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Export credit guarantees: The commodity credit corporation and US agricultural export policy
[~UTTERWORTH
Food Policy, Vol. 20, No. 1, pp. 27-39, 1995 Elsevier Science Ltd Printed in Great Britain
0306-9192(94)00003--4
Export credit guarantees: the commodity credit corporation and US agricultural export policy B e n g t H y b e r g , M a r k S m i t h , D a v i d S k u l l y a n d Cecil D a v i s o n Economic Research Service, USDA, Washington, D. C., USA A model is presented to explain the economic incentives for export credit guarantee programs. A methodology for estimating the discount component of credit guarantees from the importer's perspective is developed and applied. The cost of offering CCC credit guarantees is discussed as are issues regarding the effectiveness of the programs. In general, we find that the program benefits both importers and exporters. Keywords: export subsidies, agricultural trade
Tight budgets as well as global and bilateral trade negotiations have brought greater srutiny to agricultural export assistance. The United States uses four broad programs to enhance agricultural exports: the Export Enhancement Program (EEF), food aid programs such those authorized under Public Law 480, promotion activities under the Market Promotion Program, and Commodity Credit Corporation (CCC) export credit guarantees. The first three programs have been the subject of analysis in other studies (Anania et al., 1992; Ackerman and Smith, 1990; Bremer-Fox et al., 1990; Nichols et al., 1991). However, an economic analysis of the role of credit guarantees has not been conducted, a surprising lack of scrutiny for the largest current agricultural export program of the United States. 2 The face value of credit guarantees is often used as a measure of the extent of the program, but, this unfortunately overestimates both the program's costs and its trade effects. It is, therefore, limited to providing a general measure of program activity and is not helpful in providing estimates of the program's cost or effectiveness in increasing exports. To further meaningful analysis, this study addresses a number of issues concerning credit guarantees. We will examine credit guarantees and propose an explanation for why they are a common tool in agricultural trade, provide a means to estimate the value of credit guarantees for importers, estimate the discount value of these guarantees, and discuss the discount value compared with a measure of the cost of offering CCC credit guarantees. tThe views expressed are those of the authors and do not necessarily represent the policies of the US Department of Agriculture or the views of other US Department of Agriculture staff members. 2CCC export credit guarantee programs had a $5.7 billion program level in fiscal year 1993; an aggregate of $48 billion in credits and credit guarantees have been approved by the CCC since fiscal 1979.
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Export credit guarantees: B. Hyberg et al.
Background The CCC export credit guarantee programs are operated through the Office of the General Sales Manager (GSM) in the Foreign Agricultural Service (FAS), a US Department of Agriculture (USDA) agency. The CCC export credit programs have included direct CCC export credits (known as the GSM-5 program), but since fiscal 1979 have been primarily export credit guarantees. Currently, operating programs are the Export Credit Guarantee (GSM-102) and Intermediate Export Credit Guarantee (GSM-103) programs, which guarantee repayment of private, commercial credit extended for up to 3 years, and between 3 and 10 years, respectively. These programs were designed to facilitate US commercial agricultural exports to countries that may not be able to purchase those exports without credit, and to help meet export competition from other exporting countries (Ackerman and Smith, 1990). Most major agricultural exporters also offer export credit guarantee programs.
Estimating the discount component of CCC credit guarantees We hypothesize that differences in credit worthiness can create a situation where an importer and exporter both can benefit from credit guarantees. When an exporter has a better credit rating than a prospective importer, the exporter can offer the importer more favorable interest rates than are otherwise available to the importer. In this case the importer benefits by facing a lower total cost for the transaction, and the exporter benefits by becoming more competitive without reducing prices or expending funds. The exporter does this by incurring risk in guaranteeing private credits extended to the importer. The importer's case
Assume an importer wishes to purchase a quantity of grain, Q, for price, P. The buyer borrows the funds to purchase the grain. In this case, the cost of the grain would be, 3 C = QP(I+r)',
(1)
where Q = quantity purchased, P = price of grain, r = market interest rate for importer, 4 and t = period of the loan. If the buyer, as is characteristic of most CCC program participants, has a low or moderate credit rating, then r will be above the London InterBank Office Rate (LIBOR) plus 25 basic points, a rate that applies to many CCC-guaranteed loans. A buyer qualifying for a CCC credit guarantee can obtain financing at the lower rate. In this case the cost of the loan is C = QP(l+g)',
(2)
where g = LIBOR plus 25 basic points. The importer will assess the loan value under the credit guarantee program by 3For simplicity, this presentation assumes the repayment of principal is made with a single payment at the end of the loan. In practice, CCC guaranteed credits are repaid in semi-annual or annual installments. The transformation to capture the periodic principal payments is straightforward. +I'he interest rate r is variable and changes across countries. For simplicity assume the rate at the time of the approval applies for the length of the loan.
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looking at the flow of payments paying rate g, and discounting these payments at the alternative rate r. M = QP(l+g)t/(l+r)/.
(3)
The value M is the discounted value of the purchase, as perceived by the importer. The effective purchase price to the importer under a credit guarantee program is then PeG = M/Q,
where P c 6 = effective price of grain with a credit guarantee. The discount is the difference between P and PcGSince the lower interest rate reduces the cost of grain to importers, credit guarantees allow importers to realize a discount for commodity purchases. The value of a credit guarantee increases as the difference between the Government and commercial interest rates increases. One would expect to observe a greater demand for credit guarantees as the Government rate decreases and the available commercial rate increases. Thus, credit guarantees would be most likely used for sales between financially sound exporters and financially troubled importers. The most extreme case would be when the importer is unable to obtain commercial credit without the credit guarantee. On the other hand, if the importer can obtain a rate comparable to that offered by the exporter, then the reason for that country using credit guarantees would have to be explained outside of this paradigm. The procedures for estimating the value of these credits are straight forward present value calculations. However, practical considerations such as determining the appropriate discount rates for different participating countries and estimating the commodity specific components of CCC guarantees has up to now prevented the estimation of these discounts. The exporter's case
Under the CCC export credit programs, a US exporter negotiates a sale with an importer in a country with a credit guarantee allocation. Commercial banks are used to obtain financing at commercial rates. The CCC reviews the contract and, if the contract is acceptable, the CCC provides a guarantee for the credit. Usually the guarantee covers 98 per cent of the port value of the commodities and a portion of the interest. The CCC incurs no cost as long as the loan is repaid as scheduled. However, the program involves risk and, as discussed below, at times CCC payments are made to participating US creditors who have not been paid as scheduled. In such cases, a simple formula for the government cost for a given sale, ignoring guaranteed interest costs, is G = .98 (QP) - PR, where PR = is the amount of principal repaid prior to the default.
Estimating the value of CCC credit guarantees to importers We conducted a study of the CCC export credit guarantee programs from fiscal year 1979 (when CCC export credit guarantee programs started) through fiscal year 1992. The information needed to estimate the discount component of the credit Food Policy 1995 Volume 20 Number 1
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Export credit guarantees: B. Hyberg et al. Table 1 Moody's DBL's and Institutional Investor's Ratings Moody's / DBL's credit rating (CR)
Institutional Investor's risk rating (RR)
Aaa Aa A Baa Ba/B
85 70 60 50 40
guarantees is the appropriate market interest rate for each participating country in each year, the amount of each loan, and length of each loan. 5 The market interest rates for participants of CCC export credit programs must be estimated because the CCC programs almost exclusively focus on exports to middle- and low-income countries and a secondary market for bank loans involving many of these countries either has not been established, or has only recently developed. This difficulty is compounded by the fact that the financial standing of many of the participating countries has changed rapidly and often. In the late 1970s, Institutional Investor (1979--1992), a key international financial periodical, began to publish annual evaluations of the credit worthiness of countries. This series is the longest and most consistent available, commencing in 1979 and giving each country a score between 0 and 100, with 100 being the least risky, highest quality borrower. These scores are not sufficient to provide a market-based interest rate for sovereign borrowers. To get a reasonable approximation of market rates, we need to develop a linkage between these scores and market rates. This is done using the US corporate debt market. Investment services such as Moody's, Standard and Poor's (S&P), and Drexel Burnham Lambert (DBL) evaluate the quality of corporate borrowers. Their ratings are similar to those of Institutional Investor, but use a different scale (Table 1). Both Moody's and S&P calculate indices of the interest rates paid by issuers of investment grade debt (Baa and above for Moody's, BBB- and above for S&P's). DBL calculates an index for the interest rate on non-investment grade debt, more often called junk bonds. Non-investment grade debt is defined by Moody's as Ba and B, obligations rated Caa and below are considered default grade. These ratings provide a link between corporate credit ratings and interest rates. In the late 1980s, a secondary market for bank loans to developing countries emerged. As this market was developing, Moody's, S&P, and DBL began to assign credit ratings to the most actively traded sovereign debt. Moody's credit ratings from the period 1989-1992 were used to estimate the Institutional Investor range of risk scores covered by each commercial grade. We show the mid-point score of each commercial grade in Table 1. Since interest rates associated with the commercial credit ratings are observed, this mapping provides the link between the Institutional Investor scores and commercial market rates. Using the yield in the US Treasury bond of equivalent maturity as a reference point denoting the least risk, the risk premium for each country is estimated by subtracting the US Treasury bond rate from the corporate bond rate. This was done for each year examined. 5To estimate the effect of the CCC export credit programs on trade, these estimates need to be made by commodity and the relevant elasticities of import demand obtained. This is the subject of continuing research; additional detail is available from the authors. See Skully (1992) for an example of this approach for other programs.
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The relationship between risk premia [rr] and Moody's credit ratings (CR), and the relationship between Moody's credit ratings and Institutional Investor's risk ratings (RR) were used to developed a link between the risk premia and risk ratings.
H =f (CR) CR =g (RR) h
=fog
I1 =h (RR). Risk premia vary constantly as investor attitudes shift and the supply of bonds in different grades changes. For example, a 'flight to quality' can raise the premium on low quality debt relative to higher quality debt. On the supply side, a large supply of bonds of a particular grade may increase its relative premium. To account for such shifts, a curve was fitted to the five data points (risk ratings) for each year, using a quadratic log functional form H = ~o + ~1
RR + 132 ( R R )
2 + [33
In (RR) + c.
The quadratic log functional form was used because it captures the nonlinear shifts among risk premia, and provides a good fit to the data points. 6 The risk premia generated by this process are for long term (20-30 year) debt, and are valued relative to US Treasury bonds. Since CCC export credit guarantees are generally for a term of 1, 3, or 5 years and the num6raire for export finance is the LIBOR rather than US Treasury rates, the estimated risk premia need to be adjusted to permit examination of the CCC programs. The adjustment to make a risk premium relative to LIBOR is straightforward: the LIBOR is subtracted from the corporate rate. The adjustment for the maturity is more involved and is discussed in Appendix 1.
Examination of commodity-specific discounts Before one can estimate the effectiveness of export credit guarantee programs, one must first determine the extent to which the programs increase exports to participating markets per unit of government expenditure. To make this measurement, one requires the identification of credit guarantees by specific commodity, country and year of sale; an estimation of the discount element for credit guarantees for each specific commodity, which will vary across countries and years; the elasticity of demand by commodity for each importer; and an estimation of the government expenditure on credit guarantees. This study concerns valuing a credit guarantee from the importer's perspective. ~'An undesirable property of this formulation is that it can produce extreme values beyond the range of observed values. In the case of the country risk rankings, values less than 40 are vulnerable to this bias. To avoid problems with extreme value estimates, the risk premia for countries with non-investment grade ratings were constrained to satisfy the following criteria: • the sets of ratings must be consistent with one another, therefore, debt with a lower risk rating should never have a lower spread than debt with a higher score; • premia should not increase at an exponential rate. These criteria were met by restricting the rate of change in the risk p r e m i u m for high risk countries. When a risk ranking was less than 40, the risk p r e m i u m could change by no more than 15 basis points per one unit change in risk score.
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Export credit guarantees: B. Hyberg et al. Table 2
CCC export credit program approvals, total and selected commodities, fiscal years 1979-1992 CCC program
Fiscal year
Total Approvals (million dollars)
Approvals for Specified Crops* (million dollars)
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Total
1 627 1 524 2 133 1 543 4 737 4 402 2 513 2 535 2 873 4 504 5 195 4 296 4 522 5 684 48 090
1 246 1 029 1 509 1 202 3 875 3 442 1 717 1 740 1 878 2 898 3 533 3 063 3 803 4 210 35 116
*Wheat, wheat flour, corn, barley, sorghum, soybeans, soybean meal and soybean oil. Numbers may not add to totals because of rounding. Source: USDA, FAS, Program Operations Division. Annual reports on CCC export credit programs, 1979-1992. Figures include relatively small amounts of direct credits under the GSM-5 program.
To estimate the value of annual commodity specific loans we examined the approvals by commodity for wheat, wheat flour, corn, barley, sorghum, soybeans, soybean meal and soybean oil for fiscal years 1979-1992 (US Department of Agriculture, 1979-1992). Three sources of information were needed to generate a commodity-specific data set on credit guarantees and their associated discounts: the "Notice to Exporters" (US Department of Agriculture, 1979-1992) reports which show credit guarantee approvals by commodities and markets; the "Notice to Recipients" (US Department of Agriculture, 1979-1993a) reports which show exports under under the CCC export credit guarantee programs, and US export statistics from the Foreign Agricultural Trade of the United States (FATUS) (US Department of Agriculture, 1979-1993b). The starting point for estimating the annual credit approvals for each commodity, by country, is with the annual CCC approval reports. However, data in the approval report are often designated for a group of commodities (i.e. feed grains, oilseeds, coarse grains, protein meals, wheat and/or wheat flour, or vegetable oils). Using export data and methods discussed in Appendix 2, we estimated credit guarantee usage by commodity for participating markets. The estimates for the amount of credit guarantees under the CCC programs for these commodities by year are shown in Table 2. An estimated breakdown of approvals by commodity is shown in Table 3. To estimate the value of the interest rate discount associated with CCC export credit guarantees, equation 3 was used. 7 The interest rate estimated for each participating market, the commodity-specific CCC guarantee amount, the terms of
7The equation was modified to reflect a 3-year loan with annual payments of one-third of the principal and all of the interest accrued. This conforms with the terms of many credits under the CCC credit guarantee program. Suitable modifications were also made to deal with credits with different maturities.
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Export credit guarantees: B. Hyberg et al. Table 3
Estimated CCC export credit approvals by selected commodities, 1979-1992 Raw products
Fiscal year
Wheat
Corn
Soybeans
Sorghum Barley (million dollars)
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Total
416 389 586 679 1 603 1 896 971 810 738 1 075 1 521 1 211 837 1 592 14 325
529 459 574 268 956 795 349 361 479 732 709 882 1 320 849 9 460
45 45 86 121 512 68 77 255 321 406 431 275 522 692 3 856
29 4 14 38 392 326 122 38 58 107 233 275 277 398 2 309
5 0 15 0 20 105 0 1 9 73 25 44 14 36 348
Processed products Soybean Flour Meal Oil
Total
0 6 12 4 124 7 30 74 75 36 101 40 4 38 550
125 61 68 79 144 100 1118 80 65 195 143 134 49 102 1 452
1 246 1 029 1 509 1 202 3 875 3 442 1 717 1 740 1 878 2 898 3 533 3 063 3 803 4 210 35 116
Processed products Flour Meal Oil
Total
0 * * * 4 1 1 7 7 3 8 3 * 2 37
9 8 24 19 11)6 11)5 71 122 132 21)2 219 153 166 220 1 556
98 64 154 13 125 145 61 91 134 274 370 202 581 504 2 816
Numbers may not add to totals because of rounding.
Table 4
Discounts by selected commodities, 1979-1992
Fiscal Year
Wheat
Corn
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Total
4 3 4 10 45 66 47 56 45 68 88 63 36 95 629
* 3 13 2 23 13 6 23 35 59 50 42 70 47 387
Raw products Soybean Sorghum Barley (million dollars) 0 0 2 2 11 3 3 19 23 25 24 11 20 25 166
* * * * 12 7 5 3 5 8 14 13 11 11 89
0 0 * 0 1 6 0 * 1 4 2 3 1 2 20
0 * 3 1 4 7 4 7 10 20 23 11 27 30 148
5 l l 4 7 4 6 6 6 14 9 8 3 6 79
Numbers may not add to totals because of rounding. *Less than $11.5 million.
each loan, and LIBOR were used to estimate the discount rate discounts inherent in the commodity-specific credits are provided in Table 4. An analysis shows that the discount component of CCC export credit guarantees averaged close to 4.5 per cent of the amount of the credit guaranteed. The more than $35 billion in credit for bulk agricultural commodities (wheat, corn, soybeans, barley, sorghum, oats) and processed products (flour, and soybean meal and oil) guaranteed by the CCC between fiscal years 1979 and 1992 allowed participating importers to effectively realize a discount of $1.5 billion. The percentage discount varied over time as global interest rates and the importers participating in the Food Policy 1995 Volume 20 Number I
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Export credit guarantees: B. Hyberg
e t al.
10 9 8
m
7 6 5 4 3 2 1 0
I
I
I
I
I
I
I
1979
1981
1983
1985
1987
1989
1991
Fiscal year
Figure 1 Discount as share of approvals. program changed. As shown in Fig. 1, the discount ranged from less than 1 per cent in fiscal years 1979 and 1980 to slightly more than 7 per cent in fiscal 1986. The discount for the individual commodities over the fiscal 1979-1992 period ranged from about 4 per cent for sorghum to approximately 7 per cent for wheat flour. The average interest rate discount for corn, wheat and soybeans, the three major bulk commodities, ranged between 4 and 4.5 per cent. Wheat shipments under CCC programs had the largest implicit interest rate discount for the period, while corn and soybean shipments under CCC programs involved $387 million and $166 million dollars of implicit interest rate discounts. The discount for the purchase of bulk products such as wheat, soybeans, and corn was found to be less than the discount to purchase processed products such as wheat flour (7 per cent) or soybean meal or oil (6 per cent). This result could be an indication that countries that lack a developed processing sector have a lower credit rating. In other words, those countries that must import processed products due to an inability to process raw commodities are likely to be a greater credit risk than those countries that have sufficient processing capabilities. The interest rate discount of markets using the CCC export credit programs varies according to their credit ratings, with those importers of the lowest credit rating realizing the largest benefits. Markets realizing the highest interest rate discounts include Egypt (7 per cent) and Iraq (9 per cent). Mexico and the FSU, the two largest program markets, realized interest rate discounts of between 5 and 5.5 per cent, respectively.
C o s t o f C C C e x p o r t credit g u a r a n t e e s CCC export credit guarantee programs have a direct cost to taxpayers because guaranteed credits at times fall into arrears, a claim is made on the CCC, and the US Government is unable to reach agreement to collect or reschedule the loan with the importer's government. After a claim is paid, the CCC attempts to collect from the debtor nation or reschedule the debt through the Paris Club, an international forum where creditor governments and debtor governments reschedule debt between them. Rescheduled loans do not pose a direct cost to the US Treasury, assuming they are ultimately repaid, because the US Government can borrow at 34
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less than LIBOR. While repayment terms are often extended for rescheduled debt, the interest rate charged allows the US Treasury not to incur a loss. At times, no rescheduling agreement is reached. Iraq is the largest current example of such unrescheduled claims. For most of the study period, costs of the program were measured in terms of claims made by the CCC. Between fiscal years 1979 and 1992, about 10 per cent of the CCC guaranteed credits fell into arrears and had claims made against them (US General Accounting Office, 1992). Of the approximately( $4.3 billion in claims paid, the US Government rescheduled almost $2.9 billion. ~ While this is a sizeable amount, the interest rate that the CCC charges on rescheduled loans allows the US Treasury not to incur an economic loss, assuming the loans are repaid. Under procedures set forth in the Federal Credit Reform Act of 1990, and which became effective with fiscal year 1992, the cost to the US taxpayer of providing credit guarantees in a given year is determined by estimating the present value of future claims paid stemming from provision of a credit guarantee. For example, in fiscal year 1992, $156 million in costs were estimated for the $5.7 billion in possible GSM credit guarantees that could have been extended in that year. Such an estimate is an on-budget cost that must be appropriated by Congress; the estimate is an attempt to associate future claims paid with the program year in which the credit guarantees are extended. In fiscal year 1994, the budgetary cost was about $400 million. The US General Accounting Office (GAO) conducted an analysis of the cost of CCC export credit guarantees and found that the cost of operating the GSM-102/ 103 programs was very high - about $6.5 billion. 9 However, the analysis was based on the market value of the outstanding debt for which the CCC was potentially liable and the rescheduled debt on which the CCC had already paid claims. In other words, if the CCC had to pay claims on all guaranteed credits, and sell on a secondary market its accounts receivable (from rescheduling that and earlier debts), then GAO found that the CCC would generate revenues equal to only about half the value of the credits. From another perspective, the cost of the programs is much less than claimed by GAO. Unrescheduled claims paid through fiscal year 1992 amounted to about $1.5 billion. Almost all of this was in credits to Iraq, which ceased servicing its debts when the US established economic sanctions after the Iraqi invasion of Kuwait (US General Accounting Office, 1992). Related to program cost, the Foreign Operations Appropriations Act of 1991 authorized forgiveness of $1.3 billion of rescheduled debt, most of which was for Poland. Claims paid on credit to Poland started in fiscal year 1981 when the military leadership violently suppressed the Solidarity movement.
Discussion The use of agricultural credit guarantees to stimulate agricultural exports can be explained by the fact that both exporters and importers can benefit from credit guarantee programs. Importing countries unambiguously benefit by receiving 8Ideally, one would wish to identify those claims paid on the guarantees approved for the commodities studies. However, since claims paid could not be disaggregated by commodity, the percentage is based on credit guarantees for all commodities rather than just the $35 billion in commodities discussed earlier. ~Calculated from US Department of Agriculture (1993).
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Export credit guarantees: B. Hyberg et al.
commercial credit terms more favorable than otherwise available, which lowers the cost of agricultural goods. Exporters with superior credit ratings can benefit by providing interest rate discounts which reduce the cost of their commodities relative to less credit worthy exporters. 10 If the exporter can avoid customers such as Iraq which default and fail to reschedule, the exporter can, through credit guarantees, implicitly but effectively allow the importer to realize discounts at a relatively low cost. For example, the 1992 program cost of the credit guarantee programs was less than 20 per cent of the $970 million in Export Enhancement Program (EEP) subsidies. The potential of exporters to offer low-cost discounts explains why exporters use credit guarantees in addition to the more well-known direct price subsidies to stimulate sales. Compared with the EEP bonuses, the 4-7 per cent interest rate discounts observed by importers under the CCC export credit and credit guarantee programs are relatively small. The EEP bonus level has been as high as 36 per cent of the export price for wheat, so EEP bonuses have a greater impact on the effective price than credit guarantees, and are better suited for price-based competition. ~1 However, if foreign exchange constraints are binding, then a credit guarantee program may be more effective in promoting exports, even though providing less of a price discount. For example, even if a country is price sensitive, if it cannot obtain credit to make the desired purchase, then a price subsidy will be of little use. On the other hand, if credit is provided, then the country may proceed with a purchase, perhaps without a price subsidy. The provision of credit may lessen an importer's price sensitivity, and the importer may purchase from the exporter that provides credit rather than from one who provides an explicit price subsidy without credit. Two countries, Iraq and Poland account for most of the unrecouped claims. We estimate that unrecouped claims paid outside of credits to Iraq total less than 1 per cent of the total credits guaranteed by the CCC from fiscal year 1979 through 1992. In contrast, claims paid for credits to Iraq importers and debt forgiveness for Poland total about 6 per cent of credits guaranteed by the CCC. This suggests that political risk, the risk associated with non-payment due to political reasons (e.g. war, social upheaval), has been responsible for most of the unrescheduled claims paid under these programs. The discussion of unrescheduled loans suggests the bulk of the costs under the program may have resulted not from commercial risk, but from political risk. When loans to Iraq and Poland are excluded from the analysis, the CCC program appears to obtain its objective, providing a low-cost means to increase agricultural exports.
Summary The analysis demonstrates that the CCC export credit guarantee programs are mutually advantageous to the US and importers of US commodities. The advantage to importers is an estimated 4.5 per cent reduction in the total cost of purchasing specific agricultural products from the US The advantage to the US is the ability to offer this at a relatively low cost. From one perspective, the credit guarantee programs had a cost of about $2.8 billion between fiscal years 1979 and
J°However, a full analysis of the benefits requires an estimation of the increased sales generated by a credit guarantee program. Such an analysis while of interest is beyond the scope of this study. J~Savings in deficiency payments help offset program expenditures in both cases.
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1992, or about 6 per cent of the value of credit guarantees extended. Almost all of this cost can be attributed to political risk rather than commercial risk.
References Ackerman, K. and Smith, M. (1990), Agricultural Export Programs: Background for the 1990 Farm Legislation. Commodity Economics Division, Economic Research Service, US Department of Agriculture, Staff Report No. AGES 9033, Washington, D.C. Anania, G., Bohman, M. and Carter, C. (1992), 'US export subsidies in wheat: strategic trade policy or an expensive beggar-thy-neighbor tactic?' American Journal of Agricultural Economics 74 (3), 534-545. Bremer-Fox, J., Bailey, L. and Mervenne, M. (1990), Food Aid Impacts on Commercial Trade: A Review of The Evidence. US Agency for International Development, Washington, D.C. Institutional Investor (1979-1992). Various issues. Nichols, J., Kinnucan, H. and Ackerman, K. (eds) (1991), Economic Effects of Generic Promotion Programs for Agricultural Exports. Texas A&M University, College Station, Texas Skully, D. W. (1992), 'Price discrimination and state trading: the case of US wheat', Euro. R. Agr. Eco. 19, 313-329. US Department of Agriculture, CCC (1993), Annual Report for Fiscal Year 1992. US Department of Agriculture, Foreign Agricultural Service (1979-1992), Notice to Exporters various issues. Department of Agriculture, Washington, D.C. US Department of Agriculture (1979-1993a) Foreign Agricultural Service, Notice to Recipients various issues. Department of Agriculture, Washington, D.C. US Department of Agriculture, Economic Research Service (1979-1993b) Foreign Agricultural Trade of the United States various issues. Department of Agriculture, Washington, D.C. US General Accounting Office (1992), Loan Guarantees Export Credit Guarantee Prograrrd Costs are High, GAO/GGD-93-45. General Accounting Office, Washington, D.C.
Appendix 1: risk premia adjustments The relationship between short- and long-term rates changes over time with changes in real interest rates and inflation expectations. Short term loans always have less exposure to default than long-term loans. The default exposure reduces the risk premiums for short-term loans relative to risk premiums for longer term loans. On the other hand, market expectations regarding near-term vs long-term inflation can change, causing shifts in the yield curve. In general, the yield curve for interest rates is upward sloping, reaching a near asymptote for bonds over 10 or 20 years in maturity. However, the period covered by this study (1979-1992) includes the years 1979 through 1982, when the yield curve was inverted due to expectations for high short term inflation and the Federal Reserve Board's response by slowing the rate of growth of the money supply. The adjustment to the risk premium is made in two stages: it is transformed first, to account for the maturity of the loans and then, to accommodate shifts in the yield curve. To adjust for shorter term loans, an arbitrary but reasonable risk exposure factor (0~m) was employed (Table A1). These risk exposure factors are used to capture the reduction in the risk of default due to the shorter loan duration. Adjustments for shifts in the yield curve require additional assumptions concerning the relationship between the risk premium and maturity. To make these adjustments we will assume that the ratio between the risk premium and the underlying US Treasury instrument (ignoring, the factor 0~) is constant over the maturities being examined. This can be expressed as Food Policy 1995 Volume 20 Number 1
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Export credit guarantees: B. ttyberg et al. Table A1
Risk exposure adjustment: reduced likelihood of default
Maturity (years)
Risk exposure factor [0~m]
1
0.9 0.95 0.98
3 5
Ym =
IusTreasury,short IUSTreasury,long
_
1-Ishort, I-Ilong
where Ym is the ratio of the short term to long term yield and the subscript m represents the maturity of the shorter term instrument. This assumption is reasonable for normal, positively sloped yield curves, as y will be less than one. However, if the yield curve is inverted as it was in 1979 through 1982, y will be greater than one. A ~, greater than one implies that loans with a shorter term have a higher absolute premium than longer term loans. This is unreasonable. Consequently, when y/> it is set equal to 1, that is, there is no adjustment of the long term premium except for the risk exposure factor 0¢discussed above. These adjustments can be summarized using the equation : ~m
{ ffO(m• m
ff0gm
if Ym < 1 otherwise.
Appendix 2: calculation of credit guarantees by specific commodity The following methodology was used to estimate credit guarantees approved for specific commodity purchases given that approvals are often in terms of commodities (e.g. feed grains, oilseeds). When a commodity group is designated, more information is required to identify the specific commodity purchased using the CCC program. The identification of the specific commodities purchased with CCC credit guarantees was made using "Notice to Recipients" and the annual F A T U S reports of US agricultural exports. The CCC approval data generally corresponds to CCC export data, but differences occur. These differences arise because: (1) the export report provides an accounting for the commodities shipped, and shipments lag 1-6 months behind commodity sales. For this reason a sale approved in one year may be shipped the next year; (2) the reporting of CCC shipments is voluntary. Omissions can cause the amount reported to be lower than the amount actually shipped; (3) some contracts approved for the CCC program are cancelled and, therefore, not shipped; (4) exporters report the value shipped, which can deviate somewhat from the amount approved due to loading constraints. Given these constraints, the following procedures were used to obtain estimates of the CCC credit guarantees used for specific commodity sales in each year. (1) If the approval was for a commodity group, (i.e. wheat/wheat flour) rather than a specific commodity, and the CCC export data reported all shipments for a 38
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single commodity (wheat) and CCC exports for that commodity were near the amount approved, the entire approval was assigned to the commodity shipped (wheat); (2) If the approval was for a commodity group, the export data showed two or more commodities from that group were shipped, and the value of these shipments approximated the approval value, then the total shipment was apportioned using the proportion of each of the specific commodities designated in the CCC export report. For example, if the approval was for wheat/flour, then: Proportion of wheat exported × total approval = wheat allocation. Proportion of flour exported × total approval = flour allocation. This procedure was used to allocate "vegetable oil" approvals to specific oils, "protein meal" approvals to specific meals, and "oilseeds" to specific oilseeds. If the CCC export report was incomplete due to omissions, the data from FA TUS report was used; (3) When annual CCC approval data did not match the data in "Notice of Recipients", both the FATUS and "Notice to Recipients" data were examined to see if the shipments occurred the year following the approval. For example, if the value of wheat and flour reported shipped under CCC substantially exceeded the value of CCC approved in a particular year, the data were examined for a carry-over from the previous year's approval. If a carry-over was likely then the approval was allocated between commodities and years.
Food Policy 1995 Volume 20 Number 1
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Food Policy, Vol. 20, No. 1, pp. 27-39, 1995 Elsevier Science Ltd Printed in Great Britain
0306-9192(94)00003--4
Export credit guarantees: the commodity credit corporation and US agricultural export policy B e n g t H y b e r g , M a r k S m i t h , D a v i d S k u l l y a n d Cecil D a v i s o n Economic Research Service, USDA, Washington, D. C., USA A model is presented to explain the economic incentives for export credit guarantee programs. A methodology for estimating the discount component of credit guarantees from the importer's perspective is developed and applied. The cost of offering CCC credit guarantees is discussed as are issues regarding the effectiveness of the programs. In general, we find that the program benefits both importers and exporters. Keywords: export subsidies, agricultural trade
Tight budgets as well as global and bilateral trade negotiations have brought greater srutiny to agricultural export assistance. The United States uses four broad programs to enhance agricultural exports: the Export Enhancement Program (EEF), food aid programs such those authorized under Public Law 480, promotion activities under the Market Promotion Program, and Commodity Credit Corporation (CCC) export credit guarantees. The first three programs have been the subject of analysis in other studies (Anania et al., 1992; Ackerman and Smith, 1990; Bremer-Fox et al., 1990; Nichols et al., 1991). However, an economic analysis of the role of credit guarantees has not been conducted, a surprising lack of scrutiny for the largest current agricultural export program of the United States. 2 The face value of credit guarantees is often used as a measure of the extent of the program, but, this unfortunately overestimates both the program's costs and its trade effects. It is, therefore, limited to providing a general measure of program activity and is not helpful in providing estimates of the program's cost or effectiveness in increasing exports. To further meaningful analysis, this study addresses a number of issues concerning credit guarantees. We will examine credit guarantees and propose an explanation for why they are a common tool in agricultural trade, provide a means to estimate the value of credit guarantees for importers, estimate the discount value of these guarantees, and discuss the discount value compared with a measure of the cost of offering CCC credit guarantees. tThe views expressed are those of the authors and do not necessarily represent the policies of the US Department of Agriculture or the views of other US Department of Agriculture staff members. 2CCC export credit guarantee programs had a $5.7 billion program level in fiscal year 1993; an aggregate of $48 billion in credits and credit guarantees have been approved by the CCC since fiscal 1979.
27
Export credit guarantees: B. Hyberg et al.
Background The CCC export credit guarantee programs are operated through the Office of the General Sales Manager (GSM) in the Foreign Agricultural Service (FAS), a US Department of Agriculture (USDA) agency. The CCC export credit programs have included direct CCC export credits (known as the GSM-5 program), but since fiscal 1979 have been primarily export credit guarantees. Currently, operating programs are the Export Credit Guarantee (GSM-102) and Intermediate Export Credit Guarantee (GSM-103) programs, which guarantee repayment of private, commercial credit extended for up to 3 years, and between 3 and 10 years, respectively. These programs were designed to facilitate US commercial agricultural exports to countries that may not be able to purchase those exports without credit, and to help meet export competition from other exporting countries (Ackerman and Smith, 1990). Most major agricultural exporters also offer export credit guarantee programs.
Estimating the discount component of CCC credit guarantees We hypothesize that differences in credit worthiness can create a situation where an importer and exporter both can benefit from credit guarantees. When an exporter has a better credit rating than a prospective importer, the exporter can offer the importer more favorable interest rates than are otherwise available to the importer. In this case the importer benefits by facing a lower total cost for the transaction, and the exporter benefits by becoming more competitive without reducing prices or expending funds. The exporter does this by incurring risk in guaranteeing private credits extended to the importer. The importer's case
Assume an importer wishes to purchase a quantity of grain, Q, for price, P. The buyer borrows the funds to purchase the grain. In this case, the cost of the grain would be, 3 C = QP(I+r)',
(1)
where Q = quantity purchased, P = price of grain, r = market interest rate for importer, 4 and t = period of the loan. If the buyer, as is characteristic of most CCC program participants, has a low or moderate credit rating, then r will be above the London InterBank Office Rate (LIBOR) plus 25 basic points, a rate that applies to many CCC-guaranteed loans. A buyer qualifying for a CCC credit guarantee can obtain financing at the lower rate. In this case the cost of the loan is C = QP(l+g)',
(2)
where g = LIBOR plus 25 basic points. The importer will assess the loan value under the credit guarantee program by 3For simplicity, this presentation assumes the repayment of principal is made with a single payment at the end of the loan. In practice, CCC guaranteed credits are repaid in semi-annual or annual installments. The transformation to capture the periodic principal payments is straightforward. +I'he interest rate r is variable and changes across countries. For simplicity assume the rate at the time of the approval applies for the length of the loan.
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Export credit guarantees: B. Hyberg et al.
looking at the flow of payments paying rate g, and discounting these payments at the alternative rate r. M = QP(l+g)t/(l+r)/.
(3)
The value M is the discounted value of the purchase, as perceived by the importer. The effective purchase price to the importer under a credit guarantee program is then PeG = M/Q,
where P c 6 = effective price of grain with a credit guarantee. The discount is the difference between P and PcGSince the lower interest rate reduces the cost of grain to importers, credit guarantees allow importers to realize a discount for commodity purchases. The value of a credit guarantee increases as the difference between the Government and commercial interest rates increases. One would expect to observe a greater demand for credit guarantees as the Government rate decreases and the available commercial rate increases. Thus, credit guarantees would be most likely used for sales between financially sound exporters and financially troubled importers. The most extreme case would be when the importer is unable to obtain commercial credit without the credit guarantee. On the other hand, if the importer can obtain a rate comparable to that offered by the exporter, then the reason for that country using credit guarantees would have to be explained outside of this paradigm. The procedures for estimating the value of these credits are straight forward present value calculations. However, practical considerations such as determining the appropriate discount rates for different participating countries and estimating the commodity specific components of CCC guarantees has up to now prevented the estimation of these discounts. The exporter's case
Under the CCC export credit programs, a US exporter negotiates a sale with an importer in a country with a credit guarantee allocation. Commercial banks are used to obtain financing at commercial rates. The CCC reviews the contract and, if the contract is acceptable, the CCC provides a guarantee for the credit. Usually the guarantee covers 98 per cent of the port value of the commodities and a portion of the interest. The CCC incurs no cost as long as the loan is repaid as scheduled. However, the program involves risk and, as discussed below, at times CCC payments are made to participating US creditors who have not been paid as scheduled. In such cases, a simple formula for the government cost for a given sale, ignoring guaranteed interest costs, is G = .98 (QP) - PR, where PR = is the amount of principal repaid prior to the default.
Estimating the value of CCC credit guarantees to importers We conducted a study of the CCC export credit guarantee programs from fiscal year 1979 (when CCC export credit guarantee programs started) through fiscal year 1992. The information needed to estimate the discount component of the credit Food Policy 1995 Volume 20 Number 1
29
Export credit guarantees: B. Hyberg et al. Table 1 Moody's DBL's and Institutional Investor's Ratings Moody's / DBL's credit rating (CR)
Institutional Investor's risk rating (RR)
Aaa Aa A Baa Ba/B
85 70 60 50 40
guarantees is the appropriate market interest rate for each participating country in each year, the amount of each loan, and length of each loan. 5 The market interest rates for participants of CCC export credit programs must be estimated because the CCC programs almost exclusively focus on exports to middle- and low-income countries and a secondary market for bank loans involving many of these countries either has not been established, or has only recently developed. This difficulty is compounded by the fact that the financial standing of many of the participating countries has changed rapidly and often. In the late 1970s, Institutional Investor (1979--1992), a key international financial periodical, began to publish annual evaluations of the credit worthiness of countries. This series is the longest and most consistent available, commencing in 1979 and giving each country a score between 0 and 100, with 100 being the least risky, highest quality borrower. These scores are not sufficient to provide a market-based interest rate for sovereign borrowers. To get a reasonable approximation of market rates, we need to develop a linkage between these scores and market rates. This is done using the US corporate debt market. Investment services such as Moody's, Standard and Poor's (S&P), and Drexel Burnham Lambert (DBL) evaluate the quality of corporate borrowers. Their ratings are similar to those of Institutional Investor, but use a different scale (Table 1). Both Moody's and S&P calculate indices of the interest rates paid by issuers of investment grade debt (Baa and above for Moody's, BBB- and above for S&P's). DBL calculates an index for the interest rate on non-investment grade debt, more often called junk bonds. Non-investment grade debt is defined by Moody's as Ba and B, obligations rated Caa and below are considered default grade. These ratings provide a link between corporate credit ratings and interest rates. In the late 1980s, a secondary market for bank loans to developing countries emerged. As this market was developing, Moody's, S&P, and DBL began to assign credit ratings to the most actively traded sovereign debt. Moody's credit ratings from the period 1989-1992 were used to estimate the Institutional Investor range of risk scores covered by each commercial grade. We show the mid-point score of each commercial grade in Table 1. Since interest rates associated with the commercial credit ratings are observed, this mapping provides the link between the Institutional Investor scores and commercial market rates. Using the yield in the US Treasury bond of equivalent maturity as a reference point denoting the least risk, the risk premium for each country is estimated by subtracting the US Treasury bond rate from the corporate bond rate. This was done for each year examined. 5To estimate the effect of the CCC export credit programs on trade, these estimates need to be made by commodity and the relevant elasticities of import demand obtained. This is the subject of continuing research; additional detail is available from the authors. See Skully (1992) for an example of this approach for other programs.
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The relationship between risk premia [rr] and Moody's credit ratings (CR), and the relationship between Moody's credit ratings and Institutional Investor's risk ratings (RR) were used to developed a link between the risk premia and risk ratings.
H =f (CR) CR =g (RR) h
=fog
I1 =h (RR). Risk premia vary constantly as investor attitudes shift and the supply of bonds in different grades changes. For example, a 'flight to quality' can raise the premium on low quality debt relative to higher quality debt. On the supply side, a large supply of bonds of a particular grade may increase its relative premium. To account for such shifts, a curve was fitted to the five data points (risk ratings) for each year, using a quadratic log functional form H = ~o + ~1
RR + 132 ( R R )
2 + [33
In (RR) + c.
The quadratic log functional form was used because it captures the nonlinear shifts among risk premia, and provides a good fit to the data points. 6 The risk premia generated by this process are for long term (20-30 year) debt, and are valued relative to US Treasury bonds. Since CCC export credit guarantees are generally for a term of 1, 3, or 5 years and the num6raire for export finance is the LIBOR rather than US Treasury rates, the estimated risk premia need to be adjusted to permit examination of the CCC programs. The adjustment to make a risk premium relative to LIBOR is straightforward: the LIBOR is subtracted from the corporate rate. The adjustment for the maturity is more involved and is discussed in Appendix 1.
Examination of commodity-specific discounts Before one can estimate the effectiveness of export credit guarantee programs, one must first determine the extent to which the programs increase exports to participating markets per unit of government expenditure. To make this measurement, one requires the identification of credit guarantees by specific commodity, country and year of sale; an estimation of the discount element for credit guarantees for each specific commodity, which will vary across countries and years; the elasticity of demand by commodity for each importer; and an estimation of the government expenditure on credit guarantees. This study concerns valuing a credit guarantee from the importer's perspective. ~'An undesirable property of this formulation is that it can produce extreme values beyond the range of observed values. In the case of the country risk rankings, values less than 40 are vulnerable to this bias. To avoid problems with extreme value estimates, the risk premia for countries with non-investment grade ratings were constrained to satisfy the following criteria: • the sets of ratings must be consistent with one another, therefore, debt with a lower risk rating should never have a lower spread than debt with a higher score; • premia should not increase at an exponential rate. These criteria were met by restricting the rate of change in the risk p r e m i u m for high risk countries. When a risk ranking was less than 40, the risk p r e m i u m could change by no more than 15 basis points per one unit change in risk score.
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Export credit guarantees: B. Hyberg et al. Table 2
CCC export credit program approvals, total and selected commodities, fiscal years 1979-1992 CCC program
Fiscal year
Total Approvals (million dollars)
Approvals for Specified Crops* (million dollars)
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Total
1 627 1 524 2 133 1 543 4 737 4 402 2 513 2 535 2 873 4 504 5 195 4 296 4 522 5 684 48 090
1 246 1 029 1 509 1 202 3 875 3 442 1 717 1 740 1 878 2 898 3 533 3 063 3 803 4 210 35 116
*Wheat, wheat flour, corn, barley, sorghum, soybeans, soybean meal and soybean oil. Numbers may not add to totals because of rounding. Source: USDA, FAS, Program Operations Division. Annual reports on CCC export credit programs, 1979-1992. Figures include relatively small amounts of direct credits under the GSM-5 program.
To estimate the value of annual commodity specific loans we examined the approvals by commodity for wheat, wheat flour, corn, barley, sorghum, soybeans, soybean meal and soybean oil for fiscal years 1979-1992 (US Department of Agriculture, 1979-1992). Three sources of information were needed to generate a commodity-specific data set on credit guarantees and their associated discounts: the "Notice to Exporters" (US Department of Agriculture, 1979-1992) reports which show credit guarantee approvals by commodities and markets; the "Notice to Recipients" (US Department of Agriculture, 1979-1993a) reports which show exports under under the CCC export credit guarantee programs, and US export statistics from the Foreign Agricultural Trade of the United States (FATUS) (US Department of Agriculture, 1979-1993b). The starting point for estimating the annual credit approvals for each commodity, by country, is with the annual CCC approval reports. However, data in the approval report are often designated for a group of commodities (i.e. feed grains, oilseeds, coarse grains, protein meals, wheat and/or wheat flour, or vegetable oils). Using export data and methods discussed in Appendix 2, we estimated credit guarantee usage by commodity for participating markets. The estimates for the amount of credit guarantees under the CCC programs for these commodities by year are shown in Table 2. An estimated breakdown of approvals by commodity is shown in Table 3. To estimate the value of the interest rate discount associated with CCC export credit guarantees, equation 3 was used. 7 The interest rate estimated for each participating market, the commodity-specific CCC guarantee amount, the terms of
7The equation was modified to reflect a 3-year loan with annual payments of one-third of the principal and all of the interest accrued. This conforms with the terms of many credits under the CCC credit guarantee program. Suitable modifications were also made to deal with credits with different maturities.
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Food Policy 1995 Volume 20 Number 1
Export credit guarantees: B. Hyberg et al. Table 3
Estimated CCC export credit approvals by selected commodities, 1979-1992 Raw products
Fiscal year
Wheat
Corn
Soybeans
Sorghum Barley (million dollars)
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Total
416 389 586 679 1 603 1 896 971 810 738 1 075 1 521 1 211 837 1 592 14 325
529 459 574 268 956 795 349 361 479 732 709 882 1 320 849 9 460
45 45 86 121 512 68 77 255 321 406 431 275 522 692 3 856
29 4 14 38 392 326 122 38 58 107 233 275 277 398 2 309
5 0 15 0 20 105 0 1 9 73 25 44 14 36 348
Processed products Soybean Flour Meal Oil
Total
0 6 12 4 124 7 30 74 75 36 101 40 4 38 550
125 61 68 79 144 100 1118 80 65 195 143 134 49 102 1 452
1 246 1 029 1 509 1 202 3 875 3 442 1 717 1 740 1 878 2 898 3 533 3 063 3 803 4 210 35 116
Processed products Flour Meal Oil
Total
0 * * * 4 1 1 7 7 3 8 3 * 2 37
9 8 24 19 11)6 11)5 71 122 132 21)2 219 153 166 220 1 556
98 64 154 13 125 145 61 91 134 274 370 202 581 504 2 816
Numbers may not add to totals because of rounding.
Table 4
Discounts by selected commodities, 1979-1992
Fiscal Year
Wheat
Corn
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Total
4 3 4 10 45 66 47 56 45 68 88 63 36 95 629
* 3 13 2 23 13 6 23 35 59 50 42 70 47 387
Raw products Soybean Sorghum Barley (million dollars) 0 0 2 2 11 3 3 19 23 25 24 11 20 25 166
* * * * 12 7 5 3 5 8 14 13 11 11 89
0 0 * 0 1 6 0 * 1 4 2 3 1 2 20
0 * 3 1 4 7 4 7 10 20 23 11 27 30 148
5 l l 4 7 4 6 6 6 14 9 8 3 6 79
Numbers may not add to totals because of rounding. *Less than $11.5 million.
each loan, and LIBOR were used to estimate the discount rate discounts inherent in the commodity-specific credits are provided in Table 4. An analysis shows that the discount component of CCC export credit guarantees averaged close to 4.5 per cent of the amount of the credit guaranteed. The more than $35 billion in credit for bulk agricultural commodities (wheat, corn, soybeans, barley, sorghum, oats) and processed products (flour, and soybean meal and oil) guaranteed by the CCC between fiscal years 1979 and 1992 allowed participating importers to effectively realize a discount of $1.5 billion. The percentage discount varied over time as global interest rates and the importers participating in the Food Policy 1995 Volume 20 Number I
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Export credit guarantees: B. Hyberg
e t al.
10 9 8
m
7 6 5 4 3 2 1 0
I
I
I
I
I
I
I
1979
1981
1983
1985
1987
1989
1991
Fiscal year
Figure 1 Discount as share of approvals. program changed. As shown in Fig. 1, the discount ranged from less than 1 per cent in fiscal years 1979 and 1980 to slightly more than 7 per cent in fiscal 1986. The discount for the individual commodities over the fiscal 1979-1992 period ranged from about 4 per cent for sorghum to approximately 7 per cent for wheat flour. The average interest rate discount for corn, wheat and soybeans, the three major bulk commodities, ranged between 4 and 4.5 per cent. Wheat shipments under CCC programs had the largest implicit interest rate discount for the period, while corn and soybean shipments under CCC programs involved $387 million and $166 million dollars of implicit interest rate discounts. The discount for the purchase of bulk products such as wheat, soybeans, and corn was found to be less than the discount to purchase processed products such as wheat flour (7 per cent) or soybean meal or oil (6 per cent). This result could be an indication that countries that lack a developed processing sector have a lower credit rating. In other words, those countries that must import processed products due to an inability to process raw commodities are likely to be a greater credit risk than those countries that have sufficient processing capabilities. The interest rate discount of markets using the CCC export credit programs varies according to their credit ratings, with those importers of the lowest credit rating realizing the largest benefits. Markets realizing the highest interest rate discounts include Egypt (7 per cent) and Iraq (9 per cent). Mexico and the FSU, the two largest program markets, realized interest rate discounts of between 5 and 5.5 per cent, respectively.
C o s t o f C C C e x p o r t credit g u a r a n t e e s CCC export credit guarantee programs have a direct cost to taxpayers because guaranteed credits at times fall into arrears, a claim is made on the CCC, and the US Government is unable to reach agreement to collect or reschedule the loan with the importer's government. After a claim is paid, the CCC attempts to collect from the debtor nation or reschedule the debt through the Paris Club, an international forum where creditor governments and debtor governments reschedule debt between them. Rescheduled loans do not pose a direct cost to the US Treasury, assuming they are ultimately repaid, because the US Government can borrow at 34
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less than LIBOR. While repayment terms are often extended for rescheduled debt, the interest rate charged allows the US Treasury not to incur a loss. At times, no rescheduling agreement is reached. Iraq is the largest current example of such unrescheduled claims. For most of the study period, costs of the program were measured in terms of claims made by the CCC. Between fiscal years 1979 and 1992, about 10 per cent of the CCC guaranteed credits fell into arrears and had claims made against them (US General Accounting Office, 1992). Of the approximately( $4.3 billion in claims paid, the US Government rescheduled almost $2.9 billion. ~ While this is a sizeable amount, the interest rate that the CCC charges on rescheduled loans allows the US Treasury not to incur an economic loss, assuming the loans are repaid. Under procedures set forth in the Federal Credit Reform Act of 1990, and which became effective with fiscal year 1992, the cost to the US taxpayer of providing credit guarantees in a given year is determined by estimating the present value of future claims paid stemming from provision of a credit guarantee. For example, in fiscal year 1992, $156 million in costs were estimated for the $5.7 billion in possible GSM credit guarantees that could have been extended in that year. Such an estimate is an on-budget cost that must be appropriated by Congress; the estimate is an attempt to associate future claims paid with the program year in which the credit guarantees are extended. In fiscal year 1994, the budgetary cost was about $400 million. The US General Accounting Office (GAO) conducted an analysis of the cost of CCC export credit guarantees and found that the cost of operating the GSM-102/ 103 programs was very high - about $6.5 billion. 9 However, the analysis was based on the market value of the outstanding debt for which the CCC was potentially liable and the rescheduled debt on which the CCC had already paid claims. In other words, if the CCC had to pay claims on all guaranteed credits, and sell on a secondary market its accounts receivable (from rescheduling that and earlier debts), then GAO found that the CCC would generate revenues equal to only about half the value of the credits. From another perspective, the cost of the programs is much less than claimed by GAO. Unrescheduled claims paid through fiscal year 1992 amounted to about $1.5 billion. Almost all of this was in credits to Iraq, which ceased servicing its debts when the US established economic sanctions after the Iraqi invasion of Kuwait (US General Accounting Office, 1992). Related to program cost, the Foreign Operations Appropriations Act of 1991 authorized forgiveness of $1.3 billion of rescheduled debt, most of which was for Poland. Claims paid on credit to Poland started in fiscal year 1981 when the military leadership violently suppressed the Solidarity movement.
Discussion The use of agricultural credit guarantees to stimulate agricultural exports can be explained by the fact that both exporters and importers can benefit from credit guarantee programs. Importing countries unambiguously benefit by receiving 8Ideally, one would wish to identify those claims paid on the guarantees approved for the commodities studies. However, since claims paid could not be disaggregated by commodity, the percentage is based on credit guarantees for all commodities rather than just the $35 billion in commodities discussed earlier. ~Calculated from US Department of Agriculture (1993).
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Export credit guarantees: B. Hyberg et al.
commercial credit terms more favorable than otherwise available, which lowers the cost of agricultural goods. Exporters with superior credit ratings can benefit by providing interest rate discounts which reduce the cost of their commodities relative to less credit worthy exporters. 10 If the exporter can avoid customers such as Iraq which default and fail to reschedule, the exporter can, through credit guarantees, implicitly but effectively allow the importer to realize discounts at a relatively low cost. For example, the 1992 program cost of the credit guarantee programs was less than 20 per cent of the $970 million in Export Enhancement Program (EEP) subsidies. The potential of exporters to offer low-cost discounts explains why exporters use credit guarantees in addition to the more well-known direct price subsidies to stimulate sales. Compared with the EEP bonuses, the 4-7 per cent interest rate discounts observed by importers under the CCC export credit and credit guarantee programs are relatively small. The EEP bonus level has been as high as 36 per cent of the export price for wheat, so EEP bonuses have a greater impact on the effective price than credit guarantees, and are better suited for price-based competition. ~1 However, if foreign exchange constraints are binding, then a credit guarantee program may be more effective in promoting exports, even though providing less of a price discount. For example, even if a country is price sensitive, if it cannot obtain credit to make the desired purchase, then a price subsidy will be of little use. On the other hand, if credit is provided, then the country may proceed with a purchase, perhaps without a price subsidy. The provision of credit may lessen an importer's price sensitivity, and the importer may purchase from the exporter that provides credit rather than from one who provides an explicit price subsidy without credit. Two countries, Iraq and Poland account for most of the unrecouped claims. We estimate that unrecouped claims paid outside of credits to Iraq total less than 1 per cent of the total credits guaranteed by the CCC from fiscal year 1979 through 1992. In contrast, claims paid for credits to Iraq importers and debt forgiveness for Poland total about 6 per cent of credits guaranteed by the CCC. This suggests that political risk, the risk associated with non-payment due to political reasons (e.g. war, social upheaval), has been responsible for most of the unrescheduled claims paid under these programs. The discussion of unrescheduled loans suggests the bulk of the costs under the program may have resulted not from commercial risk, but from political risk. When loans to Iraq and Poland are excluded from the analysis, the CCC program appears to obtain its objective, providing a low-cost means to increase agricultural exports.
Summary The analysis demonstrates that the CCC export credit guarantee programs are mutually advantageous to the US and importers of US commodities. The advantage to importers is an estimated 4.5 per cent reduction in the total cost of purchasing specific agricultural products from the US The advantage to the US is the ability to offer this at a relatively low cost. From one perspective, the credit guarantee programs had a cost of about $2.8 billion between fiscal years 1979 and
J°However, a full analysis of the benefits requires an estimation of the increased sales generated by a credit guarantee program. Such an analysis while of interest is beyond the scope of this study. J~Savings in deficiency payments help offset program expenditures in both cases.
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Export credit guarantees: B. Hyberg et al.
1992, or about 6 per cent of the value of credit guarantees extended. Almost all of this cost can be attributed to political risk rather than commercial risk.
References Ackerman, K. and Smith, M. (1990), Agricultural Export Programs: Background for the 1990 Farm Legislation. Commodity Economics Division, Economic Research Service, US Department of Agriculture, Staff Report No. AGES 9033, Washington, D.C. Anania, G., Bohman, M. and Carter, C. (1992), 'US export subsidies in wheat: strategic trade policy or an expensive beggar-thy-neighbor tactic?' American Journal of Agricultural Economics 74 (3), 534-545. Bremer-Fox, J., Bailey, L. and Mervenne, M. (1990), Food Aid Impacts on Commercial Trade: A Review of The Evidence. US Agency for International Development, Washington, D.C. Institutional Investor (1979-1992). Various issues. Nichols, J., Kinnucan, H. and Ackerman, K. (eds) (1991), Economic Effects of Generic Promotion Programs for Agricultural Exports. Texas A&M University, College Station, Texas Skully, D. W. (1992), 'Price discrimination and state trading: the case of US wheat', Euro. R. Agr. Eco. 19, 313-329. US Department of Agriculture, CCC (1993), Annual Report for Fiscal Year 1992. US Department of Agriculture, Foreign Agricultural Service (1979-1992), Notice to Exporters various issues. Department of Agriculture, Washington, D.C. US Department of Agriculture (1979-1993a) Foreign Agricultural Service, Notice to Recipients various issues. Department of Agriculture, Washington, D.C. US Department of Agriculture, Economic Research Service (1979-1993b) Foreign Agricultural Trade of the United States various issues. Department of Agriculture, Washington, D.C. US General Accounting Office (1992), Loan Guarantees Export Credit Guarantee Prograrrd Costs are High, GAO/GGD-93-45. General Accounting Office, Washington, D.C.
Appendix 1: risk premia adjustments The relationship between short- and long-term rates changes over time with changes in real interest rates and inflation expectations. Short term loans always have less exposure to default than long-term loans. The default exposure reduces the risk premiums for short-term loans relative to risk premiums for longer term loans. On the other hand, market expectations regarding near-term vs long-term inflation can change, causing shifts in the yield curve. In general, the yield curve for interest rates is upward sloping, reaching a near asymptote for bonds over 10 or 20 years in maturity. However, the period covered by this study (1979-1992) includes the years 1979 through 1982, when the yield curve was inverted due to expectations for high short term inflation and the Federal Reserve Board's response by slowing the rate of growth of the money supply. The adjustment to the risk premium is made in two stages: it is transformed first, to account for the maturity of the loans and then, to accommodate shifts in the yield curve. To adjust for shorter term loans, an arbitrary but reasonable risk exposure factor (0~m) was employed (Table A1). These risk exposure factors are used to capture the reduction in the risk of default due to the shorter loan duration. Adjustments for shifts in the yield curve require additional assumptions concerning the relationship between the risk premium and maturity. To make these adjustments we will assume that the ratio between the risk premium and the underlying US Treasury instrument (ignoring, the factor 0~) is constant over the maturities being examined. This can be expressed as Food Policy 1995 Volume 20 Number 1
37
Export credit guarantees: B. ttyberg et al. Table A1
Risk exposure adjustment: reduced likelihood of default
Maturity (years)
Risk exposure factor [0~m]
1
0.9 0.95 0.98
3 5
Ym =
IusTreasury,short IUSTreasury,long
_
1-Ishort, I-Ilong
where Ym is the ratio of the short term to long term yield and the subscript m represents the maturity of the shorter term instrument. This assumption is reasonable for normal, positively sloped yield curves, as y will be less than one. However, if the yield curve is inverted as it was in 1979 through 1982, y will be greater than one. A ~, greater than one implies that loans with a shorter term have a higher absolute premium than longer term loans. This is unreasonable. Consequently, when y/> it is set equal to 1, that is, there is no adjustment of the long term premium except for the risk exposure factor 0¢discussed above. These adjustments can be summarized using the equation : ~m
{ ffO(m• m
ff0gm
if Ym < 1 otherwise.
Appendix 2: calculation of credit guarantees by specific commodity The following methodology was used to estimate credit guarantees approved for specific commodity purchases given that approvals are often in terms of commodities (e.g. feed grains, oilseeds). When a commodity group is designated, more information is required to identify the specific commodity purchased using the CCC program. The identification of the specific commodities purchased with CCC credit guarantees was made using "Notice to Recipients" and the annual F A T U S reports of US agricultural exports. The CCC approval data generally corresponds to CCC export data, but differences occur. These differences arise because: (1) the export report provides an accounting for the commodities shipped, and shipments lag 1-6 months behind commodity sales. For this reason a sale approved in one year may be shipped the next year; (2) the reporting of CCC shipments is voluntary. Omissions can cause the amount reported to be lower than the amount actually shipped; (3) some contracts approved for the CCC program are cancelled and, therefore, not shipped; (4) exporters report the value shipped, which can deviate somewhat from the amount approved due to loading constraints. Given these constraints, the following procedures were used to obtain estimates of the CCC credit guarantees used for specific commodity sales in each year. (1) If the approval was for a commodity group, (i.e. wheat/wheat flour) rather than a specific commodity, and the CCC export data reported all shipments for a 38
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Export credit guarantees: B. Hyberg et al.
single commodity (wheat) and CCC exports for that commodity were near the amount approved, the entire approval was assigned to the commodity shipped (wheat); (2) If the approval was for a commodity group, the export data showed two or more commodities from that group were shipped, and the value of these shipments approximated the approval value, then the total shipment was apportioned using the proportion of each of the specific commodities designated in the CCC export report. For example, if the approval was for wheat/flour, then: Proportion of wheat exported × total approval = wheat allocation. Proportion of flour exported × total approval = flour allocation. This procedure was used to allocate "vegetable oil" approvals to specific oils, "protein meal" approvals to specific meals, and "oilseeds" to specific oilseeds. If the CCC export report was incomplete due to omissions, the data from FA TUS report was used; (3) When annual CCC approval data did not match the data in "Notice of Recipients", both the FATUS and "Notice to Recipients" data were examined to see if the shipments occurred the year following the approval. For example, if the value of wheat and flour reported shipped under CCC substantially exceeded the value of CCC approved in a particular year, the data were examined for a carry-over from the previous year's approval. If a carry-over was likely then the approval was allocated between commodities and years.
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