The Export-Import (Ex-Im) Bank of the United States, a financial lifeline and safety net for businesses that export goods to risky foreign markets, may not exist. As things stand today, the eighty-one-year-old bank, which is a crucial lender for companies doing business overseas, will run out of funds in less than a week.
In 2014, the bank financed $20.5 billion with small to midsize businesses receiving more than $5 billion in authorizations or roughly a quarter of total authorization volume. The remaining $15.5 billion supported exports from larger corporations like General Electric and Caterpillar. Last year, this investment in financing and insurance for businesses, accounted for 164,000 American jobs and $27 billion in U.S. export revenue. This overseas credit support is critical to many U.S. companies as the Ex-Im Bank accounts for 90 percent of small business-related deals.
The upcoming closure will likely reduce access to working capital for small to midsize businesses and also increase the credit risk for enterprises that cannot get Ex-Im insurance. Many American commercial credit insurers avoid coverage to high-risk foreign markets. Insurers that provide coverage in these markets do not have cost-effective commercial coverage options for small companies that won’t eat up all their profits. Without renewal of Ex-Im Bank’s charter, self- funding seems to be the only available alternative for most companies that wish to continue exporting.
The future of the bank will remain an issue for firms that need to be insured on a rolling basis to increase their presence in global markets. However, the lack of funding from the Ex-Im Bank is also forcing major export players GE and Caterpillar to make significant changes as well. For example, the Ex-Im Bank has provided competitive advantages for these two companies in emerging markets in the Middle East. Over the next few years, the Middle East and Northern Africa is expected to see a 40% increase in population that will require the region to spend over $100 billion annually on infrastructure to meet the needs of this expected growth.
Without support from Ex-Im Bank, U.S. corporations like these will be at a disadvantage when competing on foreign bids. With uncertainty surrounding the bank’s charter, GE took measures to avoid losing business to foreign competitors and announced it would move about 500 U.S. jobs overseas to France, Hungary, and China. Caterpillar’s recent announcement of a short-term workforce reduction of 4,000 by the end of 2016 had a sizeable impact on financial indexes on Thursday, September 24, 2015.
Caterpillar claims the cuts are part of a corporate restructuring plan to save $1.5 billion annually in operating costs after implementation. However, the company also stated that it was lowering 2015 revenue expectations by $1 billion and dropping 2016 expectations by 5%. While Caterpillar may not have directly attributed the Ex-Im Bank for its reduced guidance over the next two years, Caterpillar’s actions demonstrate that it is preparing to move forward without the bank’s support. In addition to current operational changes, the company may close manufacturing facilities and cut more that 10,000 positions by the end of 2018.
These two companies are also part of a larger discussion that Congress is having as it considers reauthorizing the bank. Congress will need to reach a consensus on which corporations should receive funding from the bank. Many in both chambers feel that large corporations receive a disproportionate share of the available funding and benefits in contrast to their smaller counterparts. With the looming government shutdown set for October 1, the bank’s funding will lapse without the passage of a continuing resolution to keep the government operational.
A budget agreement is not required to reauthorize the bank, and all hope has not been lost yet for the Ex-Im’s charter renewal. Although the charter expired on June 30, the bank still services loans with terms up to 18 years. Without the charter, the Ex-Im bank cannot make or guarantee any new loans, or extend insurance without further Congressional approval. In July, the bank received substantial bipartisan support, as the Senate voted to fund the bank as part of a longer-term highway bill. Now, the future of the financial institution rests with House consideration of this bill.