Do Default Loss Risks Matter for Arab Exports? Evidence from a Gravity Modelling Approach
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Riadh Ben Jelili
Abstract
In the literature, it has been common to use credit risk scores to investigate impacts of external sources of risk and political institutions on foreign investment location choice-decisions. However, only a few studies have specifically examined the relationship between importing country’s credit risk scores and exports. Side stepping the limited availability of statistics on ECAs activities in the Arab countries, this paper investigates empirically the relationship between merchandise exports and credit scores of importing countries. Based on a gravity equation augmented with the risks of default on international payments, measured by intra-country risk ratings, the principal contribution of the present research is to scrutinize the impact of commercial and political risks on merchandise trade in the Arab region. The findings suggest that in the absence of insurance contracts against the risk of defaulting payments, firms are more likely to export to countries with higher prior probabilities to secure payments. It logically follows that provisions of export credit guarantees well targeted towards reducing buyer risks are likely to boost-up exports.
Acknowledgements
This paper has benefited greatly from valuable comments and suggestions of two anonymous reviewers. To them goes my full appreciation. I also extend special thanks to Professor Ali Arifa for his inputs and comments. The views expressed in this paper cannot be attributed to the Arab Investment & Export Credit Guarantee Corporation or its Member countries. All remaining errors are my responsibility.
Description of the data set.
| Variable | Description | Source |
|---|---|---|
| Export | The dependent variable in LSDV model is the logarithm of the bilateral exports value US$ million transformed using an inverse hyperbolic sine transformation in order to deal with zero bilateral exports. The dependent variable is the value of exports and the logarithm of the value of exports in PPML model and Heckman model respectively. In addition to initial total merchandise product group, three other export broad sub-categories defined according to the Standard international trade Classification (SITC) Revision 3 are considered: primary commodities, manufactured goods, and machinery and transport equipment. Each category of export value is expressed in US$ million. | UNCTADstat Data Center |
| Economic size | Sum of the logarithm of gross domestic product (GDP) across country-pairs in US$ million | UNCTADstat Data Center |
| Distance | Weighted distance (pop-wt, km) across country-pairs in logarithm | Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) GeoDist database. |
| Manufacturing | Logarithm of manufacturing imports to overall merchandise imports ratio in importing country. | UNCTADstat Data Center |
| Risk score | Assessment of the risk of default on international payments initially on a scale from 0 to 7, first converted into 1–100 point scales and taking the logarithm, higher value of the index corresponds to higher risk. | Compiled from OECD Country risk classification according to established methodology for assessing country credit risk and classifying countries in connection with their agreement on minimum premium fees for official export credits. |
| Regional trade agreement | Nominal variable equal 1 if a regional trade agreement is in force between the exporter and the importer. | Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) GeoDist database. |
| Common language | Nominal variable equal 1 for a common official language between the exporter and the importer. | Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) GeoDist database. |
| Bilateral investment treaty | Nominal variable equal 1 if a bilateral investment treaty agreement is in force between the exporter and the importer. | World Bank, ICSID Database. |
| Colonial link | Nominal variable equal 1 if a colonial history between the exporter and the importer. | Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) GeoDist database. |
Country coverage and OECD risk classification.
| Risk class | High income | Upper middle income | Lower middle income | Low income |
|---|---|---|---|---|
| 0 | Australia, Austria, Belgium, Canada, Cyprus, Czechia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Liechtenstein, United Kingdom, United States of America | |||
| 1 | Taiwan | |||
| 2 | Chile, China, Hong Kong SAR, Kuwait, Saudi Arabia, United Arab Emirates, Brunei Darussalam | Botswana, China, Malaysia | ||
| 3 | Bahamas, Qatar, Trinidad and Tobago, Uruguay | Bulgaria, Costa Rica, Mexico, Panama, Peru, Romania, Thailand | India, Indonesia, Morocco, Philippines | |
| 4 | Bahrain, Oman | Algeria, Colombia, Croatia, Dominican Republic, Namibia, Russian Federation, South Africa | Guatemala | |
| 5 | Azerbaijan, Brazil, Paraguay, Turkey | Bangladesh, Bolivia, El Salvador, Honduras, Jordan, Tunisia, Viet Nam | Senegal | |
| 6 | Albania, Argentina, Belarus, Ecuador, Gabon, Guyana, Iran, Jamaica, Kazakhstan, Suriname | Angola, Armenia, Cameroon, Côte d’Ivoire, Egypt, Ghana, Kenya, Mongolia, Nigeria, Papua New Guinea, Sri Lanka, Zambia | Togo, Uganda | |
| 7 | Iraq, Lebanon, Libya, Venezuela | Congo, Nicaragua, Pakistan, Sudan, Ukraine, Yemen | Burkina Faso, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Sierra Leone |
Categories for default risk refer to the OECD classification of the year 2018 and income groups defined as by the World Bank.
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Articles in the same Issue
- Research Articles
- The Effects of Power Outages on the Performance of Manufacturing Firms in the MENA Region
- SME Financing in MENA: A Quantitative and Qualitative Analysis of Multilateral and Bilateral Development Lenders’ Intermediated Lending Practices
- Do Default Loss Risks Matter for Arab Exports? Evidence from a Gravity Modelling Approach
Articles in the same Issue
- Research Articles
- The Effects of Power Outages on the Performance of Manufacturing Firms in the MENA Region
- SME Financing in MENA: A Quantitative and Qualitative Analysis of Multilateral and Bilateral Development Lenders’ Intermediated Lending Practices
- Do Default Loss Risks Matter for Arab Exports? Evidence from a Gravity Modelling Approach
