“Hermes cover” for Mongolian companies

Around 40 members of the MonGerAlumni association gathered in the heart of the Mongolian capital to learn about financing opportunities in connection with the export credit guarantees provided by the government of the Federal Republic of Germany. Dunkhu Bekh-Ochir, president of this especially active alumni association, noted the great interest among association members in this financing instrument; although it has remained relatively obscure to date, it can be used to finance a diverse range of projects in Mongolia. Owners and managing directors of Mongolian companies, some market leaders among them, along with representatives from government ministries and administrative bodies, as well as representatives from higher education, set aside two entire days to explore this highly relevant topic.

Participants learned about a broad range of topics: from an introduction to potential financing options for companies in general to the principal collateral instruments for all types of financing, the presenters discussed the methodological foundations and their practical experience with credit evaluation of companies. This is a crucial aspect, since those responsible for granting credit require companies to have assessed credit that is sufficient to enter into a loan relationship, approve credit terms and grant lines of credit – whether they be credit managers at companies or credit assessors at financial institutions or credit insurers.

Mongolian companies face a special set of challenges. Despite the impressive growth of recent years, Mongolia’s country risk is still categorized as problematic – the country is still in Category 5 of the 7-point OECD country risk scale. This categorization is the reason many private credit providers are not yet providing protective cover for deliveries to Mongolian companies. Similarly, those responsible for credit matters at German companies generally require that applications for granting credit terms be backed up by valuable collateral.

Yet 88 years ago, an instrument intended for precisely such circumstances was devised in Germany: a government export financing instrument in which the state takes on the vast share of the payment default risk in connection with exports to countries with a high risk rating. This financing instrument is known as “Hermes cover”, after Hermes (since 2002, Euler Hermes) Kreditversicherungs-AG, a provider of services on behalf of the government, which has been involved in the scheme since the outset alongside the management consultancy PwC.

Hermes cover is also available for exports to Mongolia. According to a recent country resolution, there are no formal financing restrictions for short-term credit terms up to one year. In this context, the credit worthiness of the Mongolian company purchasing supplies is reviewed and a decision is made whether to grant the credit. If the company’s credit worthiness is rated as insufficient, bank guarantees can nevertheless result in positive credit decisions in the company’s favour. In the past two years the Development Bank of Mongolia, Golomt Bank and the Trade and Development Bank of Mongolia have been accepted as issuers of bank guarantees.

There are also financing options for medium to long credit terms of one year or more – but only following assessment of the specific situation. Project financing and other forms of structured financing can also be provided, in some cases on an offset transaction basis. Even investment guarantees for German investors with long-term commitments are conceivable for projects in Mongolia.

This German government instrument was, for a long time, rather symbolic in relation to Mongolia. From 1999 to 2010 approved financing lay in the range of 0.4 to 3.3 million euro. Then in 2011 the volume increased significantly, to 32 million euro and an impressive 137 million euro in 2013 – with an increasing number of applications.

The later seminar sessions dealt with how Hermes cover could be exploited to ensure that this growth does not diminish. The great interest among participants was reflected in the numerous applications, some for extremely concrete project proposals. The impression of Khatantuul Enkhbold, a representative of the Mongolian Agriculture Ministry, likely reflects the experience of most participants: “The two-day seminar was very interesting. Although a lot of information was presented, it was presented effectively.” Baasantseren Semjid of the Nanometal company underscored how important such seminars are for the development of the medium-sized business community in Mongolia: “First of all I would like to express my thanks to the organizers for this seminar, which is so important to us. Although we have a wealth of ideas on how to develop new business opportunities, it is often extremely difficult to realise them. This is why it is crucial for us, the investors, to know whom we can contact for information on how to properly fill out the numerous documents, prepare for negotiations and get answers to any remaining questions.”

During the final ceremony at which the certificates of participation were conferred, Dambadarjaa Damdinjav, Managing Director of the MonGerAlumni Association, praised the involvement of GIZ within the framework of the MP; he emphasized how it is contributing to the very positive growth of Mongolian companies in close cooperation with German medium-sized companies – specifically through continuing education opportunities, practical observational opportunities in Germany as well as the referral of experts on Mongolia. At the closing group dinner, everyone expressed their personal impressions and expectations for the future, especially with regard to cooperation with German companies.

Andreas Steinborn