The Middle East: Managing Corporate Risk in a Crisis

The wave of political and social turmoil across the Middle East this past year has had a considerable economic and commercial impact. The popular protests, which began in Tunisia in December and spread quickly to Egypt, Bahrain, Libya, Yemen, and Oman, and more recently Syria, severely disrupted normal business operations and significantly increased the risk profiles of corporates operating in the region.

Three countries were particularly hard hit by the ‘Arab Spring’ uprisings. Egypt, Libya and Bahrain were significantly impacted, with Libya descending into a civil war situation. Fighting in the UN-mandated no-fly zone, as well as international sanctions, has interrupted day-to-day business activities, effectively bringing the country to a halt. It is still too early to tell how long economic disruption will continue or how serious the impact of political events will be on business continuity.

Bahrain’s volatile state of affairs, which included a three-month state of emergency preventing many people from going to work, was met with very resolute action by the Bahraini government. The Gulf Co-operation Council (GCC) Peninsula Shield supported this action – in the form of Saudi troops.

In the long term, the country’s political stability will be cause for concern for investors and may have a negative impact on its image as a global financial hub, particularly for the offshore banking sector. On the other hand, Bahrain will also receive increased support from Saudi Arabia in the future.

In the medium term, the country will see an uptake in activity, mainly in the form of large infrastructure projects. For example, the Housing Ministry is overseeing a BHD2bn project to build 50,000 housing units across Bahrain over the next five years.

Egypt remains in a state of flux, as uncertainties continue over the timing and degree with which the Egyptian military regime is progressing towards a democratic transition.

A referendum for constitutional reform was passed on 20 March 2011, but political risks remain in place. Particularly in the medium term, it is not clear whether any incoming government will be able to meet the Egyptian populace’s expectations with respect to democratic rights and standard of living improvements, which were the basic tenets of the revolution.

Therefore, further labour action and strikes are expected, as well as further popular demonstrations, as the country transitions from the old regime. But it will also mean that the government will need to allocate more resources to social justice programmes, such as raising subsidies, pensions, civil servant wages, bonuses, the minimum wage, unemployment benefits, etc. That will come at a great cost.

As a result, Egypt still has a bumpy path ahead, which could be sporadically disruptive to business activity. It is expected that political tensions will continue to drag on until elections later in the year and most likely extend into 2012.

In addition, there are emerging risks elsewhere in the region – for example, in Syria where pro-democracy protests are gaining momentum. If the Bashar al-Assad regime stays in place, the hardliners may be able to gain the upper hand, which means that Syria will become once again more closely aligned with Iran than it has been over the past 10 years. This has implications for the Middle East region as a whole, including Jordan, Israel and Iraq.

Egypt: A Rapid Response to the Crisis

The saying ‘cash is king’ really holds true in a crisis. Companies still need to be able to pay staff and suppliers but cash becomes extremely scarce in a pressure cooker situation, such as in Egypt. Therefore, when the political turmoil began it was critical for banks to ensure cash was made available to key corporate customers. In order to do this, the immediate internal requirement for a bank is to ensure there is a business continuity plan in place.

The second most important issue proved to be information flow. To be successful in a crisis, a bank must open up as many communication channels as possible, and interact with chief financial officers (CFOs), treasurers and local subsidiaries and business partners, to get a full picture of a corporate’s requirements.

For example, Citi responded to the escalating situation in Egypt by bringing together a response team, which created core relationship products in order to bridge the on-the-ground teams in Egypt with overseas parent organisations. The response team was set up to capture requirements that might arise with the parents companies, and its mandate was to get in touch with them immediately to ensure that the bank responded to their queries, as well as send regular situation updates.

The response team was based at an offsite location, and included a core set of staff from multiple products and responsibilities. From a technological perspective, the bank linked together all the local systems, so that the team could see any transactions that were delayed or stuck due to infrastructural changes on the ground. This allowed the bank to give informed responses to client queries as to where a particular transaction was stuck, or whether a salary or a payment had been made.

In addition, there were senior representatives on the ground, who were constantly in touch with local parties to ensure that there was continuity during this period.

A key factor to a successful business continuity plan was an effective communications strategy, both externally and internally. With many overseas treasury centres and CFOs of multinational corporates and investors as clients, the bank had to be able to answer questions about the situation on the ground and the status of the financial infrastructure. These companies needed a point of contact to find out more details, particularly when it came to the state of the play with local clearing system and stock exchanges. Internally, too, the bank had to disseminate information to local relationship managers, in case they were asked similar questions.

The communication strategy had two advantages. First, customers realised that they had a ‘go-to’ team for developing issues. Second, it had a calming effect on the customer base because they realised that they weren’t alone struggling for information. The central response team meant that it was easy to gather information from the Egyptian team, as well as to use them to effect any transactions that needed to be done.

As the crisis unfolded, the most immediate pain point for corporates was the ability to get cash to their employees. In Cairo, for example, all the ATMs ran out of money within days. Therefore, corporates needed to find a way to pay their employees, even if it was just an interim payment to ensure that they had cash to survive.

Once that issue was resolved, many treasurers turned their attention to pending collections and payments. They also wanted the ability to quickly deposit money in local banks because they didn’t want to keep money in their offices due to the prevailing lawlessness.

The third main issue was settlements. The issue of paying local suppliers became important because in many cases local suppliers want to be paid in cash. And they were willing to discount the invoice as long as they were paid in cash, so they could in turn pay their workers and suppliers, etc.

Another focal point for corporates was to get continuous, up-to-date information on the financial markets and infrastructure because most corporate treasurers, locally or overseas, were completely cut off from normal information flows in a constantly changing scenario. Therefore, the teams in Egypt and overseas were called on to provide constant updates.

As things began to return to ‘business as usual’, Citi maintained open communication channels. On 5-7 May 2011, the bank held a forum in Sharm El-Sheikh for its local and international corporate clients to shed light on Egypt’s economic situation post-revolution, as well as discuss the best international banking practices in cash management and trade solutions. Over 70 corporates participated in the forum to talk about how they weathered the crisis and how they best can take advantage of the emerging opportunities.

The Future

Although it is difficult to assess the current infrastructural damage in Libya, for example, quite clearly it will be significant. As soon as the fighting subsides, there will be a substantial reconstruction effort needed to restore the physical infrastructure. Infrastructural damage has largely been limited in the other countries, but other problems prevailed. During the height of the unrest in Egypt – the 18 days from 24 January – commercial flows ground to a halt, largely due to looting and lawlessness.

In the future, there could be a financial impact on the banking sector in certain countries. This is most obvious in Egypt, where the government will need to borrow more money to finance a large deficit. This will have an impact on the availability of credit for the economy at large, given that the banks will have to divert more resources to financing the government.

From a commercial stability perspective, the main issue to resolve is the social frictions that are brewing across the region. The most important of these is unemployment; therefore, labour market reform is going to be a key priority in preserving commercial stability going forward.

Conclusion

The biggest pain point for corporates operating during the upheavals in the Middle East has been the continued uncertainty: political uncertainty persists in Egypt, while demonstrations against the Syrian regime are continuing.

However, the situation in Egypt is going through a number of positive developments and its future looks optimistic. The country has been proactive in finding funding sources and has entered into a series of bilateral agreements with members of the GCC community, as well as other partners in Europe and America, to get the Egyptian economy back on its feet. Bahrain is also on a path to stability.

Most of the GCC nations are embarking on the road to economic and political reform, which has actually led to an increase in capital expenditure and investment to bid on the large infrastructure projects that are being rolled out across the GCC.

These infrastructure projects – airports, roads, housing, bridges, drainage canals, etc -are clearly on the governments’ agendas, certainly across the four of the six GCC countries. Massive budgets have been approved for these development and construction projects, which will attract new workers to and from within the region, blue collar as well as white collar.

This will help in income distribution as part of the social justice agenda, which is not limited to Egypt but is a demand that reverberates across the region.

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