Reassessing down payments and maximum official support: Debate and aftermath
The recent expiration of a temporary rule has fuelled debate about fairness, precedent, and support for developing countries.
The export credit community has recently been engaged in a substantive debate over whether to make permanent the temporary rule, implemented under the OECD Arrangement during the COVID-19 pandemic, decreasing the minimum downpayment requirement for certain countries from the standard 15% to 5%. The rule also raised the maximum publicly supported financing portion to 95% of the value of the exported goods.
This measure, originally introduced to address the challenges of funding developing country transactions during the pandemic and recovery period, was extended but came under increasing scrutiny as the health-related justification faded. Its expiration on 13 December 2024 has provoked reflection within the export credit community regarding the appropriate balance between supporting exporters and managing financial risks.
The origins of the debate
It is natural to question the reasons and objectives behind the temporary rule’s introduction. It could be argued that developing countries require financial support (the impact motive, with ECA financing usually being more favourable than private market options), that there is a market deficiency issue (a lack of private risk-takers willing to cover the 15% down payment), or perhaps that the change addresses competition issues related to non-OECD public financing.
The current rule requiring a 15% minimum down payment and a maximum official support of 85% is clear, easy to understand, and backed by decades of precedent. The down payment rule was originally introduced to protect exporters and ensure they had access to financing during the manufacturing phase of exported goods. In order to keep this approach in place, it has been proposed to keep the 15% down payment rule intact while increasing maximum official support to 95%. In practice, this would mean that ECAs would finance 10% of the down payment while exporters would still receive the full 15% before the starting point of the credit.
Proposals and implications
This debate, viewed as a single point within the broader framework of rules, illustrates the horizontal characteristics of many of the Arrangement regulations. Taking the developing country (impact motive) rationale for adjusting the down payment requirement, similar justifications could arguably apply to all other relevant Arrangement rules (maximum repayment term, minimum premia rules, minimum interest rate rules, repayment profile, and others). In that case, a more holistic approach to rule adjustments for developing countries may be necessary to ensure consistency and fairness.
Developing countries are a large, heterogeneous group. In light of this, should any new rule be applicable to all such countries, or tailored to a specific subset? For instance, a new rule could focus only on the least developed countries (potentially maximising impact), the riskiest countries where private financing is less available (accounting for mixed signals about the private market’s ability to support down payment financing), or middle income countries which are better positioned to respond to competing offers.
A path to wider reforms?
Obviously, the debate on a single rule change is being overshadowed by debate over a new, more comprehensive approach to public transactions in developing countries: social infrastructure. These emerging ideas and proposals signal a gradual convergence of the rules governing the main Arrangement and tied aid, often referred to as the ‘Helsinki package’. Moreover, terms offered by Development Finance Institutions reflect another significant trend: making use of the blended finance concept.
All of this discussion, whether focused on the down payment question or the social infrastructure debate more broadly, suggests that there is a continued appetite for introducing even more flexibilities giving a larger role to ECA financing. Despite the recent outcomes of negotiations on the modernisation of the Arrangement, these types of adjustments appear to better reflect the realities under which ECAs operate while preserving the mandates of publicly supported export credits. After all, the Arrangement remains ‘a living document’. In the meantime, any Participant to the Arrangement may use existing rules for ad hoc proposals, known as the Common Line process, for specific transactions, including raising maximum official support to 95% or proposing other tailored solutions.
