MENA trade, Covid-19 and oil price volatility

One of the big winners of globalisation has been the Middle East and Northern Africa (MENA) region. As MENA diversifies from hydrocarbons, it has evolved into a trade hub.

But Covid-19 has disrupted this journey and trade has been slowing down. Although capacity is being restored after the collapse of inventories and supply chains, it is not clear when demand will recover. However, the long-term outlook is, according to our panel, broadly positive.

The other big risk for region is, as Rebecca Harding observes, the volatility of oil prices, “A lot of the region’s trade is dominated by commodities, and much government policy has been about reducing budget dependencies on a high oil prices.”

Joined by Deutsche Bank’s Cairo-based Ahmed Shehab and the European Bank for Reconstruction and Development’s Anna Brod, the panel reviews how Egypt is preparing for economic recovery as trade flows include equipment needed to upgrade industrial capacity to help exports such as natural gas, petrochemicals and textiles. The country has also seen budget gains from the oil price falls, and is financing renewable energy projects and energy efficiency investments across sectors.

To find out more why not tune in?

Partipants

  • Dr Rebecca Harding, Trade Economist and CEO of Coriolis Technologies 
  • Ahmed Shehab, Head of Cairo Representative Office and Head of Trade Finance Financial Institutions MENA Deutsche Bank
  • Anna Brod, Principal Banker – Trade Facilitation Programme, EBRD Financial Institutions

Presenter

Clarissa Dann, Editorial Director, Deutsche Bank

Transcript of interview:

Clarissa Dann Welcome to Trade Finance TV coming out of lockdown. I’m Clarissa Dann, your presenter. Today we’re going to take a closer look at the Middle East and Northern Africa region. How is COVID-19 affecting it and its trade flows. With me in the studio we have Dr. Rebecca Harding (Trade Economist and CEO of Coriolis Technologies) and Ahmed Shehab (Head of Cairo Representative Office and Head of Trade Finance Financial Institutions MENA, Deutsche Bank) and Anna Brod (Principal Banker – Trade Facilitation Programme, ERBD Financial Institutions).

Ahmed, would you like to kick off?

Ahmed Shehab Sure. Thank you, Clarissa. So my name is Ahmed Shehab, I’m dual hatted within my role in Deutsche Bank, s I cover Egypt as country head, and I cover the Middle East, North Africa, Pakistan and Turkey as the trade finance financial institutions head.

Clarissa Dann Thanks, Ahmed. Anna?

Anna Brod Thank you, Clarissa, I’m Anna Brod. I’m a banker in the trade facilitation program of the European Bank for Construction and Development. I work with a number of banks across the region of EBRD, including of course, Egypt. And there we work with about 50 partner banks and supporting their trade finance business.

Clarissa Dann And Rebecca, you’re back?

Dr. Rebecca Harding I’m back, and thank you very much for inviting me to this session. I’m Rebecca Harding. I’m the chief executive of Coriolis Technologies. And in terms of the Middle East and North Africa, it’s a region that’s fascinated me for a very long time because it’s been one of the big winners from globalization, as its role asa trade hub has expanded it has sought to diversify away from just oil and gas and into other areas as well. So a deeply fascinating region politically and economically.

Clarissa Dann Thanks, Rebecca. With more than six months of COVID-19 behind us, how do we see the Middle East and Northern Africa region shaping up? In particular, how is the oil price been affecting it? And let’s take a closer look also at Egypt itself and the flows in and out. What are your thoughts?

Dr. Rebecca Harding There are two things that are going to affect the region’s trade. And the first is the fact it is a trade hub, so we’ve seen trade in general slowed down, we’ve seen inventories collapse, we’ve seen supply chains collapse over the last few months. We’re beginning to see some of that pick back up again now. There are estimates all the way around the world of anything between 70-80% capacity being restored. The big risk for the region is that global demand doesn’t pick up in the way that everybody might want it to, and it will therefore take a long time.

The other big risk for the region as well is, as you say, and this is probably the most important point at the moment, the volatility of oil prices. Oil prices really haven’t recovered at all to the level that we saw pre-pandemic. There’s a lot of geopolitics around the oil price as well at the moment. And because most of the region’s trade that isn’t going through trade hubs and free ports, is directed through commodities, it is commodity trade. It just dominates everything else. That’s creating a real problem for the region, because a country like Saudi Arabia, the IMF fx, says that Saudi Arabia actually can’t manage its economy with oil prices below 70 dollars a barrel. And a lot of the policy within the region has been to reduce that dependency on the high oil price for economic growth, so I think the big question for the region now is one of economic development and not necessarily about economic growth as we come out of the crisis.

Clarissa Dann Anna, is that playing out in some of the flows you’re seeing?

Anna Brod Absolutely. I mean, since the beginning of the crisis, the EBRD committed that from now on, for the foreseeable future, for the next few years, all of its financing and support will go to crisis response. Supply chains are collapsing. There is less demand for trade. We saw an increase pick up in the first few months, but now we see the numbers going down. There’s less global demand for simple consumer goods, there is no demand that we see for investment goods, and the only thing that is really visible on our side is, of course, food security. And by that it’s import of grain, which still remains on a high and will only continue to grow.

Clarissa Dann Ahmed, what do you think?

Ahmed Shehab Well, just talking about the MENA first weekly; it’s the same significant impact as the rest of the world on the region, and overall, as Rebecca mentioned the oil producing countries suffered the extra pain of the drop in oil prices such as the Gulf and Algeria and North Africa as well. For other countries such as Egypt, this kind of a drop in oil prices partially helped ease the pressure on the government budget. Nonetheless on the macro-side, major foreign currency revenue generators were definitely impacted; be it tourism, revenues, expats, remittances, and also importantly, the outflow of portfolio investors and the local debt instreams. This, along with the imposed curfew and partial lockdown, affected the overall trade as mentioned also by Anna, and there is definitely a notable drop if we compare nowadays to the same time in 2019.

But what made the difference for Egypt is actually the proactive, early intervention of the central bank and the government, based on comfort in levels of reserves and the granted stimulus packages that helped to maintain both the public sector and private sector. Running alright, but definitely with a slower momentum. And actually there was no post on execution of any of the mega-projects in the middle of all this.

Clarissa Dann Let’s keep with the theme of government responses and other interventions in the region. Are there any others that have actually caught your eye in terms of the work you are doing that you can tell us about?

Anna Brod On the government intervention, I mean, we’ve seen it in a number of countries, including Egypt, of course, that at the start of the crisis, they gave the relief for repayment of loans, the repayment holidays that obviously helped. And we saw that a lot in our portfolio, both in trade finance and other business where clients came back to us and asked us to prolong the transactions by another six months, to give importers more time to repay the loans, etc.. We on the other hand at the same time increased our limits for the banks to ensure that if there are any supply chains that are disrupted, because commercial banks cannot cover them, so that at least the goods come in, for trade to continue. And similarly to provide the banks in the countries not just trade finance support, but a lifeline by providing them with general, all-purpose, short-term loans to ensure that their business as a bank continues.

Clarissa Dann Just a quick one on that. The number of confirming banks that you are getting through your programs, are you happy with the level of confirmations you’re getting or has it dropped off because of COVID-19?

Anna Brod In some countries, we’ve seen a significant decrease of availability of trade finance lines. What’s interesting to see in Egypt, is we haven’t seen that. Already prior to COVID-19 the private banks in Egypt always had sufficient limits, efficient lines, and where we were needed were mostly on the long with tenants for investment goods, but we haven’t seen investments coming into Egypt for a while already. So in that aspect, you know, they still have their short term limits. They still don’t require our cover. It is more when we see the demand growing because the supply of the commercial banks is more on the state banks, because at the end of the day, the traders are relying on these banks, especially for the essential goods coming into the country, procured by the government, imported by the government, supported by the state banks. And there we see slightly that availability of lines may be reducing, but not significantly.

Clarissa Dann And if you got any comments on that?

Ahmed Shehab The government and especially the central bank had to juggle two aspects here. One was the support for the local market, and two was securing the funding needs. As Anna mentioned as well there was several stimulus packages. And what was good about that is that it hit every level of the economy and every aspect of the economy. The construction, tourism, agriculture, industry, you name it. And it was on all levels of the corporates as well, large, medium and SMEs. So that was on the incentive side.

Most importantly, in the middle of all of this, they had to secure the funding needs, so there was a dual approach at the beginning of the pandemic, the IMF with an 8 billion package that was already secured to Egypt split into 5.2 billion on standby and 2.8 billion for financing. And also they went into the debt capital market. So between this and that, they managed to secure the needs of the funding and at the same time support the foreign currency reserves that has dropped from the level of 45 billion at the beginning of the pandemic to a level of 38 billion, lately, and it’s started to rise again, now.

Clarissa Dann Rebecca, in terms of capital flows, what is the overall pattern you’re seeing in Egypt and in the wider region?

Dr. Rebecca Harding So I think at the moment it’s hard to say what anybody is seeing in capital flows because capital flows have been desperately affected by the COVID-19 crisis. So at the moment the capital flows are around keeping businesses running, making sure that supply chains are working, particularly around commodities. And if you look at a country like Egypt fx, even though Egypt is a net importer of oil, it exports a lot of oil as well, so it dominates the Egyptian economy, so we’re still seeing a lot of movement around that.

I think the important point that was actually made was around the funding for small, medium sized companies, because across the region, this has been a whole effort over the last five, six years to try and promote resourcing, finance and appropriate types of trade finance into the small and medium sized communities, because this is where the diversification of the future is going to come from. And I think we have to look at that as a kind of a route out for the region in terms of where it goes after COVID-19. Egypt’s role is very much a trading hub; there’s a lot that goes in and goes out and a lot of that is commodities, but if you look at the import profile of Egypt, it’s much more diversified than the export profile. So you can see that demand is beginning to shift as well. And a lot of that demand shift will be turned into economic growth by trading and exporting SMEs.

Clarissa Dann While we’re on the topic of SMEs, it’s a very difficult one in terms of risk for a number of banks to swallow. So we’re seeing a lot more of the SMEs being supported through supply chain finance platforms and things like that. The bankers in this panel, is that your impression? What do you think?

Anna Brod For us as a development bank most financing is going to SMEs, now even more so. If they have supply chain and more digitized programs, then we can support them. But what we see is that the banks are not ready yet. And I guess what the pandemic has taught many, with lockdowns, with working from home, is that we have to move digitally. We can’t continue with a paper-based business from home. We had to prolong a lot of our transactions because our partner banks simply couldn’t come into the office and all deals were delayed. So this may finally be a push for banks to move in this direction, but it has to come from the larger key players that would also guide them in that direction.

Dr. Rebecca Harding You’ve raised a really important point about the future of the region, because one of the things that I’ve heard from going to successive conferences in the region and writing about the region as well, is the importance of digitization. And what’s beginning to happen with COVID-19 is that all of that process of digitization, all of that shift in the way we’re financing seems particularly on supply-chain platforms, but in other ways as well, to bring on the onboarding and make that quicker. Everything is being digitized and technology is beginning to drive this SME market. The Middle East and North Africa is actually invested a lot in all of that because it understands the fact that in insurance terms and risks terms it ranks has high risk, and therefore streamlining these processes, cutting the costs of providing finance to SMEs is going to be absolutely critical for the sector to grow.

Ahmed Shehab What you just mentioned is exactly what we witness on the ground. And specifically on Egypt, the topic of financial inclusion and digitalization is on top of the agenda, both for the government and for the central bank. This is reflected in so many companies. This is a population of 100 million that doesn’t maintain the suitable number of bank accounts that should reflect this kind of population, so having this approach has been done already before COVID-19 and now the government has made it even more imperative.

Clarissa Dann In terms of the actual goods that are coming in and out of Egypt, what are we financing? We heard about grain coming in and obviously bread is a big one in Egypt. What are the other flows?

Ahmed Shehab As mentioned by Anna, Egypt is actually the largest importer of wheat, globally. I mean the influence of oil as well, the bill on a monthly basis reaches 600-700 million. So the basic necessity goods comes as the number one in terms of the size of the transaction, constituting the majority of the trunk for the trade to flow in Egypt, but to add to this as well, there is now a clear direction from the government to go towards export; meaning upgrade the industrial part and upgrading the factories and so on and so forth. So what we have seen lately as well is a lot of demand on the importation of industrial goods in the past couple of years

Clarissa Dann Now it appears that we all need to actually learn to live with COVID-19 and make it part of our business routines. How do we see the outlook for the next 12 to 18 months?

Anna Brod Just this morning I read an article that Egypt in the last month or so have increased weak imports by 40%, trying to stock up on minimum stock for the next six months. You know that the silos are full, so I assume this will keep us busy. We’re looking at onboarding maybe a few more banks in order to support them. Apart from these types of goods, so the essential food security, medical goods, etc., we believe we will see a decrease. We see that in a number of countries that went through other kind of crises prior to COVID-19, during the recovery, they managed to be very competitive on the export side and built kind of that sector. So this will be very interesting to follow also in Egypt, but in general we believe maybe in another few months we will see a decline in trade. As we saw during the financial crisis, a very steep decline, but a very kind of quick growth as well but for that to happen, probably the trade gap, which is just growing right now, has to be financed by someone. So let’s see.

Clarissa Dann Ahmed, how do you see it? Better or flat?

Ahmed Shehab Actually, I would disagree in terms of what Anna mentioned down the road and one year ahead. This is simply because if you look at the mega-projects by the government, be it the new capital, the the development in the Suez canal region and the upgrading of the infrastructure in general, whether it’s communication, electricity and so on and so forth, this will entail significant implications down the road. So maybe the type of trade will shift, but those kind of mega-projects will not be abandoned. And this is long term, and since we’re talking five to 10 years, but it will come to the point about securing the funding needs as Anna mentioned.

Clarissa Dann And in terms of the wider economy, Rebecca, I’m going to give you the last word on the region and its prospects.

Dr. Rebecca Harding So a lot of this will depend on whether or not we see a global recovery and how quickly that happens, because that will push up the price of oil. So the extent to which intra-regional trade can grow and pull the region as a whole out will be limited by those big oil exporting nations and their export revenues. So I think there are some big risks to the recovery. There are some signs, though, within the region, particularly around digitization and sustainability and SME growth, those are big things that the region is picking up on as priorities as it comes out of COVID-19. And if finance can be marshaled into those areas, making supply chains sustainable, growing SMEs with technology, then I think the region has a bright future.

Clarissa Dann Thank you very much Rebecca. I think that is a great place to close this off and thanks all of you, for coming in to the studio today. Thank you.

Ahmed Shehab Thank you so much. Thank you.

Clarissa Dann I’d like to thank Ahmed, Anna and Rebecca for their insights on the Middle East and Northern Africa and in particular Egypt today. I’d also like to thank all of you for watching Trade Finance TV. For further episodes, do visit TRADEFINANCETV.NET.

Published on September 25, 2020

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