Global | Publication | January 2024
The fall-out from the COVID-19 pandemic aggravated what the Organisation for Economic Cooperation and Development (the OECD) described as market failures1 in which the private sector has been hesitant to provide insurance cover for low and middle income countries.
Under the Arrangement on Officially Supported Export Credits (the Arrangement), first enacted in 1978 and most recently updated in 2023, export finance transactions must feature a downpayment of 15%. To counter these perceived constraints and as part of a broader modernisation package2, this down payment was reduced from 15% to 5% in 2021 through a Common Line agreement, CL-XCR 2/2021. As of 12 December 2023, and following agreement between Participants3, the OECD extended this Common Line agreement until 13 December 2024 (CL-XCR-02-2023, the Common Line agreement).
This memorandum will set out the provision on down payments in the Arrangement, before explaining how the Common Line agreement modifies this.
The general rule is that, where goods and services are the subject of official support, purchasers are required to make down payments equating to at least 15% of the export contract value at or before the start of the credit line.
(a) Calculation of overall export contract value
To establish when the credit line begins, it is necessary to consult the conditions for the relevant grouping as defined in Annex XIII:
(i) Parts or components (intermediate goods) including related services;
(ii) Quasi-capital goods, including related services – machinery or equipment, generally of relatively low unit value, intended to be used in an industrial process or for productive or commercial use;
(iii) Capital goods and project services – machinery or equipment of high value intended to be used in an industrial process or for productive or commercial use; or
(iv) Complete plants or factories – complete productive units of high value requiring the use of capital goods.
(b) Applying reductions
It is worth noting that the export contract value can be proportionally reduced in cases where the transaction includes goods and services from a third country that does not fall within the remit of official support. This, in turn, can proportionally reduce the down payment amount4.
(c) Official support parameters
It is possible to finance and/or insure 100% of the premium and it may or may not be included in the value of the export contract itself. Official support for downpayments covered in the Arrangement must only take the form of insurance or guarantee against usual pre-credit risks.
Official support may be provided by Participants for local costs where:
(i) The maximum amount of official support for local costs shall not exceed:
(A) for Category I countries, 40% of the export contract value.
(B) for Category II countries, 50% of the export contract value5.
(ii) Official support for local costs shall not be provided on terms more favourable/less restrictive than those agreed for the related exports.
(iii) Where official support for local costs exceeds 15% of the export contract value, such official support shall be subject to prior notification, pursuant to Article 446, specifying the nature of the local costs being supported.
Outside of the down payment parameters of the Arrangement, Participants are not able to provide official support in excess of 85% of the export contract value (taking into account third country supply but excluding local costs).
Under Article 59 of the Arrangement, its terms can be adjusted through Common Line agreements for a period of two years at a time. Common Lines are understandings between Participants to agree specific financial terms and conditions for official support. Once agreed, a Common Line supersedes the Arrangement as per the use-case specified in the Common Line.
The Common Line agreement in question (CL-XCR-02-2023) reduces the downpayment rate specified above to 5%. This reduction is only available for sovereign buyers in Category II countries7 that have a country risk category of 5-7 (inclusive). Country risk categories correspond to likelihood of whether the country will be able to service their external debts (as per Article 22).
(a) Country Risk Assessment Methodology
The rating is applied through a two-step methodology:
Step One – Quantitative
First, a quantitative model – the Country Risk Assessment Model (CRAM) – assesses each country on three risk indicators:
(i) payment experience reported by the Participants,
(ii) the financial situation based on IMF indicators, and
(iii) the economic situation based primarily on IMF indicators.
Step Two – Qualitative
Country risk experts from OECD members produce a qualitative assessment in order to capture factors that are not included in the CRAM. Changes to the CRAM brought about by this qualitative assessment must be approved by a consensus of the country risk experts.
This is an evolving list, and the Arrangement requires that this list is made publicly available8. Additionally, a guarantee from the ministry of finance or central bank must be obtained.
(b) Implications
This renewal of the downpayment Common Line amendment first put in place in 2021 will now run until 13 December 2024. This means that ECAs will be able to continue offering a significant coverage on export contracts of up to 95% as opposed to the 85% envisaged in the original Arrangement.
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