The Islamic Corporation for the Insurance of Export Credits and Investment (ICIEC), the standalone export credit agency (ECA) of the Islamic Development Bank (IDB) Group, received a major boost for 2012 when Saudi Arabia recently announced that it is increasing its subscribed capital in the corporation by over five times from $13.5 million to $60 million.
This brings the Kingdom’s total number of shares in ICIEC to 60,000, the second largest after the IDB Waqf Fund’s 100,000 shares. Both these subscriptions dwarf the next ones by far – 5,000 shares each by Morocco and Pakistan.
The increase, approved by the Saudi Cabinet chaired by King Abdullah, is already in the process of being implemented and is pursuant to the decision of ICIEC’s Board of Governors in June this year to increase in corporation’s authorized capital from $240 million to $640 million. Indeed the board also adopted a resolution allowing financial institutions and business enterprises in its member countries to participate in the capital of the Corporation through a special class of shares. This would allow ICIEC’s business partners including Saudi Basic Industries Corp. (SABIC), Zamil Group and Saudi Industrial Export Companies in the Kingdom to become shareholders of ICIEC, albeit without voting rights.
Abdel Rahman Taha, chief executive officer of ICIEC, emphasized that the share capital increase of Saudi Arabia in ICIEC is a major new development and will help to significantly enhance its underwriting and reinsurance capacity.
In fact, ICIEC’s business relations with the government-linked agencies and corporates, and private sector entities in Saudi Arabia, are set to increase significantly in 2012 for various reasons. Riyadh has recently appointed its vice minister of finance, Hamad bin Suleiman Al-Bazai, who is also a US-trained economist, to the IDB board of executive directors and ICIEC board of directors.
At the same time Saudi Arabia is expecting a boom in exports and foreign direct investment (FDI) flows in 2012, both of which would require export credit and or investment insurance. For the period 2000-10, Saudi Arabia, according to the World Bank, for instance, was by far the largest recipient of cumulative FDI flows totaling just under $150 billion, followed by the UAE with just under $80 billion, Egypt with $55 billion, Qatar with $31 billion and Lebanon with $29 billion.
While the short-term outlook for global foreign direct investment (FDI) flows is bleak, although in the medium-term, FDI flows will get better and Saudi Arabia will continue to experience an increase in FDI and in exports, primarily due to its dominant position as the world’s largest oil and petrochemicals exporter.
This compared with the Arab Spring countries where foreign investors and exporters are adopting a wait-and-see attitude to see how the movement towards democracy in countries such as Egypt, Tunisia and Libya takes hold.
The World Bank’s Multilateral Investment Guarantee Agency (MIGA) in its 2011 World Investment and Political Risk report which was published in December in London, indeed confirmed that demand for political risk insurance (PRI) has increased to unprecedented levels, with PRI supply by members of the Bern Union remaining robust and pricing reflecting a buyer’s market. The rationale is that in these volatile times managing global political risks is a major challenge for investors and financiers alike. As the global economic and financial crisis and its impact on markets the world over; the euro zone sovereign debt crisis; and the fallout of the Arab Spring continue to fester, demand for investment, political risk and sovereign risk insurance is soaring as part of risk management and mitigation strategies.
In the MENA countries, this includes demand for Shariah-compliant PRI which has increased significantly, according to both ICIEC and the Aman Union, the association of investment and export credit agencies in the Arab and Islamic World.
ICIEC’s 2012 Strategic Focus is aimed at developing new products for various market segments, especially a sukuk guarantee fund in particular, which may be transformed into a new policy; the implementation of the corporation’s capital increase; the improvement of ICIEC’s expense ratio, which was high in its formative years, but should be now brought near to the industry average; at reaching out to ICIEC member countries in Sub-Saharan Africa to support the developmental objective of the corporation and the IDB Group; at enhancing the investment income of ICIEC to accelerating the build-up of reserves; at increasing the medium-term and foreign investment insurance business of the corporation to complement the short-term insurance business that has now matured; and at reviewing the corporation’s organizational set-up for Insurance Operations to help remove operational bottlenecks, and to enhance customer relationships.
With Saudi Arabia, ICIEC is engaged through two key products, namely, the comprehensive Short-Term Policy (CSTP) and the Documentary Credit Insurance Policy (DCIP). ICIEC recently signed a CSTP with PetroRabigh, a leading joint venture petrochemical company based in Saudi Arabia run by Saudi Aramco and Sumitomo Chemical of Japan.
According to ICIEC, the Policy will cover PetroRabigh’s exports to over 37 countries. The policy involves ICIEC “covering the whole turnover of PetroRabigh, whereby it provides open account credit to its buyers, and ICIEC’s involvement insulates PetroRabigh against the non-payment of its buyers due to commercial or political reasons.”
The policy, which was signed at PetroRabigh’s headquarters by ICIEC’s Taha and by PetroRabigh CEO, Ziad Al-Labban, will also allow PetroRabigh to explore new markets in North Africa, Europe, and the Far East; to ensure its balance sheet is protected against shocks by isolating the risk of non-payment; and to offer competitive credit terms to its buyers, directly enhancing its competitiveness in new markets.
ICIEC, on the other hand, stresses that it will have access to specialized databases which provide detailed information on the payment history and creditworthiness of millions of companies, allowing it to advise PetroRabigh on credit management and enhancement, where required.
The significance of this partnership can be overstated, for PetroRabigh comprises of 23 plants producing 18.4 million tons of petroleum-based products and 2.4mtpa of ethylene and propylene-based derivatives per annum. Indeed PetroRabigh as a company has the highest component of FDI in the Kingdom.
One short-term product that is gaining popularity is ICIEC’s Documentary Credit Insurance Policy (DCIP). Earlier this year, ICIEC issued its first DCIP to The Saudi British Bank (SABB) in Riyadh. Under this policy, ICIEC covers the LCs confirmed by SABB. ICIEC’s DCIP will help SABB to extend its LC confirmation portfolio to additional banks all over the world, particularly in some challenging countries where SABB would normally not confirm LCs without ICIEC’s support. This, says ICIEC, will enable SABB to increase its capacity for LCs issued by foreign banks while helping it to effectively manage some of its international bank risks.
ICIEC is currently working on a new product – Contract Frustration Policy – which is an enhancement of its Specific Transaction Policy with the inclusion of a new cover, Contract Frustration. This extension, according to ICIEC, sets up the Corporation as a distinct full-service Trade and Political Risk Insurer for its existing and potential clients in the market, especially those involved in large and complex cross-border projects.
“Companies that enter into sales and trade contracts overseas,” maintained the Corporation, “are constantly subjected to cross border perils. Government actions such as trade embargoes, import/export license cancellations, and currency transfer restrictions as well as unilateral termination of contracts by governmental entities and non-payment by a sovereign buyer or by a private company (when caused by a political event) can threaten a company’s contractual rights and its ability to do business in a given country. The Specific Transaction Policy (Contract Frustration) has been launched to cater to the needs of exporters to mitigate such risks.
The policy mitigates and covers against losses due to premature canceling of contracts by sovereigns; against non-performance of a trade or sales contract by either party due to political events, including pre-shipment risk, buyer’s country embargo and license cancellation; against buyer termination including post-shipment risk; against buyer non-performance; against guarantor non-payment including indemnification against breach of contract by an agent of the government otherwise known as a public buyer, and indemnification against breach of contract by a private entity or buyer caused by an act of government.
ICEIC business insured in First Half 2011 had increased by 96 percent to reach $1,499 million, and that new commitments approved during the Second Quarter 2011 reached $1,305 million as compared to $492 million during the same period last year, an increase of 165 percent. The total new commitments for the First Half 2011 reached $1,986 million, which is 128 percent of the target set for the period.
Similarly, according to ICIEC, the business insured during the Second Quarter 2011, which represents implemented insured shipments and projects, reached $870 million compared to $478 million during the same period last year, an increase of 82 percent.
Taha is confident that the Corporation stands ready to provide all kinds of support needed by its stakeholders. In this regard, the corporation is working in parallel to develop new products, to strengthen existing ones and to forge new reinsurance/coinsurance alliances and convince the central banks (CBs) in its member countries on the usefulness of credit and political risk insurance services provided by the ECAs.
In this respect, ICIEC conducted a number of seminars and has also met top central bank officials in Saudi Arabia, Malaysia, Bahrain, UAE, Pakistan and Egypt as part of the first phase of this initiative. In the next phase ICIEC intends to meet more Member Country central banks. The major focus of these meetings is to help the CBs to understand the ECA products; their ability to transfer risk and their treatment under the Basel II regime.
Taha believes that the CBs, once they understand the risk mitigating features of export credit insurance and political risk insurance, would allow its use by the commercial banks under their supervision. ICIEC has received positive feedback on these efforts.
