As the UAE and other GCC economies continue to grow – surpassing many developed and emerging markets – economic risks are also rising substantially in the region.
Today, when speaking at the Annual Investment Meeting (AIM) 2014 about economic risk management, Massimo Falcioni, CEO of Euler Hermes GCC, said these economic risks would have to be managed intelligently and strategically for companies to sustain healthy profitability.
AIM Congress is the region’s first emerging markets foreign direct investments-focused event, which will feature practises and principles corporate and individual companies can follow to help them invest better in the region. The conference has been and will be attended by high government officials, private investors, investment managers and project promoters from across the globe.
SMEs are expected to feel more pressure in accessing finance due to intensified competition. According to Mohammed bin Rashid Establishment for SME Development (MBRE), SMEs comprise more than 90 per cent of UAE businesses.
An MBRE report reveals that one third of SMEs do not make it in the business world and this is primarily due to the common challenge most entrepreneurs face – access to finance. A white paper on the SME sector in the Mena region, commissioned by Citi Foundation and Shell Foundation, found that lending to SMEs averages at approximately two per cent in the GCC region and 13 per cent in non-GCC countries, and only 20 per cent of SMEs have a loan or line of credit.
To mitigate this risk, Falcioni highlights the vital importance of trade credit for SMEs. “To compete in the local, regional and global market, a company has to trade on credit. More than 60 per cent of company assets can be reflected in its receivables and Trade Credit Insurance (TCI) is one of the most effective services offered to SMEs that want to trade and export. TCI increases the rating of a company and also guarantees to protect businesses against payment defaults,” he says.
Currently, the GCC is underpenetrated in terms of insurance and even more so for TCI, but this is growing fast. The GCC region has an enormous GDP of AED9.6 trillion, but the total TCI premium in the region is approximately AED218 million – a penetration of just 0.004 per cent, four times lower than the US and six times lower than Europe.
“The reasons for this are culturally related because, as of today, there is still not much awareness on TCI and the most common tool used is a letter of credit, which will not be sustainable in the long run due to its high cost and time consuming procedure,” adds Falcioni.
In addition, as re-exports from the UAE continue to increase, thanks to being a cost-effective haven for logistics and trade, the insolvency index of the UAE is also expected to increase. Official figures from Dubai Customs reveal that Dubai exports and re-exports have grown by four per cent from AED498 billion in 2012 to AED518bn in 2013.
“The UAE and GCC countries optimal strategic location is another factor contributing to an accelerated growth in the volume and value of cross border trade. This has led the region to become an ideal centre for re-exports. However, this also exposes traders to additional risks when trading on open credit terms. These increased levels of risks are boosting demand for trade credit insurance solutions, which is what Euler Hermes is able to provide from its offices in Dubai, DIFC, Riyadh and Jeddah,” says Falcioni.