Standing on the shoulders of elephants Background and Perspectives on India Amit Roy, Head of SACE Mumbai Office India and South Asia
Forewords The area covered by India and South Asia Office encompasses India, Pakistan, Bangladesh and Sri-Lanka. This presentation, however, will only focus on India due to the relevance of this country to Italian exporters. While transactions in Pakistan and Sri-Lanka are very often backed by government guarantees, Bangladeshi banking sector is fairly active in supporting local importers. SACE International Network
Avoid getting BRIC d India at a Turning Point Many factors among which a strong internal demand allowed India to pass through the financial storm with little harm. Economic fundamentals point to sustained growth of 7~8% annually over the next decade Economic growth over the past two decades has built a middle class that is 274 million and projections over the coming decade see the number more than doubling to 600 million. Still, India has to carry out an extensive public governance overhaul and huge investments in infrastructure to cope with the economic players expectations and needs In this framework, Italian companies will have to take pro-active approach to seize the emerging opportunities and SACE is readily available to support their investments
Indo-Italian exchange India-Italy Trade flows (2010, Mn) Source: ISTAT Import Export 3,388 3,429 2,995 3,090 2,904 2,735 3,811 3,389 2007 2008 2009 2010 Italy ranked 22 nd as trading partner to India Total exports to the Country amounted to Eur 3.4 Bn Export to India grew 3.1% CAGR between 2008 and 2010 while it decreased globally (-4.31%) Resilience of trade flows to financial crises (around USD 8 Bn)
SACE experience in India New Commitments 2007-3Q2011 ( Mn) 2011 BUYER'S CREDIT L/C CONF. SUPPLIER'S CREDIT UNTIED BANK UNTIED CORPORATE 2010 2009 2008 2007-50 100 150 200 250 300 350 400 Total Commitments: 872 Mn Outstanding Commitments: 568 Mn (as reported on SACE Risk Report 3Q2011) Large buyer s credit and corporate untied account for 710 Mn (81%) Supplier s credit accounts for the second largest source of funding with 142 Mn (16%) in the period No trend is detected in new commitments, due to high volatility and presence of landmark transactions in 2007-2008 (Reliance, Fiat-Tata)
Export flows and SACE portfolio composition Trade flows and SACE portfolio (3Q2011) Exports to India Source: Indian Trade Ministry SACE Portfolio 3Q2011 Gross Exposure Other 56% Machinery & mechanical appliances 17% Electrical machinery & equipment 8% Iron & Steel 8% Instruments and other appliances 6% Aircrafts 2% Rolling stocks 2% Infrastructures 0.03% Defence 24.0% Auto parts 12.0% Aircrafts 6.0% Machinery & mechanical appliances 57.7% Let aside top 10 deals, avg. ticket size ~ 1.1 Mn (supplier s credit) Main export sectors: machinery for shoemaking, clothes, steel, stone and wood carving SACE target sectors account roughly 44% of export flows ( 1.8 Bn in 2010) SACE approach to India has been supplier driven Opportunities in ground moving machinery, thermo-hydro, auto parts, rolling stock
Asia market comparison Trade flows between Italy and major Asian economies (excl. Japan), 2010 Country Exports * New Commitments * Penetration SACE Rating India 3,389 106 3.11% M1 Singapore 1,763 1 0.06% L2 China 8,201 23 0.28% L3 Indonesia 607 5 0.82% M2 Malaysia 893 - - M1 South Korea 2,544 18 0.71% L3 Source: Indian Trade Ministry, Sace Export Report SACE penetration rate in India (as ratio of new commitments over exports) is the highest amongst the other major economies in the area However, lack of portfolio granularity may affect stability (or growth) in exposure towards the Country
Market Positioning Penetration of ECAs in India New Commitments, Mn Source: Berne Union Penetration Rate As new commitments over 2010 exports, Source: Berne Union 2,500 2,000 1,500 1,000 2008 2009 2010 3Q2011 20% 15% 10% 500 5% 0 US Eximbank Nexi Euler Hermes Coface EDC SACE 0% Coface Nexi EDC US Eximbank Euler Hermes SACE New commitments and penetration rate for SACE are the lowest compared to international competitors While Italy ranks 3rd in the 6 country panel for total exports towards India, SACE ranks 6th for penetration rate and new commitments.
Main findings and other ECAs experience (1/2) Different stance and approaches among ECAs EDC (Canada) Exposure around USD 1.6 Bn (focus on Corporate/FIs) Main programs/policies: SME program: buyer s credit scheme for transaction of USD 1-5 Mn with SME borrowers through very lean set of documents Pool Protocol: (much beyond the untied facility), where major Indian companies, in industries where Canada has expertise, are financed. EDC arranges B2B meeting between the borrower and the relevant Canadian suppliers JBIC (Japan) Exposure of around USD 3 Bn in Yen equivalent (focus on Bank/FIs) Main programs/policies: Line of Credit with several local banks ICICI Bank untied facility for projects in Renewable Energy
Main findings and other ECAs experience (2/2) Different stance and approaches among ECAs KEXIM (S.Korea) Exposure of around USD 2 Bn, spread over sectors like power, infrastructure, auto, white goods and steel (focus on FIs and Korean conglomerates) US EX-IM (USA) Exposure of around USD 7 Bn (mixed focus) Main programs/policies: India Infrastructure Facility: USD 2.2 Bn of facilities to promote infrastructure. Credit enhancement is provided by local banks Memorandum of Understanding: with companies or FIs in order to support specific investment projects (e.g. credit facility to Reliance) KFW, PROPARCO (Germany, France) Have investment plans to support specific sectors as infrastructures and renewable energies. No link to home country export has to be in place when loan is granted. Based on other ECA s experience in India, SACE shall enhance Bank/FI exposure and explore opportunities in Infrastructure and Renewable sectors
Opportunities Infrastructures (1/2) Massive opportunity in funding infrastructures India GDP growth is steady in the range of 7-8% p.a. Planned investments in Indian infrastructure market are USD 1 Tn within 2017 out of which almost USD 500 Bn will be provided by private sector Main investment areas are: power, telecom, roads, railways, ports and airports Area Power Current scenario 746k GWh installed capacity Perspectives 130GW capacity increase USD 190b from private sector Airports 124m passengers in 2010 Steady growth in passengers no. Telecom Roads 584m users 61% CAGR since 2004 Expressways:2% of all roads but 50% of traffic 350m more users by 2012 USD 110b from private sector 40,000km upgrading USD 50b from private sector Italian companies are rarely involved in these projects, SACE may explore opportunities in construction machinery and equipments
Opportunities Infrastructures (2/2) Funding and regulatory challenges Constraint on infrastructure investments by pension funds and insurance Restrictions on external (foreign) sources of funds for such projects Bid/Award process and land clearance very slow So far, though, local banks have taken the bulk of private infrastructure investments: USD 85 Bn in 2010 alone (49% CAGR since 1998) Risk concentration issues and need for diversification arise Opportunity for ECAs: ability to provide long term (>10ys) fixed rate loans in both local and foreign currency Issues: little or no ownership over assets, revenues in local currency, cost over-runs
Opportunities Manufacturing Catching up with overwhelming services sector Manufacturing sector in India accounts for 16% of GDP (against 57% of services) and currently employs 16-17 million people (13% of work force) Government aim is to increase GDP share to 20-25% by 2022 thus creating jobs to 150 million people. National Investment and Manufacturing Zones (NIMZ) will be developed to foster industrial investments (business friendly environment) Opportunities may emerge in supporting the establishment of Italian companies or their expansion (Piaggio) in NIMZ and also purchase of machinery from Italy particularly in automotive, steel and engineered goods
Opportunities Automotive and auto parts Emerging middle class and SMEs demands for vehicles (units) Totale sales of Passenger cars and LCV in India, 2008-20113Q Source: IDBI Bank Automotive manufacture (passengers and LCV) showed sales growth rates around 25% in the last two years. Forecasts for 2012 see growth rate at same level. Investments in production capacity increase will reach USD 30 Bn by 2020 Tata, Maruti-Suzuki, Hyundai, Piaggio (3-wheelers) will be top players in the market Production capacity expansion could lead to huge opportunities for component suppliers (Magneti Marelli, Brembo) and also for machinery suppliers. Multi-tied (pool) facilities to O&M and direct funding to Italian companies (vendor financing) could be arranged by SACE in the framework of sector programs
Opportunities Airlines ECAs still supporting battered sector Airlines are facing challenges in India mainly due to fierce competition among carriers, rising fuel cost, debt burden and high income taxes Kingfisher is currently under debt restructuring and most of carriers are reporting operating losses in 2011 However, the sector may face consolidation in 2012-2013 with more profitable airlines taking over Air India and Kingfisher routes and slots Number of aircrafts will reach 700 by 2020 from actual 300 Airlines are planning investments (GoAir-Airbus, ATR) and ECAs are willing to grant support to the sector (e.g. EDC- SpiceJet USD 450 Mn Bombardier aircraft purchase) Low-cost carriers are also gaining market shares: GoAir, IndiGo Finally, Government opening to FDI in civil aviation, now forbidden may result in a corporate accounts improvement
Opportunities Banking sector (1/2) Even in weaker economic momentum, banks remain well positioned Banking sector is dominated by the government which holds, through controlled banks, almost 60% of the market. Even though the asset quality of banks is worsening, due mainly to economic slowdown and higher interest burden linked to tight monetary policy (harsher on SMEs), banking cos. are fairly sound (avg. Core Tier 1/RWA at 9.5%) and liquid (avg. 31% of liquid assets on total) Average credit rating for the whole industry is Baa3 (Moody s) SACE exposure to Indian banks is around Euro 22 Mn Opportunity for SACE to leverage the huge SMEs and large corporate franchise through 2- step transactions (see next slide)
Opportunities Banking sector (2/2) Two-step approach Guarantee International Bank Repayment of facility Local Bank Repayment of facility Corporate or SME Portfolio Funding Funding Step One SACE along with a foreign bank will lend to a bank in India Step Two Indian bank will on-lend to corporate or portfolio of SMEs On-lending will follow pre-approved requirements (Italian link), specific portfolio requirement will be set up-front Scheme gives comfort in financing low credit-standing local corporates, also for high amounts Micro/small transactions with SMEs are effectively financed through this scheme
Opportunities Renewable energies India needs power to fuel its growth India is short on electric power, many regions still face unreliable service or remain off the grid completely Energy demand growth rate will over 3% per year over the next 25 years. The country relies heavily on imported fossil fuel, which account for 25% of its energy needs India has abundant renewable energy resources: by some estimates, solar power has the capacity to replace up to 30% of imported coal in the next decade Expanding renewable energy would also lead to i) reduction in air pollution, ii) meet rural development goals (due to distribute nature of sources) The total investment needed for the NSM until 2022 ranges between $ 20-30 Bn However, production costs and tariff subsidy uncertainty reduce the willingness of investors to enter the market on pure Project Financing basis Lack of expertise and sectorial cap (concentration) of local banks act as deterrent for raising debt. SACE may explore taking exposure on selective basis
Opportunities come with challenges Moving in a strictly regulated and competitive market Foreign currency lending in India is regulated by central bank, RBI. It sets pricing cap based on tenor from time to time under the trade credit and external commercial borrowing guidelines: Type of import Tenor Max rate Capital goods 3 years max Euribor + 3,50% p.a. Capital goods 3 to 5 years Euribor + 3,50%p.a. Capital goods 5 to 10 years Euribor + 5% p.a. SACE has to comply with local regulations as prescribed from time to time
Final Remarks Promises to be held India presents one of the greatest long-term potential but faces tremendous challenge to achieve that goal Demographical and labor dividend, high domestic savings & investments rate and favorable financial reforms will help assuage these hurdles Expenditure in excess of USD 1 Tn in infrastructures will also contribute filling the gap with other fast-growing economies (China, Brazil) Huge opportunities emerge in the market for Italian players, however their and their partners needs have to be properly addressed SACE attempts to become reference for Italian companies as a reliable financing partner in their pursuit of India and South Asia Business