risk focus - JLT Specialty

RISK FOCUS CREDIT, POLITICAL & SECURITY RISKS BULLETIN JULY 2016

Africa’s foreign exchange crisis Africa’s foreign exchange (FX) crisis will remain a prominent issue for global markets in 2016. The deterioration in trade due to suppressed commodity prices has led to significantly reduced foreign currency levels in key African economies, including Nigeria, Angola, Ethiopia and Egypt.

The FX situation has limited the ability

compared to Q4 2015) have left the

foreign airlines from repatriating an

of businesses to import goods and

country with an acute foreign currency

estimated USD 600 million in ticket sales.

for foreign entities to transfer profits.

shortage. Government reports put FX

Generally, commodity prices are not

holdings at USD 26.5 billion, or five

envisioned to recover dramatically

months of imports (although the real

this year, enhancing the need for

figure may be considerably lower), down

governments to take meaningful

from USD 31.5 billion in July 2015. This

steps to bolster FX reserves and fill

is limiting the ability of businesses to pay

gaps in national budgets. Meanwhile,

for imports and for foreign companies to

businesses operating in the region

repatriate naira-denominated earnings.

should take steps to mitigate the threat

Numerous companies, such as South

of currency inconvertibility, non-payment

Africa’s Nampak Ltd and British Airways,

and other credit and political risks.

have indicated difficulties in this regard

In Nigeria, where the energy sector accounts for more than 90% of FX earnings, significantly reduced oil and gas revenues (down 34.1% in Q1 2016

Years of geopolitical and economic turmoil have seen Egypt’s FX reserves plummet to USD 17.5 billion in May 2016, from USD 36 billion in early 2011, creating havoc in a country which imports almost three times as much as it exports. Alongside this, the black market has flourished, with businesses willing to pay high prices in order to secure foreign currency.

in recent months. In June 2016, United

In Angola, cashflow problems stemming

Airlines and Spanish airline Iberia halted

from low oil prices have prevented

flights to Nigeria due to foreign currency

national oil company Sonangol from

restrictions which have prevented

contributing to state reserves since

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CREDIT, POLITICAL & SECURITY RISKS BULLETIN | Africa’s foreign exchange crisis | July 2016

January 2016, exacerbating the

foreign banks, notably Standard Bank

country’s already troublesome FX

and Bank of America, cease trading with

situation. Oil output represents over

Angola’s financial system in late 2015,

95% of Angola’s FX revenues, while

further restricting the circulation of US

remittances from Sonangol account for

dollars. This in turn has led the central

60% of state revenues. This is reflected

bank to prioritise access to US dollars to

in the country’s deteriorating import

key sectors such as oil and healthcare.

flows, which were down 33.6% in

The repercussions for foreign businesses

March-May 2016 compared to the same

are concerning. For several months, the

period last year. Legal and regulatory

government has allegedly blocked an

risks are also exacerbating the situation.

estimated USD 237 million belonging to

Concerns regarding international

various airlines operating in the country.

money-laundering regulations saw major

NIGERIA FX RESERVES MAY 2015-16 70

32000 31000

50

USD MILLION

29000 28000

40

27000

30

26000 20 25000

BARRELS PER DAY (BPD)

60

30000

10

24000 23000

0 May 15

Jun 15

Jul 15

Aug 15

Sep 15

Oct 15

Nov 15

Dec 15

Jan 16

Feb 16

Mar 16

Apr 16

May 16

Source: Bloomberg / Central Bank of Nigeria

JLT RISK RATINGS FOR JULY 2016

Currency Inconvertibility & Transfer Risk 10

9

Country Economic Risk

8

Sovereign Credit Risk

7

6

NIGERIA

5

4

ANGOLA

3

War & Civil War

Expropriation

2

EGYPT

1

MOZAMBIQUE 1 = Low Risk 10 = High Risk

Contractual Agreement Repudiation

Terrorism

P = Under Review

Strikes, Riots & Civil Commotion

Legal & Regulatory Risk

Nigeria Central Bank FX Reserves

Brent Crude Oil Price (bpd)

www.jltspecialty.com | Africa’s foreign exchange crisis

JLT COUNTRY ECONOMIC RISK RATINGS FOR JULY 2016 Tunisia Morocco

Libya

Algeria

Egypt

Western Sahara

Mauritania Mali

Chad

Niger

Sudan Eritrea

Cape Verde

Senegal Gambia

Burkina Faso

Guinea Bissau Guinea Sierra Leone Liberia

Ghana Cote D’Ivore

Djibouti Benin Nigeria

Ethiopia South Sudan

Togo

Central African Rep.

Somalia

Cameroon

Uganda Gabon

Kenya

Congo D.R of the Congo

Tanzania

HIGH RISK

Angola Malawi

Zambia

10 Zimbabwe Namibia

9

Mozambique

Mauritius

Botswana

Swaziland

8

South Africa

7

6 5

4

Beijing

Shanghai

Hong Kong

Taiwan

3 2

1 LOW RISK

Source: JLT World Risk Review Ratings

3

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Government responses Governments across Africa are responding to currency crises with measures of differing stringency and effectiveness. Numerous countries, including Mozambique, Angola and Nigeria, have implemented capital controls in 2015 and early 2016 to protect their currencies and FX holdings. These have ranged from import quotas to caps on FX accounts. As a result, businesses in these countries have struggled to access much-needed foreign currency. The recent relaxation of capital controls

in over six years, and above the central

In March 2016, Italian company

in Egypt and other countries is a

bank’s 12% short term interest rate. With

Italcementi, reported it had been

positive move, although with currency

inflation likely to rise further in H2 2016,

struggling to move USD 54.8 million

volatility likely to continue in H2 2016,

interest rate hikes will be required to

in shareholder profits out of Egypt for

a snapback should not be ruled

enhance foreign exchange flows.

over a year and had faced difficulties

out. Efforts to ease pressure in FX markets have culminated in currency devaluations in a number of countries including Angola, Nigeria, Ghana and Egypt, generating inflationary pressures and forcing governments to tighten monetary policy.

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In a similar vein, the Central Bank of Egypt (CBE) has responded to FX market problems by loosening capital controls implemented in early 2015 and moving toward a more flexible exchange-rate policy. However, these approaches have yet to significantly boost FX inflows as

USD

Egyptian manufacturers are struggling to procure dollars to import key materials and

bn

Estimated backlog in FX demand in Nigeria. On 20 June 2016, Nigeria ended its currency peg to the US dollar in a bid to open up foreign exchange markets and stem large-scale capital flight. The move was welcomed by domestic and foreign businesses, which have been deterred for over a year by the uncertainty surrounding the exchange rate. Since then, the regulator has attempted to enhance

machinery, limiting export opportunities. State intervention has also stepped up as the government looks to protect its FX position by reducing non-essential imports.

in paying foreign suppliers. Likewise, Egyptian grain tenders have met with a lukewarm reception from foreign merchants in recent months, after three shipments of French wheat were delayed in January 2016 due to difficulties in securing LCs from Gasc, the official Egyptian grain authority. These issues emphasise the need for businesses to take steps to mitigate non-payment and non-performance risks, particularly surrounding LC transactions. Angolan authorities introduced a

“Angolan authorities introduced a range of FX controls in 2015, including limits on foreign currency account withdrawals, import quotas on selected products, and the prioritisation of access to dollars for certain goods such as oil and food.”

range of FX controls in 2015, including limits on foreign currency account withdrawals, import quotas on selected products, and the prioritisation of access to dollars for certain goods such as oil and food. However, the potential impact of these measures has effectively been negated by the halting of remittances from Sonangol and other key FX sources. Meanwhile, the business environment has been

liquidity and trade flows by clearing a USD 4 billion backlog in FX demand. While this

In December 2015, new restrictions

significantly affected, with foreign

is a step in the right direction, sustained

were implemented requiring importers

entities experiencing payment delays,

high demand is expected in the coming

to register source factories with the

non-renewal of contracts and transfer

months which will maintain downward

General Organisation for Export and

issues. In June 2016, the central bank

pressure on the naira. In the short term,

Import Control (GOEIC), provide

stated it would sanction seven banks,

foreign investors are likely to remain

documentation confirming the quality

including the Angolan subsidiary of

cautious while the economy rebalances

of products and pay 100% cash

South Africa’s Standard Bank, for

and the government’s commitment

deposits on letters of credit (LCs).

failing to comply with FX controls.

to policies that support the business

These and other measures have made

environment is uncertain. Inflation reached

it more difficult to transfer funds and

15.6% in May 2016, the highest level

secure LCs.

www.jltspecialty.com | Africa’s foreign exchange crisis

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Foreign exchange outlook The FX situation is unlikely to improve significantly in the short term. State efforts to control depreciation will likely place further downward pressure on FX reserves, while inflationary risks will persist. Much depends on the commodities outlook, given that the region’s key economies rely heavily on oil and other exports in order to generate FX revenues.

50

USD

pb

Figure oil prices are forecast to level off at around USD 50 pb this year, falling short of the USD 60 pb level needed to generate momentum in the industry. Global commodities prices are likely to remain suppressed in 2016, particularly for iron ore, copper, zinc and coal. Oil prices are forecast to level off at around USD 50 pb this year, falling short of the USD 60 pb level needed to generate momentum in the industry. Countries including Nigeria, Angola and Egypt will therefore look to retain capital controls for the time being. Meanwhile, states which have large external financing requirements, such as Mozambique, Ghana, Republic of the Congo, Uganda and Namibia, will experience further pressure on FX reserves or see mounting external debt. As a result, pre- and post-shipment risks will remain elevated in the coming months. Trade Credit and Structured Credit insurance products are specifically designed to address these issues, providing cover for perils ranging from currency inconvertibility to import/export license cancellations.

“...there are positive indications that commodities prices will rebound in the medium term, bolstered by improving fundamentals in the energy sector.”

However, there are positive indications

On 3 June 2016, Niger Delta Avengers

that commodities prices will rebound

(NDA) militants damaged Royal Dutch

in the medium term, bolstered by

Shell’s Forcados export pipeline, forcing

improving fundamentals in the energy

the company to indefinitely suspend

sector. This will improve FX liquidity in

oil exports of 250,000bpd. Similarly,

countries reliant on commodity exports.

tourism in Egypt, which is a key source

In the meantime, various African

of foreign currency, has declined

governments will look to push through

following a string of terrorist attacks in

widespread fiscal and structural

late 2015 and early 2016. In addition

reforms, most prominently in the major

to negatively impacting exports and

oil-producing countries.

thus foreign currency inflows, such

“...tourism in Egypt, which is a key source of foreign currency, has declined following a string of terrorist attacks in late 2015 and early 2016.”

activity increases the threat to foreign enterprises from property damage and business disruption. Security risks will likely become more evident in affected countries in the coming months as inflationary pressures come to bear, eroding purchasing

Nigeria’s central bank is reportedly

power and raising costs of living.

planning to ring-fence USD 2.5

Inflation rose to nearly 30% in Angola,

billion to provide loans to non-oil

18.9% in Ghana and 15.6% in Nigeria

exporters and has set up two export

in May 2016. This will affect the general

credit facilities to drive economic

population, much of which live in abject

30

poverty, increasing the risk of political

diversification.

violence in the form of strikes, riots and civil commotion. In June 2016,

%

Inflation rose to nearly 30% in Angola in May 2016, eroding purchasing power and raising costs of living.

Nigeria’s finance ministry was closed for several days as staff went on strike over pay demands related to rising inflation. Commercial entities may well be affected as wage cuts and workforce consolidation become more likely. JLT’s comprehensive Political

The speed of the recovery will also

Violence Insurance programme can help

be governed by domestic factors,

businesses mitigate the impact of

which continue to exacerbate the

such activity on physical assets,

effect of global headwinds on the FX

personnel and operations.

situation. Nigeria’s energy sector is currently experiencing severe disruption stemming from escalating militant activity in the Niger Delta region.

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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. As one of the world’s strongest credit, political and security risks teams we help banks, commodity traders and corporations to understand, mitigate and transfer the effects of political and country economic risk, counterparty (credit) risk, political violence and kidnap & ransom. Through a relationship driven, consultative approach we use a systematic methodology to quantify, prioritise and minimise your company’s political risk, security and trade credit exposures.

CONTACTS Ruth Lux Senior Consultant, JLT Specialty +44 (0) 20 7886 5409 [email protected]

Claims Management Claims management is central to the value that we seek to add at JLT, and foremost in our minds when we work for any client. Claims are not an afterthought; they drive our placing process. JLT has a diversified client base by sector and geography and JLT has had all credit / political risk insurance claims either paid in full, settled in agreement with the client or withdrawn by the client. Please see below for our recent claims data:

LOCATION

YEAR

INDUSTRY SECTOR

SUMMARY OF CIRCUMSTANCES

Nigeria

2011

Banking

Contract Frustration Non Payment

Egypt

2011

Mining

Forced Abandonment

Mozambique

2006

Banking

Credit Protracted Default

Ghana

2011

Banking

Contract Frustration Non Payment

Algeria

2015

Manufacturing

Non Payment of Invoices Due

Cameroon

2010

Telecomms

Expropriation

South Africa

2010

Ceramics


South Africa

2010

Textiles


JLT Credit, Political & Security Risk Expertise Organisations with international operations are exposed to counterparty and country risks in the course of their daily trade and investment. The diversity of JLT’s client base reflects the fact that all balance sheets can benefit from the leverage and protection given by structured use of credit and political isnurance. Niche operators and global

James Cubitt [email protected]

leaders come together from the community of international banks, commodity traders,

Eleanor Smith [email protected]

retailers for whom we act.

JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW www.jltspecialty.com 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. © July 2016 272358

exporters, investors, manufacturers, plant and equipment operators and overseas

JLT has been a leader in political risk insurance since the advent of the market in the early 1980s and enjoy strong relationships with all insurers in this sector. At any one time we manage upwards of USD 60 billion of insurance capacity and we have had extensive success in collecting claims on our client’s behalf. The insurance contracts we arrange relate to a wide variety of transactions brought about by our diverse client base and we also offer a range of risk consulting services.

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.