Diversification: Beyond China: Habeck wants to steer the economy into these markets

The headline on the changes in foreign trade promotion goes something like this: reducing the German economy's dependencies on China.

Diversification: Beyond China: Habeck wants to steer the economy into these markets

The headline on the changes in foreign trade promotion goes something like this: reducing the German economy's dependencies on China. If companies invest in other emerging and developing countries, they can have the federal government insure against political default risks - and at better conditions in the future. The lower thresholds will apply to 34 target countries in the future. However, this may not be enough as an incentive to completely reorganize supply chains.

Minister Robert Habeck had already announced in February that the federal government wanted to improve state support for foreign business under the difficult conditions of increased geopolitical risks. The purpose of the exercise is to make it easier for exporters and investors on their way abroad to finance export and investment projects. In view of the war in Ukraine and the simmering conflict between the People's Republic of China and Taiwan, the ministry believes it is increasingly urgent that German companies spread their foreign business across as many bases as possible to be on the safe side. According to Habeck, Germany must “become more independent of individual countries” when it comes to purchasing raw materials, supplying intermediate products and sales markets.

The gradual reform is now reaching its goal: In addition to investment guarantees, export credit guarantees are also being worked on to protect against politically-related payment defaults. New climate policy sector guidelines should apply to both instruments, which should place more focus on climate protection in the course of the green transformation - in the industrial, energy and transport sectors. A new “green” category is intended to provide easier and more attractive coverage conditions for technologies that are particularly worthy of support, such as wind and solar energy as well as “green” hydrogen. At the same time, the financing of climate-damaging activities will be ended in the future, it is said.

For investment guarantees that are intended to pave the way for business decisions in uncertain markets, the application fee will now be waived in the future; in the event of damage, the deductible will be halved to 2.5 percent, and the annual costs for coverage will be reduced by ten percent. “German companies should be supported even more effectively in opening up new markets,” says the principles of the strategy. The discounts don't seem huge, but single-digit percentage points can definitely make a difference when you're betting millions.

When selecting the targets, which is described as "geographically balanced", the federal government takes credit for having selected countries that offer good conditions for German companies, "but have so far been less of a focus for the economy" and are also of secondary importance for investment guarantees played a role. This may apply to the group of Western Balkan countries, which are now being chosen as preferred partners in geopolitical competition with Russia and China. In Asia or Latin America, however, some supposedly new friends appear who are no strangers to previous project funding.

Admittedly, the proviso that countries have particularly distinguished themselves as “transformation partners”, as “foreign policy partners in a rules-based global order” or as “emerging economic partners” also allows for a wide range of countries to exist despite values-based foreign policy: in addition to flawless democratic systems autocratic states or pseudo-democracies.

Example Turkey: Projects in the now preferred partner country will receive more favorable conditions for the first time, but the country was already among the top 5 markets in terms of volume of approved orders (300 million euros) in 2022 - behind China and ahead of Malaysia and Argentina. Along with Russia, Turkey belongs to the Eastern European group of countries, which as of 2022 accounted for around 30 percent of all secured projects with a commitment of 48 guarantees and a maximum liability of one billion euros, according to the annual report. In the first half of 2023, Turkey will also be in fifth place in terms of the number of approved applications (behind China, Ukraine, Armenia and Peru).

In the Caucasus/Central Asia group of countries, alongside the new dream partners Georgia and Kazakhstan, Uzbekistan, which is only formally governed democratically, is no newcomer to funding: in 2022, measured in terms of the value of approved applications (550 million euros), it came in second place behind China. The presidential regime in Kazakhstan does not qualify as a partner of values, but the country has developed into a sought-after trade hub in the wake of Western sanctions against Russia.

“We have selected countries that are reliable foreign trade partners and politically stable,” said State Secretary Franziska Brantner to the “Handelsblatt”. "Unfortunately, diversification will only be successful if we get involved with trading partners who do not share all of our values."

A look at the concentrated risk of possible crisis-related failures shows that diversification is also in the federal government's own interest. In mid-2023, the federal government had around 600 investment guarantees in its portfolio with a resulting maximum liability of 29.5 billion euros - according to the annual report, at a "still high level" after 30.1 billion euros at the end of 2022. On the People's Republic of China, where projects are now fewer are strongly supported, the highest value in terms of volume of secured projects was 10.4 billion euros (154 guarantees), followed by Russia in second place with 7 billion euros.

In South and Southeast Asia, investment projects in Taiwan have been secured again for a long time in 2022, where, according to Brantner, Germany is striving for closer economic cooperation - but without declaring it a target country. In terms of the number of approved applications, Taiwan is already placed in the top five markets - as is Vietnam, which is one of the newly preferred markets - alongside India, Indonesia, Malaysia, the Philippines and Thailand.

In the first half of 2023, the regional focus of supported investments fell on Indonesia: the resource-rich country wants to become an industrial country and is recording record investments, especially in the metal processing and mining sectors. The export ban on nickel ore has attracted huge projects, writes the GTAI foreign trade service. The ban on bauxite has been in effect since mid-June 2023. The next raw materials on the list could be copper and tin. Germany has traditionally played the role of a technology supplier in the island kingdom - not that of an investor, according to GTAI, which estimates inflows of $200 million in 2021.

The supply chains there are dominated by Chinese companies - which also leads to the role of foreign trade promotion in strengthening domestic companies in competition. China's omnipresence also extends to Latin America, not least because of the abundant agricultural and mineral raw materials there. The latter are also inspiring German imaginations with the energy transition. While Asia accounts for almost 60 percent of the approved applications for investment guarantees, Central and South America accounted for at least twelve percent in 2022 (more than the historical proportion).

For example, Peru, whose most important trade and investment partner is China, is now a preferred destination country. Chinese companies operate two of the five largest copper mines, and nearly three-quarters of copper exports go to China, according to GTAI. The People's Republic is also expanding its presence in other areas such as infrastructure and energy.

The largest German investor in the country is Fraport. The expansion of Lima International Airport with a second runway, tower and new terminal is scheduled to be completed in 2025. A major project in Peru also dominated the federal government's guarantee balance in the first half of 2023: 90 percent of the newly acquired volume was in Central and South America. However, applicants are treated confidentially - whether there is a connection with the hub airport in South America is unclear.

The fact that there is already increased interest in the new ideal partner Argentina is shown by its position in fifth place among all top markets by volume worldwide in 2022 (behind Turkey and Malaysia). In Brazil, the federal government is pinning its hopes on new investment opportunities following the change in government to Inazio Lula da Silva. According to a statement from the guarantee administrator PWC, existing guarantees were also recently extended for projects in Colombia. A climate and energy partnership has already been concluded with Chile - the fourth regional country of choice for diversification - which should also include opportunities to develop hydrogen supplies.

Potential markets for the import of hydrogen to Germany and Europe are now also being explored in Africa, which brings up the rear in terms of German direct investments and also demand for guarantees. Projects in Africa accounted for a full seven percent of the guaranteed portfolio in 2022. Algeria alone made it to fifth place that year in terms of the volume of registered applications and, alongside Kenya and South Africa, it is now also one of the 13 target countries recommended by the diversification strategy on the continent.

The other ten - including Egypt, Ethiopia, Ghana, Morocco, Senegal and Tunisia - are already treated as reform countries within the G20 partnerships "Compact with Africa" ​​- and therefore particularly worthy of support. Applications for investment in heavily indebted and authoritarian Egypt were approved by the Interministerial Committee in 2020 and most recently in August.

The African Association of German Business therefore welcomes the federal government's additional escort protection for three new destination countries. This makes it easier to enter heavily neglected markets. But what about the remaining 41 countries, asks AV Managing Director Christoph Kannengiesser: "The ministry's list does not include Nigeria, the largest economy in sub-Saharan Africa, but also other countries that are suitable for diversification."

According to the Ministry of Economic Affairs, the range of target markets for German investors has already increased significantly in 2022 (16 compared to 11 in 2021). Investment guarantees certainly offer advantages in developing economies - long-term protection against political risks, interventions from Berlin if there is a risk of damage, if necessary the federal government will share the costs or compensation in the event of political damage, such as expropriation, war or breach of law.

But Martin Lück from asset manager Blackrock, for example, considers them unsuitable as an incentive for investments – or even for diverting them into uncertain markets. They are intended more as diplomatic security and protection against having to withdraw under certain risks, he says in an interview. At the same time, very few companies are likely to miss out on profit opportunities in China because of this improved support for new good friends.

This article first appeared on "Capital".