ECIC head of political, economic, analysis and research, Benoit Fugah
Export insurance protects an exporter against a foreign buyer’s failure to pay for goods or services for political or commercial reasons
African countries’ borders are becoming more porous, allowing for greater movement of goods and services via the African Continental Free Trade Area (AfCFTA) agreement, but by its nature this comes with a lot of risk. This is where export insurance comes in: to protect an exporter against a foreign buyer’s failure to pay for goods or services for political or commercial reasons.
South African companies can count themselves lucky to have export insurance available to them 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 commencement of the AfCFTA, the mandate of ECIC has been expanded to cover not only capital goods and services, but all export transactions in the short, medium and long-term insurance market.
The ECIC has a core mandate to promote the export of South African goods and services by underwriting export credit loans outside of South Africa.
This mandate is fulfilled by providing political and commercial insurance cover against adverse events that may result in loss of business, which would prevent the repayment of loans or profits repatriated by South African investors.
Some of the biggest risks that affect exporters, according to ECIC head of political, economic, analysis and research, Benoit Fugah, include non-payment, adverse political events and confiscation, among others.
“By undertaking an export transaction to a foreign country, which is an unknown terrain, the exporter is exposed to a number of risks, but principally, the risk of non-payment by the foreign buyer. Payment default may be caused by adverse events of either 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 disturbances; confiscation; expropriation; nationalisation; contract frustration due to breach of contractual obligations in the case where the foreign buyer is a sovereign; and lastly, any action by the foreign government or its representatives leading to project frustration, including the inability to operate over a certain period.
“Adverse commercial events” include protracted payment default; insolvency; or liquidation of the foreign buyer.
Fugah noted that these risks can be mitigated by ensuring that feasibility studies have been completed and the project is viable with regard to funding, technical and technological aspects; project due diligence visit has taken place for verification of facts in the study; all permits, authorisations, government approvals and licences are verified and in place; all project risks have been identified, and each stakeholder is given responsibility for relevant risks.
“It is true that as an insurance service provider, ECIC would step in to pay the insured party which would have incurred a loss. However, there is a risk evaluation process that ECIC follows before providing the insurance coverage to ensure that country and project risks are either eliminated, mitigated or accepted,” Fugah said.
The AfCFTA is the perfect platform for cross-border trade and a number of opportunities exist. Substantial reduction of tariff and non-tariff barriers that will result from the implementation of AfCFTA will indeed increase intra-Africa trade and promote regional economic development.
It is unacceptable that Africa, the second largest continental landmass after Asia, with all the resources, accounts for just 4.4% of world trade.
“On such a big continent with a population of more than one billion people, commodities 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 tapped into the demographic dividend,” Fugah said.
He explained that intra-regional trade in Africa continues to lag behind other regions. Intra-regional trade in Europe, which is the average of imports and exports, is at 67.1%. Asia follows with 61.1% and America is at 47.4%, while Africa trails behind at 15.2%.
These other regions have drawn on vibrant cross-border trade to sustain growth and economic development, as well as integration into the global economy.
The date of adoption of the AfCFTA was 21 March 2018, but trade under the agreement only commenced from January 2021. There were some challenges in implementing the agreement, which led to its delay.
Fugah noted that the challenges, some of which still exist, in the implementation of the agreement include poor physical infrastructure, which render intra-Africa trade difficult and costly; lack of capacity to combat smuggling and other illicit practices across the continent; weak production capacities, which limit the extent of value addition and therefore the extent to which African countries can trade; red tape; inefficiencies at border posts and security risks.
However, advancements have been made in the implementation of the agreement. Currently, 44 out of the 54 African countries have ratified the agreement. When an agreement is ratified that means it has gone through the state’s own internal procedures and has been approved.
“AfCFTA has reached 88% on agreements relating to the Rules of Origin, a very high consensus threshold. Of 8 000 products under the World Customs Organisation’s Harmonised System of Rules of Origin and tariffs, an agreement has been reached on more than 80% of those products. Protocol on Dispute Settlement has been operationalised. 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.