Risk-Managing Revolution (Arab Spring)

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SPECIAL REPORT MIDDLE EAST

Late January 2011 was a strangetime or Ashra Abdul Wahab,head o the dealing room at CrditAgricoles Egyptian branch in Cairo theofce was closed, executive committeemeetings were being held in the livingrooms o his colleagues and to make

matters worse the coee was running out.For the past ew weeks, civil unrest had

been spreading across Egypt. On January25, the rst organised protests began indowntown Cairo (see box), and thecapital quickly became the backdrop to apitched battle between protesters and thesecurity orces o president HosniMubaraks regime. Crdit Agricoles maintrading room, located near the heart othe violence at ahrir Square, was

inaccessible to sta by day, and a curewkept people in their homes at night.

With the internet and mobile networksblocked by the government, and Egyptsnancial sector thrown into disarray bythe closure o the national stock exchangeand most banks on January 28, CrditAgricoles senior management in Cairohad to nd some way o managing the

situation so they resorted to meeting attheir own homes.Tis was a very strange experience.

Te executive committee represents thewhole bank. We were sitting in eachothers living rooms discussing how todeal with every single operational andtrading problem we aced, rom evacua-tion o expatriate sta to keeping thebank going through the crisis andpreparing or trading to reopen, saysAbdul Wahab. Tese meetings went on

or almost two weeks, right up untilMubarak was orced rom power onFebruary 11. One day we would go toone house, the next we would go toanother. Fortunately, we live airly closeto one another, but we had other logisticalproblems. We were all running low on

ood because the supermarkets were eithershut or empty. Te water supply was alsounreliable. Tese are the real problemsduring a revolution.

Te Egyptian revolution, and thebroader Arab Spring that swept acrossmany neighbouring states in the earlymonths o this year, can be traced back to asingle event. On December 17 2010,Mohamed Bouazizi set re to himsel in aprovincial unisian town in protest against

a lack o job opportunities or younggraduates like himsel. Riots soon spreadacross the country, orcing the resignationo the dictatorial president Zine El AbidineBen Ali on January 14. Within a month,protests targeted the Egyptian andBahraini regimes. Disturbances also brokeout in Iran, Yemen, Saudi Arabia, Oman,Morocco and Algeria. As Riskwent to

press, Muammar Gadda and Basharal-Assad continue to ght or their politicallives in Libya and Syria, respectively.

Te erocity and pace o these eventscaught many in the Arab world on thehop. I dont think anyone could havepredicted the regime change in unisia,and the speed at which protests spreadacross North Arica and the Middle East,says Sulaiman Moolla at the HSBCIslamic sales team in Dubai.

However, some Egyptian risk managers

were expecting trouble rom the o. Teoverthrow o Ben Ali in unisia did comeas a surprise, but once unrest broke outthere, it was only a matter o time beorethings went the same way in Egypt, saysGhada Mostaa, operational risk andinormation systems manager at the

Export Development Bank o Egypt(EDBE) in Cairo. Poverty and unem-ployment were on the rise. Tere was a biggap between real-lie conditions and thepropaganda o the regime. Many o uswere expecting, i anything, a longer andbloodier revolt than actually occurred.

Banks had to react quickly. By thetime Ben Ali ell, small-scale protestshad already begun in Egypt. Duringthat week, we were beginning to see redlights ashing everywhere in themarket, says Wahab at Crdit Agricole.Wary o what increa sed risk perceptionso Egypt would do to sovereign andcorporate credit spreads, the bankstraders began to cut the size o theirxed-income portolios.

We were very cautious at this time, aswe elt something was brewing. We movedaway rom long maturity positions, andbegan to aggressively trade out o ourportolios, oten cutting them by as muchas 50%. Our oreign exchange traders alsobegan to rebalance portolios, avoidingbeing excessively long in the Egyptianpound, and preerring instead to be longon US dollar or euro, he says.

Tese proved to be sensible moves.

Although the Egyptian pound stayedairly steady, Egyptian credit deault swap(CDS) spreads widened rom 280 basispoints to 334bp between January 14 andJanuary 25.

When markets closed completely theollowing week, banks in Egypt had todeal with a whole new world o problems.With no access to central ofces and nolive market data to work with, many rmswere unable to apply the usual array orisk indicators to their positions. We

The January revolt in Tunisia sparked protests that toppled regimes and started wars across

North Africa and the Middle East. In many countries, financial markets seized up, or closed

completely. How did risk managers in the region deal with the challenges of the Arab Spring?

Michael Wattreports

Risk-managing revolution

We were sitting in each others living rooms discussing how to

deal with every single operational and trading problem we faced,

from evacuation of expatriate staff to keeping the bank going

through the crisis Ashraf Abdul Wahab, Crdit Agricole

32 Emerging markets August 2011


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risk.net/risk-magazine 33

MIDDLE EAST SPECIAL REPORT

could see our positions precisely in thevarious asset classes, but visibility on datarelative to the Egyptian market hadtotally disappeared. Without this, wecouldnt revalue our positions or our

value-at-risk calculations as accurately asbeore the crisis. Our best tool remainedstress testing, which proved its reliabilityunder those severe crisis times. We alsohad the possibility o asking our col-leagues in London or Paris to put onappropriate hedging positions i needed,says Athar Iqbal, regional head o marketrisk or the Middle East and Arica atCrdit Agricole in Bahrain.

Tere were no such luxuries ordomestic Egyptian banks. We weredrating a business continuity plan whenthe crisis hit what wed do i we couldntaccess the ofce, how wed communicate

with each other, how we would keep therm intact rom a nancial perspective,says Mostaa at the EDBE. We alreadyhad disaster centres in reserve or Iaccess and treasury operations. Tankgoodness we had this, and that it wasalready tested. We were able to keep theservers going, and were able to putthrough some very important internaland external transactions during the timethe banks were closed.

Te next challenge was reopening themarkets again. According to some sources,while the Crdit Agricole executivecommittee members were in and out oeach others houses, the Central Bank oEgypt (CBE) was conducting some cloakand dagger meetings o its own. It hostedthe heads o all the major domestic andinternational banks based in Egypt in avariety o unofcial locations, and askedthem to travel to and romthe meetings inunmarked cars. At these gatherings, theCBE and the markets senior executiveswere trying to decide how best to reopenthe banks. Te authorities eared a massdeposit run rom panicked Egyptiancitizens, and were attempting to set upsupport arrangements or rms i the worst

should happen.Fortunately, when some banks openedtheir doors on February 6, it didnt. Itwasnt as bad as people expected. Terewas some initia l reduction in deposits atEgyptian retail banks, but not too much.In act, many banks reported thatdeposits soon started to increase, perhapsbecause people were worried about havingmoney under the mattress, says LailaSadek, a director in Fitch Ratingsnancial institutions team in London.

Market participants say the CBE usedits close relationship with Egyptspublic-sector banks, such as Bank oAlexandria and the National Bank oEgypt, to keep the value o the Egyptianpound relatively steady ater banksreopened or business (see box).

All the oreign hedge unds and assetmanagers wanted to get out o the marketpretty quickly. Te CBEs priority was togive people a way out o their positions,while maintaining the value o thecurrency and other local assets. So, theyintervened in the market through thepublic banks. Each one was asked toprovide liquidity in a dierent asset

Egyptian pounds, reasury bills or otherxed-income instruments. Te price wewere getting or these assets was veryattractive. We were oered 5.605.70Egyptian pounds to the dollar when theactual market price was around 5.90, saysone senior trader at an Egyptian bank.

I so, it was a generous move by Egyptspublic banks. While anxious investorswere given relatively stable prices and an

easy exit i they wanted it the statehad to soak up sizeable losses, one marketsource says. When the banks reopened,the Egyptian pound quickly lost valueagainst the dollar, but recovered soonater. It would have been worse withoutintervention, the source says. Te CBEailed to return calls a sking or comment.

While bankers and regulators wereghting res in Egypt, the Arab Springcontagion marched east across the region.By February 14, it had reached Bahrain.Protesters, largely rom the islands Shiamajority, occupied the Pearl Roundaboutin Manama and demanded democraticreorms rom the Sunni monarchy.

According to market par ticipants inBahrain, the immediate nancial impacto this particular uprising was mutedwhen compared with events in Egypt. Teprotests orced some bank branches andthe stock exchange to close briey,Bahraini CDS spreads widened and theBahraini dinar wobbled, but the majornancial rms operating in the kingdomweathered the storm relatively well.

We already had disaster centres in reserve for IT access and

treasury operations. Thank goodness we had this, and that it was

already tested Ghada Mostafa, Export Development Bank of Egypt

KhalilHamra/A

P/PressAssociationImages


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34 Emerging markets August 2011

SPECIAL REPORT MIDDLE EAST

Te picture was slightly dierent orBahraini retail banks, with a number oobservers reporting a movement o depositsrom Bahrain to saer havens in the UnitedArab Emirates (UAE), such as Dubai orAbu Dhabi. Firm data is hard to come by,but the deposit ow rom Bahrain to theUAE has been pretty substantial, saysDan Cowan, a banking analyst or theMiddle East and North Arican region atMorgan Stanley in Dubai.

Te uprising was more problematic orsmaller nancial rms in Bahrain. Ourbalance sheet has taken some major hitssince the turn o the year. We have suered

a 2030% impairment on our Bahrainiretail investments, largely attributable tothe protests, says a risk manager at anIslamic investment bank in Bahrain.

Te banks exposure to Libya madematters worse, he says: We have directinvestment in a couple o dozen oil rigs inLibya. Because o the conict there, theyhave been completely non-operational orthe past ew months. Weve written o allour air-value gain in Libya or the pastthree to our years. Te increase in

Bahraini risk perceptions has hurt us. Teunrest has pushed away a lot o investors.Say we invest in and build a hospital well take a 10% stake in it, but werending it very difcult to nd interest inthe other 90%. It puts us in a toughposition. We can structure all the dealswe want, but there are no takers becausewere a Bahraini bank. Te risk percep-tion is just too high. Over the past sixmonths, our cash position has becomevery stretched, he says.

Some people believe the uprising inBahrain signals the end o its status as thepre-eminent Middle East banking hub.

Bahrain was certainly top dog in the1990s and early 2000s, but over the pastve years Dubai has caught up ast, saysCowan at Morgan Stanley. Bahraini GDPgrowth, which was 4.3% in 2010, isexpected to slow down to 1.4% or thisyear. Te combined GDP growth o theUAE was 3.7% last year, and shouldprogress at the same rate this year.Meanwhile, Qatari GDP is growing at animpressive clip 15.3% last year, and apredicted 21.5% this year, according to

research conducted by Barclays Capital.Other observers are more optimistic

about Bahrains uture. Te undamen-tals o the Bahraini economy remainstrong. Its been a nancial hub or manyyears. Saudi Arabia will be very keen tokeep Bahrain as a strong nancialcompetitor, and will be providing it withsupport. O course Dubai and others inthe region will progress, but not necessar-ily to the detriment o Bahrain, saysIqbal at Crdit Agricole.

For now, the main worry or manybankers working in Bahrain is a repeat oFebruarys uprising, which was repressed

with Saudi assistance by the Bahrainigovernment. Ever since the 1970s, therehas been an uprising, or serious unrest, inBahrain every 10 years or so. Because othis history, I dont think anyone was toosurprised when the trouble started. Teethnic and religious mix on the island ispretty ractious, and the problems thatcaused the revolt have yet to be solved.Banks should be prepared or moreunrest, says the Islamic investment bankrisk manager. l

Dec 17, 2010

UnemployedTunisian

graduateMohamed

Bouazizi sets

fire to himselfin protest at

high youth

unemployment.

Protests begin

Jan 14, 2011

Tunisian

president

Ben Ali

resigns in

the face ofsevere civil

unrest

Jan 25

First

co-ordinated

protestsbegin in

Egypt. Regimeblocks mobile

use and

internet access

Jan 28

EgyptianStock Exchange

closes after

benchmark

index falls 16%

in previous daystrading. Egyptian

banks also close

Feb 6

Some

Egyptian

banksbeginto reopen

Feb 11

Egyptianpresident

HosniMubarak

resigns

Feb 14

First large

protests

begin in

Bahrain

Feb 17

Bahraini

troopsattack

Pearl

Roundabout

in Manama,

the focalpoint of

civil unrest

in the capital

Mar 14

Saudi

Arabian

troops

enter

Bahrainto quell

protests

Mar 15

Martial lawdeclared by

Bahraini

government

Mar 18

Bahrainirevolt

crushed bygovernment.

Pearl

Roundaboutdestroyed

Mar 23

Egyptian

Stock

Exchange

reopens

forbusiness

Bahraini five-year CDS spreads

Egyptian five-year CDS spreads

Egyptian poundBahraini dinar

Bahraini and Egyptian currencies and CDS spreads: December 2010March 2011

Source: Credit Markit (CDSs) and RBC Capital (currencies)

against the dollaragainst the dollar


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Risk-Managing Revolution (Arab Spring)