximbank serves as the
Secretariat. ICRAS ratings have been adjusted to reflect the
financial turmoil being experienced by some of the Eximbank's
sovereign (government) clients and the assessment that they are seen
as more likely to experience difficulties in meeting the terms and
conditions of their original financing agreements. In addition to
increasing the subsidy cost of the Eximbank's existing portfolio, the
recent downgrading of ICRAS ratings project greater subsidy costs of
new Eximbank business.
The Eximbank's total portfolio exposure to sovereign and private
borrowers was $52 billion as of August 31, 1998. In August 1998, the
sovereign risk rating of six nations was placed in a higher risk
category. The Eximbank's total sovereign debt exposure with these
six nations was $3.8 billion, which the Eximbank estimates will
require an addition to its loan loss reserve of $410 million. The
Eximbank also downgraded the credit risk of 82 private obligors
(borrowers) in Asia, Latin America, and the newly independent states
(NIS) of the former Soviet Union with total exposure of about $11.4
billion (about 22 percent of its total portfolio). According to
preliminary Eximbank estimates, the increased risk of these private
obligors may require an addition to its loan loss reserve of about
$1.6 billion to cover potential losses associated with these
transactions. In sum, the Eximbank estimates that it will have to
increase its loan loss reserves by about $2 billion to cover
potential sovereign and private losses in Asia, Latin America, and
Russia. These additional costs will be covered through permanent and
indefinite budget authority, that is, they are not subject to the
annual appropriations process.
We would now like to provide some information on the status of
certain nonsovereign transactions being tracked in specific nations.
As previously noted, the Eximbank's global financial exposure totaled
just over
$52 billion at the end of August 1998. A total of $6.6 billion, or
just under 13 percent of this exposure, is being tracked in the
Eximbank's most recent internal portfolio report's "watch" list under
the categories of "workout," "heavy concern," and "moderate concern."
According to the same report, just under $2 billion (22 percent) of
the Eximbank's total exposure of $9.1 billion in Korea, the
Philippines, Thailand, and Indonesia is in what is described as
"workout," that is, Eximbank staff has been actively working to
restructure agreements with borrowers currently experiencing
financial difficulties. An additional $982 million of the Eximbank's
exposure is classified as of "heavy concern," nearly all of which are
project finance deals. The Eximbank's third watch category,
"moderate concern," covers an additional $3.6 billion and includes
about $1.4 billion of the Eximbank's $2.4 billion in Russian
financial exposure.
PROJECT FINANCE DECLINES
-------------------------------------------------------- Chapter 0:3.2
A significant shift in the Eximbank's operations occurred in fiscal
year 1998 when no project finance transactions were approved--a sharp
contrast to the large program growth that occurred between fiscal
year 1993 and 1997. Project finance transactions, which depend on
the cash flows of a project to service debt, generally require a
relatively stable legal and commercial environment in the host
country in order for risk mitigation of the project to be possible.\4
While project finance transactions accounted for only about 3 percent
of Eximbank's medium- and long-term transactions in fiscal year 1993,
by 1997 that figure had risen to 22 percent. Over the 1993 to 1997
period, the Eximbank provided close to $7 billion in project finance
support, including $2.6 billion in fiscal year 1997. Many of these
transactions were in Asia, and these typically used a small amount of
the Eximbank's subsidy budget (table II.1 shows the nations where
ECAs were supporting project finance activity in 1997). Eximbank
officials attribute the lack of new project finance transactions to
market concerns about the stability of some emerging market
economies.
--------------------
\4 Because these project finance transactions tend to be large, the
Eximbank often shares project risk with other ECAs, the Overseas
Private Investment Corporation (OPIC), or with multilateral
institutions such as the International Finance Corporation.
SHORT-TERM FINANCING CHANGES
-------------------------------------------------------- Chapter 0:3.3
Another shift in the Eximbank's operations occurred with the increase
of short-term insurance from $2.3 billion in fiscal year 1997 to
about $3.2 billion in fiscal year 1998. An early manifestation of
the economic crisis was a credit crunch in several Asian markets that
led to a surge in demand for short-term financing to cover exporters'
growing concerns about receiving payments for their shipments.
Previously, there had been little demand for Eximbank short-term
financing for exports to Asia, but the crisis has made private banks
reluctant to extend credit in the region, thereby increasing the
demand.
The Eximbank has been involved in several initiatives in Asia
designed to respond to the economic crisis facing those nations.
These initiatives include a $3 billion short- and medium-term export
credit insurance and loan program for Korea, $750 million of which
has been used this fiscal year. Similar programs for Thailand ($1
billion) and Indonesia ($1 billion) have been approved but are not
yet operative, according to Eximbank officials. The Eximbank has
worked with its foreign counterparts in the G-7 and OECD nations to
encourage these agencies to keep programs operational in the Asian
region.
CHANGES IN COUNTRY AND
COMPANY USERS
-------------------------------------------------------- Chapter 0:3.4
Over the past 3 fiscal years, there have been some changes in the
markets receiving Eximbank financing authorizations. As seen in
table 1, China and Mexico have been the top two country recipients of
Eximbank financing for those fiscal years. Indonesia, the third
leading recipient of Eximbank financing authorizations in fiscal year
1996 and the fourth in fiscal
year 1997, had support of only $7.25 million in fiscal year 1998 and
dropped off the top 10 list of country markets. At the same time,
authorizations for two NIS nations--Russia and Uzbekistan--grew to a
combined total of over $1 billion in fiscal year 1998.
Table 1
Top 10 Country Recipients of Eximbank
Financing Authorizations, Fiscal Years
1996-98
(Dollars in millions)
Fiscal year 1996 Fiscal year 1997 Fiscal year 1998
------------------------ ------------------------ ------------------------
Ra Financing Financing Financing
nk Country authorized Country authorized Country authorized
-- ----------- ----------- ----------- ----------- ----------- -----------
1 China $1,297 China $1,330 Mexico $1,671
2 Mexico $1,226 Mexico $1,192 China $1,354
3 Indonesia $873 Korea $755 Russia $637
4 Trinidad $632 Indonesia $626 United $382
and Tobago States
5 Brazil $502 Brazil $564 Uzbekistan $379
6 Argentina $494 Philippines $564 Turkey $376
7 Pakistan $484 Qatar $525 Brazil $353
8 Ghana $411 Russia $474 Chile $198
9 United $366 United $443 India $188
States States
10 Russia $351 Venezuela $349 Venezuela $133
--------------------------------------------------------------------------------
Note: These figures do not include short-term insurance
authorizations because of limitations in the way the data are
collected. Figures for the United States include working capital
guarantees for pre-export production.
Source: Eximbank.
Despite the many changes occurring in the composition of the
Eximbank's programs, Boeing Co., remains its largest customer. Table
2 presents data on the companies that used the Eximbank's financing
over the same 1996-98 fiscal year period. These data do not capture
the full range of U.S. companies associated with Eximbank-financed
deals such as subcontractors and other suppliers. As seen in the
table, Boeing was the top user each year, with total authorizations
rising from just over $1.2 billion in fiscal year 1996 to about $2.6
billion in fiscal year 1998. Other users that appeared in the top 10
in 2 of the last 3 fiscal years are ABB Asea Brown Boveri Ltd.,
Bechtel Group Inc., Caterpillar Inc., General Electric, and
Halliburton. Companies' use of the Eximbank's financing varies by
fiscal year, depending on the number and size of transactions. It
should also be pointed out that the largest users in terms of
authorizations are not necessarily the largest consumers of the
Eximbank's program subsidy.\5
Table 2
Top 10 Corporate Recipients of Eximbank
Financing Authorizations, Fiscal Years
1996-98
(Dollars in millions)
--------------------
\5 For example, the subsidy rate (projected subsidy usage as a
percentage of financing) for the Eximbank's transactions with Boeing
Co., were 0.3, 3.1, and 2 percent, respectively, from fiscal
year 1996 to 1998. Over the same period, the average subsidy rate
for all Eximbank transactions was 7.8, 6.9, and 6.9 percent,
respectively.
*** End of document ***