Export insurance protects an exporter against non-payment for goods or services by a foreign buyer for political or commercial reasons.
The borders of African countries are becoming more porous, allowing for greater movement of goods and services through the African Continental Free Trade Area (AfCFTA) agreement, but by its nature this carries many risks. This is where export insurance comes in: to protect an exporter against non-payment for goods or services by a foreign buyer for political or commercial reasons.
South African companies can consider themselves lucky to have export insurance available through the Export Credit Insurance Corporation (ECIC), which is an official export credit agency, wholly owned by the Department of Trade, Industry and Competition. .
With the inception of the AfCFTA, ECIC’s mandate has been extended to cover not only capital goods and services, but also all export transactions in the short, medium and long-term insurance market.
The ECIC has a central mandate to promote the export of South African goods and services through the underwriting of export credit loans outside of South Africa.
This mandate is met by providing political and commercial insurance cover against adverse events that may result in loss of business, which would prevent repayment of loans or repatriated profits by South African investors.
Some of the biggest risks affecting exporters, according to ECIC’s head of political, economic and economic research and analysis, Benoit Fugah, include non-payment, adverse political events and confiscation, among others.
“When carrying out an export transaction to a foreign country, which is unknown terrain, the exporter is exposed to a series of risks, but mainly, the risk of non-payment by the foreign buyer. Payment default can be caused by adverse events of a political or commercial nature,” Fugah said.
He explained “adverse political events” as transfer restriction(s) and currency inconvertibility; discriminatory change in law; war and civil unrest; confiscation; expropriation; nationalization; frustration of contract for breach of contractual obligations in the event that the foreign buyer is a sovereign; and, finally, any action by the foreign government or its representatives that leads to the frustration of the project, including the impossibility of operating for a specified period.
“Adverse business events” include prolonged payment defaults; insolvency; or liquidation of the foreign buyer.
Fugah noted that these risks can be mitigated by ensuring that feasibility studies have been completed and that the project is viable with respect to financial, technical and technological aspects; a due diligence visit of the project has been carried out to verify the facts in the study; all permits, authorizations, government approvals and licenses are verified and in place; all project risks have been identified, and each stakeholder is responsible for the relevant risks.
“It is true that, as an insurance service provider, ECIC would step in to pay the insured party who would have suffered a loss. However, ECIC follows a risk assessment process before providing insurance coverage to ensure country and project risks are eliminated, mitigated or accepted,” Fugah said.
The AfCFTA is the perfect platform for cross-border trade and there are several opportunities. The substantial reduction in tariff and non-tariff barriers that will result from the implementation of the AfCFTA will increase intra-African trade and promote regional economic development.
It is unacceptable that Africa, the second largest landmass after Asia, with all its resources, accounts for only 4.4% of world trade.
“In such a large continent with a population of over a billion people, raw materials and natural resources continue to dominate the export basket and the continent’s participation in the global value chain is still minimal. We have not yet reaped the demographic dividend,” Fugah said.
He explained that intraregional trade in Africa continues to lag behind other regions. Intraregional trade in Europe, which is the average of imports and exports, stands at 67.1%. It is followed by Asia with 61.1% and the Americas with 47.4%, while Africa lags behind with 15.2%.
These other regions have relied on vibrant cross-border trade to sustain economic growth and development, as well as integration into the global economy.
The adoption date of the AfCFTA was March 21, 2018, but trade under the agreement only started from January 2021. There were some challenges in the implementation of the agreement, which caused it to be delayed.
Fugah noted that challenges, some of which still exist, in implementing the agreement include poor physical infrastructure, which makes intra-African trade difficult and expensive; lack of capacity to combat smuggling and other illegal practices throughout the continent; weak production capacities, which limit the scope for value added and therefore the extent to which African countries can trade; red ribbon; inefficiencies at border posts and security risks.
However, progress has been made in the implementation of the agreement. Currently, 44 out of 54 African countries have ratified the agreement. When an agreement is ratified, it means that it has gone through the state’s internal procedures and has been approved.
“AfCFTA has reached 88% in agreements related to the Rules of Origin, a very high consensus threshold. Of 8,000 products under the World Customs Organization’s Harmonized System of Rules of Origin and tariffs, agreement has been reached on more than 80% of those products. The Dispute Settlement Protocol has been launched. This sends a signal that Africa is ready to be bound by the rules of the trade law, which will boost intra-African trade and investment,” Fugah explained.
