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Monday, 12 December 2011

Demand for Shariah-compliant political risk insurance (PRI) increases in MENA

In these volatile times managing global political risks is a major challenge for investors and financiers alike. As the global economic and financial crisis and its impact on markets the world over; the euro zone sovereign debt crisis; and the fallout of the Arab Spring continue to fester, demand for investment, political risk and sovereign risk insurance is soaring as part of risk management and mitigation strategies. In the MENA countries, demand for Shariah-compliant PRI has increased significantly, according to various providers.
A the launch of the World Bank's Multilateral Investment Guarantee Agency (MIGA's) 2011 World Investment and Political Risk report in London last Thursday, Ravi Vish, director and chief economist of MIGA, indeed confirmed that demand for political risk insurance (PRI) has increased to unprecedented levels, with PRI supply by members of the Berne Union remaining robust and pricing reflecting a buyer's market.
Vish warned that the short-term outlook for global foreign direct investment (FDI) flows is bleak, although in the medium-term, FDI flows will get better but it is difficult to say by how much. As far as the Arab Spring countries are concerned investors are adopting a wait-and-see attitude to see how the movement toward democracy in countries such as Egypt, Tunisia and Libya takes hold.
In fact, a 2011 survey by MIGA-EIU revealed that the turmoil in the Arab countries did have a significant impact on investor intentions. Violence and government instability are major factors putting off investors, who admitted that they did not anticipate the events in Egypt, Tunisia and Libya which frankly took them by surprise. Indeed MIGA itself has revised its risk assessment strategies to incorporate some of the findings of the survey especially the impact of rising food and commodity prices on family income and the absence of democratic governance. According to a World Bank forecast, FDI flows into the MENA region will decline in 2011 and 2012, with a slight rally in 2013.
For the period 2000-10, Saudi Arabia, according to the World Bank, was by far the largest recipient of cumulative FDI flows totaling just under $150 billion, followed by the UAE with just under $80 billion, Egypt with $55 billion, Qatar with $31 billion and Lebanon with $29 billion.
Vish however maintained that there are good opportunities in selected MENA countries for early investors who also have PRI cover, albeit dependent on the nature of the regime and governance in place in the individual countries.
The torchbearer of the Arab Spring countries at the MIGA launch was Jalloul Ayed, minister of finance of Tunisia in the transitional coalition government led by the Islamist Al-Nahda Party. Articulate and urbane, Ayed put the case for Tunisia pleading that the country cannot transform on its own and needs the financial, economic and investment support from outside, both from the multilaterals such as the World Bank and the Islamic Development Bank (IDB), and from the private sector.
"We cannot do it on our own. If we do not create jobs especially for the youth, we will be answerable to the people at the next election," he acknowledged.
In fact, IDB President Ahmed Muhamed Ali, confirmed to Arab News that the bank is in the process of releasing $250 million of funds from the bank's ordinary resources for Egypt and Tunisia to assist in youth employment generation schemes. In April 2011, the IDB allocated $250 million to finance employment opportunities for youth through the establishment of small and medium projects in a number of Arab countries that have recently experienced change and are undergoing political and economic. According to the IDB, this funding will enhance building institutional capacity of those countries either by supporting training programs that meets labor market needs, or by supporting Microfinance Institutions (MFIs), vocational training, and lines of financing for small and medium enterprises.
MIGA's conclusions were in fact pre-empted by similar sentiments emerging from the 2nd annual meeting of the Aman Union, the association of investment and export credit agencies in the Arab and Islamic World, which was held in Istanbul in October - that of increased demand for political risk insurance especially insuring risks in post-conflict countries and those undergoing economic and political transformation.
Abdel Rahman El-Tayeb Taha the chief executive officer of the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), the standalone ECA of the Jeddah based Islamic Development Bank Group (IDB), which is a member of the Bern Union, a grouping of export credit agencies (ECAs) from around the world, and which has co-underwriting ties with MIGA, is passionately promoting PRI to its member countries to ensure their investments against the risk of war, civil disturbances, expropriation, transfer restrictions, and non-honoring of sovereign financial obligations of the host country.
The political transformation in the MENA region, confirmed Taha, will present new opportunities of ICIEC and any other insurers of political risk. "We feel that the fundamentals are sound. Indeed, the corporation is ready to take calculated risks in countries where the political crisis is contained. However, it is inevitable that the crisis will eventually generate more business. In short, the region has both challenges and opportunities, and ICIEC will deal with them accordingly."
He stressed that the demand for commercial credit insurance has also increased after the current financial crisis. "All of our Aman Union ECAs members are actively covering this risk and the majority have seen an increase in the demand for their services covering commercial risk which includes risks related to the buyer's financial situation (insolvency, unwilling to pay, bankruptcy)," he added.
Vish agrees that PRI providers will have to be nimble, flexible and better informed about their potential markets and clients.
ICIEC in fact is another step ahead. In light of the developments taking place in the global arena over the past couple of years, ICIEC, according to Taha, "had the foresight to identify the need for a product that addresses the issue of sovereign debt. We have a product called 'Non-honoring of Sovereign financial obligations (NHSFO)', which protects investors and financiers against the risk of the sovereign host country not complying with the demand to pay under an unconditional and irrevocable financial guarantee. We launched this product a year and half ago and we have seen a great deal of interest for it in the market. We have already issued two policies - one direct insurance and one reinsurance - and are now working on a number of other applications, including two that we expect to issue in the coming several weeks."
But what are the factors that will mitigate demand for PRI and sovereign risk insurance? In the Tunisian context, Finance Minister Jalloul Ayed spelt out the conditions for the future stability of the country's nascent transition to democracy. "The first phase of transition to democracy was a very important first step, perhaps even a giant leap in the history of the country. The challenge now is to navigate this transition to consolidating our democracy," he explained.
He identified for key conditions for this consolidation: i) strong legitimate government ; ii) rule of law complete with the reform of the judiciary and separation of powers; iii) civil society with strong institutions and administration; and iv) a strong economy and institutions with a role for government and the private sector to give balance and synergies.
However, Minister Ayed's contention that these four conditions "have largely been met" in Tunisia today may prove to be far too optimistic, just as his contention that the "winds of change are sweeping through the region" and this should have happened a long time ago. Egypt is still struggling with both the form and substance of its transition to democracy; Libya presents even a greater challenge because of the lack of credible institutions and an underdeveloped polity and political culture; and even Tunisia although it seems that it has reached a point of no return (in the words of Ayed), the real test will come at the next election when parties will vie to get in on their own majority instead of coalitions.
In all three countries, the challenge of dealing with the emergent so-called Islamist parties will prove vital. How do the secular parties and the Western-educated elites and establishment, some of whom colluded with the military dictatorships for so long, conduct themselves, especially if they find themselves as minority parties far from getting that vital majority? Do they live in denial or do they deal with the reality of the situation?
They can learn from the mistakes of the secularist parties in Kemalist Turkey who for decades spewed vitriol in connivance with the military establishment against so-called Islamist leaning parties led by Necmettin Erbakan, Abdullah Gul and Recep Tayyip Erdogan accusing them of creeping fundamentalism and so on. Erdogan's AK Party has won three successive elections with thumping majorities and has been the most successful political party in Turkey's Republican history. While the secularist parties focused on issues of whether civil servants should have the right to grow beards or Muslim girls should have the right to wear the Hijab or a headscarf at university, Erdogan focused on making Turkey an economic powerhouse and the 17th largest economy in the world. "It's the economy stupid", Turkish voters including non-religious Turks who were merely concerned with the mundane challenges of life such as jobs, housing, education etc and who supported Erdogan, told Turkish politicians.
The signs in the Arab Spring countries unfortunately are not good. Ayed, for instance, is either living in denial or is deliberately ambivalent and ambiguous when he stressed in London that the recent election "was not about people embracing any ideology or religion. It was reflective of people making a break from the past."
If it was merely a break from the past, why is it that Islamist parties have emerged with the largest votes in both Tunisia and Egypt? In fact, there was a certain surrealism about the discussion at the MIGA report launch. There was endless talk about political Islamism and even the challenge of governmental Islamism (as if only pro-Islamist parties have challenges when they are in government). And yet there was no mention of financial and economic Islamism, they type of which is proving to be so successful in economies such as Turkey and Malaysia with their 5 percent to 8 percent GDP growth.
The Islamic finance industry is already earmarking opportunities in the Arab Spring countries, with the IDB Group leading the way followed by the private sector banks and institutions. But the industry cannot be taken for granted. The Arab Spring countries must genuinely cater for the facilitation of Islamic financial products through introducing the requisite regulatory and legal frameworks in law. This would be best done through a dual banking and financial model to give citizens a choice of which system they wish to engage with. Such an approach would help the Arab Spring countries perhaps in their biggest challenge of raising funds from the market and through FDI flows. Here Islamic finance offers potentially the best, most cost-effective and the most dynamic structure that is available in the market - the ever popular sukuk, a point which even euro zone countries such as Germany, France and Italy should also note. (Arab News/12Dec2011)


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