The Middle East has been one of the most dynamically developing regions in the past decade, though progress has varied, with some economies making great strides while others are still trying to gain a foothold. The team at Recovery Advisers share an overview of the region, the journey the markets have been on and their road ahead.

 

Earlier this year, an industry survey by the Berne Union identified that the main issues for credit insurers and export-import banks were, among others, existing and new trade barriers, inflation, interest rates, FX shortages and unsustainable debt service, as well as supply chain disruptions due to ongoing conflicts. The impact these issues have on Mena countries varies significantly, with countries in North Africa struggling to maintain their hard currency reserves and control imports, while GCC countries (especially Saudi Arabia and the UAE) continue to see an influx of foreign investments and increasing immigration of highly skilled expats, further buoying their economies.

Most of our clients have highlighted that in the past five years, the two most challenging markets in the region have been Algeria and Egypt.

The main challenges exporters to Algeria typically face arise from complex import procedures, and the impact these procedures have on the application of ICC standardised trade and payment terms such as Incoterms, UCP 600 and URC 522.

Exporters to Algeria are often surprised to discover that clearing goods into the country is a statutory prerequisite to transferring payments overseas.

This prerequisite results in most Incoterms contracts (E, F, C and most D types), documents against payment (URC 522 D/P) and documentary credits (UCP 600), not working as expected or providing creditors with the security they expect.

For example, if goods purchased on Incoterms F-type or C-type terms (such as FOB or CIF) are lost in transit, the risk still – effectively – remains with the seller, as enforcing the buyer’s payment obligation is not possible due to the statutory requirement of clearing the goods into Algeria first before an international payment is permitted.

For the same reasons, documentary credits issued by Algerian banks cannot be enforced unless the goods have been cleared into Algeria, despite the clear and express separation of the documentary credit from the underlying commercial agreements. Therefore, if the goods are not cleared into Algeria for any reason (including the buyer’s breach of their obligation to take receipt of the goods), the issuing bank is prohibited from honouring the letter of credit.

Despite these challenges, Algeria remains a very important market with great potential. Our data and experience show that recoveries from Algeria are generally positive (ie, amicable and judicial recoveries are relatively efficient). Our colleagues in Algeria almost always report that Algerian importers usually cooperate in resolving their defaults amicably and have a sense of duty to honour their obligations towards their foreign suppliers.

Egypt has also been reported as a challenging market for exporters and traders. One of the largest economies in Africa and the Arab World, Egypt continues to struggle with a persistent negative balance of payments, which exerts extreme pressure on the Egyptian pound (EGP), and has resulted in several devaluations and a general shortage of hard currency.

To stem the outflows of foreign currency and alleviate the pressure on the EGP, Egyptian regulators traditionally tend to introduce non-tariff barriers in the form of restrictions on domestic banking transactions (such as limiting deposits of foreign currency), criminalising foreign exchange transactions that take place outside of the official channels, or introducing rules relating to international payments.

Following the recent devaluations of the EGP, repayment of obligations denominated in foreign currency has become especially difficult for companies with revenue streams predominantly in EGP.

According to our Cairo team, amicable debt recovery typically involves reductions (haircuts), debt recycling,1 or a combination of both, along with securing/collateralising the remaining open credit.

We noticed that many creditors adopt a pragmatic approach when restructuring debt owed by Egyptian obligors. Creditors often prioritise collateralisation and preservation of commercial relationships over fast recovery solutions.

We have assisted many of our clients with securing their exposures in the Egyptian Collateral Registry (Movable Collateral Law No. 115 of 2015), giving creditors the security they need, and debtors the time necessary to adapt to currency devaluations.

 

In contrast to the challenges seen in North Africa, the economies of the GCC countries are booming, mostly led by Saudi Arabia and the UAE and their drives to wean their economies off of oil.

As an economic and political safe haven, the UAE continues to attract investments and highly skilled expatriates from all over the world.

Continued developments and improvements in the legal system have made extending credit and recovering debt significantly more efficient and ultimately cheaper.

Such developments include the digitisation and acceleration of electronic documentation and court procedures, usually slashing the duration of procedures down to a matter of days. For example, procedures to enforce payment obligations (such as commercial papers, IOUs, etc) or ratification and enforcement of foreign arbitral awards are now completed in less than 10 days, as opposed to months (or even years) in the past.

Another recent development is the new bankruptcy law (Federal Law Decree No. 51 of 2023 concerning Financial Restructuring and Bankruptcy) which came into effect on May 1, 2024. This new law replaced the previous Federal Law No. 9 of 2016 and makes it easier for businesses to restructure debt and avoid bankruptcy, ultimately providing value preservation and protection to both debtors and creditors.

Similarly, the drive of Saudi Arabia towards diversification away from oil is already starting to reap benefits as the Kingdom continues to attract foreign investments, embark on numerous mega projects, and create employment opportunities for the ever-growing number of highly skilled Saudi nationals entering the labour market.

As part of its ambitious reform, Saudi Arabia overhauled its legal system by moving towards a codified system as well as adopting technology and digitalisation, making it among the most efficient legal systems in the region, and arguably the world.

The new regulations adopted in the past two years have significantly expanded the collaterals available to secure trade finance transactions. Digital solutions enable on-demand monitoring of certain collaterals, while the bankruptcy law has prioritised the interests of foreign investors and creditors, and the dispute resolution processes have reached lightning pace, concluding court cases within a few months.

Moreover, complex disputes that were traditionally considered risky and difficult to resolve in Saudi Arabia have become lower-risk and predictable. For example, court claims on behalf of credit insurers as subrogees are now more predictable and certain. Our team in Saudi Arabia won an award for successfully enforcing the rights of a subrogee in front of Saudi courts and fully recovering the subrogated debt.

Our Riyadh-based team reported that recovering outstanding or disputed debt has been significantly faster in the past few years, and the jurisdiction has become the most efficient among the markets Recovery Advisers cover.

Besides the core commercial debt collection activity, Recovery Advisers has helped banks, export credit agencies and private insurers recover hundreds of their outstanding debts in the region, earning awards from the trade finance industry. However, there has been a shift towards more pre-emptive solutions lately, where creditors and insurers are becoming more cautious about taking risks.

Our ExpoFin services, introduced in January 2024, respond to this need and have helped dozens of creditors clarify and verify provided information, expanding their horizon from being a desk-based exercise without the resources (time and costs) demanded by borrower/buyer visits. By identifying red flags and fraudulent practices, we have prevented the closure of fraudulent deals and loan agreements to the amount of US$55mn, which then could be reallocated to profitable export transactions.

“The economies in the Mena region continue to diverge, with those in the GCC showing very strong fundamentals and true growth, while those in North Africa grapple with balance of payments challenges,” says Ahmed Madkour, managing director at Recovery Advisers.

“That said, the entire region remains substantially more attractive for trade and investment compared to other regions of the world. However, the divergence in economic performance necessitates risk mitigation and recovery strategies that are specific to each country; strategies that take into consideration each country’s unique circumstances, access and availability to information, and efficiency of its legal system.”

Reference

  1. Debt recycling is the practice of repaying outstanding debt by making payments part of which are allocated to settling the outstanding debt and the remainder is allocated to new orders.