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Marketing Consultancy Division (MCD)

Export Consultancy Unit (ECU)

Export Bulletin No. 6.

Export Risks & Management

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TABLE OF CONTENTS

EXPORT RISKS & MANAGMENT Page INTRODUCTION 1 RISK ASSOCIATED WITH EXPORTING 1 Areas & Causes of Export Risk 2 RISK MANAGEMENT 4 Risk Management Structure 5 Implementation of Corporate Risk Management System 6 HOW TO MITIGATE EXPORT RISKS 9 COUNTRY RISK RATINGS FROM MAJOR ASSESSORS/INSTITUTIONS 13 Country Exposure Limits 14 Current Country Risk Assessment 15 AVAILABILITY OF RISK SERVICES 16 USEFUL WEBSITES 17 RISK MANAGEMENT TERMINOLOGY 17 SUMMARY 17 APPENDICES

1. Useful Websites i 2. Risk Management Terminology v 3. Country Risk Ratings of Several Risk

Assessment Organisations � (for July, 2004) vi 4. Availability of Risk Services viii

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Export Bulletin No. 6. Export Risks & Management INTRODUCTION

In taking a decision to export, there are many facets that need to be evaluated by the local Producer/Exporter before a final conclusion is reached. Apart from assessing the market potential of the target countries, there is also a need for the KSA company to evaluate the different types of �risks� associated with exporting to particular territories. In this context the company needs to implement in-house risk management systems which can deal with the levels of corporate risks associated with both the domestic and export markets.

In order to understand �risks� and implement risk management strategies, the following sections outline the areas of export �risk� that need to be assessed so that a system can be put into place to mitigate against them. Not understanding �risks� or implementing suitable mechanisms to minimise corporate risk could have a detrimental effect on the overall performance and profitability of the company - in the worst case scenario it may mean the liquidation of the company.

The following sections outline:- (a) the risks that exist in export, (b) what is risk management, and (c) how to mitigate against the risks. Also included in the text and Appendices are details of (i) current country risk ratings, (ii) the availability of risk services, (iii) useful websites, and (iv) risk management terminology.

RISKS ASSOCIATED WITH EXPORTING

In the context of undertaking foreign trade, KSA Producers who are exporting or who are planning to export are subject to different types and ranges of risk than they would experience in the domestic market. International trade is affected by, but not limited to, a range of risks that need to be addressed and which include:-

Country/political risk. Currency exchange risk - the stability of the local currency market. Transfer risk Credit risk � relating to credit & financing. Non-performance risk.

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Transport risk. Legal risk. Risk of fraud. Risks related to social, and geographic issues.

Foreign risk, therefore, requires Producers/Exporters to take additional precautionary measures to protect their corporate interests as these risk variables directly impact on their customer's ability to pay for the products being supplied. It is, therefore, inevitable that dealing with customers in other countries adds a layer of complexity to any trade dealing, so it becomes essential to be aware of the various types of potential commercial risks and to understand the strategies that can help the KSA company to protect its business against them.

Areas & Causes of Export Risk

Knowing the risks associated with exporting to a particular country is, therefore, an important factor, as it could determine how the company will mitigate against these risks. This also has a bearing on the level of market penetration and profitability that can be achieved in a particular target export market. To understand these risk factors, the following is a brief description of the likely problems that may arise and which will need to be addressed in the main risk groups associated with exporting:-

Country/political risk - this implies the threat that some government action could interfere with export/import commerce in some way, which could take several forms, including loss of property, market share, ability to operate etc. This is prevalent in those countries that may experience major political instability, which could result in defaults on payments, exchange transfer blockages, nationalisation or confiscation of property. Various organisations monitor the effects of political changes on businesses and a list of websites is provided (see APPENDIX 1) which can assist in keeping abreast of any changes in this area.

Legal risk - differences in local laws can exist in overseas countries, which may have an impact in areas such as import procedures, taxation, employment practices, currency dealings, property rights, the protection of intellectual property, agency/distributorship and other related subjects. Obtaining advice from respected/reputable legal practitioners in the target countries concerned is, therefore, important in order to understand the legal obligations for the KSA company, before it starts to export its products to the target country.

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Credit & financing risks � this implies that possibilities exist that:- (a) a customer will default on payment, and/or (b) the customer�s business may fail, and/or (c) there is political or economic volatility. For a KSA company to protect itself against payment default it is sensible, at least initially, to use payment methods which can provide some level of security � e.g. irrevocable letters of credit. The Producer/Exporter�s bank should be able to provide advice on payment options and their relative advantages. Banks can also advise how a company can protect itself against changes in currency fluctuations as international trading exposes the Producer/Exporter to foreign exchange risks.

In addition to the above, there are a number of other secondary risk concerns that the KSA company needs to be aware of, which include:-

Macro-economic mismanagement risk � this relates to governments who may pursue unsound monetary/fiscal policies � e.g. if a situation occurs where a country�s policies:-

Has an increase in its money supply � inflation will occur which can affect the Producer/Exporter in terms of higher local costs, difficulty in planning, currency depreciation, etc.

Runs a fiscal deficit � then the following could occur and effect the Producer/Exporter:-

o Higher interest rates may need to be implemented which would create higher borrowing costs in the target country.

o Recession could be produced, which would lower demand for products in target market.

o Hard currency shortage could be created, as the government may use its hard currency earnings to pay foreign debts.

Insurance gap risk � the possibility that multi or bi-lateral or private insurance cover may not be obtainable or only partly available due to the country/political risk of a particular export county being high. This leaves an insurance gap that cannot be covered except by the Producer/Exporter himself. Here it may be possible to take out insurance cover from several sources that will cover different aspects of the deal, instead of trying to secure a single insurance deal.

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Cargo theft risk � this is a growing areas of risk where the cost of insurance cover is rising regularly because the incidence of theft is also rising rapidly.

Other areas of risks � these could include the following:- War & civil disorder � creating general disruptions in getting

products to market. Labour unrest � creating higher costs, work stoppages, etc.

It is hoped that this information will assist the KSA Producer/Exporter to plan ahead for exporting, as he needs to be aware of the range of risks that exist, how they can affect his business operations, understand how to manage these risks, and to implement corporate systems to minimise against them.

RISK MANAGEMENT

Risk Management is a process consisting of well-defined steps which, when taken in sequence, support better decision making by contributing to a greater insight into risks and their impact on the business. Also as corporate management becomes increasingly accountable for company losses, there is a need to understand the implications and risks associated with any export decision that may be undertaken � as accountability may be lacking without a risk management policy in place. It is the process of identifying, assessing and controlling or minimising a range of business risks that may lead to financial loss that has to be addressed by management. Risk management is, therefore, needed for the following reasons:-

It is a good business and management practice. It assists companies to undertake strategic planning. It helps to reduces unexpected and costly surprises. It enables a more effective and efficient allocation of corporate

resources. It provides better results from projects and programmes that are

implemented. It assists the Producer/Exporter to clearly define insurance needs. It provides better information for decision making. It enables compliance with regulatory requirements in export markets. It assists in preparation for eventual corporate auditing. It minimises risk and enable the development of a growing export

customer-base. It enables the company to balance its opportunities with its relevant

risks.

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Risk Management Structure

For the KSA company too implement sales policies with confidence that business opportunities can be maximised while alleviating the levels of risks to be encountered in the export markets, there is a need to understand the structure of risk, what aspects need to be evaluated and how they can be minimised. The following two charts identify the various levels of international risk associated with exporting and breaks them down into their constituent parts, so that each risk can be better understood and actioned:-

Levels of International Risks Associated with Exporting RISK GROUPS RISK SUB-GROUPS

Sovereign risk � defined as risk from customers that are in the public sector.

Transfer risk � defined as risk from customers that are in the private sector.

Cross-border risk - describes the risk related to the volatility of returns on international investments caused by events associated with a particular country as opposed to events associated solely with a particular economic or financial agent.

Country risk - defined as the risk that something may happen in a foreign country which will negatively influence the willingness or ability of public and/or privately owned customers in that country to pay their debts on time. Country risk is caused by political (unwillingness to repay) or economic (inability to repay) events in a particular country.

Local company risks � the risk based on the financial standing of the company and its ability to meet business commitments.

Local currency risk � the risk that a business' operations or an investment�s value will be affected by changes in exchange rates.

Customer/counter party risk � the risk that the other party to an agreement will default. In an options contract, the risk to the option buyer that the option writer will not buy or sell the �underlying� (defined as: what supports the security or instrument that parties agree to exchange in a derivative contract) as agreed.

Covariant with country risk - a statistical measure of the degree to which random variables move together.

Governance - A generic term which describes the ways in which rights and responsibilities are shared between the various corporate participants via the management.

Accounting standards - the adoption of certain accounting principles and methods when preparing accounts.

Transparency � managerial transparency refers to the actions, writing and plans of organisations that exclude any hidden information, motives or data.

Systemic risk � risks that affects an entire financial market or system, and not just specific participants. It is not possible to avoid systemic risk through diversification.

Contagion � excess correlation of equity or bond returns. Contagion is difficult to identify because there is a need for some sort of measure of the expected correlation. It is complicated because correlations are known to change through time. See APPENDIX 2.

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Risk Management & Minimisation Methods RISK MINIMISATION METHODS

Bi-lateral public guarantees/insurance � a guarantee/insurance contract with a specific government body, which binds the government to indemnify its national commercial entity against specified loss(es) in return for premiums paid � a service provided by the government to support the development of its national business sector.

Multi-lateral guarantees/insurance - a guarantee/insurance contract with an international funding entity, which binds the entity to indemnify commercial entity (whose countries are members of the entity) against specified loss(es) in return for premiums paid � a service provided by the international body to support the development of the various international business sectors.

Defeasance - the setting aside by a borrower of cash or bonds sufficient to service the borrower�s debt. Both the borrower�s debt and the offsetting cash or bonds are removed from the balance sheet.

Private insurance - A promise of compensation, by a private sector company, for specific potential future losses in exchange for payment. Insurance is designed to protect the financial well-being of a company in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest.

Asset backed structures � such as a secured business loan in which the borrower pledges as collateral any assets used in the conduct of the business � also called commercial finance or asset-based lending.

Risk management and mitigation - risk management is the decision-making process involving considerations of political, social, economic and engineering factors with relevant risk assessments relating to a potential hazard so as to develop, analyse and compare regulatory options and to select the optimal regulatory response for safety from that hazard. Essentially risk management is the combination of three steps: risk evaluation, exposure control and risk monitoring.

Mitigation - to try to

reduce (minimise) the impact of risks.

Product/customer selection � minimising risks by selecting customers who have a solid financial base and will not default on payments. Selecting products to export which are easily importable against agreed payments into a target country.

It is clear from the above that a local Producer/Exporter needs a systematic, cost effective and practical internal process designed to produce a relevant quantitative monetary limit for the company�s exposure to risk in each relevant export market.

Implementation of Corporate Risk Management System

By adopting effective risk management techniques a corporate risk system can be put in place which will enable the local KSA company to manage its risks and processes effectively. This will help the company to improve its safety, quality and the overall business performance. In this manner the Producer/Exporter can administer an efficient risk management process which would address the following factors:-

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Risk Identification - identify the specific risks connected with the various facets of the particular export activity. Some risks are fairly obvious and others take a little more thought and foresight to fully understand and identify as a truly potential risk. The question to be asked here are:- (a) what can happen? (listing the events that might happen), and (b) how and why can it happen? (listing the possible causes and scenarios).

Risk Assessment - assessing the relative significance of the export activity and its level of risk, as well as estimating the probability of the event occurring and its magnitude. Risk assessment requires the identification and gauging of risk exposures that the company may be subjected to in an export environment. Therefore, risk assessment lies at the heart of risk management because it assists in providing the information required to respond to a potential risk. The questions necessary to be addressed here are the following:- (a) what are the consequences if it occurs?, and (b) how likely is it to occur?. Answers to these can be determined by:- (i) looking at the adequacy of existing controls, (ii) assessing any consequences that may incur any levels of risk, (iii) reviewing the level of risk determined in the previous stage, and (iv) deciding which risks are to be treated or accepted.

Risk Control � estimating and/or minimising the identified export risks and treating them through available mitigation mechanisms. In this phase an �Action Plan� needs to be developed to plan for the mitigation of the identified risks. This plan, just like the assessment stage must be carefully thought out because:-

Risk management planning extends the values and vision of the Producer/Exporter by determining the needs of the company and how it can accomplish its goals.

The plan must be simple and detailed enough to clearly identify specific goals and its mitigation measures.

Risk management planning is a continuous process. It should be done periodically to determine if goals are being reached and are on track.

Risk management planning is a road map to show where the company is going.

Risk management planning can provide a sense of security. Risk management planning minimises the needless waste of

financial and human resources. The risk management plan should be realistic and manageable.

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On finalising the risk plan, the management should evaluate the plan�s status from time to time.

Once the plan has been implemented, its effect on corporate risk should be evaluated on the basis of it:- (a) minimising the likelihood of risk, (b) reducing the consequences of risk, (c) transferring the risk (e.g. insurance), (d) accepting certain levels of risk, and (e) avoiding the risk.

Risk Administration � implementing a system of ongoing monitoring and review of the risks. This provides the necessary protection against the unavoidable risks (e.g. insurance coverage). The overall goal of risk administration is to create and sustain the interest and commitment of risk management and work towards the implementation of the specific risk management items - as deemed necessary by the company.

By addressing these point positively, there are many benefits which could be achieved in implementing these risk management procedures, some of which include:-

More effective strategic export planning. Better business cost controls. Enhancing shareholder value - by minimising losses and maximising

opportunities. Increased knowledge and understanding of exposure risks. A systematic, well-informed and thorough method of decision making. Increased preparedness for outside review � where appropriate. Minimising business disruptions. Better utilisation of available resources. Strengthening in-house business culture for continued future

improvements. Creating a best practice and quality organisation.

A point to clarify is that risk management does not equate to corporate safety, if risk management is performed correctly, the end result of the efforts will be a safe and prosperous company. Thus, when any business activity is planned or envisaged, the company management must list the potential risks related to that activity, as well as to assess them properly. Effective risk management should consider the long-term results so as to provide the required foundation for changes in activities, attitudes, objectives and situations. NOTE: Risk management relates to both the export and domestic operations of the KSA Producer/Exporter.

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HOW TO MITIGATE EXPORT RISKS

It should now be apparent why businesses involved in exporting are subject to different types of risk than non-exporting companies. International trade is affected by the stability of the local currency market and social, political and geographic issues and, therefore, foreign risk requires businesses to take additional precautionary measures to protect their interests as these variables will directly impact on their customer's ability to repay. As discussed earlier, dealing with export customers increases the need to be aware of and mitigate against the potential commercial risks, fraud possibilities, and to understand the strategies that can help the KSA company to protect its business against them. In this respect, the commercial risks involved in an export transaction include currency exchange risk, risk of non-performance, credit risk, transfer risk, country risk, transport risk and risk of fraud, etc. The following information on the risk factors provides data on the �cause� and how to �mitigate against� the company exposure to such export risks:-

Country/political risk - in addition to restrictions on the export customer to send payments overseas, a change in government regulations could prevent or restrict the Producer/Exporter�s ability to ship products to the selected export market. This arises because many countries regulate the import and export of goods. Unexpected regulatory changes, such as cancelling of permits or licenses, may occur between entering and settling a export sales contract.

How can it be mitigated - the Producer/Exporter should always research the country of destination of its goods and identify any associated risks. They should examine the need for credit insurance, identify the most appropriate policy and investigate competitive products and services. Political risk insurance allows the KSA company to leverage against any damage caused by the actions of the foreign government � including confiscation, expropriation (expropriation is a governmental taking or modification of an individual�s property rights, usually by eminent domain) and nationalisation.

Credit Risk - is involved when the export customer is not creditworthy, or not willing and/or able to pay. This arises because the customer, or other parties involved in the payment chain, are not able to meet their legal commitments.

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How can it be mitigated - the exporter should check credit references before dealing with any trading partner, to assess the credit worthiness of the export customer. This should include checking the following:-

The identity of the customer � (a) does he exist as a legally established business in the country of import, and (b) is the Producer/Exporter dealing with someone who has the authority to bind their employer to a deal.

The usual period of credit offered in the customer's country and the acceptable methods for payments.

The credit limit the Producer/Exporter is prepared to offer their customer.

The trading history of their customer - are they prompt payers, have there been any changes to their normal payment patterns, etc.

Are the products being sold compatible with the customer's normal business profile.

Can the export customer pay the bill � a customer's insolvency can involve the Producer/Exporter in a pre-credit risk, where losses can occur if the customer becomes insolvent during the manufacturing process or at any time before or after the despatch of the export consignment.

The KSA company can undertake these checks itself or have them carried out through a reputable credit agency or credit insurer.

In addition, the following financial mechanisms could also be used for mitigation purposes:-

The Producer/Exporter may use �Without Recourse Export Finance�* to combine the benefits of post-shipment finance and export credit insurance for 100% of the transaction amount. NOTE: * Short term trade financing facilities can be granted on either:- (a) NON-RECOURSE basis - which means the Producer/Exporter having sold his receivable, will have passed the risk to the bank, or on a (b) RECOURSE basis - which means

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that full responsibility of the KSA Producer/Exporter for the amount of the transaction will be retained in the event of non-payment for any reason. Limited recourse will always be retained, however, in the event of non-payment by the export customer for reasons of a contractual dispute and in some cases for post maturity interest in the event of late payment and where no predetermined compensatory amount was paid by the Producer/Exporter to the bank � e.g. some type of bond.

�Aforfait� financing - where the financing ranges from 1 to 5 years - which can be useful where Producers/Exporters are looking for fixed rates on a Non-Recourse basis. It is available in various marketable currencies and what is special about forfaiting is the limited documentation that is required. A quick response/turnaround and the transfer by the Producer/Exporter to the forfaiter of all the risks as well as the administration and collection concerns. It is a cash for credit trade financing service which has been growing rapidly in recent years. Here the banks will purchase a series of promissory notes which will usually bear the �Aval� or guarantee of an acceptable international bank or government guarantee. In some instances where the name of a highly reputable world-class multi-national corporation is concerned, its name alone can often be considered acceptable. NOTE: Avail is defined as a guarantee added by a bank to an accepted time draft by endorsing the front of the draft "per aval." The avalising bank becomes obligated to pay the draft at maturity if the drawee/acceptor fails to do so. Forfaiting can be defined as a form of factoring that involves selling large, medium to long-term receivables to buyers (forfaiters) who are willing and able to bear the costs and risks of credit and collections.

Taking out credit risk insurance which can complement any political risk insurance taken out. However, the premiums are determined by the financial strength of the customer and the economic risks associated with the country and/or Region where the products are exported.

Currency exchange risk � this exposes the KSA company to receiving a lower amount of payment if the currency amount receivable on settlement is lower than the amount calculated when entering the export contract. For example, if the exporter settled the deal in Saudi Rials and the Rial

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value decreases against the Euro, the exporter will end up receiving less Euros for the products sold than originally expected. This arises because the exchange rates vary over time, and there is a time lag between entering into a contract and receiving the payment.

How does the Producer/Exporter manage currency exchange risk - through foreign exchange risk management techniques including hedging and buying the foreign currency forward or entering a futures contract. The Producer/Exporter should contact their bank's Foreign Desk office and obtain more information on currency exchange management.

Risk of non-performance - occurs when the export customer repudiates the contract and refuses to pay. In this situation, any efforts the Producer/Exporter makes to enforce the contract will add costs that detracts from their expected profit. This arises when the export customer refuses to acknowledge their obligation to pay.

How can it be mitigated � a Producer/Exporter may consult an international trade attorney before entering a large export contract and an export credit insurance agent to insure against the risk of the contract being repudiated (this means - to refuse to acknowledge, ratify, or recognise an agreement/contract as being valid).

Transfer risk - occurs when a change in government regulations prevents or restricts the Producer/Exporter's ability to receive payments or exchange foreign currency. It arises from the fact that many countries regulate transfer of money and conversion of foreign currency receipts. Unexpected regulatory changes may occur between entering and settling a contract.

How can it be mitigated - export credit insurance agencies can insure the Producer/Exporter against transfer risk. The Producer/Exporter could use �Without Recourse Export Finance� to combine the benefits of post-shipment finance and export credit insurance for 100% of the transaction amount.

Transport risk � where the goods are stolen, pilfered or damaged while in transit.

How can it be mitigated - commercial marine insurance policies will insure the goods against transport risks. These protect the Producer/Exporter from losses from warehouse to warehouse as well as general loss or

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damage. Additionally, insurance helps to reduce the level of damage that a Producer/Exporter may possibly have to incur during the transportation of his products. Detailed information can be obtained by consulting with a freight forwarder or an insurance agency.

Risk of fraud � arises if the trade partner/export customer is not �bona fide� and turns out to be an unscrupulous person/organisation seeking to take advantage of the Producer/Exporter. The complexity of international trade can sometimes make it difficult to detect fraud before it occurs.

How can it be mitigated � undertake business transactions only with reputable parties that have a proven record in the products in question - including any third parties involved. Beware of offers that seem too good to be true, as they are often not. The KSA company should discuss any reservations with its bankers � as the banks see many attempted and perpetrated frauds while facilitating trade transactions, knows how to deal with such matters, and can advise on the best actions to take to mitigate against it.

COUNTRY RISK RATINGS FROM MAJOR ASSESSORS/INSTITUTIONS

In brief, country risk relates to the likelihood that changes in the business environment may occur and reduce the profitability of doing business in a particular country. These changes can adversely affect the operating profits as well as the value of the products being sold into that target market by KSA companies.

For this reason, a number of well know and respected international �institutions� undertake regular country risk assessments and provide a service to their subscription paying clients to help them to manage their corporate risks in a meaningful way. Thus, country risk ratings summarise the conclusions of the country�s risk analysis process. The ratings are an important component of country risk management because they provide a framework for establishing country exposure limits that can assist the KSA company to set its own risk tolerance levels for their specific export markets.

Because some types of companies may be more exposed to local country conditions than others, it is a common and acceptable practice for country rating �institutions� to distinguish between different types of exposures when assigning their country risk ratings � e.g. trade-related and banking sector exposures typically receive better risk ratings than other categories of exposure because the importance of

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these types of transactions to a country's economy has usually moved governments to give them preferential treatment for repayment. The risk rating systems of some �institutions� differentiates between public sector and private-sector exposures, and in some other �institutions�, a country's private sector credits cannot be rated less severely than its public sector credits (i.e., the institution imposes a "sovereign ceiling" on the rating for all exposures in a country). Both are acceptable practices within the risk evaluation industry.

An �institution's� assigned country ratings can help a Producer/Exporter to decide whether to extend additional credit to a particular country/customer, as well as assisting the company to evaluate how to manage existing exposures. Such ratings, therefore, have a forward looking and broad country risk focus.

Country Exposure Limits

As part of their country risk management process, internationally active Producers/Exporters should adopt a system of country exposure limits, which should reflect a balancing of several considerations, namely:-

The overall strategy guidelines for undertaking international activities. The levels of risk to be undertaken � linked to the target country's risk

rating. Perceived business opportunities in the target country. The need to support the international business needs of domestic

customers.

A Producer/Exporter should consider whether its international operations are such that it should supplement its aggregate exposure limits with more discrete controls. Such controls could take the form of:-

Setting risk limits on the different lines of business undertaken in each of the target country.

Setting risk limits by type of customers/industry sectors covered. Setting risk limits by type of exposure likely to be experienced. Setting risk limits related to exposure to local currencies.

Although country-by-country exposure limits are customary, KSA Producers/Exporters should also consider limiting (or at least monitoring) exposures on a broader Regional basis. The troubles of a particular country often affect its neighbours, and the adverse effects may also be extend to geographically distant countries with close ties through trade or investment. By monitoring and controlling exposures on a Regional basis, KSA companies should be

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in a better position to respond if the adverse effects of a country's problems begin to spread.

The management of KSA companies, who have significant export business (and those who supply a wide range of products to the overseas markets), should monitor internal corporate compliance with approved/set risk limits on a frequent basis.

Current Country Risk Assessment

The assessment of country risk is undertaken by a number of international organisation using the basis identified in the text of this report to come up with their evaluation of the risks that are likely to be experienced by companies doing business in specified country. The main organisations undertaking country risk assessments are:-

Standard�s & Poor � http://www2.standardandpoors.com/NASApp/cs/ContentServer?pagename=sp/Page/HomePg

Moody�s - http://www.moodys.com/cust/default.asp Fitch IBCA - http://www.fitchratings.com/ Coface - http://www.cofacerating.com/

These organisations undertake risk assessment on a regular basis, however, the analysis can change quite rapidly for some countries that are going through difficult economic and/or political situation. The information provided by these organisation is not always free and KSA companies may need to subscribe to the service. However, there are some websites apart from the ones mentioned above where general information is available without subscriptions, and these include:-

Credit Suisse � https://entry.credit-suisse.ch/csfs/p/cb/en/tradefinance/landinfo/lio_laenderratings.jsp

Hong Kong Trade Development Council � http://www.tdctrade.com/countryrisk/index.htm

Purely as an example of some selected countries, the chart in APPENDIX 3 provides some of the risk ratings that have been set by a number of the above named, major international risk rating institutions. Additionally the legend for the risk assessment system used by each organisation is also provided in the same Appendix.

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AVAILABILITY OF RISK SERVICES

Depending upon the type and range of risk services required by the KSA Producers/Exporters, a number of sources are available which include some multilateral and bilateral risk providers as well as some local private insurance companies. More information on the risk services is provided in APPENDIX 4. Some brief details are provided on these sources below:-

Multilateral Investment Guarantee Agency (MIGA) - is part of the World Bank Group, where its role is to promote foreign direct investment into developing countries. MIGA is a global insurer to private investors and also an adviser to countries on foreign investment � it is a leading assessor of political risks. MIGA membership is open to all World Bank member countries. Full details of the risk services offered by MEGA can be seen on their website, www.miga.org.

Export Financing Scheme (EFS) � is part of the Islamic Development

Bank, where its role is to promote the export of goods of OIC (Organisation of Islamic Countries) member countries participating in the scheme through short and long term financing of exports destined to both member and non-member countries. To date, 24 countries are members of EFS. . Full details of the services offered by EFS can be seen on the Islamic Development Bank website, www.isdb.org.

Islamic Corporation for Insurance of Investments & Export Credit

(ICIEC) � part of the Islamic Development Bank, providing a range of facilities for exporters/importers who are members of the Bank and OIC. . Full details of the services offered by ICIEC can also be seen on the Islamic Development Bank website, www.isbd.org.

Arab Trade Financing Program (ATFP) - part of the Arab Monetary

Fund, The Arab Trade Financing Program is a specialised regional Arab financial institution which contributes to the development of Arab trade, through various services including the provision of financial facilities. Full details of the services offered by ATFP can be seen on their website, www.atfp.org.ae.

Export Credit Insurance & Guarantee (ECIG) � a KSA risk insurance

and guarantee scheme operated under the Saudi Export Program (SEP),

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which is part of the Saudi Fund for Development (SFD). The scope of the SEP�s ECIG risk services offered include commercial and political risk cover. All KSA exporters can apply to join the ECIG services offered by the SEP. Full details of the risk services offered by ECIG can be seen on their website, www.sep.gov.sa.

The Inter-Arab Investment Guarantee Corporation (IAIGC) � the

IAIGC operates an Export Credit Guarantee Scheme, which aims at promoting inter-Arab trade. IAIGC objective is to promote Arab trade with schemes aimed at providing insurance coverage for inter-Arab investments (non-commercial risks) and export credits (non-commercial/commercial risks), as well as fostering inter-Arab investment flows by making potential investors aware of investment opportunities. Full details of the services available from IAIGC can be seen on their website, www.iaigc.org.

Other International Private Export Credit Insurance Companies � overseas providers of risk cover that can be contacted to ascertain the range of services available.

Other Private Insurance Companies/Brokers & Risk Consultants in the KSA � providers of different kinds of risk insurances. Many also provide support/advice on risk matters.

USEFUL WEBSITES

A list of useful websites covering country analysis and risks, background information, statistics, ratings, etc. are provided in APPENDIX 1. Information relating to specific KSA Producer/Exporter queries may be obtained from the listed websites.

RISK MANAGEMENT TERMINOLOGY

A list of words commonly used in risk management and their respective meanings can be found in APPENDIX 2. Additionally, web-links are provided to appropriate glossaries that provide meanings of words/terminologies/jargon used in this business sector.

SUMMARY

In summary, it is imperative that the KSA Producer/Exporter becomes fully aware of the range and type of �risks� that threaten business operations when exporting

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to overseas countries and the facilities available, in the KSA and internationally, to mitigate against these factors. Most importantly, business threats can be more easily controlled when a company is aware of the various facets of �risk� that can affect a commercial operation, and can implement in-house procedures to manage and control it. Without a full understanding of the factors that can affect business stability and the mechanisms to control them, there could be a high probability that the overall performance and profitability of the company may be affected.

Various mechanisms are available to mitigate against known �risk� factors, which are outlined in this Bulletin. It is highly recommended that the KSA company understands the range of �risk services� available and identified above, and how they can be applied to its business � all of these services are available to Saudi companies, and the KSA company can directly contact any of these organisation for further information. As a broad range of services are available from several sources, the Producer/Exporter can identify and select the services of particular interest to him in order the utilise the appropriate facilities. The provisions of risk services have a cost attached to them, which may need to be incorporated into the end-price of the product being sold in the export market.

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APPENDIX 1 Useful Websites

The following are some useful websites to obtain information on a company�s �risk� when in entering a foreign market. The websites have been listed on the basis of subject matter and should be useful to Producers/Exporters when undertaking market studies on particular export markets.

Country Analysis

Websites in this category produce country analysis, insights and forecasts. They provide not just data, but also background information to answer the questions �what�, �why� and �what next�. This level of information tends to come for a price but there are some free options also. The websites in this category are:-

Coface@Rating - http://www.trading-safely.com Country risk analysis � www.duke.edu/~charvey/Country_risk/couindex.htm Country risk reports - http://www.econ.pncbank.com/cra.htm Moody's Sovereign Ratings - http://www.moodys.com/cust/default.asp NewNations.com - http://www.newnations.com Standard & Poor's Sovereign Ratings �

http://www2.standardandpoors.com/NASApp/cs/ContentServer?pagename=sp/Page/FixedIncomeBrowsePg&r=1&l=EN&b=2&s=17&f=3

TDC Trade.com - http://www.tdctrade.com/countryrisk/index.htm

Country Background Information

Sites in this category publish narratives on countries, such as history, politics, culture, economy, etc. For analysis purposes, they can provide forecasts of what's ahead and data on risk assessments. Generally there is a price for this information but there are some exceptions. The websites in this category include:-

BBC Country Profiles � http://news.bbc.co.uk/2/hi/country_profiles/default.stm

CIA World Factbook � http://www.odci.gov/cia/publications/factbook/index.html

Deloitte and Touche Country Snapshots �

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http://www.deloitte.com/dtt/section_node/0%2C2332%2Csid%25253D11414%2C00.html

Global Risk Assessments Inc � www.grai.com/ U.K. Foreign & Commonwealth Office Country Profiles �

http://www.fco.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPage&c=Page&cid=1007029394365

U.K. Trade & Investment Profiles - http://www.trade.uktradeinvest.gov.uk World Bank Investment Climate Assessments �

http://www.worldbank.org/privatesector/ic/ic_ica.htm

Country Data & Statistics

Sites in this category carry cross-country statistics and data, useful for country analysis, on topics from politics to the economy to the environment. The websites include:-

FAO Country Profiles � http://www.fao.org/countryprofiles/default.asp?lang=en

Joint Statistics on Foreign Debt � http://www.oecd.org/document/5/0,2340,en_2649_3236325_1895813_1_1

NationMaster.com - http://www.nationmaster.com State Failure Statistics - http://www.cidcm.umd.edu/inscr/stfail/ UNCTAD FDI Stats �

http://r0.unctad.org/en/subsites/dite/fdistats_files/fdistats.htm UNCTAD Trade Data �

http://www.unctad.org/Templates/Page.asp?intItemID=1885&lang=1 UNIDO Statistics - http://www.unido.org/Regions.cfm?area=GLO World Bank Country Data �

http://www.worldbank.org/data/countrydata/countrydata.html

Country Ratings

Sites in this category produce a variety of country ratings, on topics from corruption to quality of regulation. These aren't country risk ratings per se - those sites are filed in "Country Risk Ratings" - but these are often useful resources for country analysis. Websites included in this section are:-

AT Kearney's FDI Confidence Index � http://www.atkearney.com/main.taf?p=5,3

AT Kearney's Globalisation Index � http://www.atkearney.com/main.taf?p=5,4,1,93

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AT Kearney's Retail Development Index � http://www.atkearney.com/main.taf?p=5,3,1,61

World Bank "Doing Business" Ratings � http://rru.worldbank.org/DoingBusiness/default.aspx

World Bank Governance Indicators � http://info.worldbank.org/governance/kkz2002/

World Business Environment Survey � http://info.worldbank.org/governance/wbes

WorldAudit.org - http://www.worldaudit.org

Investment Risk Ratings

Sites in this category produce country ratings specific to business risks, such as trade credit loss, sovereign default, confiscation/expropriation, war, and so on. Related websites are:-

Coface @Rating - http://www.trading-safely.com Ducroire-Delcredere Country Risks �

http://www.delcredere.be/Ducroire/Website.nsf/AllWeb/Ducroire-Delcredere:+Country+risks?OpenDocument&Language=en

ECGD Cover Policies � http://www.ecgd.gov.uk/home/ps_home/overseasinvestment/overseasinvestment

EKN Cover Possibilities � http://www.ekn.se/cgi-bin/landlista/index.pl?inenglish=1

Euler Hermes Export Credit � http://www.exportkreditgarantien.de/eng/service/country.html

Exim Cover Availability � http://www.exim.gov/tools/country/country_limits.html

Fitch Sovereign Ratings � http://www.fitchratings.com/corporate/sectors/sector.cfm?sector_flag=5&marketsector=1&body_content=about

Moody's Sovereign Ratings - http://www.moodys.com/cust/default.asp OECD Consensus Country Classifications �

http://www.oecd.org/document/49/0,2340,en_2649_34171_1901105_1_1 Standard & Poor's Sovereign Ratings �

http://www2.standardandpoors.com/NASApp/cs/ContentServer?pagename=sp/Page/FixedIncomeBrowsePg&r=1&l=EN&b=2&s=17&f=3

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Country Risks Newsletters

A growing number of companies put out free country risk newsletters to generate publicity. This can assist in ensuring that the Producer/Exporter has up to date information on the relevant export countries. Websites include:-

Air Security International's Hot Spots � http://www.airsecurity.com/newsite/intelligence_services/hot_spots.asp

Aon's Political Risk Update � http://www.aon.com/us/busi/risk_management/risk_transfer/trade_credit/j

Coface Country Risk Newsletter � http://www.trading-safely.com/sitecwp/ceen.nsf/vwNL?Openview

Ducroire's Mailing List � http://www.delcredere.be/ducroire/Website.nsf/AllWeb/Ducroire-Delcredere:+Newsletter+?OpenDocument

EKN E-newsletter � http://www.ekn.se/cgi-bin/lasbestall/index.pl?inenglish=1 (NOTE: EKN's newsletter tracks global risks to exporters).

Euler's Country Risk Bulletin � http://www.eulerhermes.com/usa/html_en/news_publicatio/country_risk_bu

Other Websites

These websites provide information related to risk management:-

erisk.com/reference/ref.asp - Provides some key reference sources to consult when researching risk.

riskchat.com - An active forum for traders, financial engineers, and risk managers.

riskbook.com - Independent book reviews and book comparisons. risklearning.com - Professional training in financial math, financial

engineering, and risk management. riskexpertise.com - Expert consulting in financial engineering and risk

management. trading-safely.com/ - Trading safely.com value-at-risk.net - Exercise solutions and more from book on value-at-risk.

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APPENDIX 2 Risk Management Terminology

A short list of more commonly used words are identified below, together with their respective meanings:-

Terminology Description Contagion (a) When an economic crisis in a country's bond or equity markets spreads to other

countries which experience the same problems. The term comes from the more general definition of contagion, which is a highly transmittable disease. (b) The World Bank definition is:- Contagion is the cross-country transmission of shocks or the general cross-country spill-over effects. Contagion can take place both during "good" times and "bad" times. Then, contagion does not need to be related to crises. However, contagion has been emphasised during crisis times.

Expropriation The official seizure by a government of private property. Any government has the right to seize such property, according to international law, if prompt and adequate compensation is given.

Repudiation The refusal to acknowledge or pay a debt or honour a contract (especially by public authorities).

Risk The chance of something happening that will have an impact upon objectives. It is measured in terms of likelihood and consequences.

Risk Management The culture, processes and structures that are directed towards the effective management of potential opportunities and adverse effects.

Risk Reduction A selective application of appropriate techniques and management principles to reduce either likelihood of an occurrence or its consequences or both.

Risk Transfer Shifting responsibility or burden for loss to another party through legislation, contract, insurance or through other means.

Risk Acceptance An informed decision to accept the consequences and the likelihood of particular risk.

Risk Assessment Likelihood � used as a qualitative description of probability and frequency. Consequence � the outcome of an event or situation expressed qualitatively or quantatively, being a loss, injury, disadvantage or gain.

Watch List A list of securities selected for special surveillance by a brokerage, exchange, or regulatory organisation; firms on the list are often takeover targets, companies planning to issue new securities, or stocks showing unusual activity.

In addition, a comprehensive glossary and encyclopaedia of risk and other related terms can be found at a number of websites including the following:-

www.riskglossary.com www.trading-glossary.com www.investorwords.com www.legal-definitions.com www.maxtrad.com/glossary.html http://is.fws1.com/custom.html & http://is.fws1.com/custom2.html

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APPENDIX 3 Country Risk Ratings of Several Risk Assessment Organisations - (for July, 2004)

Region Country Major International Rating Companies Standard &

Poor�s Moody�s Fitch IBCA Coface

East Europe Bulgaria BB- (stable) Ba2 (stable) BBB- (stable) B Hungary A- (stable) A1 (stable) A- (negative) A2 Poland BBB+ (negative) A2 (stable) BBB+ (stable) A4 (positive) Romania BB+ (positive) Ba3 (stable) BB (positive) B Russian Fed. BB+ (stable) Baa3 (stable) BB+ (stable) B Turkey BB- (stable) B1 (stable) B+ (positive) B East Asia China BBB (positive) A2 (stable) A- (positive) A3 Hong Kong A+ (stable) A3 (positive) AA- (stable) A1 Japan AA- (stable) Aaa (stable) AA (negative) A1 Middle East Bahrain A- (stable) Baa (stable) A- (stable) A3 Cyprus A (stable) A2 (stable) A+ (positive) A3 Iran n/a B2 (stable) B+ (positive) B Jordan BB (stable) Ba2 (stable) n/a B Kuwait A+ (stable) A2 (stable) AA- (stable) A2 Lebanon B- (stable) B2 (negative) B- (stable) C Oman BBB (stable) Baa2 (stable) n/a A3 Qatar A+ (stable) A3 (stable) n/a A2 UAE n/a n/a A2 (stable) n/a North America Canada AA (stable) Aaa (stable) AAA (stable) A1 USA AAA (stable) Aaa (stable) AAA (stable) A1 Western Europe Austria AAA (stable) Aaa (stable) AAA (stable) A1 Belgium AA+ (stable) Aa1 (stable) AA (stable) A1 France AAA (stable) Aaa (stable) AAA (stable) A2 Germany AAA (stable) Aaa (stable) AAA (stable) A2 Italy AA- (stable) Aa2 (stable) AA (stable) A2 (negative) Spain AA+ (stable) Aaa (stable) AAA (stable) A1 UK AAA (stable) Aaa (stable) AAA (stable) A1 Africa Egypt BB+ (negative) Ba1 (stable) BB+ (stable) B Morocco BB (positive) Ba1 (stable) n/a A4 South Africa BBB (negative) Baa2 (positive) BBB (stable) A4 (positive) Tunisia BBB (stable) Baa2 (stable) BBB (stable) A4 Pacific (Oceania) Australia AAA (stable) Aa2 (stable) AA+ (stable) A1 New Zealand AA+ (stable) Aaa (stable) AA+ (stable) A1 South Asia India BB (negative) Baa3 (stable) BB (positive) A4 (positive) Pakistan BB (positive) B2 (stable) n/a C South East Asia Indonesia B (positive) B2 (stable) B+ (stable) B Malaysia A- (stable) Baa1 (positive) BBB+ (positive) A2 Philippines BB (stable) Ba2 (negative) BB (stable) A4 (negative) Thailand BBB+ (stable) Baa1 (stable) BBB (positive) A2

NOTE: The terms stable, positive and negative refers to being kept on a �watchlist� to gauge future direction.

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All country risk rating companies use different grading systems, which are identified above. To obtain a better understanding of the meanings of the above ratings systems, the following two �Legends� provides the grading definitions to enable a better understanding of the meanings of the above table:-

Description Standard & Poor�s Moody�s Fitch IBCA

Substantially Risk Free � Smallest degree of risk, these countries offer exceptional financial security. AAA Aaa AAA

Minimal Risk � Excellent financial security. AA+ AA AA-

Aa1 Aa2 Aa3

AA+ AA AA-

Modest Risk � Good financial security, more susceptible to adverse effects of changes in circumstances and economic conditions.

A+ A A-

A1 A2 A3

A+ A A-

Average Risk � Adequate financial security, certain protective elements are lacking.

BBB+ BBB BBB-

Baa1 Baa2 Baa3

BBB+ BBB BBB-

Acceptable Risk � Questionable financial security, major uncertainties and ongoing exposure to adverse political or economic conditions leading to inadequate capacity to meet financial commitments.

BB+ BB BB-

Ba1 Ba2 Ba3

BB+ BB BB-

Poor Financial Security � Currently has capacity to meet financial commitments, but any adverse political or economic development will likely impair capacity or willingness to meet commitments.

B+ B B-

B1 B2 B3

B+ B B-

Very Poor Financial Security � Often in default or on the verge of default.

CCC+ CCC CCC- CC C D

Caa Caa Caa Ca C C

CCC CCC CCC CC CC -

NOTE: The above is not an official comparison, as each company uses its own methodologies to evaluate its ratings, but it is the nearest equivalents.

The Coface country risk rating system is slightly different to the above in its definitions/ratings, which are shown in the following chart:-

Description Coface Ratings Very weak default probability - the steady political and economic environment has positive effects on an already good payment record of companies. A1

Default probability is still weak - even in the case when one country's political and economic environment or the payment record of companies is not as good as in A1-rated countries. A2

Adverse political or economic circumstances may lead to a worsening payment record - that is already lower than the previous categories, although the probability of a payment default is still low.

A3

An already patchy payment record - could be further worsened by a deteriorating political and economic environment. Nevertheless, the probability of a default is still acceptable. A4

An unsteady political and economic environment - is likely to affect further an already poor payment record. B

A very unsteady political and economic environment - could deteriorate an already bad payment record. C

The high risk profile of a country's economic and political environment will further worsen - a generally very bad payment record. D

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APPENDIX 4 Availability of Risk Services

The range of risk services provided by a number of organisations are outlined in the sections below. More detailed information should be sought by either visiting their respective websites and by making contact with the relevant organisation directly. Brief details outlining the scope of risk activities are provided as follows:-

Other International Private Export Credit Insurance Companies

Other sources of credit insurance are also available, however, the KSA Producer/Exporter should make contact with the relevant company to ascertain the level of services/fees charged. The list of companies include the following:-

Coface North America (USA) � www.coface-usa.com Cox Insurance Political Risk Unit (UK) � www.cox.co.uk Credito y Caucin (Spain) �

www.creditoycaucion.com/new/english/home_inicio.htm Euler Group (France) � www.eulergroup.com Eurofactor (France) � www.eurofactor.fr/gen/index.cfm Exporters Insurance Co. (Bermuda) � www.exporters.bm Hiscox Trade Credit Insurance (UK) � www.hiscox.com Seguradora Brasileira de Credito a Exportaco (Brazil) � www.sbce.com.br

Other Private Insurance Companies/Brokers & Risk Consultants in the KSA

There are numerous private insurance companies and brokers in the Kingdom, many of whom provide/arrange insurance cover for very specific types of risks (mainly marine insurance) � estimated to be around 80 companies offering a wide range of insurance cover for both domestic and commercial insurance applications. There are also a number of risk management consultants who can provide advice on best practices and options, on a fee paying consultancy basis. The local Producer/Exporter may wish to contact these organisation to ascertain what particular risk services they offer and at what cost. KSA companies will then be able to identify which particular insurance companies, brokers, and/or consultants could assist them, if any, to provide the particular export risks cover that needs to be purchased/implemented. Amongst others, the following list is a sample of some

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of the local organisations, which provide a range of services in this particular sector:-

Al-Salamah Arabian Agencies Company � risk managers, risk consultancy, insurance and reinsurance brokers.

Amity Insurance Company - marine insurance. Hussein Aoueini & Company - marine insurance. International Surveyors - risk-management/survey & loss-adjustment

services. Red Sea Insurance Group � all classes of insurance. Risk & Investment Management Group (RIM) � insurance, risk management

services and consultancy, reinsurance services. Saudi National Insurance Company - marine insurance. Wolouf Trading Est. � insurance brokers, risk management consultants.

To identify and make contact with other similar local organisations, some web-links to other KSA companies providing insurance services are give below:-

http://www.aiwagulf.com/directory/sa/sp.asp?pc=63 http://www.abfdir.com/Saudi/s_other1.htm http://www.zawya.com/cm/companylookup.cfm?country=430&Ownership=1

&sector=02&Industry=0209

KSA companies should always check-out any local/international company they contact, prior to making any commercial commitments and/or agreements with them.