Dubai’s supply chain is suffering under a growing number of non-payments. Now credit insurers, faced with mounting claims, have been forced to take urgent action, David Banks writes.
Supply chain risk in Dubai has escalated rapidly in 2009. The failure of companies to pay their contractors and suppliers has reached such a critical level that many trade deals and development projects have come to a standstill.
Now credit insurers, who have seen a rapid rise in claims since the end of 2008, are putting up prices and attempting to reduce their exposures by turning away business.
The problem, which is seen predominantly in Dubai, presents a three-fold problem for the business community: inability to source credit insurance, higher prices and an increase in credit risk elsewhere in the supply chain.
For example, in Dubai’s construction sector, more than $600m is said to be owed to British suppliers and contractors alone, according to the UK’s Association for Consulting and Engineering, which has asked the UK Government to intervene to help recover the money.
David Venediger, managing director of Coface Emirates Services, says the demand for credit insurance is still rising after a 75% rise in the last three months of 2008.
“Into Q2 2009 the number of enquiries was still increasing, signalling a growing awareness for credit insurance in the local market. This jump in demand is a direct consequence of the financial insecurity that exporters and traders are facing in the wake of the current worldwide economic crisis,” Venediger says.
The cost of credit insurance has also increased across the board, not just for UAE supply chains, however Venediger adds that any rate increase has probably been offset by lower interest rates.
Instead of relying on price increases, credit insurers are closing the door on new business. Peter Boberg, country manager for Al Mulla Atradius Insurance Consultancy, says credit insurers have seen lots of defaults.
“There’s a trend of slower payments and lower liquidity which means the commercial insurance providers like us are less keen to write cover. We have too many claims and we want to reduce our exposure,” Boberg says.
“It is affecting the market. The capacity to take more risk on board is deteriorating, which means we have a problem.”
However, he adds that while credit insurers are reducing exposure in Dubai, they are maintaining support in other parts of the Gulf. “We see slow payments in other parts of the Gulf, but mainly in Dubai. We are committed to the GCC as a whole,” he adds.
Boberg believes that the unwillingness of banks to lend, together with the lower availability of credit insurance, can be expected to “further hamper trade and construction.”
However, Venediger says companies must now re-install trust in their trade relationships. To assist, Coface has launched a ‘Transparency Charter’ allowing firms to reassess their limits after a financial assessment.
In other countries, the government has stepped in to provide credit reinsurance capacity to encourage credit insurers to maintain their support for the market and to ensure a reduction in cover does not stifle trade.
Although a state agency provides credit insurance to UAE Government-backed trade, there has been no official announcement about a credit reinsurance facility for the wider market. UAE credit insurers say that the same facility would be useful.
How a state-backed credit reinsurance facility works
The governments of Canada, Denmark, Spain and the UK have all launched temporary credit reinsurance facilities to support business supply chains in the downturn.
In the UK, the government is providing a temporary six-month facility providing credit reinsurance capacity of Â£5bn ($7.83bn) for credit insurers for domestic business only.
The policy objective is to allow people who form supply chains to maintain their trade relationships at times when capital is reduced.
Example: A garden furniture supplier brings shipments from around the country. When the companyâ€™s supply chain faces increased risks, such as unpaid customer bills or suppliers going out of business, its credit insurer will either adjust the amount of cover it supplies for each shipment or might even choose not to underwrite the shipment. In this case, the government would step in to provide replacement cover, at a top-up price, to allow the shipment to be made.
Philip Jarvis, a partner at Allen & Overy, who advised the UK Government on credit reinsurance, said: â€œThe government needs its risk to be shared by the insurer and therefore provides only top-up cover and would not replace insurance outright.â€