HSBC gathered a group of corporate clients in Cairo to discuss the critical risks and concerns currently facing their local and international trade business.


Roundtable participants

  • Alaa Arafa, CEO and chairman, Arafa Holding and chairman, Egyptian Centre for Economic Studies (ECES)
  • Tim Evans, regional head of trade and receivables finance, Mena, HSBC (chair)
  • Amr Kandil, CEO, Kandil Steel
  • Sadri Mathari, chief commercial officer, Venus International


Evans: What do you see as the key risks in your business now, from a trading perspective? 

Kandil: The most important risk currently is the devaluation of the Egyptian pound. We serve most manufacturing industries in Egypt, and we have to keep stocks and deliver on partial supplies. Therefore we took a big risk importing in US dollars and selling into the Egyptian market with Egyptian pounds. Other than this, we have risk in our raw material acquisition process.

Over the past few years since the 2008 crisis, fluctuations in prices have become very volatile and very quick. Therefore, prices of fresh products keep changing while you have inventorial stocks. Unfortunately for our product, we do not have hedging tools like the LME for this business, so it becomes much more difficult to fix your costs.


Evans: What about your export business, do you have a natural hedge there? Are you able to sell on a US dollar basis? 

Kandil: Of course; this is partial hedging, but you need to hedge all of it, because the margins in the steel business are very narrow. If you hedge only half of your imports or half of your business it is not enough; you need to hedge 80 to 85% to be on the safe side.


Evans: These are risks that probably existed in your business even before the Arab Spring and the global economic crisis. Apart from the currency volatility, what other aspects are impacting your business as a result of the world economic crisis and also what has happened recently in Egypt? 

Kandil: At the beginning there was a big tightness in credit facilities from the banks. It was not really tightness; it was more like a fear of the coming months and what would happen in the region. It was not for long, and three to four months after the revolution things came back not to normal, but they went back to being functional. We still have this fear from most of the financing banks, but it is not a problem.

On the sales side we have a lot of problems in collections, especially selling to the construction industry. We are talking mainly about industrial construction, not residential construction. We are facing big problems with the collections. We have problems financing our clients in the region, because we are selling to the region and to Europe as well. We are not talking about Saudi Arabia or the Gulf; we are talking about Libya and Sudan. This region is becoming hectic with getting their letters of credit (LCs), their payments, their Swifts – everything is taking much longer.


Evans: Sadri, we have heard from someone who imports and exports. You import and distribute locally, so you must have even greater FX volatility in your business. What are the key things impacting your business? 

Mathari: Essentially the volatility in prices, because we are dealing in a very volatile environment; our prices are essentially based on the futures market, so we have seen huge instability lately due to crop conditions in the world. We had to manage that, and we had to make sure that the risk is also not completely transferred to the customers, who in Egypt are already – for the same reason that Mr Kandil was giving – in an economic environment that is in crisis.

We do some re-export business, and we have been affected by the same problem Mr Kandil was talking about, which is the issuance of letters of credit from our importers. Our business is not based completely on the export business; the export is a plus, so as far as Egypt is concerned we do not see particular changes in terms of the way the people consume, buy, or import.

The other risk that we have is the cash squeeze that we are seeing in the Egyptian economy. We are a free-zone company, so what we are selling is not in local currency – we buy in US dollars and sell in US dollars – and our customers are facing difficulty in financing themselves with Egyptian banks. A regulation from the Central Bank of Egypt has imposed a 50% cash collateral for the import business, which means they have to put a lot of capital on the table.


Evans: With the heightened risk in the market, are you doing less sales on an open account basis? Are you doing more on an LC basis than before? 

Mathari: We do not see the volume being affected. You have some seasonality, but the volumes are the same as before the revolution. The only thing is that people will probably be more rational when they buy. They used to buy a large quantity at one time, and now we see them buying the same volume, but over a different period of time. That is in order to spread the risk and be able to buy the commodity they have from us and resell it in the market to recoup the goods, since they do not have the facilities from the bank to make an import transaction.


Evans: They are holding less inventory because of the risk of distressed stock?

Mathari: I would say they use us for storage.


Evans: Has your inventory holding had to go up as a result of that? 

Mathari: We definitely keep goods in the warehouse for a longer time, but, again, because we have a very large logistic structure we can support and sustain that. We are exposed to a lower rotation of capital because we have to pay the full amount of the vessel. We are bringing Panamax-sized vessels of 60,000 tonnes and more, and we are reselling it into the Egyptian market in parcels. That has been slowing down the rotation of the capital.


Evans: Alaa, what has been your experience of the key risks in your business, and are there any new ones that you think have come as a result of the stresses that the world economy and the Egyptian economy has been under recently? 

Arafa: We have a lot of risk, and every day there is a different risk. The financial risk was always there, and will continue to be there. Volatility of currency is part of our life; hedging your methodology: you sell your cashflow forward, or you make hedging for your protection. There are a lot of mechanisms to protect fluctuation in currency and fluctuation of commodities – it is possible. In today’s world I do not think this is a new risk; it became a norm for businesses to have to protect themselves against fluctuations, either in commodities or currencies.

We are a net exporter. We have subsidiaries in Italy, Portugal and the UK. Our sales in the local market are 6 to 7% of our turnover, but some of our costs are in Egyptian pounds. We believe the Egyptian pound is over-valued; put it this way, the Egyptian pound is already devaluated if you compare it with commodities. If you compare it with other currencies the Egyptian pound should be devaluated. The decision should come from the Central Bank of Egypt, but it may be too late.


Evans: If you take a step back, are the risks in your business greater since the credit crisis, as opposed to the Egyptian revolution? 

Arafa: Egypt got an economic recession as a result of the financial crisis, but Egypt did not have a financial crisis. An economic recession is different from a financial crisis. We did not have one bank claim bankruptcy; we did not have major signs and symptoms of financial crisis in the country. The Central Bank of Egypt was a good protector, but it was crippling the economy to protect, so we have an economic recession.

Our business has been affected by the financial crisis in a big way, because we are an export business; we export men’s suits. We are the biggest exporter in the fashion menswear business in the region. We are exporting to Italy, the UK; Debenhams is our business, as is Marks & Spencer. You buy our goods directly or indirectly in the UK or Italy. We have a unique operation here in Egypt; we have a lot of skills and know-how to produce for the fashion business, and we have subsidiaries overseas. We are in the luxury business; we also make fine cotton shirts. We are a player in a sector that has traditionally existed in Egypt, but not in this segment.


Evans: Would the key impact be the consumer demand in your export markets?

Arafa: We suffered in the financial crisis – the UK was a disaster, as was Europe. Many people in the financial sector were made redundant, so nobody would buy a suit, nobody would invest. Our business suffered tremendously in the financial crisis, and the local companies here have supported our overseas subsidiaries.

As such, this has had a really big impact on us. We have written off investments that we had in the UK, because we had to get rid of bleeding cash: you cannot take any business that is cash-negative. We got rid of whatever cash negative business we had; either we restructured and we kept the cash positive business, or we got rid of it. We decreased our business in the UK, but we increased it in Spain in order to balance our business in Europe.

Today Egypt is a risk with the labour conditions, because there are strikes in the ports and the factories. Security is better today – better than it was before. I believe we will face fuel shortages in the future; lack of energy will be a big problem.

What’s more, China is not consuming as before. China was a very important market for us. We were selling a lot of luxury goods in China, and now our business in China is flat. We were depending on the growth of China, because Japan is a big disaster. We closed our subsidiary in Japan.


Evans: Amr, you exported to Western Europe in the past; what impact have you had on your business from a risk perspective as a result of the financial crisis that started in 2008? 

Kandil: The difference is that Alaa is selling to very big brands; we are selling to manufacturers, and manufacturers exist everywhere. Even before the 2008 crisis, since the early European crisis in 2005, we immediately started moving to Eastern Europe and we started selling to this area: Bulgaria, Poland, Russia and Ukraine. After the 2008 crisis we moved back to the region where we sell to almost every single country: Turkey is a big market for us, Saudi Arabia, East Africa, and we are also developing West Africa nowadays. The main problem we are facing with developing our export business, now that 50% of our production is being exported, is the finance.

Evans: The biggest risk is obtaining finance from local banks in Egypt, even for a trade transaction?

Kandil: Yes. For example, on the other side we are enjoying open terms with Europe. We are buying our raw materials from Europe, from Japan and sometimes from Egypt, and we are enjoying lots of open terms from our suppliers of raw material in Europe. On the other hand, we cannot give this facility to all of our clients. Although they are mainly manufacturers, they are stable companies, but they exist in very risky places, and we do not have the same tools that you have in Europe for financing these people.


Evans: The risks have clearly increased; banks are less willing to lend. What steps are you taking to try and reduce the level of risk in your business? Are you doing less on open account and more on LC? Are you using credit risk insurance?

Kandil: We did not normally do any open terms; we would like to do open terms, but we do not have the credit insurance, so our open terms would be limited to 10% of clients, where we have real confidence that they will pay. Otherwise the counter-measures we are taking are negligible, because there is nothing in hand. We need the finance facilities or tools to exist in the region to use them. We do not have any problem with the clients other than this; the clients need the material, we have it, we can supply it, but to get a Swift from Libya, not even an LC, it would take 15 days, or sometimes a month, to get the money in the bank.

Many of our clients have started moving through Dubai or Abu Dhabi, but the governments are resisting, because they want every dollar to come out of their country. In Sudan, their latest rule is that no one can import material unless the LC is opened and the dollar issued from Sudan.

Mathari: For us it is exactly the same situation. Our business model is on a cash-and-carry basis, so we do not have receivables in the market; we buy in US dollars and we sell in US dollars. Nevertheless, the volumes are very important; we are putting a lot of money on the table for very small returns, so we have to make a lot of volume, and what is becoming difficult is the issue of financing, for us, but also for our customers. The main consequence has been the substantial slowing down in the rotation of the capital. On average we used to have a rotation of capital between 21 and 30 days; now, the rotation of capital is extended to beyond 60 days. It definitely slowed down the operation.

It is the same type of risk when we export, even though in the grain industry you have a lot of instruments that have been put in place to mitigate the risks, and we have the logistics to offer our customers the possibility of paying exactly what they have in terms of capital. They do not want to over-expose themselves by asking for additional financing because they have to buy a large quantity to achieve economy of scale. The logistics allow us to bring the goods and distribute them in smaller lots, so that we can benefit from cash payments.


Evans: Would you say that the biggest impact to your business has been the ability to get funding from banks? 

Mathari: Of course it is very important, because it is a very capital intensive activity, but the second important aspect has been the volatility in prices. It is very difficult for an Egyptian importer to understand some international trading concepts, some very sophisticated hedging tools. The result is they tend to take advantage of these tools and try to have a pricing system where they can fix the part of the price that is related to the future market, but they do not have the knowledge to price their goods. The problem is that, as a supplier, we are trying to offer an advisory service, but the culture here is that they tend to be, not defiant, but they do not really trust you; they prefer to do it on their own, and they end up taking much bigger risks than we do as a larger company. They do not hedge themselves, or they wait until the last minute to fix prices.

In the context of an international market, which is very volatile, they are taking incredible risks, which even a big multinational would not take; of course, at their scale, but if you put that in terms of percentage in terms of exposure of their own capital it is huge. This is a risk, because we are facing a situation where we are bringing commodities into the Egyptian market. Due to the fact that they do not know how to manage the tools, they end up not being able to take delivery of the goods, because the market outside is going very high, and there is not an instant reaction or adjustment of the local market to the market action outside. There is sometimes a difference that translates into huge losses for them.


Evans: You mitigate that risk by doing cash-and-carry? 

Mathari: Exactly; we used to transfer the price risk onto the customer, but we now have to manage it more for us. We have the knowledge, the techniques, and the experience to do it, but it was not our business model to do that in the first place.


Evans: I suppose you are in a strong position to be able to demand sight terms of payment, but if you take Alaa’s business, where I presume you are dealing with European companies who want to deal on an open account basis, and some credit terms, do you use credit risk insurance to mitigate the risks? How effective has that been? 

Arafa: We do not use credit insurance only for risk; we use it for risk and finance. Credit insurance is important to use, because if the supplier would like to get cash he can get his money in cash, and I get my terms through the factory or credit insurance. It happens vice versa; if I need my money in cash, and my customer needs terms, I will get my money in cash, but everything has a cost. As long as you agree about the cost, you get credit insurance.


Evans: When you sell, do you also use letters of credit, or do you use primary open account with a credit risk insurance wrap? 

Arafa: Letters of credit are becoming less common. There is no security in the letter of credit any more. It is a very difficult and bureaucratic operation. In the past we used to use letters of credit more, and we would follow the rules of the letter of credit, and how you mitigate risk by a letter of credit. Today an open account with credit insurance is mostly the model we use with the American and European customers. I do not sell to Africa; I do not know how to do this.


Evans: It is interesting that you bring up the subject of Africa, because the feedback that I have been getting is that a lot of countries in this part of the world that were focused on Europe, and I take Turkey or Egypt as an example, realise that Europe will go through a sustained period of austerity, and that maybe the opportunities are facing south as opposed to facing north. 

Arafa: We ship to Europe, but our final customer is not in Europe. You ship goods to Europe, and those goods go to China. We ship to Massimo Dutti in Spain, but Massimo Dutti sells everywhere. If Massimo Dutti opens a shop in South Africa, Egypt, or Libya, this is a different story; this is the difference between our business model and their business model. They sell commodity; we are selling fashion, which is a bit different.


Evans: Looking at your markets, I know Sadri you are primarily domestically focused, but if you were to look forward where do you see the big opportunities?

Mathari: We are seeing more and more south-south trade flow. They are not traditional routes. In the commodity business you usually import from the big industrialised countries, because they have very powerful agriculture; you will buy grains from the US, Canada, France, Germany, Russia, Brazil, Argentina. You will still buy from them, but because in certain countries they have difficulty in accessing financing, or for logistical reasons you have countries that do not have big ports, we have seen growth in south-south commerce. We will see an increase in commerce between Egypt and Iran, Tunisia and Burkina Faso.

These are not traditional flows, and this is definitely developing. We are seeing India and Pakistan coming to the market more and more.

We see countries like Kazakhstan, which has a substantial production of commodities, but is very dependent on Russia to export its commodity via the Black Sea or Baltic Sea, and now it is trying to open new routes via Iran and the Persian Gulf. We are seeing more non-traditional types of business.


Evans: If the real opportunities going forward are Africa and some of these developing markets, clearly there is the demand, but then there is also the risk associated with it. 

Mathari: We are seeing some very interesting cases in Africa, where there have been some success stories.

Ghana used to be a very risky country and Ghana has registered very important growth. We are seeing Ethiopia more and more. Who would have thought several years ago that Ethiopia would have stabilised? There are some explorations to be made, and new businesses and new trade flows to be created with these countries.

As far as the risks are concerned with these countries, we have to identify the types of risk. The first thing that we will put at the top of the line will be the financial risk: how these people are going to pay us and how they are going to finance. You can create barter transactions; you can use Egypt as a hub and send small parcels that mobilise huge capitals. We all have to be creative.


Evans: Amr, I know that your business has moved over time from being Western Europe-based to being Eastern Europe-based; what do you see as the opportunities and what are the risks associated with those opportunities? 

Kandil: You have to be very careful in choosing the country that you are intending to grow, because there are a lot of opportunities in Africa and in the region. The model that we are proceeding with currently is we are buying our raw materials from very good countries, because they are severely under pressure; you get good quality material with very competitive prices, then we have a very good product. If you have a good product, where will you take it to? You have to study whether they need these sorts of products, and whether they will value your product. How will we go there? It is easy to penetrate the market, to ship the material, to move to the region or countries. There are some logistical challenges, but they are not the main challenges.

We are using big European trading companies that used to market European products to Africa, that are also financing our purchase of raw materials, to go to Africa, because they have established offices and credit lines with some of the clients. They are getting back to their traders that are financing us, to finance our sales to this region until we have a clear vision of what we can do financially.


Evans: When you sell to these countries, ultimately you are going to sell on an LC basis and get it confirmed, which in many ways removes the risk?

Kandil: Of course, but LCs are not as easy as before. Mostly you get a down payment just to start production, and when the material is ready they have to transfer the balance, and that may be late so this may affect your cashflow. You get into a cycle that never ends.


Evans: Egypt has gone through some tough periods, but overall it is on the road to recovery. There are opportunities for intra-regional trade; there are longer-term opportunities in Africa. Risks have risen, and it is harder to get hold of finance to undertake these transactions, but globally trade growth rates have tended to outstrip GDP. Amr, where does the world go from a trade perspective over the short to medium-term?

Kandil: With the current instability all over the world and the lack of forecasts, I cannot answer this question concretely. I see Europe coming back as a very aggressive supplier of raw materials to the whole region, because of the current status over there. China is showing a very slight slowdown in the economy and they are trying to export a lot. Europe is trying to fight back, so eventually trade will grow from everywhere, because with the current world situation everybody needs to export, everybody needs to explore new opportunities. Africa is the focus of many of these countries, but Africa’s size is not enough.

Mathari: It is very difficult to answer, because we have identified trade flows, and the cursor has shifted to the East. We also have a lot of political uncertainty, and this is rendering the reply very difficult, because the political situation worldwide has an impact on the economies. The way the economies are going to develop, there are big question marks as far as the EU is concerned. I am sure the problems will be overcome, but when? It is all about time. Look at the example of the Arab Spring; who would have expected that? We do not know what will happen down the road; there are a lot of problems in many areas. Of course, the Middle East is still very unstable.

It will also depend on the attitude of the G20 countries, what they want to do and what they can do. The solution is not only in their hands; there will be a shift of power and other areas in the world will take over.