SPECIAL REPORT MIDDLE EAST

Risk-managing revolution
The January revolt in Tunisia sparked protests that toppled regimes and started wars across North Africa and the Middle East. In many countries, nancial markets seized up, or closed completely. How did risk managers in the region deal with the challenges of the Arab Spring? Michael Watt reports
January 2011 was a strange time for Ashraf Abdul Wahab, head of the dealing room at Crdit Agricoles Egyptian branch in Cairo the office was closed, executive committee meetings were being held in the living rooms of his colleagues and to make matters worse the coffee was running out. For the past few weeks, civil unrest had been spreading across Egypt. On January 25, the first organised protests began in downtown Cairo (see box), and the capital quickly became the backdrop to a pitched battle between protesters and the security forces of president Hosni Mubaraks regime. Crdit Agricoles main trading room, located near the heart of the violence at Tahrir Square, was

Late

for almost two weeks, right up until Mubarak was forced from power on February 11. One day we would go to one house, the next we would go to another. Fortunately, we live fairly close to one another, but we had other logistical problems. We were all running low on food because the supermarkets were either shut or empty. The water supply was also unreliable. These are the real problems during a revolution. The Egyptian revolution, and the broader Arab Spring that swept across many neighbouring states in the early months of this year, can be traced back to a single event. On December 17 2010, Mohamed Bouazizi set fire to himself in a provincial Tunisian town in protest against

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 sta to keeping the bank going through the crisis Ashraf Abdul Wahab, Crdit Agricole
inaccessible to staff by day, and a curfew kept people in their homes at night. With the internet and mobile networks blocked by the government, and Egypts financial sector thrown into disarray by the closure of the national stock exchange and most banks on January 28, Crdit Agricoles senior management in Cairo had to find some way of managing the situation so they resorted to meeting at their own homes. This was a very strange experience. The executive committee represents the whole bank. 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 and preparing for trading to reopen, says Abdul Wahab. These meetings went on a lack of job opportunities for young graduates like himself. Riots soon spread across the country, forcing the resignation of the dictatorial president Zine El Abidine Ben Ali on January 14. Within a month, protests targeted the Egyptian and Bahraini regimes. Disturbances also broke out in Iran, Yemen, Saudi Arabia, Oman, Morocco and Algeria. As Risk went to press, Muammar Gaddafi and Bashar al-Assad continue to fight for their political lives in Libya and Syria, respectively. The ferocity and pace of these events caught many in the Arab world on the hop. I dont think anyone could have predicted the regime change in Tunisia, and the speed at which protests spread across North Africa and the Middle East, says Sulaiman Moolla at the HSBC Islamic sales team in Dubai. However, some Egyptian risk managers

were expecting trouble from the off. The overthrow of Ben Ali in Tunisia did come as a surprise, but once unrest broke out there, it was only a matter of time before things went the same way in Egypt, says Ghada Mostafa, operational risk and information systems manager at the Export Development Bank of Egypt (EDBE) in Cairo. Poverty and unemployment were on the rise. There was a big gap between real-life conditions and the propaganda of the regime. Many of us were expecting, if anything, a longer and bloodier revolt than actually occurred. Banks had to react quickly. By the time Ben Ali fell, small-scale protests had already begun in Egypt. During that week, we were beginning to see red lights flashing everywhere in the market, says Wahab at Crdit Agricole. Wary of what increased risk perceptions of Egypt would do to sovereign and corporate credit spreads, the banks traders began to cut the size of their fixed-income portfolios. We were very cautious at this time, as we felt something was brewing. We moved away from long maturity positions, and began to aggressively trade out of our portfolios, often cutting them by as much as 50%. Our foreign exchange traders also began to rebalance portfolios, avoiding being excessively long in the Egyptian pound, and preferring instead to be long on US dollar or euro, he says. These proved to be sensible moves. Although the Egyptian pound stayed fairly steady, Egyptian credit default swap (CDS) spreads widened from 280 basis points to 334bp between January 14 and January 25. When markets closed completely the following week, banks in Egypt had to deal with a whole new world of problems. With no access to central offices and no live market data to work with, many firms were unable to apply the usual array of risk indicators to their positions. We

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could see our positions precisely in the various asset classes, but visibility on data relative to the Egyptian market had totally disappeared. Without this, we couldnt revalue our positions or our value-at-risk calculations as accurately as before the crisis. Our best tool remained stress testing, which proved its reliability under those severe crisis times. We also had the possibility of asking our colleagues in London or Paris to put on appropriate hedging positions if needed, says Athar Iqbal, regional head of market risk for the Middle East and Africa at Crdit Agricole in Bahrain. There were no such luxuries for domestic Egyptian banks. We were drafting a business continuity plan when the crisis hit what wed do if we couldnt access the office, how wed communicate with each other, how we would keep the firm intact from a financial perspective, says Mostafa at the EDBE. We already had disaster centres in reserve for IT access and treasury operations. Thank goodness we had this, and that it was already tested. We were able to keep the servers going, and were able to put through some very important internal and external transactions during the time the banks were closed. The next challenge was reopening the markets again. According to some sources, while the Crdit Agricole executive committee members were in and out of each others houses, the Central Bank of Egypt (CBE) was conducting some cloak and dagger meetings of its own. It hosted the heads of all the major domestic and international banks based in Egypt in a variety of unofficial locations, and asked them to travel to and from the meetings in unmarked cars. At these gatherings, the CBE and the markets senior executives were trying to decide how best to reopen the banks. The authorities feared a mass deposit run from panicked Egyptian citizens, and were attempting to set up support arrangements for firms if the worst should happen. Fortunately, when some banks opened their doors on February 6, it didnt. It wasnt as bad as people expected. There was some initial reduction in deposits at Egyptian retail banks, but not too much. In fact, many banks reported that deposits soon started to increase, perhaps because people were worried about having money under the mattress, says Laila Sadek, a director in Fitch Ratings financial institutions team in London.

Khalil Hamra/AP/Press Association Images

Market participants say the CBE used its close relationship with Egypts public-sector banks, such as Bank of Alexandria and the National Bank of Egypt, to keep the value of the Egyptian pound relatively steady after banks reopened for business (see box). All the foreign hedge funds and asset managers wanted to get out of the market pretty quickly. The CBEs priority was to give people a way out of their positions, while maintaining the value of the currency and other local assets. So, they intervened in the market through the public banks. Each one was asked to provide liquidity in a different asset

easy exit if they wanted it the state had to soak up sizeable losses, one market source says. When the banks reopened, the Egyptian pound quickly lost value against the dollar, but recovered soon after. It would have been worse without intervention, the source says. The CBE failed to return calls asking for comment. While bankers and regulators were fighting fires in Egypt, the Arab Spring contagion marched east across the region. By February 14, it had reached Bahrain. Protesters, largely from the islands Shia majority, occupied the Pearl Roundabout in Manama and demanded democratic reforms from the Sunni monarchy.

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
Egyptian pounds, Treasury bills or other fixed-income instruments. The price we were getting for these assets was very attractive. We were offered 5.605.70 Egyptian pounds to the dollar when the actual market price was around 5.90, says one senior trader at an Egyptian bank. If so, it was a generous move by Egypts public banks. While anxious investors were given relatively stable prices and an According to market participants in Bahrain, the immediate financial impact of this particular uprising was muted when compared with events in Egypt. The protests forced some bank branches and the stock exchange to close briefly, Bahraini CDS spreads widened and the Bahraini dinar wobbled, but the major financial firms operating in the kingdom weathered the storm relatively well.

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

Bahraini five-year CDS spreads Egyptian five-year CDS spreads Egyptian pound against the dollar Bahraini dinar against the dollar

Dec 17, 2010 Unemployed Tunisian graduate Mohamed Bouazizi sets fire to himself in protest at high youth unemployment. Protests begin

Jan 14, 2011 Tunisian president Ben Ali resigns in the face of severe civil unrest

Jan 25 First co-ordinated protests begin in Egypt. Regime blocks mobile use and internet access

Feb 6 Some Egyptian banks begin to reopen

Feb 11 Egyptian president Hosni Mubarak resigns

Jan 28 Egyptian Stock Exchange closes after benchmark index falls 16% in previous days trading. Egyptian banks also close

Feb 17 Bahraini troops attack Pearl Roundabout in Manama, Feb 14 the focal First large point of protests civil unrest begin in in the capital Bahrain

Mar 14 Saudi Arabian troops enter Bahrain to quell protests

Mar 18 Bahraini revolt crushed by government. Pearl Roundabout destroyed

Mar 23 Egyptian Stock Exchange reopens for business

Mar 15 Martial law declared by Bahraini government

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

The picture was slightly different for Bahraini retail banks, with a number of observers reporting a movement of deposits from Bahrain to safer havens in the United Arab Emirates (UAE), such as Dubai or Abu Dhabi. Firm data is hard to come by, but the deposit flow from Bahrain to the UAE has been pretty substantial, says Dan Cowan, a banking analyst for the Middle East and North African region at Morgan Stanley in Dubai. The uprising was more problematic for smaller financial firms in Bahrain. Our balance sheet has taken some major hits since the turn of the year. We have suffered a 2030% impairment on our Bahraini retail investments, largely attributable to the protests, says a risk manager at an Islamic investment bank in Bahrain. The banks exposure to Libya made matters worse, he says: We have direct investment in a couple of dozen oil rigs in Libya. Because of the conflict there, they have been completely non-operational for the past few months. Weve written off all our fair-value gain in Libya for the past three to four years. The increase in

Bahraini risk perceptions has hurt us. The unrest has pushed away a lot of investors. Say we invest in and build a hospital well take a 10% stake in it, but were finding it very difficult to find interest in the other 90%. It puts us in a tough position. We can structure all the deals we want, but there are no takers because were a Bahraini bank. The risk perception is just too high. Over the past six months, our cash position has become very stretched, he says. Some people believe the uprising in Bahrain signals the end of its status as the pre-eminent Middle East banking hub. Bahrain was certainly top dog in the 1990s and early 2000s, but over the past five years Dubai has caught up fast, says Cowan at Morgan Stanley. Bahraini GDP growth, which was 4.3% in 2010, is expected to slow down to 1.4% for this year. The combined GDP growth of the UAE was 3.7% last year, and should progress at the same rate this year. Meanwhile, Qatari GDP is growing at an impressive clip 15.3% last year, and a predicted 21.5% this year, according to

research conducted by Barclays Capital. Other observers are more optimistic about Bahrains future. The fundamentals of the Bahraini economy remain strong. Its been a financial hub for many years. Saudi Arabia will be very keen to keep Bahrain as a strong financial competitor, and will be providing it with support. Of course Dubai and others in the region will progress, but not necessarily to the detriment of Bahrain, says Iqbal at Crdit Agricole. For now, the main worry for many bankers working in Bahrain is a repeat of Februarys uprising, which was repressed with Saudi assistance by the Bahraini government. Ever since the 1970s, there has been an uprising, or serious unrest, in Bahrain every 10 years or so. Because of this history, I dont think anyone was too surprised when the trouble started. The ethnic and religious mix on the island is pretty fractious, and the problems that caused the revolt have yet to be solved. Banks should be prepared for more unrest, says the Islamic investment bank risk manager. l

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