(Export Development Canada)
Exporting has long been the key to Canada's success. But along with success comes risk, and there is more than one way to manage it.
There are many risks associated with exporting, but the most common
is that of not being paid by the foreign buyer. Most foreign buyers would rather not pay cash in advance of the export shipment, instead delaying payment for 30 or 60 days, or even longer. That means the
exporter is taking a credit risk, and those risks rise and fall with the cycles in the economy.
During 2004, virtually every company and country received a ratings upgrade. Interest rate spreads
narrowed dramatically as risks fell to the lowest level seen since the mid-1990s. The best times are behind us, though -- the world economy is slowing from its too-hot 5 per cent pace in 2004 to around 4 per
cent growth in 2005-06.
Companies will no longer be able to hide their faults behind rapid growth, and credit risks will begin to rise. Bond spreads have already begun to increase.
Exporters
can manage these exporting risks by purchasing insurance. Some private insurers cover such risks, and EDC does as well, with the difference that EDC covers some high-risk markets and small transactions that
private insurers do not. Paying a small premium to insure against risk of non-payment allows the exporter -- and their banker -- to sleep better at night.
During 2004, EDC facilitated $55 billion in
international transactions for nearly 7,000 companies. Some 90 per cent of those were small- or medium-sized, most with export sales of less than $1 million annually. About $11.6 billion in transactions were
in higher-risk developing markets. And, EDC helped to facilitate $1.8 billion in foreign investment by Canadian companies.
Another key difference between EDC and its counterparts in the private sector
(banks and insurance companies) is that EDC's transactions must produce an economic benefit to Canada. Central to the benefit calculation is the export of goods and services produced in Canada, of course,
but in these days of globalized companies it is important to recognize that Canada's exports often contain foreign inputs, too. Other Canadian benefits include the generation of employment, R&D spending,
helping Canada to break into new export markets, or helping small companies that otherwise might not be able to grow beyond their domestic marketplace.
Taking account of all the complexity of
Canada's international trade and foreign investment, the varying degrees of imported content, and the future benefits that accrue when the transaction involves an investment, EDC calculates that its
transactions helped contribute $34.7 billion to Canada's GDP in 2004. Approximately 438,000 jobs were supported by that activity.
The bottom line? Canada's exporters had a good year in 2004, as global
risks receded significantly. The next two years will be more typical -- exporting risks will be higher than in 2004, but not excessive, and exports will grow at a more moderate pace.
Note: The
views expressed here are those of the author, and not necessarily of Export Development Canada.
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