Exporters Seeking More Risk Management

(Stephen Poloz, Export Development Canada)

Canadian exports rose by an unimpressive 1.4% in 2007. Even so, with the Canadian dollar riding high and the slowdown that emerged in the U.S. economy, it could have been worse. In the circumstances, exporters tapped into EDC’s services like never before.

EDC facilitated over $77 billion in export and international investment transactions during 2007, an increase of 17.5% compared with 2006. This is very rapid growth, especially given the slow pace of export growth overall. There were several reasons for this.

First, Canadian companies are increasingly investing abroad in order to break into new foreign markets, or to develop global supply chains - in short, in order to globalize their operations. Investing abroad is riskier than ordinary export sales, and requires a lot of capital.

Accordingly, EDC is regularly asked to participate in such transactions, often in partnership with banks. EDC can help to meet a shortfall in financial capacity, or can bring political risk insurance to the table so that more private sector participants will come forward. EDC facilitated $5.9 billion in new Canadian investment abroad in 2007, more than double the amount in 2006.

Second, although Canadian exports overall rose by only 1.4% in 2007, exports to emerging markets grew by 14%. Leading export destinations were Algeria, Brazil, China, India, Russia and Saudi Arabia, but transactions were supported in some 183 markets worldwide. Sales to emerging markets are generally perceived to carry a greater risk of non-payment than sales to major economies, leading exporters to make greater use of accounts receivable insurance.

Third, exports have not been weak across all sectors. There has been good growth in aerospace, telecom equipment and in equipment sales related to agriculture, mining and energy. These sectors have traditionally been relatively heavy users of EDC’s services. There has also been good growth in foreign infrastructure projects, which EDC often participates in so as to encourage procurement from Canada, particularly of engineering and construction services.

Fourth, EDC expanded its program for certain sectors that were under considerable stress in 2007. Notable among these were the auto parts sector, and the pulp and paper sector.

How does all this feed back into Canada? Every transaction that EDC facilitates must have demonstrable economic benefits for Canada. We estimate that the transactions facilitated by EDC in 2007 helped to generate 4.5% of Canada’s GDP, and helped sustain some 624,000 Canadian jobs.

The bottom line? Exporters were hit by a number of negative shocks in 2007, making it natural for them to make increased use of EDC’s risk mitigation tools. In 2008, we are expecting to see even more international risk, but even softer export performance at the same time.