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Economic Outlook, Governance, Regulation and GCC Risk Mitigation Dr. Nasser Saidi
Economic Outlook, Governance, Regulation and GCC Risk Mitigation
Dr. Nasser Saidi
2 © Copyright Euler Hermes 1/29/17
Agenda 1 Global & regional risks: through the looking glass
2 GFC, Basel and the changing regulatory
response
3 Governance & Risk Management
4 Basel & trade finance
5 Key takeaways
3 © Copyright Euler Hermes 1/29/17
1 1 Global & regional risks: through the looking
glass
2 GFC, Basel and the changing regulatory
response
3 Governance & Risk Management
4 Basel & trade finance
5 Key takeaways
4
Global outlook & underlying risks; 2016-17 anni horribiles
Outlook
§ IMF: Global real GDP growth to rise to 3.4% in 2017; EMEs: 4.5%
§ Productivity growth is stagnant in advanced economies: secular stagnation?
§ Global trade & industrial activity sluggish
§ Uncertain & changing US policy mix: fiscal expansion, monetary tightening, deregulation, trade policy
Macroeconomic Risks
§ Growing policy uncertainty
§ Inward-looking policies & protectionism
§ Low oil prices => weak investment in commodity exporters & fiscal adjustment
§ EU banking sector vulnerabilities: Italy, Greece
§ Appreciating $ and higher interest rates: EME debt vulnerability, currency wars
Geo-political risks
§ Trump’s policies on Russia, China, Iran
§ Elections in France, Italy, Germany, Iran
§ Brexit =>UK & EU economic, political, institutional uncertainty
§ End of Neoliberalism & Globalisation. New Cold War?
§ Ongoing conflicts in the region & spillovers
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Rising Global Economic Policy Uncertainty
Source: http://www.policyuncertainty.com/
§ Economic Policy Uncertainty index began tracking the US before widening to reflect a global picture. § At macro level, policy uncertainty innovations foreshadow declines in investment, output, and employment. § Global EPU calculated as the GDP-weighted average of monthly EPU index values for US, Canada, Brazil, Chile, UK,
Germany, Italy, Spain, France, Netherlands, Russia, India, China, South Korea, Japan, Ireland, and Australia
Jan 1997-Nov 2016
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Rise in credit risk (1/3) (a) Subdued global growth (3%) & trade growth (4%): slowdown in real trade
growth is widespread, both in absolute terms and relative to GDP growth Compared with 2003-07 pre-GFC, growth of goods and services imports relative to
GDP growth during 2012–15 shows slowdown in 116 nations
Difference in the Ratio of Average Real Import Growth to Average Real GDP Growth between 2003–07 and 2012–15
Source: IMF World Economic Outlook, Oct 2016
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Rise in credit risk (2/3) (b) Monetary policy change: Very low policy rates; central bank B/S soar
(c) Rise in large bankruptcies Yearly changes in % & contribution to the Global
Index
Euler Hermes Global Insolvency Index and regional indices
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Rise in credit risk (3/3)
(d) Politics, nationalism & protectionism (e) Higher R + strong dollar -> EME $ indebted companies - Debt of nonfinancial firms in EMEs has quadrupled over the past decade, with
bonds accounting for a growing share (Chart 1) - Corporate debt in EMEs markets has climbed faster in more cyclical sectors,
with the greatest growth seen in construction (Chart 2)
Source: What the Fed Rate Rise Means for Corporate Debt in Emerging Markets, IMF Blog, Jan 2017 https://blog-imfdirect.imf.org/2017/01/09/what-the-fed-rate-rise-means-for-corporate-debt-in-emerging-markets/
Chart 1. Corporate Debt Build-up in EMEs Firms are vulnerable to rises in interest rates ($ bns)
Chart 2. EMEs: Corporate Leverage by Selected Regions and Sectors Construction business is a weak spot, esp in China (%, ratio of total liabilities to total equity, listed firms)
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Top 10 business risks in 2017: Middle East & Africa
Source: Allianz Risk Barometer 2017
10 Visa Confidential
MENA/ GCC Risk Landscape
Energy price shocks
Trumponomics & US policies;
China rebalancing
US Monetary Policy
Debt overhang & Market Liquidity/
Financial Resilience
Economic non-diversification
Lower oil/ energy prices
Geopolitical tensions
Near-term Medium-term
Regional conflicts
Spillover effects:
refugees, FDI, aid,
remittances
Political & social tensions
US$ Peg
Demographics,
Youth & Unemployment
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GCC’s Growing Trade with China & Developing Asia: new linkages & different risk exposures
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Source: IMF Direction of Trade Statistics database. Data till Aug 2016.
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Saudi Arabia: Many Promises to Keep
§ IMF: Real GDP growth 2017 lowered to 0.4% (from 2% prev.); modest recovery in non-oil growth
§ Vision 2030 & National Transformation Plan are a path towards greater economic diversification
§ Working towards a privatization plan (Aramco)
§ Fiscal reforms: spending cuts, energy price reforms, new non-oil revenue measures (VAT, excises)
§ Tapping international bond markets to finance its deficits – likely to continue
§ Capital market reforms; parallel market for SMEs
§ SAMA continues to respond to tightened liquidity conditions: relaxed loan-to-deposit ratio, placed deposits with commercial bank, broadened range of repo facilities =>decline in inter-bank interest rates
§ Delayed payments – slowly getting back on track
§ Challenges: unemployment, women’s participation, delays in projects
Breakdown of Gross Public Debt
Bank Liquidity continues to improve
Source: Jadwa Investment, Jan 2017.
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UAE: First mover advantage
§ IMF: Real GDP growth 2017 at 2.5% (2018: 3.1%)
§ Sustained low oil prices => weaker fiscal & external positions, monetary & financial conditions
§ Dubai, more diversified and with low dependence on oil, suffered from a stronger dollar, weak external demand
§ Fiscal reforms: fuel price reforms, phased removal of water, electricity subsidies; VAT to be introduced in 2018
§ Financial stability: timely implementation of plans to phase in Basel III capital & liquidity standards over 2015-19
§ The Emirates NBD PMI for the UAE averaged 53.9 in 2016, down from 56.0 in 2015, signaling slower non-oil growth
§ Investment to pick-up in the run-up to the Expo 2020
§ Key reform implemented: Bankruptcy Law; In the pipeline: relaxing constraints on foreign ownership
§ Push towards renewable energy, innovation / digital disruption
Bank Liquidity, 2008–16 (AED bn)
Non-financial Corporates: Vulnerable Debt, 2012–15 ($ bns)
Source: IMF Article IV Consultation UAE, 2016
14 © Copyright Euler Hermes 1/29/17
2 1 Global & regional risks: through the looking glass
2 GFC, Basel and the changing regulatory
response
3 Governance & Risk Management
4 Basel & trade finance
5 Key takeaways
15
GFC & the changing regulatory landscape
§ Adoption of Basel III capital requirements (8% min), including a countercyclical capital buffer and a surcharge for globally systemically important financial institutions (G-SIFIs).
§ Strengthening of corporate governance & emphasis on risk management
§ Agreement reached on liquidity standard: Liquidity Coverage Ratio (3% on total assets).
§ Some progress on reducing Too-Big-To-Fail, with the identification of G-SIFIs, domestically systemically important banks (D-SIBs), higher capital adequacy requirements and more intense supervision.
§ Adoption of principles for sound compensation practices, to avoid perverse incentives for risk-taking
§ Some reforms of national resolution schemes (including bail-in instruments) so that failing institutions can be resolved without wider disruptions.
§ Enhancements to the “securitization model.”
§ Some closure of data gaps, e.g., the beginning of harmonized collection of improved consolidated data on bilateral counterparty and credit risks of major systemic banks
Source: “The Regulatory Responses to the Global Financial Crisis: Some Uncomfortable Questions”, IMF Working Paper, March 2014.
16 © Copyright Euler Hermes 1/29/17
3 1 Global & regional risks: through the looking glass
2 GFC, Basel and the changing regulatory
response
3 Governance & Risk Management
4 Basel & trade finance
5 Key takeaways
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Key Principles of Sound Risk Governance
Source: Standards on Risk Governance in Financial Institutions, IFC,2012
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Main aspects of credit risk management improvement, post GFC
COMPLIANCE BASEL III CAPITAL REQUIREMENT
RE-EVALUATION OF CURRENT MANAGEMENT SYSTEM & MODELS
BALANCE QUANTITATIVE & QUALITATIVE METHODS
APPROPRIATE BALANCE BETWEEN RISK APPETITE & RISK CONTROL
FORWARD-LOOKING STRESS-TESTING/ SCENARIO ANALYSIS
RISK-WEIGHTED ASSETS CALCULATIONS
COLLATERAL MANAGEMENT & MONITORING
CREDIT RISK MANAGEMENT GLOBAL FINANCIAL
CRISIS
BASEL II REQUIREMENTS
BA
SEL
III
REQ
UIR
EMEN
TS
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Where Do Banking and Trade Credit Insurance Intersect?
Financing
Protection against non-payment of
trade receivables: Political & Credit Risk
Financing trade receivables: § Asset-based lending § Receivables purchases; Factoring § Letters of credit § Securitizations (trade receivables)
Credit insurers have access and can harness ‘Big Data’: global, regional, local risk developments
20 © Copyright Euler Hermes 1/29/17
4 1 Global & regional risks: through the looking glass
2 GFC, Basel and the changing regulatory
response
3 Governance & Risk Management
4 Basel & trade finance
5 Key takeaways
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Trade finance & Impact of Basel III
Role of trade finance § Trade finance performs two vital roles:
provides working capital tied to international trade, and/or means to reduce payment risk
§ Trade finance supports trade, a main engine of economic development
§ Trade finance directly supports about 1/3rd of global trade, with letters of credit covering about 1/6th of total trade
§ Empirical evidence shows reduced trade finance availability may have accounted for up to 1/5th of the decline in trade volumes in the aftermath of the GFC
§ Shift in trade & growth to Asia has not been accompanied by commensurate growth in trade finance
Impact of Basel III § Increased cost and limited availability of Trade
Finance, especially for SMEs and developing economies
§ Decreased liquidity for trade finance as banks exit the business and/or reallocate capital to other business lines: very challenging for banks with limited $ liquidity as most trade is $ denominated
§ Requires more sophisticated risk weighting § Movement of low risk trade finance assets to
less regulated non-bank financial intermediaries § Favorable treatment of LCs and exposures to
foreign banks reduced § Growing compliance costs § With the cost and availability of trade finance
likely to increase significantly, counterparty and country risk information has become even more crucial
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Trade finance treatment under risk-weighted assets: Standardised & Internal approach
Standardised approach
§ Credit conversion factor (CCF) of 20% to both issuing & confirming bank for short-term self-liquidating LCs
§ 20% CCF means 1/5 of “normal” capital requirements (i.e. based on 8% minimum requirement, capital charge would be 1.6%)
Internal ratings based approach
§ In general, banks under this approach have to use a minimum maturity of one year (independent of actual maturity)
§ In principle, the longer the maturity, the higher the risk and thus the higher the capital requirement
§ Exception for letters of credit – actual remaining maturity should be used
Leverage ratio
§ In principle, denominator of leverage ratio based on accounting value: banks under the leverage ratio have to hold five times less capital for trade instruments than originally envisaged (as under the risk based measure)
§ For short-term self-liquidating trade LCs, a 20% CCF will be applied to both the issuing and confirming bank
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GFC, regulations, liquidity squeeze all affected availability of trade finance, as counterparty risk rose significantly
Source: Joint OECD-BIS-IMF-WB Statistics on External Debt, www.jedh.org; World Trade Organisation (WTO)
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Impact of Basel III & global risks on the GCC
§ GCC banks have sizeable capital buffers by international standards: easier to comply with Basel III
§ Compliance with liquidity standards more problematic in the absence of liquid money & government debt markets
§ GCC banks’ gross exposures are concentrated in claims on corporates, sovereigns, and public sector entities
§ Given with policy focus on greater diversification & growing role of the private sector and SMEs, Basel III lowers availability of finance
§ Dollar strength + Trump policies can have negative impact on foreign trade of the region
§ An exchange rate appreciation will affect REER, and would make it harder for the non-oil sector to compete & lead trade diversification
§ UAE/ Dubai could be affected given its role as a regional trading hub
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GCC Banks: Asset Quality Indicators
Source: GCC Banks Will Show Resilience In The Face Of A Weaker Operating Environment In 2017-2018, S&P.
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GCC Trade Finance & Insurance Industry: technological change & credit information infrastructure will transform risk management
• FinTech-Blockchain will increasingly be facilitating trade finance as well as compliance with AML/KYC
• Big Data & AI will be transformational for risk management and the insurance industry
§ Factoring & Securitisation of receivables
§ Establishing Companies Houses
§ Credit information databases – e.g. Al Etihad credit bureau in UAE
27 © Copyright Euler Hermes 1/29/17
5 1 Global & regional risks: through the looking glass
2 GFC, Basel and the changing regulatory
response
3 Governance & Risk Management
4 Basel & trade finance
5 Key takeaways
28
Key Takeaways I
§ GFC & Basel regulations have radically changed banking landscape and the availability & pricing of trade finance
§ 2017 outlook and risk landscape are characterised by growing policy uncertainty and Trumponomics
§ Trade credit insurance has shifted from being primarily government dominated (Exim banks) to the private sector & increasingly centralised
§ Major part of global trade can be trade credit insured; cover political risk and credit risk
§ Trade credit insurance allows companies to develop business outside traditional sector and geography; allows move away from pre-payment and L/Cs to open account
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Key Takeaways II
§ Lenders and businesses can provide more attractive terms using trade credit insurance
§ Trade credit insurance can/should be integral part of risk & working capital management for lenders, borrowers and businesses.
§ Trade credit insurance is not a substitute for internal controls, policies & procedures, credit analysis and sound risk management. It cannot be the outsourcing of the credit function.
§ Trade credit insurance is in its infancy in MENA/GCC; it has potential to be an important financial tool in growing trade credit and mitigating actual and perceived risk
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Q&A
