Trade flows always seem to splutter and stall in the wake of political uncertainty and turmoil. Sarah Rundell examines trade disruptions resulting from the Arab Spring.


It’s no surprise that the Arab revolutions that have toppled regimes in Egypt, Libya and Tunisia over the past year and threaten to do the same in Syria have had a knock-on effect on trade. In a vicious circle, finance drops away as banks and insurers cut their services for fear of not being paid, just as companies in crisis-hit countries have a greater need for banks to support vital trade flows.

Any analysis of trade flows in Arab Spring countries quickly shows that the story comprises two distinct halves. On one hand, the prognosis isn’t that gloomy for countries such as Tunisia and Egypt. Here, although it’s costlier to borrow and long-term finance is hard to come by, banks are lending to companies that have a history of trading with their counterparties.

In contrast, sanctions against Libya and now Syria have stopped trade in its tracks, compounding existing challenges such as Libya’s undeveloped private sector and oil-dependent economy. The IMF says Syria’s economy will shrink 2% this year, the first contraction since 2003, as a result of political turmoil. And because instability has coincided with a broader liquidity crisis in developed economies, European and US banks think more carefully than ever before when allocating limited funds, making Libya and Syria a risk too far.


Uncertainty reigns

That’s not to say that things are easy for Egypt and Tunisia. Import prices have soared as exchange rates have fallen and all companies have cut back on their levels of inventory. “Companies have a wait-and-see approach; when it comes to re-ordering they are very selective,” says Tim Evans, regional head of trade and receivable finance at HSBC.

Banks and insurers are also being selective, tending to support imports of vital food stuffs. “The more core the goods, the more the appetite from insurers, since we anticipate the counterparty is more likely to pay,” says Lila Rymer, manager of Beazley’s US political risk and trade credit business.

Moreover, lenders and insurers are worried about the state of these governments’ foreign reserves.

The speed at which Egypt is ploughing through its foreign exchange threatens both the government’s ability to import and private companies’ access to dollars. Foreign investment and tourism have dwindled since the uprising, and according to central bank statistics, reserves fell to US$16.35bn in January 2012, shedding around US$2bn every month since last October. What remains equals about four months of import cover.

“We are watching to see if and to what extent our public sector counterparties will be affected by this new dynamic,” says Rymer. “There is heightened uncertainty regarding trade where the government is the buyer.” Insurers will only underwrite short-term risk and any hint of policy change such as exchange controls would send fresh ripples of fear through the market.

Companies are paying much more to trade. Sovereign downgrades have pushed up borrowing costs and buyers that used to trade open account or uninsured have begun to opt for trade instruments like letters of credit and insurance to secure flows and payments.

Trade traffic statistics from Swift reveal that although letters of credit issued into some of Tunisia and Egypt’s biggest markets fell sharply in the first quarter of 2011, they rose back to near 2010 levels at the end of 2011. “Offshore suppliers have moved back to demanding confirmed letters of credit as the only accepted payment tool as opposed to the advised, or unconfirmed, letters of credit and other trade settlement products with easier conditions, like documents for collections, that had started to take place lately,” says Amal Ragheb, COO at Egyptian car manufacturer GB Auto Group in Cairo.

In other examples of the tougher and more costly climate, foreign suppliers have shortened their payment cycles, from over a year to months or weeks; some even demand advance payments to secure importation. It all exerts further pressure on importers’ struggling cash flow. “It’s difficult for companies to shift gear in terms of their trade cycles,” says Ahmed Abdelaal, head of corporate banking at HSBC in Dubai. “They might try and reduce it by 30 days but achieving this is actually something else.”

Late payment has forced insurers to hike their premiums. “Delays in payment are heavy for us to carry. We are revising our pricing upwards between 15-20% in the Egyptian market,” says Karim Nasrallah at Beirut-based Lebanese Credit Insurer which insures petroleum products traded throughout the region. It’s even more difficult for Syrian companies where all credit insurers have cut their lines, he says. Although Syrian buyers pay their suppliers “well and promptly”, their credit terms have been cancelled, forcing importers to pay in advance or with cash on delivery. “It is tough for Syrian importers but the private sector is coping,” says Nasrallah.


Faint hope

But out of adversity comes opportunity. International banks offering trade finance say they have benefited because of their enhanced reputation amongst nervous exporters. “There is an element of flight to quality,” says HSBC’s Evans. In Egypt the handful of local banks with dollar liquidity are exploiting the gap vacated by European banks, and bigger regional players are also taking the opportunity to muscle into this space. Saudi banks are increasingly refinancing projects in dollars in North Africa in a new role carved out since the European debt crisis.

In another development, multinationals looking to put their liquidity to work are expected to bid for infrastructure or engineering projects in these countries, predicts Motasim Iqbal, regional head transaction sales, banks segment, Mena and Pakistan at Standard Chartered. “Multinationals used to park their liquidity with the banks; now they are looking at how to finance trade transactions themselves.”

Other changes include banks collaborating more through syndication rather than competing with each other to lend to projects.

The region also holds promise for ECAs, which are set to ramp up their presence once demand for long-term financing returns. The prospect of World Bank and IMF financial support to the region will also draw in ECAs; Egypt returned to the IMF last month and is now discussing a US$3.2bn standby facility.

“Whilst it is still early days we do expect ECAs to support the new governments in these countries by backing equipment supplies from their exporters,” says Piers Constable, head of coverage for the Middle East and Africa at Deutsche Bank.

Projects that best meet the needs of these economies will find it easiest to get ECA cover initially, making infrastructure or schemes that generate hard currency earnings key priorities. “We would expect those ECAs that have traditionally been strong in the respective markets to be most visible; so Coface in Tunisia and Sace in Libya, for example,” says Constable. Syria is likely to remain off the agenda for most ECAs until there is a change in regime.

Commentators in Egypt and Tunisia are imbued with a sense of optimism that regime change in Libya promises huge opportunity for their own neighbouring economies.

Once Libya opens up, regional trade could start to flourish, benefiting Tunisian and Egyptian banks wanting to lend to oil projects and exporters looking for new consumer markets. The IMF says Libya halved its imports last year to just US$11.2bn compared to US$24.6bn in 2010 because of the effect of sanctions.
But developing Libya’s economy won’t be straightforward.

“The state still dominates almost two-thirds of business activity in Libya so freeing up business and enterprise requires cultural change,” warns Ben Knowles, Libya and Middle East specialist at commercial law firm Clyde & Co. Libya’s emerging private sector could also be affected by unknowns like mooted regulations that all businesses should be required to have over 50% local ownership. “This would make international companies less keen on Libya,” he says.
Nonetheless, it seems the worst is over for Egypt and Tunisia. All sizeable projectsare on the backburner but banks are financing existing trade with long-standing clients, companies are extracting more out of their working capital to ride out the storm and encouragingly the Egyptian government is pursuing ways to access longer-term finance via the international markets and multilateral organisations.

“Banks take a long-term view. Given the size of these populations and their diversified economies they won’t step away lightly,” says Philip Patterson, a senior analyst at Arab Banking Corporation.

Egypt has also been buoyed by tolls from the Suez Canal and remittances have helped stop trade flows deteriorating altogether. Encouragingly, US trade representatives, bent on deepening commercial links with Egypt and other Arab Spring countries, met with their Egyptian counterparts in late January to discuss the trade environment.

In Libya and Syria the road ahead is rockier. Libya has to build its economy from scratch and Syria hasn’t “seen the full impact of sanctions yet” warns Patterson. Until their political situations improve, trade will remain in the doldrums.