Risk in Egypt: A Fixed Price on Uncertainty | Commentary

Posted August 4, 2014 at 4:16pm

As African leaders gather for the US-Africa Leaders Summit in Washington, it is hard to ignore Egypt. If countries can be too-big-to-fail, Egypt is that country for the North Africa region.

The first step in this direction, however, depends on how the al-Sisi administration handles the stabilization of risk and uncertainty.

Egypt’s prospects for growth and the quelling of disquiet among the Egyptian public depends on one thing – jobs. With youth unemployment at 33 percent and general unemployment at 13 percent, the Egyptian economy has to grow between 6 percent and 7 percent to absorb the 700,000 new entrants in the labor force each year, targeting 8 percent unemployment according to economists at The Arab Stabilization Plan.

Micro enterprises with fewer than four employees account for 91 percent of Egyptian enterprises employing 58 percent of the workforce. The remaining 9 percent of Egyptian enterprises are small to medium-sized (SMEs), representing 8 percent, or the total with 5 to 100 employees accounting for 25 percent of the workforce. The top 1 percent of firms in the Egyptian economy are large, with more than 100 employees representing approximately 17 percent of the workforce according to a Carnegie report.

As with many countries, the share of value captured by these enterprises is inversely related to the employment pyramid, with the top 1 percent of firms commanding the lion’s share of Egypt’s economic wealth. Not only are micro enterprises and SMEs squeezed by the burden from above, they are also pressured to be the engines of job creation. All the while, they are starved of capital needed to expand their businesses while raising living standards for the average Egyptian.

To have this paradigm shift, businesses need to understand risk and uncertainty.

The difference between these two concepts is that risk can be measured and factored into most investment decisions. Indeed, without risk, there would be no so-called ‘upside.’

Uncertainty on the other hand cannot be measured and it is this fact that causes panics, flights of capital, bank runs and general paralysis. Post-revolution foreign direct investment inflows of $1.5 billion were nearly netted out entirely by capital outflows, in a flight to safety, of $1.2 billion. Similarly, domestic investments by Egypt’s largest firms were halved from their pre-revolution levels down to $18.3 billion between 2011 and 2012 according to leading regional experts, Ibrahim Saif and Ahmed Farouk Ghoneim.

Yet, all is not lost.

Internationally-backed Egyptian firms, such as Carbon Holdings led by Basil El-Baz, are leading by example andcapitalizing on these uncertain times by investing heavily in a down market. According to The World Bank, high-impact entrepreneurs such as El-Baz are a major part of the solution for both job creation and a rise in living standards of Egypt. Approximately 5 percent to 10 percent of these firms deliver between 50 percent and 80 percent of job creation. Similarly to how El-Baz turned to international players such as the Export-Import Bank of the United States for financing and guarantees, agencies such as OPIC and private insurers offer a range of solutions to put a fixed price on uncertainty.

Against this standard, many developing and frontier markets are moving from being too risky to investment grade with the advent of solutions like political risk insurance, which offers a vital hedge against a host of worst-case scenarios.

For practical purposes, international firms operating in Egypt will need to consider insuring their tangible assets with property insurance valued in the same currency as their operating income. For example, a European firm denominated in Euros will not only have exposure to country risk in Egypt, they will also face certain risks relating to a currency mismatch. This pernicious effect often renders many insurance policies of little value at the time of a claim and subject asset valuations to currency volatility.

Political risk insurance covering the investments, forced abandonment of property, currency inconvertibility, and various forms of contract frustration are available from private insurers or agencies, such as OPIC.

Covering the “people behind the P&L” is, of course, of paramount importance. However, less common but highly-advised forms of coverage include political evacuation and salary continuation insurance. This policy class not only affords international staff the semblance of stability by guaranteeing that a portion of their earnings continue, but they also afford insured firms the peace of mind of having professional assistance with the evacuation process.

Remaining on the sidelines as an investor, domestically and internationally, may only compound Egypt’s woes and translate into lost opportunities in a competitive global market.

Dante Disparte is the U.S. managing director for Clements Worldwide, a leading risk management firm and insurance brokerage serving customers in over 180 countries. Disparte is also a member of the American Security Project’s Consensus for American Security. He has previously served as managing director of Land Rover’s activities in 32 Sub-Saharan markets.