Keith Paul, Senior Underwriter Trade Credit and Political Risk, MENA.
Trade credit insurance protects suppliers against non-payment or late payment for goods or services provided on credit, typically triggered by financial difficulties or insolvencies of their trading partners. As a result, trade credit insurers are particularly exposed during economic downturns.
The travel restrictions have also curbed economic activities from consumers. In Egypt, it is battling with lower tourism receipts and remittances, a very substantial part of its GDP. Similarly, exports have been hit by the slump in global demand, especially in Europe and the US export markets. We are in for an extended period of low growth, low inflation, and low interest rate.
As a result, fiscal revenues have fallen sharply in the region. Most industries will or have been negatively impacted. There will also be more delays, restructurings and higher chances of insolvencies, particularly within the more volatile sectors – clearly the energy industry being one and aviation as another.
These downturns will inevitably have repercussions for credit and political risk insurers in the form of steep rises in insolvencies and ultimately claims.
Which country and sectors in the region do you think will recover first?
Strong balance sheets will provide resilience for higher rated sovereigns and corporates in the region. Wider fiscal deficits will lead to higher debt and drawdowns of fiscal reserves and any available credit lines.
The wealthier Gulf States - Kuwait, the UAE and Qatar have large financial buffers to cushion them through the sharp reduction in oil consumption due to lockdown measures globally by governments.
In Saudi Arabia, the bulk of its Sovereign Wealth Funds (SWFs) are the official reserves of the Saudi Arabian Monetary Authority (SAMA), which the government can immediately draw down on its deposits readily.
On the corporate level, companies that have stronger balance sheets, higher liquidity, better interest coverage and higher cash reserves are in a better position for recovery.
Sectors that are under the government’s focus are also better placed: healthcare in Saudi Arabia is one of the government’s priorities; education is one of the sectors under focus in Egypt and Kuwait; telecommunications and utilities for Saudi Arabia, the UAE, Kuwait and Egypt.
What are the key risks facing the Middle East or Gulf Cooperation Council (GCC) region? Which one is the most challenging risk?
More than any other region, MENA is confronting two distinct but related shocks with the spread of the coronavirus and collapse in oil prices.
Not only do lower oil prices directly punish exporters, they are also hurting importers through a drop in remittances, investment and flows of capital.
On the other hand, the impact of global measures to contain the coronavirus could lead to a steep fall in GDP this year, and the collapse in output, spike in capital outflows and plunge in commodity prices could trigger balance sheet problems that make the downturn much worse and the recovery slower.
Faced with a double whammy of a combination of coronavirus and the collapse in crude oil prices, many countries in the MENA region had to implement economic policies to deal with these unprecedented challenges accordingly, albeit with tradeoffs.
For example, Saudi Arabia had to slash government spending, raise debt and impose painful austerity measures, including tripling VAT to 15% and suspending cost of living allowances for the civil services, which employs mostly Saudi workers, as well as slashing state spending and delaying projects.
Moreover, the sharp economic slowdown threatens the ambitious economic diversification plans set out by Saudi crown prince, Mohammed bin Salman, who had pledged to attract investment into new sectors of the economy to reduce the kingdom’s dependence on oil and create jobs for Saudi youths who had backed his social reforms.
What actions can companies take to mitigate these impacts on trade?
It is important for our clients to review their business models and ensure flexibility in adapting to the constantly changing world we are currently living in.
As an underwriter, we would evaluate how heavily reliant companies are on one or a few key clients or products. If a key client struggles and fold, then you will struggle; if a key client changes appetite and your product is no longer in demand, or if your key client finds another supplier as your product is done better by a competitor, then your business will be in financial difficulty.
To mitigate these impacts, companies should outline a report on how they have managed the crisis operationally, what have they learnt from it and what would they do better the next time when it’s more severe.
Do also be wary of opportunistic fraudsters who pose as potential customers. Don’t be smitten by the temptation of a new customer or new order during these challenging times and relax on the Know Your Customer (KYC) process and other relevant due diligence. Companies should never let their guard down.
Can you summarise the impact on trade credit insurance class of business?
- Premium volumes could reduce, particularly from businesses unable to trade due to lockdown and social distancing measures.
- Insurers may look to avoid or limit coverage for perceived high-risk businesses as an underwriting measure.
- Governments may step in to guarantee payments, to which insurers can continue to provide coverage.
From a claim’s perspective insurers can expect:
- Significant increase in notifications and claims due to the economic downturn.
- Enforced shutdown measures are likely to push companies into financial difficulties.
- Business impact will be more severe for certain sectors: retail, aviation, energy, travel & tourism.
How should companies manage their upcoming credit insurance renewals?
Early engagement and transparency with your broker and insurer are recommended and will only help with navigating through the crisis.
We encourage regular dialogue (regular weekly or monthly calls) with your insurers. Share your most recent aging reports to identify payment patterns and overdue or past debts and agree on a course of action including working out plans, discussing ongoing coverage needs, and in due course, providing updates on filed claims.
Executing this plan of action will allow all parties to ensure that their covers are maintained during the crisis, while enhancing and strengthening relationships.
What is Markel’s plan in the region?
Our approach at Markel is to take a long-term view when assessing risks. While we have been operating in the MENA region since 2014, we have been involved in insuring risks well before that globally.
Combined with our ability to develop bespoke wordings to cater to our clients’ needs, long standing relationships with distribution partners, local expertise and a strong focus on service, Markel is committed to seeing our clients in the region through this crisis together.
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