Enhancing diversification - promoting SMEs

Challenges in promoting foreign trade

GUEST CONTRIBUTION BY GERLIND HECKMANN

The German business model, which is based on a strong industrial sector and an international orientation of the economy, has come under pressure. High energy prices in connection with Russia’s attack on Ukraine, global competition under changing conditions, a restructuring of international supply chains and the transformation to a climate-friendly economy – all of these pose enormous challenges for the German export economy.

Russian President Vladimir Putin’s war against Ukraine is an attack on Europe’s security and our values. The sanctions imposed by mutual agreement between the federal government of Germany and our European and transatlantic partners are therefore logical and unavoidable.

The turning point announced by Chancellor Olaf Scholz began on 24 February 2022 for the promotion of foreign trade. Immediately after the attack on Ukraine, the federal government of Germany suspended protection options for exports and investments to and from Russia and Belarus. Accordingly, the coverage volumes fell, especially with the export credit guarantees. Overnight, the German economy was no longer accompanied by guarantee instruments in important foreign markets.

The war in Ukraine and the resulting European energy crisis, as well as massive supply shortages due to the coronavirus pandemic and increasing tendency towards isolation in China, have amplified voices forecasting the end of globalisation and painting the spectre of Germany’s deindustrialisation on the wall. I do not share all of these fears.

However, the Ukraine war has shown us how dangerous unilateral dependencies are. Diversification is therefore the order of the day.

Germany must become more independent of individual states throughout its value creation chain, from procurement to production and sales. The guarantee instruments of the German federal government can support this. The German federal government already secures deliveries of goods and services to more than 150 countries with export credit guarantees. It not only gives German exporters access to new markets; guarantees also help reducing value creation dependencies and they make supply chains more resilient.

As with the export credit guarantees, we also support the diversification efforts of the German economy in direct investments. In the past year, the federal government has secured investment projects in 16 countries with investment guarantees. With improved guarantee conditions, we are laying the foundation for their number to increase in the coming years.

With global uncertainties, guarantees for unbound financial loans – a less used funding instrument in the past – became the focus of industry. Last year, the guarantees for unbound financial loans helped secure the supply of raw materials and energy in Germany and drive the transformation of the economy. The financing of a battery cell factory in Hungary and the purchase of liquid gas were secured last year.

While the Ukraine war is the dominant theme at present, we must not lose sight of life-threatening climate change and the measures to counter it. The federal government is aware of its obligation to contribute to greater climate protection and the ecological conversion of the economy with its guarantee instruments. For this reason, the federal government already takes environmental, social and human rights aspects into account in its coverage decisions. In addition, it promotes alternative energy projects in particular. Initial successes are visible. The portfolio of guarantee instruments is becoming increasingly green. In terms of the export credit guarantees, the share of renewable energy projects in the energy sector has risen continuously compared to previous years and is now around 75 percent. Last year alone, the federal government secured 25 transformation projects with export credit guarantees, including numerous wind turbines.

Nevertheless, the federal government has set itself the goal of aligning its coverage policy overall with the Paris 1.5 degree target. This means that green projects will be consistently promoted and transactions that are particularly harmful to the climate will no longer receive federal coverage.

In addition to the expansion of the transformative coverage policy, there will be further essential changes in the export credit guarantees of the federal government in 2023, which in this case are aimed at supporting German small and medium-sized enterprises (SMEs) in particular.

With the introduction of a forfaiting guarantee during the second quarter, the federal government will fulfil the promise from the coalition agreement “to improve the options of SMEs in financing low-volume transactions”. Up until now, the banks have struggled to purchase receivables covered by the federal government because they are concerned that the purchased receivable could not be legally valid. With the forfaiting guarantee, these legal risks are secured by the federal government.

At present, the specific product design is being developed. I am extremely grateful to AKA for participating in this process and for participating in the development of this product in coordination with Euler Hermes, exporters and other banks engaged by the federal government to implement this. As a partner of medium-sized exporters, AKA is most familiar with the needs of SMEs and therefore an indispensable source of advice for us not only in the development of the forfaiting guarantee.

A product that has already been launched this year is digital supplier and financial credit cover with a price escalation clause. Due to inflation and the supply chain problems, exporters – especially SMEs in this case – are increasingly adding price escalation clauses to their contracts. They can be secured by the German federal government. Since this was previously only possible in connection with classic supplier or financial loan cover, we also included the price escalation clause in the digital supplier loan cover and digital financial loan cover at the beginning of the year.

Another project concerns modernisation of the OECD consensus. There is a good chance that negotiations can be successfully completed this year. Among other things, the rules establish the minimum requirements for loan terms, advance payments, the inclusion of local costs, repayment profiles as well as remuneration rates and minimum interest. In recent years, Germany has vehemently committed itself to making the financing conditions more flexible and, thus, improving the international competitive conditions for German and European SMEs.

Since the export credit guarantees were introduced 74 years ago, the instrument has continued to gain in importance among exporters and export-oriented banks and often plays an indispensable role in financing. The instrument has proved adaptable in the ever-changing economic environment. And in the future, we will continue to develop the guarantee instruments according to the needs of the German export industry, in particular SMEs.