State-run Kredex fulfills vital financial role for exporters

  • 2005-10-19
  • By Kairi Kurm
TALLINN - Kredex, a state-run credit agency, may have to limit its short-term export guarantees to companies dealing with EU and OECD member states next year. The restriction is a result of the European Comission's preliminary assessment of Kredex, which determined that some of the agency's financial support mechanisms could be regarded as state aid.
Kredex's export guarantees to Estonian companies had been halted from January until July 2005, but were allowed to continue until the end of the year.

Andrus Treier, CEO of Kredex, believes that the agency's licence will be prolonged for the EU and OECD markets until EU officials have made a decision on the matter.

The export guarantee offered by Kredex enables an exporter to insure both short-term and long-term transactions, as well as cover political risks related to Estonian companies' foreign direct investments. Treier said that, for years, there has been a lack of supply for long-term guarantees and guarantees to non-marketable areas. Thus, the agency was filling an essential market niche.

"The main aim of the state guaranteed scheme is to promote exports. Good exporters are big exporters. To become big, equal opportunities should be offered to small exporters," said Treier.

Currently Euler Hermes is the only private insurance company registered in Estonia offering similar export guarantees. Frank Wille, a manager, said he hopes that Kredex would focus on assisting exporters with so called non-marketable risks in Russia, Belarus, Asia or Africa. Kredex's statement that the private insurance market was not interested in guaranteeing the risks of small companies taking loans from banks, he stressed, was not true. But he remains optimistic in the matter and believes that Kredex and Euler Hermes could cooperate.

"Russia is such a huge market. There is enough room for everybody," said Wille.

Not everyone agrees. Mart Mere, managing director of the insurance brokering company Marsh Kindlustusmaakler, says he does not support cooperation between a state agency and a private company. He also says that, generally, private insurance companies are less willing to cover risks in the East. Euler Hermes is one example.

As an insurance broker, Marsh Kindlustusmaakler intermediates products of all insurance companies, including Euler Hermes and Kredex.

"It does not affect our business if Kredex receives a licence from the European Commission. They are our joint partners. They are necessary, but we can do without them," said Mere.

He agreed with Wille that there was no reason to fear that small companies would not receive export guarantees from private insurers if Kredex were to be out of the game. "Usually the premium rates offered by private insurers are lower than those of Kredex," said Mere.

According to Treier, private companies insure entire export deliveries, while through Kredex, it is also possible to insure only riskier transactions. "The rate is higher, but in general it comes cheaper," said Treier.

Kredex's guarantee premium is between 0.3 to 0.7 percent of the guaranteed credit and sometimes higher, but not more than 1 percent. The guarantee coverage is 90 percent for business risks and up to 100 percent for political risks.

Tambet Made, board chairman at the non-profit export development organization Estonian Trade Council, supports Kredex's export guarantee services. "It is very positive, and they should continue forever. They have been of much help for Estonian companies," he said. "The Estonian market is small, and we will never have a proper amount of private insurers. So the service should be provided by a state foundation."

Kredex is currently guaranteeing exports of 100 companies against the risks of 400 buyers. Last year Kredex guaranteed 0.9 percent of Estonian exports 's to the tune of 648 million kroons (42 million euros).

The goal is to boost that to 1 - 2 percent, as is common in most countries. In Slovakia, the state credit agency covers 10 percent of total exports. Only in Latvia, Lithuania, Malta and Cyprus do no such state guarantee organizations exist.

The agency posted earnings of 3 million kroons last year. So far this year, Kredex has lost more money in claims than it has received in premiums. The aim is to reach the break-even point over the long term, explained Treier.

Hekotek was the first company to receive a long-term export guarantee to Russia. The company sold equipment to a Russian company, and with a Kredex guarantee the buyer has five years to repay the loan to Hansapank.

Heiki Einpaul, chairman at Hekotek, said the process itself had not been easy, since it was the first case. It took a long time, and the conditions were not flexible enough, he said.

Still, he supports Kredex on all markets. "I haven't found a serious alternative so far," he said.

Treier stressed the importance of state systems, especially in terms of crisis situations. The 2001 attacks on New York's World Trade Center showed how vulnerable the private insurance sector was, he said.

Kredex's own vision is to become a self-sustaining fund that acts in the public interest by decreasing market failures and directing the credit market. The European Investment Fund shares the risks taken by Kredex in guaranteeing bank investment loans to the extent of 50 percent from the guaranteed amount. Besides export guarantees, Kredex offers loan and housing guarantees.

"One important aspect in providing the state guarantees is that it should not distort the private markets. This is the reason why the activities are limited and state aid rules applied in the EU," said Treier.