Nippon Export and Investment Insurance (NEXI) announced on September 25 that it will introduce in October a “special insurance for interest rate swaps” as part of efforts to promote Japan’s exports of infrastructure. For loans involving power-generation-plant projects in emerging economies, NEXI will expand the scope of trade insurance coverage to include interest swap transactions in addition to the principal and interest. Businesses make a swap transaction contract to protect themselves from future interest rate increases. The new arrangement will cover the settlement at the loan’s termination to further reduce the loan risk. The measure will help Prime Minister Shinzo Abe’s initiative of promoting official and private investment in African nations, where a huge increase in power plant construction is forecast.
In general, interest on power-plant-project loans is set with a floating rate. However, investments in emerging countries with unstable political conditions face a higher risk of interest rate increases. To avoid the risk, companies engaged in projects in emerging countries make a special swap contract with financial institutions that allows businesses to make repayments with fixed rather than floating rates.
If the project goes under, the loan’s principal and interest would be covered by insurance. Under the current system, however, the settlement with an interest swap contract would not be covered by insurance in the event of premature termination due to the project failure, leading to a big loss for the business perhaps as large as 30% of the principal.
In Africa, there is an urgent need to build large-scale power plants including thermal power stations. According to the International Energy Agency, energy demand on the African continent in 2040 is estimated to be roughly triple the demand in 2012.
African investments sometimes involve local companies, and the risk of the settlement has presented a challenge to Japanese corporations. Because of this, Japan has lagged behind China and Western nations in investment in power-plant projects in Africa.
In order to promote the export of high-quality infrastructure, NEXI also extended the duration of overseas investment insurance from the current 15 years to 30 years starting in April this year. Establishment in the next fiscal year of a dollar trade insurance policy is under consideration.