Treasury Staff Insights: Rangitaki article by the Financial Markets team
This article explains the role of the New Zealand Export Credit Office (NZECO) and sets out the recent changes to NZECO’s mandate and products.
Earlier last year, following a review by the Treasury, the Government approved updates to NZECO’s mandate and amendments to some operational criteria and products. The changes will enable NZECO to support a wider range of businesses involved in exports, while also helping to develop a more diversified risk portfolio. The changes also bring NZECO closer to the international best-practice of other Export Credit Agencies who provide insurance and financial guarantees.
What is NZECO?
NZECO is New Zealand’s export credit agency and operates as a commercial unit within the Treasury. NZECO provides Crown-backed trade credit insurance and financial guarantees to support the financing and insurance of New Zealand exports in instances where private insurers or banks lack the credit capacity or risk appetite to take on this business. NZECO’s products and services focus on enabling growing exporters to establish themselves in new markets and to grow in size and profitability, which may then make them more insurable, bankable or investable by the private sector.
Since inception, NZECO has issued over 536 policies covering NZD 1.02 billion of risk, in support of 133 firms and NZD 2.5 billion worth of export transactions into 83 countries. This support has been weighted towards small firms establishing themselves in international markets, higher value-add exports and exports to destination countries beyond New Zealand’s top ten export markets.
Why were changes made now?
The Treasury conducted a review of NZECO in November 2015, following an earlier request by Cabinet and in advance of agreeing funding for NZECO for 2016/17 and beyond. Over the years, NZECO had also identified the scope for a number of incremental improvements that could be made to its products and mandate. These options were considered as part of the review.
NZECO mandate refresh
The review developed a new mission statement for NZECO that explicitly outlines its three primary objectives. The three objectives are:
- to promote and support NZ exports
- to complement rather than compete with the private sector, and
- to ensure that risk-appropriate commercial premiums are applied in order to fully cover NZECO’s operating costs and claims over the longer term.
This clearer mission statement will enable NZECO to balance its various objectives and to achieve growth, portfolio diversification and sustainability in the long run. The three objectives can also be used to measure performance and results.
What changes have been made to the product range?
The first change made is that the maximum level of political and commercial risk that NZECO can cover when underwriting letters of credit and export credit guarantees has been increased to 100%. This will enable NZECO to meet industry practice and market demand to underwrite 100% for such transactions, in circumstances where the New Zealand banks have limited credit capacity or appetite for certain regions and banks. Despite this, the standard approach is also to require a degree of risk-sharing by the insured party.
There have been two amendments to NZECO’s loan guarantees. The first is to remove the criterion that only firms with an annual turnover of less than $50 million are eligible for loan guarantee. The review identified a number of New Zealand exporters that were close to or above the previous limit, but would benefit from NZECO support. This change will not reduce the support available to smaller firms, but instead broadens the range of New Zealand companies that NZECO can support.
Secondly, the maximum term of the loan guarantee has been changed from three to five years. This was done on the basis that some firms need guarantees for longer-term loans for capital investments or offshore expansion. Support will be conditional on risk sharing with the firm’s bank as well as evidence of new equity being invested into the firm.
NZECO’s products have been extended to New Zealand based firms which are not directly exporting themselves but which are providing goods and/or services that are an integral part of an exporter’s supply chain. In New Zealand, many small and medium-size enterprises act as specialist suppliers of parts, components and services to larger exporting companies. These businesses often have to accept the payment terms of their exporter buyers, often without much negotiation power, which constrains their own working capital. Provided that a firm can demonstrate that their domestic good or service is integral to an exporter’s performance, NZECO can now provide its solutions to support these domestic firms.
Finally, a political risk investment insurance has been introduced to support firms’ overseas direct investment. New Zealand exporters can face many political risks in emerging markets when performing projects, investing in assets and/or sharing ownership in a foreign subsidiary or joint venture. Examples of such risks include political violence that can damage or destroy assets, or a foreign government taking control of companies or property. NZECO will now be able to provide political risk investment insurance to New Zealand exporters, which complements similar insurance offered by specialist political risk private insurers and multilateral agencies.
NZECO is now working to put these changes into effect and we hope that the increased support will enable New Zealand’s exporters to grow and prosper.
For more information about NZECO, see its dedicated website at: http://www.nzeco.govt.nz/
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Treasury Staff Insights: Rangitaki
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