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Maplecroft and Marsh issue Egypt business risks briefings

Both Maplecroft and Marsh have issued business risk assessments for companies with operations in Egypt. These are reproduced below (verbatim):

MAPLECROFT POLITICAL RISK BRIEFING: EGYPT AT THE CROSS-ROADS: RISK CONSIDERATIONS FOR BUSINESS

Egypt continues to witness social, economic and political turmoil as thousands of protestors have vowed to increase the momentum of demonstrations across the country. The majority demand the resignation of President Hosni Mubarak who has ruled Egypt for three decades. Having taken power in 1981 following the assassination of former President Anwar al-Sadat by Islamist militants, Mubarak has presided over a regime characterised by political oppression and high levels of corruption (see analysis below).

High unemployment, which is estimated at 9.2% by the IMF but is likely to be significantly higher, has fuelled widespread resentment of the Mubarak regime. So too has the high cost of living. In October 2010, the IMF projected consumer price inflation at 11.7%, but this may yet increase (see analysis below). Parallels have been made with Tunisia’s ‘Yasmine Revolution’ which toppled former President Ben Ali earlier this month, but Mubarak has so far refused to relinquish power. This means that the coming days, weeks and possibly months, will be fraught with multiple risks:

Key political risks
* Mubarak tried to deflect criticism of his rule by dissolving the cabinet on 28 January 2011 while promising improved living conditions and greater political rights. His attempts to maintain the status quo and cling onto power have been transparent, however. That Egypt’s newly appointed Vice-President and new Prime Minister have strong military / security credentials underlines Mubarak’s ambition to hold onto power as long as he can. The appointments also draw attention to the fact that Mubarak has kept members of the establishment in positions of authority, fuelling the ire of many protestors. Although widely respected in Egypt, Vice-President Omar Suleiman has long been Mubarak’s right hand man. The public resent the fact that the former head of intelligence has not resigned from public office and has been willing to help Mubarak in his attempt to diffuse the crisis on his terms. Egyptians are also point to fact that Prime Minister Ahmed Shafiq is not a democrat but a military man. These appointments have essentially failed to diffuse the political crisis.

* Mubarak nonetheless appears to be facing increasing pressure to leave from high-level officials. Despite accepting the position of Vice-President, Suleiman has reported advised Mubarak to bow out of politics. Defence Minister Hussein Tantawi has also urged the president to resign, according to official reports. It is not altogether inconceivable that Mubarak may make rash decisions as the pressure for him to step down continues to mount. Yet, there is nothing to guarantee that Egypt’s military top brass or soldiers will obey orders to resort to violence and extreme force against protestors. The military has yet to decide on which side of history it wants to belong. Current signs are positive, however. On the evening of 31 January the military officially announced that it would ‘not use force’ against demonstrators.

* The military may feel the need to intervene directly into politics. It is likely to play a pivotal role in future developments and senior officers may be forced to step in if the gridlock between Mubarak and the opposition movement persists. Such an intervention would not guarantee a democratic future for Egypt and may trigger similar uprisings in the future. The risk, however, is to a degree offset by the strength and momentum of current-day protests which have sent a strong signal to all state institutions about the need for democratic reform. This includes the military.

* Egypt is unlikely to witness a rapid return to stability if President Mubarak does resign. Western governments and investors will remain nervous if the new government is dissolved. Mohammed ELBaradei, the current day leader of the opposition movement and much-respected former head of the International Atomic Energy Agency (IAEA), may assume a prominent role in a future government. However, his endorsement by the banned Islamist Muslim Brotherhood has been a source of concern (see next bullet point).

* The banned Islamist Muslim Brotherhood which has long-been suppressed by the Mubarak regime may feature prominently in a post-Mubarak Egypt. Its prominent role is reflected in the fact that members of the group will be included in a committee charged to negotiate with the military to find a resolution to the current political gridlock. With strong grass-roots support, the Muslim Brotherhood is generally described as religiously conservative, moderate and non-violent (although it consists of both conservative and liberal elements). While the group says that it wants to work in partnership with opposition groups, fears persist that it will eventually take the reins of control in Egypt. This could conceivably mark a worrisome shift in Egypt’s foreign policy towards one which is anti-Israeli and cooler towards the West. It may also account for economic policies which cater more to social welfare but are less friendly to foreign investment from the West and business in general.

* The potential for conflict between members of the security forces and protestors is likely to pose an ongoing risk to the personnel, assets and infrastructure of companies. Estimates on the total number of deaths as a result of clashes between demonstrators and members of the security forces during recent protests (and the general state of anarchy) stood at approximately 150 as of 31 January. Egypt has witnessed looting and destruction of private and public property in recent days. Although the security forces have endeavoured (with very mixed results) to address this risk, criminals will continue to exploit the level of disruption and unrest in Egypt.

* The Mubarak regime’s preoccupation with its survival may be exploited by militant Islamist groups which have long criticised the government for its secularist orientation, working relationship with Israel and close ties with the West. The risk of terrorism has been offset by the Mubarak regime’s strong security apparatus and system of surveillance in mosques. Even with these measures in place, Mubarak has not managed to prevent occasional attacks in the Sinai Peninsula or the capital.

Economic / Business environment related risks

* The Egyptian currency has come under increased pressure and this may trigger a financial crisis if political instability persists. Currency traders say that investors have transferred hundreds of millions of US dollars out of the country since protests began almost a week ago. Markets and banks remain shut across Egypt, and fears are growing that once they open hundreds of millions of USD will be withdrawn. The Central Bank is likely to face extreme pressure to keep the Egyptian pound stable, meaning that is will be forced to spend. It may get through its foreign currency reserves (which stood at US$36bn at the end of December according to the Central Bank) at a rapid rate. This could cause panic amongst investors.

* The depreciation of the Egyptian pound would place immense pressure on the current account deficit, as imports become more expensive due to the weak Egyptian pound. IMF figures from October 2010 reveal that Egypt’s current account was 2.4% in the red in 2009, and expects it to diminish to 2% in 2010. This projection may well be reviewed however if the crisis persists in Egypt. A widening of the current account deficit will lead to a further deterioration in investor confidence.

* Continued political instability will inevitably affect growth, as the markets sour and businesses struggle to operate normally. Tourists are currently trying to leave Egypt en masse. In October 2010, the IMF projected real GDP growth at a 5.5% in 2011, but this figure is now overly optimistic. A dramatic or even moderate reduction in growth will make it more difficult for the government to create new jobs. The lack of jobs remains a chief source of complain amongst demonstrators. This, along with the high price of food, will fuel social grievances and the risk of further protests.

* The weakened currency would also perpetuate inflationary pressure, causing further social disgruntlement. The IMF expects consumer price inflation to amount to 10% in 2011, but the figure could be significantly higher in view of recent events. On 31 January Mubarak ordered Egypt’s new Prime Minister, Ahmed Shafiq, to maintain subsidies on basic foodstuffs such as bread and sugar and fuel. This is in a bid to control inflation and generate more jobs. Yet, banks have been closed for days. When they do reopen there may be a run on the banks as people seek to withdraw their money. This, combined with a spike in spending on basic foodstuffs is likely to add further inflationary pressure to the economy.

* Traffic through Egypt’s Suez Canal has not, as yet, been affected by the political turmoil. Any disruption to shipping through the Suez Canal would not only place the Egyptian budget under further pressure but also adversely affect the price of commodities. The Canal accounts for 10% of world trade and four million barrels of crude oil pass through the canal a day. Concerns persist that the canal may come under attack by militants or even demonstrators. On 31st January the price of oil broke the US$100 a barrel threshold for the first time in over two years, reflecting ongoing concerns about the level of turmoil in Egypt.

Maplecroft will release the in-depth Country Report on Egypt on 04 February 2011. The report will contain high level analysis of the key national and sector risks to companies and investors, plus country scores, maps, key recent events and stakeholder viewpoints.

www.maplecroft.com

EGYPTIAN UNREST: COMPANIES NEED TO RE-EXAMINE INSURANCE AND RISK STRATEGIES

New York, February 1, 2011 — Companies are re-assessing the adequacy of their insurance coverage and risk management arrangements in the wake of political unrest in Cairo and other cities across Egypt, according to Marsh. Companies investing, manufacturing, and trading in emerging markets are increasingly realizing that they face a more complex risk landscape. As these events demonstrate, instances of political violence can occur with little warning in countries previously considered relatively stable.

Commenting on recent developments, Evan Freely, Global Head of Marsh's Political Risk and Trade Credit Practice, said: "We have already seen companies across a number of industries affected by acts of political violence in Egypt, including those in the oil and gas, hospitality, and real estate sectors as well as professional services firms and financial institutions. Affected companies should be gathering as much information as possible to prepare for the claims process.

"These incidents in Egypt should cause every company with operations in emerging markets to re-evaluate the adequacy of their risk management strategies," Mr. Freely said. "Companies need to have plans in place that can protect both colleagues and strategic assets."
Companies with operations in countries affected by political unrest face losses from risks such as business interruption, theft of and damage to property, threats to contract for both purchase and supply, late payments—potentially impairing cash flow—and the need to evacuate employees.

"Some buyers of terrorism insurance have found themselves without cover following civil disturbances, for example in Thailand last year, because of disagreements about whether certain events were acts of terrorism or political violence," Mr. Freely added. "Companies need to make sure that they have insurance coverage for a broad range of perils, reducing uncertainty that can be caused over the classification of an event."

www.marsh.com

•Date: 1st Feb 2011 • Region: Africa/M.East •Type: Article •Topic: Operational risk


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