Fernando Salazar: "Recovery will come, as always, from the external sector"
On 17 March, just three days after the Spanish Government announced the state of alarm, with total confinement of the Spanish population to stop the spread of the coronavirus, the Government, through the State Account managed by CESCE ( Spanish Export Credit Insurance Management Corporation), set in motion an entire insurance system to cover Spanish companies.
CESCE, a state-owned company (50.25%) together with the rest of the shareholders comprising banks and insurance companies (49.75%), celebrates the 50th anniversary this year. A majority public insurance company, but with a very strong private presence and activity, it focuses its activities on credit and guarantee insurance and, in particular, on insurance aimed at supporting the internationalisation of companies. CESCE operates on a daily basis on its own account, as another company in the market, but it also operates on behalf of the State, as an ECA (Export Credit Agency), exclusively managing the risks derived from internationalisation. Last year, CESCE insured sales collections, both in Spain and abroad, for a value of 38,000 million Euros on its own account and issued insurance for the State's account for a value of more than 3,000 million Euros, covering in particular political, extraordinary and commercial risks not insurable by the market for Spanish companies' operations abroad. In short, CESCE is a company of great tradition and prestige, crucial in these times, especially in regions such as Latin America, Africa and the Middle East.
What are CESCE's main actions at the moment?
CESCE makes it possible for companies to be paid when they export, which is no small thing. If the exporter does export and does not get paid, it is no use exporting. He must make sure that he can sell by charging in instalments with guarantees. And that is what we do. If the client does not pay the invoice, CESCE pays it with certain conditions and percentages in the insurance conditions. For example, last year we insured sales on our own account, in Spain and abroad, for 38,000 million euros. The whole of the sector in Spain insured sales for 200,000 million Euros, 17% of the GDP, which makes credit insurance a large industry, very unknown, but essential to give security to our companies. Insurance companies in this sector are very efficient, as we compete in a market, the credit insurance market between companies, which is very specialised, but with a very high degree of competition, almost fierce. There are several actors in our country, some of them very strong, with large international groups behind. But in CESCE we maintain a market share in Spain close to 20% and we are specialised in offering personalised and innovative solutions to our clients. We have subsidiaries abroad, mainly in Latin America, but, above all, we are the owners of a large commercial risk information company, Informa D&B, which is as important as the parent company: it has information on 400 million companies, information that is updated 375 million times a day. These are figures which, frankly, impress me.
And, last but not least, since it is our essence, we exclusively manage export insurance on behalf of the State. We are the Spanish ECA (Export Credit Agency), with a portfolio of live operations exceeding 16,000 million euros. We support the operations of Spanish companies abroad, through a range of policies on behalf of the State, such as buyer's credit, guarantees, working capital, works or documentary credit.
Can any company access the services of CESCE?
Yes, in November we had more than 11,000 clients and the great majority of them are SMEs. The private credit insurance is designed to cover transactions between companies and its main customers are SMEs. At CESCE we try to make it easier for them. Last year, for example, we launched a new policy called 'CESCE Easy', which is very simple to manage: all you have to do is give your NIF, check with INFORMA, sign and pay the policy and CESCE will insure up to 70% of the amount of the sales. And if you also declare your sales and clients, the insurance coverage increases to 85%. It is designed for companies with a turnover of less than five million and it can be managed online.
In this context of extreme uncertainty, and while waiting for a vaccine, companies have been very cautious, some investment projects have been cancelled. How does CESCE see and approach the economic-political and market risk situation in which we find ourselves?
It is true that we are in a very complex situation, with a lot of uncertainty and that makes it very difficult to plan business and, in particular, investments. Many companies are concentrating on surviving and this is no small thing.
We are witnessing a health crisis of such magnitude that we are forced to go back a hundred years, at least, to find something similar. We are facing a unique, very serious situation, where the world has come to a complete standstill: 4 billion people have been confined. With the advent of COVID-19, demand, supply, production, value chains, etc. were interrupted. Companies discovered the risk of being dependent on a single supplier and, moreover, a so distant one. The consequences have been dramatic. The World Bank's data speaks for itself: never before have more than 80% of countries been in recession at the same time, a figure that was reached during the Great Depression. Now 93% of the world's countries have gone into recession.
The good thing about a company like ours is that we have instruments and systems that allow us to see, before others, some trends that others do not yet detect. We can anticipate them. And that allows us to adapt to uncertainty and design better responses to risks. Many of our latest initiatives are along these lines and there are many more to come.
It is obvious that our recovery will be hooked up with those countries whose recovery is faster. We will recover via the external sector, via exports: as demand picks up in those countries, our exports to them will start to grow and they will start to pull our economy. An example is Asia, where recovery is coming first. China is already growing again. And where the market grows, exports grow. Note that our exports to China in the first nine months of 2020 are growing at 20 per cent. But it is also obvious that the recovery will be uneven and subject to uncertainty. Until a few days ago, with the second wave of the COVID-19, some forecasts for the last quarter were changing. And since the effectiveness of the first vaccines has been announced, market expectations have changed dramatically. We must get used to these ups and downs.
What has been the reaction of governments?
In the face of such a major global recession, with GDP falling more sharply than in the Great Depression, governments have reacted quickly and forcefully. The ECB has provided liquidity from the very first minute and the IMF has acted very quickly. The EU has approved a very important rescue plan, not without debate and uncertainty, it is true, but with funds of 750 billion euros, and a totally innovative mutualisation of EU debt. The national plans have also been quick and forceful. There is much debate about the plan adopted by Spain, but when we compare Spanish support with that of similar countries, we come out quite well from that comparison, and I would highlight, in particular, the importance of the ICO's liquidity lines.
Will the countries come out of this alone, or is it essential to be within a union of countries such as the EU? Thinking about the protectionism introduced by Donald Trump, with regard to third countries and border disputes.
Recently, we were used to globalisation and the business and travel facilities it brings with it. And suddenly we are suffering from restrictions on trade and mobility of all kinds. There are, for example, restrictions on mobility at the border and interruptions within the national territory or within our own municipality. All of this affects a country as touristy as ours, which needs open borders to survive. In fact, Spain is very dependent on its foreign sector. We are the second largest exporter of goods and services in the EU in proportion to its GDP. With this dependence, we cannot get out of the crisis alone. We need to be included in an area that facilitates the movement of people, goods and capital, such as the European Union.
As for protectionism, it never rains but it pours. There was already a protectionist tendency before the arrival of the virus. Public opinion was focused on Donald Trump and the Chinese-American "trade war", but the issue was more complex; it was not only commercial but also geopolitical and technological, and the protectionist trend was more global and could be seen in different countries and at different levels.
The pandemic may aggravate it and, why not, help in certain respects. The COVID-19 is making value chains rethinkable and tends to shorten them. The combination of both will lead to what is known as on-shoring, where production gradually returns to your own country, or near-shoring, where it returns to nearby countries within your own economic environment, such as the EU, or countries with association and free trade agreements. And this, on the other side of our beloved Mediterranean Sea, countries such as Morocco, for example, could benefit greatly from this.
The EU is a refuge from external protectionism and a great advocate of free trade in negotiations with third countries. Furthermore, with a European monetary policy as important as the one we are seeing, with such a reconstruction plan, with the greater flexibility that has been introduced in state aid, I am optimistic that Europe can emerge from the crisis together.
Bearing in mind our companies, CESCE has played an important role in the COVID-19 crisis with the line of coverage for working capital loans, a line that is complementary to that of the ICO. How is that line working, how much use does it have, is the bank effectively providing sufficient liquidity?
I understand that the fact that liquidity lines are processed through the financial system can generate opinions for and against and doubts can arise as to whether the banks are doing enough. But, that weekend we spent confined to our homes, setting up the lines as quickly as possible (the state of alarm was decreed on March 14 and the lines came out in the RDL of March 17), we thought it was healthy for them to be articulated through the financial system and not for us to act in parallel with the banks. And we still think so.
One thing we learned from the previous crisis is that it was not possible to operate in parallel with the financial system, rather we had to operate by relying on the financial system. The line was therefore designed to be channelled through the banks and for them to receive the applications, filter them and retain part of the risk, around 30%, which we think is very healthy.
In general, the lines have worked very well. CESCE's is complementary to ICO's, which is much smaller but focused on export companies. With it, 752 operations have been subscribed to cover current credit, 464 of them for SMEs, with 1,377 million euros in bank loans mobilised. And we have just activated the second tranche which, after a few days in operation, has 25 operations registered, and in the process of being contracted, for a credit amount of 160 million euros.
I believe that our response has been appreciated by exporting companies. In fact, the Exporters' Club has just given us an award to the staff of CESCE, ICO and COFIDES for our rapid and extraordinary reaction to the pandemic. I have always been proud of the people who work at CESCE, but with the pandemic they have outdone themselves. They have given their best to help Spanish companies and it is fair to acknowledge this.
In the absence of such 100% coverage, the bank could perhaps establish higher financing conditions.
It may be, indeed, but the general monetary conditions are very lax and there is strong competition in the financial market, so I do not see a great risk of higher credit costs. Let's look at it another way. What the bank does is to accept a risk for which it will have to take 30 per cent. So, it is very careful to ensure that this risk is "healthy", keeping, I hope, the accident rate at acceptable levels. An accident rate which, for the moment, has not appeared and which should be lower in the case of the CESCE line, given that we focus on the export company segment. These companies are used to operating in international markets, under very competitive conditions, and have their demand more diversified in different countries. With few exceptions, they are usually a good risk.
In terms of country risk coverage, what level are you at with regard to country limits or country credit ceilings, and the speeding up and processing of such coverage in short and long term operations?
There is always talk of credit ceilings and the debate is focused on a particular ceiling, but we tend to forget that there are three basic coverage situations:
The first is open coverage without restrictions, where there are no ceilings or a priori restrictions, a situation that encompasses a huge group of countries. The coverage limit only depends on the characteristics of each operation. In Africa, an area that is of great interest to you, there are several countries without coverage, such as Namibia, Botswana, South Africa and Morocco.
A second situation is where the risk is medium-high and cover can be granted, but only up to a certain limit. This is where the famous "ceiling" appears. In some countries there is excess demand for that limit and the ceiling becomes saturated. This is the famous ceiling in Angola, for example, although it is not so saturated lately. But let us not forget that there are also many ceilings that are not fully used, such as those in Ghana, Ivory Coast, Senegal, Rwanda, for example, and there is no waiting line and they are open to all companies offering viable operations.
The third situation would be that of a closed coverage policy for several reasons (conflicts, defaults, unsustainable debt, etc.), something which unfortunately occurs in several African countries. There is even a fourth situation, where there is not enough demand or tradition to establish a hedging policy, but we will be happy to establish it when we have operations in these countries.
Another issue is the speed with which operations are processed. Many companies complain about this, with good reason. We are making efforts to shorten these deadlines which, in many cases, do not depend on us. In particular, there has been recently a change in the way we manage operations on behalf of the State. In the case of operations of up to 10 million euros, they can now be approved directly by the CESCE. Between 10 and 30 million euros, operations are taken to what is known as the virtual CRE (virtual State Risk Commission) on a weekly basis. And from 30 million euros, they go to the face-to-face CRE, which is held every fortnight. In short, we know there is a problem of agility, but we are solving it and we have improved a lot.
Several Latin American countries (Brazil, Mexico, Peru, Colombia) present a high political and social risk and a high exposure to the COVID-19 crisis. Among the 15 economies with the worst results (i.e. with a drop in GDP of at least 7% in 2020 compared to 2019), seven are in Latin America. How do you see the region at the moment in CESCE, taking into account the important presence of Spanish companies?
CESCE has a strong presence in Latin America, where almost our entire international presence is concentrated. It is true that we have a minority investment in Morocco and a branch in Portugal, but all the other subsidiaries of CESCE are in Latin America. We are currently in five countries: Mexico, Brazil, Colombia, Peru, and Chile. We had another subsidiary in Argentina, but it has been sold after years of losses and we are in the last phase of selling Venezuela, for obvious reasons. Given this important presence in the region, we are following the situation there very closely and with some concern.
The region has already been in trouble for a few years due to the fall in raw material prices. The underlying problem is that they have not achieved genuine diversification, as they remain heavily dependent on exports of primary goods, despite progress in industrialisation and services. This fall in prices has led to a slowdown in growth, a cutback in social policies, generating social unrest and leading to situations such as the riots which erupted in late 2019. All this has been aggravated by COVID-19, generating a very complex situation. The fall in GDP in the region will be significant and the consequences severe. But the situation should improve next year and the IMF is giving it three percent growth in 2021. It is not much, but it is a start.
How has the pandemic affected Africa?
It was feared that the pandemic would explode in Africa, but it is likely that the pandemic in Africa is not having as strong an impact as we thought a priori. In fact, Africa may be more socially prepared than it seemed for such a pandemic, because of its previous and recurrent experience with epidemics. I don't know for sure, I'm not an expert on these issues, but I see that many forecasts and apriorisms are falling away from the African continent.
One thing is certain: Africa comes from very high levels of debt and, like other parts of the developing world, is facing a significant fall in the price of raw materials it exports. The G20 initiative will provide temporary relief from foreign debt payments for several countries in the region, but we should not forget that the HIPC (Heavily Indebted Poor Countries) initiative required significant debt relief from creditor governments. All this means that we must be prudent in terms of credit coverage, especially in those countries with complex debt situations, which the IMF calls high or extreme DSAs (debt sustainability analysis).
I think we should not focus on the countries that have the most problems. Let us not forget that there are countries in Africa which, a priori, do not present any problem for CESCE's coverage on behalf of the state, such as those I mentioned earlier, and others where there is a large balance available in the coverage ceilings. In short, the coverage policy with Africa is not as restrictive as it seems and, of course, Africa is a continent full of opportunities for our companies.
Do you have a subsidiary in Morocco?
It is not so much a subsidiary as an investment that we would like it to become a subsidiary, if the Moroccan government wants it to. We have 23% of the capital of SMAEX, the Moroccan company similar to CESCE, as it manages insurance on behalf of the Moroccan State and also has its own insurance. We are a minority and institutional investor, that is, we do not have the management. Our objective in Morocco would be to increase our participation and manage the company so that it takes a great leap forward in the very competitive environment that has been generated in Morocco, adopting our systems, equipment, products and know-how for the benefit of the development of this market.
What about the Middle East? To what extent might the decline in oil have influenced your coverage?
Let us not forget that at the beginning of the crisis a situation was not very understandable: a negative oil price. The future price of West Texas Intermediate was -40 dollars, that is, you took my barrel and paid me nothing, but I had to pay you 40 dollars. It was absurd.
This frightened the markets and, for a moment, we thought it would put that industry and the countries that live off it in check. Yet this was a very short-term situation, which reflected the fact that demand had collapsed and that production was not having time to adjust. There was a surplus of oil on the market and there was nowhere to store it, hence the prices.
Now the Brent is trading above $40, which is much more reasonable. Many countries have already adjusted their accounts, investments and programmes to that price. The shock of the past no longer reigns. However, this crude oil price affects the potential demand of many countries in the Middle East and others, such as Russia, which could demand much more if the price were different. But this price results from the current market situation, as it should not be forgotten that 93% of countries are currently in recession. As they emerge, this will also be reflected in the price of crude oil.
In general, we have not adjusted our insurance policies with these countries, beyond the changes in classification agreed by the OECD's country risk panel. But these changes affect the price of the coverage, not the policy of granting risks.
How does CESCE see the tension in the Mediterranean between Greece and Turkey, between France and Turkey, the gas exchange that everybody wants?
It is undoubtedly an added risk. In that area we were already witnessing a long-standing Israeli-Palestinian conflict, a rivalry between Shiites and Sunnis, many regional connotations. Now Turkey is coming onto the scene and even, at times, seems to be trying to recall its former Ottoman Empire. Turkey is occupying spaces that have been left empty by other diplomats and intelligences, and is being very active in Libya or Syria. This logically generates tension. The game board in the Middle East was complicated and is now more so.
What else should governments do to support exports that in the previous 2008 crisis helped companies to survive somehow?
Exporting is what always brought Spain out of the crisis. We only have to look at our economic history. The difference is that in the past we had the peseta, which we could devalue to increase our competitiveness and accelerate the recovery process.
In the 2008 crisis, however, we found that there was no peseta, so you did not have the correcting factor for devaluation. In addition, the significant budgetary adjustment we were undergoing meant that the public sector could not increase its budgetary and financial support for exports to help lead the way. In spite of this, Spanish companies went out, exported, internationalised and pulled the national economy. But the truth is that they had been laying these foundations for many years, as they had begun the process since Spain joined the European Community. The EU brought competition home to us and this forced us to go beyond our borders to counteract that competition. And the crisis accelerated that process, making exports a decisive factor in our recovery.
Today we have more than 160,000 exporting companies and we are the second country in Europe with the highest exports of goods and services in relation to GDP, behind Germany. As on the last occasion, the Administration does not have an open bar to support companies, but it is aware of the importance of exports and will clearly try to support them as much as possible, focusing its efforts on sectors and countries. Without going any further, the Spanish Government has just presented a Shock Plan to support internationalisation, with a budget of 2,643 million euros. Of these, 2,500 million euros are managed by CESCE, evidence of our importance in the set of instruments for financially promoting internationalisation.
