x Abu Dhabi, UAEFriday 21 July 2017

Surge in Gulf trade credit insurance

Demand for trade-related credit insurance in the GCC is expected to rise by nearly 40 per cent this year as companies seek to improve their ability to secure finance and cover risks in markets like Europe and Africa.

A cargo ship at the entrance of Jebel Ali port in Dubai. A growing number of specialist insurers are seeking to take advantage of surging flows of trade in the region. Pawan Singh / The National
A cargo ship at the entrance of Jebel Ali port in Dubai. A growing number of specialist insurers are seeking to take advantage of surging flows of trade in the region. Pawan Singh / The National

Demand for trade-related credit insurance in the GCC is expected to rise by nearly 40 per cent this year as companies seek to improve their ability to secure finance and cover risks in Europe, Africa and other markets.

The forecast comes from Euler Hermes, the largest credit insurer in the world, which is targeting the region as one of its key growth markets for selling trade insurance services alongside the Americas, Asia and Russia.

"We have seen huge growth in the credit market in the region and the reason for this is that it's an increased credit risk awareness that has come out from entrepreneurs," said Massimo Falcioni, chief executive of Euler Hermes in the GCC. "We expect double-digit growth again in 2013 and 2014, which could be around 30 per cent."

The Paris stock exchange-listed company is one of a growing number of specialist insurers seeking to take advantage of surging flows of trade in the region. The vibrancy of trade across the region and in Dubai, in particular, which swelled 13 per cent to Dh1.2 trillion last year, is in contrast to a more sluggish flow of goods in Europe.

Trade credit insurance protects suppliers against the risk of a buyer defaulting on payments for goods and helps suppliers to offer longer payment terms to their buyers.

Euler Hermes experienced 54 per cent growth in its GCC portfolio last year. It helps insure about 46 per cent of the Dh20 billion trade credit insurance regional market.

Officials highlight several reasons for the growing popularity of the product in the region. First, in the post-global financial crisis era as availability of credit remains tight, companies are resorting to insuring trade deals to secure funding. More risk-averse banks are less willing to lend to traders if credit guarantees are not in place.

Second, companies also want to guard against the risk of default on trade payments by their buyers in some markets. Global insolvencies are forecast by Euler Hermes to rise by 8 per cent this year, with the highest rate of increase in cash-strapped countries in the euro zone.

Third, trade credit is becoming more essential for companies as they explore new markets such as Africa. The Dubai Chamber of Commerce and Industry plans to open a series of offices in Africa in the coming years to help Dubai companies export to the continent.

"The ability to access growing markets will be the key to developing new success stories," said Gregory Le Henand, the GCC country manager at Coface, the French credit insurer. "In this respect Africa with its 750 million consumers, its opportunities for growth in infrastructure and links to Asia will be the perfect candidate."

Demand for more traditional types of trade payment guarantees is also rising.

Barclays was experiencing a growing number of requests for letters of credit, said Sunil Rao, the head of financial institutions for the Middle East and North Africa at Barclays. Issued by banks, letters of credit guarantee that a buyer's payment to a seller will be issued on time and for the correct amount.

"The letter of credit volume goes up when there's concern about credit worthiness," he said. "Have we seen it go up? Yes, but when you look at it from a proportion of overall trade volume it has remained the same as the trade volume in the GCC has grown significantly."

 

tarnold@thenational.ae