improve external confidence in Egypt's economy and boost investor sentiment. ... (Monitoring for increased risk). Under
RISK FOCUS CREDIT, POLITICAL & SECURITY RISK BULLETIN NOVEMBER 2016
Egypt risk outlook Confirmation of a USD 12 billion loan from the International Monetary Fund (IMF) will ease Egypt’s currency crisis and fiscal challenges in the short term. Long term economic reforms will be implemented alongside the loan, and this will elevate the threat of civil commotion over the next year. The need to attract increased foreign investment to the country will provide opportunities across the energy and construction industries.
TRADING ENVIRONMENT The Egyptian economy is facing a currency crisis that will only be
in July 2016 were down 41.9% from
funding required for the agreement to go
July 2015) will increase the pressure on
ahead. USD 3 billion has been delivered
currency reserves.
by the United Arab Emirates and Saudi
successfully navigated with significant
In August 2016 the country came to a
external assistance. Years of geopolitical
provisional agreement with the IMF for
and economic turbulence saw foreign
a USD 12 billion loan over three years,
exchange (FX) reserves fall to around
which will ease currency pressures and
USD 19.6 billion in September 2016,
boost investor sentiment. The loan is
down from USD 36 billion in 2011. The
likely to be confirmed before the end
negative impact that insecurity has had
of 2016 as Egypt has moved close to
on the tourism industry (visitor numbers
securing the USD 5-6 billion external
Arabia, with almost USD 1 billion coming from G7 countries in addition to a currency swap agreement with China in October 2016, worth USD 2.7 billion. Once confirmed the agreement will lower non-payment risks for international oil and gas firms. The government of President Abdel Fattah el-Sisi has pledged to honour the country’s debts to
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CREDIT, POLITICAL & SECURITY RISK | Risk Focus | November 2016
WORLD RISK REVIEW RATINGS EGYPT
Currency Inconvertibility & Transfer Risk
November 2016
10 9
Sovereign Credit Risk
Country Economic Risk
8 7 6 5 4 3
Expropriation
War & Civil War
2 1
EGYPT Contractual Agreement Repudiation
Terrorism
Low Risk
1
High Risk
10
Under Review (Monitoring for increased risk) Under Review (Monitoring for decreased risk) Legal & Regulatory Risk
Strikes, Riots & Civil Commotion
USD 3.58 billion in September 2016.
INVESTMENT ENVIRONMENT
Although long term economic challenges
In October 2016 Sisi established a
are substantial, the agreement will
Supreme Investment Council with the
also help the country to avoid an
aim to boost much-needed foreign
immediate fiscal crisis, and allow
investment in the country. In the short
Planned infrastructure projects, boosted
important long term reforms to be
term the government is aiming to push
by external liquidity, should increase
implemented, including fuel subsidy
through an updated investment law (the
demand for steel in the five year
cuts to go alongside the value-added
last investment law was introduced in
outlook. Growth in the construction
tax which was approved in August
2015), which will focus on diversifying
sector is expected to be robust despite
2016. The government devalued the
incentives for investors and reducing the
macroeconomic headwinds, reaching
Egyptian pound by 48% in November
regulatory burden for foreign companies.
8.4% in 2017. This will be driven by a
companies in this sector, which reached
2016, before announcing that the currency would be allowed to free float. This should relieve the draining of the country’s FX reserves and will provide a boost to investors in the short term, with the IMF loan reliant on a far more competitive currency. The move immediately eliminated the spread between the Egyptian pound’s official rate and the black market rate (trading on the black market had been double the official rate before devaluation), which will improve external confidence in Egypt’s economy and boost investor sentiment.
Significant opportunities exist for companies operating in the hydrocarbons sector. New discoveries will act as a catalyst for investment
Alongside this, there is significant investment potential opening up in the renewables industry, as the government has committed to sourcing 20% of energy from renewable sources by 2020.
strong project pipeline and private sector investment, with 39 projects totalling USD 39 billion currently underway on a public private partnership (PPP) basis.
despite a prolonged period of suppressed
The government is likely to continue
commodities prices, whilst the likely
targeting development of the country’s
roll back of energy subsidies will make
agribusiness sector, which contributes
sales prices more attractive. In August
around 15% of GDP, providing
2016, oil and gas firm Royal Dutch Shell
opportunities for foreign companies
announced the discovery of 142 billion
in the long term. In March 2016 the
cubic metres of potential natural gas
European Bank for Reconstruction
reserves in Egypt’s Western Desert.
and Development made a USD 100
Meanwhile, private sector investment
million investment in the sugar refining
worth USD 20 billion will boost the oil
sector, whilst multinationals such as
and gas sector in the next five years.
Nestlé and Coca Cola have announced
www.jltspecialty.com | Risk Focus
significant investments in the country in
Jordan was shut down for an extended
recent years.
period, with supplies to Israel later
The importance of foreign investment for the country means the government is unlikely to actively pursue outright expropriation or selective discrimination of foreign companies. However, operational and investment risks remain. Commercial contract disputes can become delayed by an inefficient bureaucracy, whilst red tape can cause delays for investors looking to enter
cancelled. The threat from IS-inspired groups extends beyond Sinai, with attacks on people and property also seen in Cairo and other urban areas, often targeting tourists and foreign workers. In August 2015, a Croatian expatriate working for a French company was kidnapped and executed in Cairo by a group linked to IS.
Centamin has faced a protracted legal
PRIVATE INSURANCE MARKET INSIGHT
battle since 2012 in relation to its rights
The sentiments outlined in this Risk
over the Sukari gold mine in the Eastern
Focus are echoed in the private
Desert, with the dispute still unresolved.
insurance market as being points of
the Egyptian market. Gold mining firm
concern. However, it is revealing that
SECURITY ENVIRONMENT Challenging economic conditions in Egypt elevate the threat of civil
of the approximately 40 insurers JLT surveyed in October 2016: • 79% are ‘open for business’ with
commotion. Inflationary pressures are
almost all of these viewing Egypt
driving up costs of housing and daily
with tempered enthusiasm as
staples (food and drink prices rose
‘an opportunity’
14.8% in September 2016), whilst the implementation of macroeconomic reforms risks an outbreak of popular discontent. The rise in energy prices announced by the government in November 2016 will exacerbate these challenges, with the cost of diesel increasing by 30.5%. In October 2016 hundreds of protestors in the northern city of Port Said marched in objection to rising housing costs. In the short
• 10% expressed non-committal interest in supporting Egyptian business • 11% viewed Egyptian risk as a ‘step too far’ Of note are the detectable nuances in risk perception and treatment between the different segments of the insurance market which act as homes for ‘Egyptian risk’:
term such protests will not escalate to the scale seen in 2011, but can pose
Credit and political
business interruption and property
• In line with the percentages above,
damage risks in urban areas. The Islamist insurgency in Sinai will continue to pose threats to energy sector assets in the one-year outlook. In January 2016 Islamic State (IS)-affiliated militants attacked a natural gas pipeline in northern Sinai, following a series of attacks targeting energy infrastructure since the Arab Spring uprisings. After a number of attacks in 2011 the pipeline carrying gas through Sinai to Israel and
relative comfort can be noted in relation to Egyptian political risk, but less so when it comes to credit risk associated with private Egyptian companies. For the latter, appetite is far reduced with only 34% of insurers being ‘open for business’ and only a third of these perceiving Egypt as an ‘opportunity.’ • Alongside this reduced appetite for private counterparty credit risk,
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CREDIT, POLITICAL & SECURITY RISK | Risk Focus | November 2016
JLT Specialty Limited provides insurance broking, risk management and claims consulting services to large and international companies. Our success comes from focusing on sectors where we know we can make the greatest difference – using insight, intelligence and imagination to provide expert advice and robust – often unique – solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles.
insurers also show greater selectivity
Middle East. Insurers will concede
in the sectors they are prepared to
that they see greater risk in the
support. Construction, infrastructure,
Sinai Peninsula, however, this does
oil & gas, power and technology
not limit risk appetite, rather the
feature as preferred sectors, whilst
effect is limited to slightly higher
appetite for the agribusiness sector
premium cost.
drops off almost universally (unless there is some form of direct and
Terrorism
contract specific government
For the terrorism market the location of
support).
the property concerned is an important consideration. This is partly due to the
• Insurer appetite comes full circle where support from the Egyptian
geographic concentrations which are
government is included within
synonymous with the locations of Egypt’s
a contractual structure. In more
industrial and tourist hubs, but also the
challenging territories insurers will
higher risk associated with the Sinai
As one of the world’s strongest
always gravitate towards government
Peninsula and Western Desert areas.
credit, political and security risks
payment or performance risk and
Otherwise, there is an upbeat tone
teams we help banks, commodity
Egypt is no exception. The majority of
among insurers, similar to that seen in
traders and corporations to
today’s demand for credit & political
the K&R market. Any reluctance derived
understand, mitigate and transfer
risk insurance comes in relation to
from losses during the Arab Spring
the effects of political and country
contracts or concessions where the
of 2011 has become a thing of the
economic risk, counterparty (credit)
Egyptian government is the ultimate
relative past.
risk, political violence and kidnap
counterparty, with the oil & gas
& ransom. Through a relationship
sector foremost in this context.
In summary, demand for all types of insurance relative to Egyptian risk is
driven, consultative approach we use a systematic methodology to
Kidnap and Ransom
quantify, prioritise and minimise your
• In the Kidnap and Ransom (K&R)
company’s political risk, security and
market generally the number of
trade credit exposures.
insurers with a credible offering
consistently high (especially in relation to the oil & gas sector) and, generally, this is matched by appetite from insurers. The exception is in credit & political risks, where there is the greatest
narrows dramatically. However,
CONTACT
selectivity. Here, the identity of the
this does not result in capacity or appetite restrictions when it comes to Egypt. Less than 1% of risks are
Ruth Lux Senior Consultant, JLT Specialty Limited +44 (0) 20 7886 5409
[email protected]
JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW
declined and there is a strong desire to expand in North Africa and the
© November 2016 273199
its individual corporate ‘story’ routinely makes the difference in generating the best terms from the market and securing adequate capacity.
PRIVATE INSURANCE MARKET VIEW ON EGYPTIAN RISK* 11%
“Open for business”
10%
Non-committal interest “Step too far”
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Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No. 01536540. VAT No. 244 2321 96.
prospective policyholder and quality of
79% *based on a JLT survey of 40 insurers in October 2016
This publication is for the benefit of clients and prospective clients of JLT Specialty Limited. It is not legal advice and is intended only to highlight general issues relating to its subject matter but does not necessarily deal with every aspect of the topic. If you intend to take any action or make any decision on the basis of the content of this bulletin, you should first seek specific professional advice.
