A 2023 in a rearview and 2024 outlook.

Summary

Recovery Advisers offers to share a general take on 2023 trends and regional highlights, as well, as outlook to 2024.

A year in review and our growth

As we just closed 2023, we reflect back on a year that flashed by. We’ve seen some significant changes to the way we work, and we’re excited about what lies ahead. We’ve been busy growing our team and improving our claim systems. We’ve also been making an effort to understand our customers better, which has led us to revamp our claims process.

2023 has been an unexpected year from the claims perspective, Recovery Advisers have received a record number of new entrustments, and not only because of the territorial expansion (opening new offices in Africa), but to our traditional core markets.

Recognition in Saudi Arabia

We are proud and delighted to share the success of our Saudi Arabian team: Recovery Advisers Saudi Arabia won the GTR Saudi Arabia 2023 ‘Leaders in Trade’ Award for the Best non-bank provider! The award given to Recovery Advisers Saudi Arabia was in recognition of the work our Saudi colleagues have done to address ambiguities and questions concerning the rights of subrogees.

Our Saudi colleagues were successful in a recent landmark court decision addressed important questions regarding subrogated claims (such as jurisdiction to decide subrogated claims, and the rights and obligations of credit insurers and ECAs. Additionally, our recent court victory demonstrated the incredible speed of development of the Saudi legal system supporting foreign creditors and recoveries. The landmark case proves the recognition and enforcement of subrogated rights under Saudi regulations, assuring ECAs and credit insurers of the support of Saudi courts to directly recover their rights.

IT development

Everything in every market tends towards more digitisation and automation, and the claims and recoveries industry cannot be exempt from that either. We have created a new vision about how we will optimise our operations, whether case management, effective recoveries or predictive analysis of future claims.

Information technologies have a wider impact on the trade industry. We closely monitor the implementation of electronic transferable records in major jurisdictions and how the Central Bank Digital Currency initiative will affect cross border transfers and trade.

Regional expansion

Reacting to the market demand, Recovery Advisers has opened new offices in Sub-Saharan Africa, in Nairobi to serve as the regional hub for Eastern Africa and in Johannesburg to serve as the regional hub for Southern Africa.

 

Our general take on 2023

In the ECA and private insurance realm insurers primarily expect a higher claims year than in 2022 (for more information please see the Berne Union’s BU Confidence Index), which was corroborated by the registered claims in H1 2023, which saw a 19% increase in total claims paid (USD 4.5bn). The main driver was the deteriorating political/sovereign risk in the MLT business line, with notable concentrations in Zambia, Sri Lanka and Ghana. ST claims also increased by 13% in H1 2023, mainly due higher number of insolvencies in Europe and Northern America. However, please note that the year is far from over and the official statistics on claims will only be available in early Q2 2024.

As our take on 2023, the major issues in global trade we saw that led to defaults and claims were the following:

Stemming from the COVID-19 pandemic, supply chain disruptions were caused by lockdowns, labour shortages, and logistical bottlenecks. These disruptions led to delays in shipping, increased transportation costs, and difficulties in sourcing materials, significantly affecting manufacturers and retailers. This made it harder for businesses to fulfil contracts on time, leading to defaults and claims. As an example, the automotive industry faced significant challenges due to a shortage of semiconductors. Major car manufacturers had to cut back production, affecting their supply chain and leading to delays in delivering new vehicles to customers.

Rising geopolitical tensions in various parts of the world, including the conflict between Russia and Ukraine, affected global trade dynamics. These tensions led to sanctions, export controls, and re-evaluation of trade relationships. It disrupted established trade routes and practices, forcing businesses to navigate a more complex and uncertain international trade landscape.

Post-pandemic economic recovery was uneven across countries, leading to high inflation, varying monetary policies, and currency volatility. Economic instability made financial planning and pricing in international contracts challenging. Currency fluctuations, in particular, affected the costs and revenues of cross-border transactions, leading to financial strain and potential contract disputes. For example, Turkey faced a severe currency crisis, with the lira losing a significant portion of its value. This volatility affected international trade contracts, especially those priced in local currency, leading to financial losses and renegotiations. Same applies to the fragile Egyptian economy that struggles even with the restrictions to keep hard currency in the country.

Geopolitical issues, supply chain disruptions, and demand fluctuations affected energy markets. Volatile energy prices increased the cost of transportation and production, impacting the profitability and feasibility of international trade deals. This led to renegotiations and disputes over contract terms. Just look at the European energy crisis, exacerbated by reduced gas supplies from Russia, led to soaring energy prices across Europe. This affected industries reliant on energy, leading to increased production costs and impacting trade agreements.

In response to economic challenges and political pressures, some countries implemented more protectionist policies. Tariffs, quotas, and other trade barriers increased the cost and complexity of international trade, most prominently seen in the relationship between the US and China. Companies had to navigate a changing regulatory landscape, leading to legal challenges and trade disputes.

Growing awareness of climate change led to stricter environmental regulations and standards globally, such as the European Union’s Green Deal aimed to make Europe the first climate-neutral continent by 2050. This initiative led to stricter environmental regulations affecting trade, requiring businesses to adopt more sustainable practices.. Businesses had to invest in cleaner technologies and practices, adjust their supply chains, and sometimes face trade barriers for not complying with environmental standards. This transition period created challenges in maintaining the efficiency and cost-effectiveness of trade operations.

The increasing reliance on digital technologies for trade brought cybersecurity to the forefront. Cyberattacks and data breaches posed risks to trade secrets, supply chain integrity, and operational continuity. Companies had to invest in cybersecurity measures, and failures in this area led to significant trade disruptions and potential legal liabilities. For example, a significant cyberattack on the Colonial Pipeline in the US caused major disruptions in fuel supply, and the incident highlighted the vulnerabilities in critical infrastructure and the impact such attacks can have on trade and supply chains.

Changes in consumer preferences, often influenced by broader economic, social, and environmental trends. Businesses faced challenges in predicting and adapting to these shifts, such as the fashion industry, which experienced a rapid shift towards sustainable and ethically sourced products. Global brands had to adjust their supply chains and product lines to meet this changing consumer demand, impacting their global trade strategies. Overproduction or underproduction, supply imbalances, and inventory management issues arose, leading to financial losses and complications in fulfilling trade agreements.

Beside these active trends in 2023, and we noted fraud as an overarching and ever-present issue, that had major and continuing impact on trade, whether it was local and linked to small trading volumes, or over USD 500 million aluminium fraud case. Fraud may happen in various forms, about which we have published a dedicated market update earlier this year, for more information please check out our website article.

Regional updates

Saudi Arabian and UAE markets remains strong

The United Arab Emirates’ gross domestic product estimated to grow about 4% in 2023, and the non-oil sector growth vastly outperformed the overall growth. It surged about 6%, as the country is becoming less reliant on oil and more dependent on knowledge-based industries: the non-oil sector accounts for more than 70% of the country’s GDP.

Similarly, Saudi Arabia’s economy is also undergoing a transformation, as it implements reforms to reduce oil dependence, diversify income sources, and enhance competitiveness through improvements in the regulatory and business environment (promotion of entrepreneurship, protection of investors’ rights, lower costs of doing business, etc). 2023 also marked an important juncture as the midpoint of the ambitious Vision 2030 journey.

Despite the high-octane developments, UAE and Saudi Arabia remained in the top 3 of our claims markets by the number of new cases.

Egypt grappling with FX and IMF

The Egyptian economy was currently grappling with several significant challenges, particularly due to the depreciation of the Egyptian Pound and the increasing rates of inflation. A key factor in this situation was the transition towards a more flexible exchange rate system, a shift that aligns with the requirements set forth by a USD 3 billion loan agreement with the International Monetary Fund (IMF) at the end of the year.

For further information, check our detailed market update HERE.

Morocco and Algeria

Northwestern Africa has shown great resilience in 2023. Morocco’s economy showed signs of stability and recovery, with expected 3%+ GDP growth in 2023, driven by a partial recovery in agricultural output, improvement in services, and an increase in net exports. Morocco has introduced regulatory changes to further improve its economic status, including tax reforms, as well as a new Free Trade Agreements with the US (MAFTA), however, the corporate insolvencies have still increased by about 5% in 2023.

Algeria has also shown signs of recovery with the economy’s expected growth of about 2.5% in 2023. Positive signs are the regulatory changes to create better business and investment climate (e.g. with tax incentives), however, the tight import rules still cause delays and issues when trading to Algeria.

China slowdown?

The potential slowdown of the Chinese economy is a multifaceted issue that could have significant global ramifications. As the second-largest economy in the world, any slowdown in China’s economic growth rate can have far-reaching effects on global markets and international trade.

China’s shift from a manufacturing-driven economy to one that is more service-oriented may lead to short-term disruptions and a re-balancing of economic activities. The government’s stringent regulatory measures in various sectors, including technology and real estate, have also raised concerns about the investment climate and future growth prospects. Moreover, the ongoing geopolitical tensions and trade disputes add to the uncertainty and could impact foreign investment and export markets.

All these factors combined make the outlook for China’s economic growth uncertain, with potential implications for both domestic and global economic stability.

From the claims and recoveries perspective the major development in China was their accession to the Apostille Convention that reduces time and process for cases in China and for Chinese creditors abroad as well. For further information, check our detailed update HERE.

 

What do we expect from 2024?

In 2023, global trade faced many challenges that led to defaults, financial losses, and claims. Major issues included ongoing supply chain disruptions, rising geopolitical tensions like the conflicts in Europe and the Middle East, volatile energy prices and shortages, economic instability with high inflation and currency fluctuations, increasing protectionism and regulatory changes, and growing environmental regulations. Fraud also remained a persistent problem impacting trade. These issues forced businesses to navigate complex conditions and renegotiate contracts.

In 2024, similar trends are expected to continue and possibly intensify, especially potential escalation of the situation in the Middle East in and around Israel, the financial struggle of several Middle Eastern markets (Turkey, Egypt, Iraq) and key upcoming elections that could potentially change the course of the global trade/economy and political stability (most prominently USA, and the United Kingdom). These challenges will probably make taming inflation more challenging than it already is. While high-inflation may have short-term benefits on recoveries of trade receivables, persistently high inflation exerts pressure on MLT and Project Finance restructured debt, ultimately increasing the chances of further defaults.

Sub-Saharan Africa

Ethiopia’s sovereign default in December 2023, marked a significant event in the country’s financial history, failing to make a USD 33 million payment on its only international government bond. This situation emerged from a combination of severe financial strain due to the pandemic and the impact of a two-year civil war that concluded in November 2022. Ethiopia’s decision to default followed the breakdown of negotiations with pension funds and other private sector creditors who held its bond.

The default has several immediate implications. Firstly, it limits Ethiopia’s access to international capital markets and external financing, which is critical for a country’s economic development. The default may also lead to further downgrades in Ethiopia’s credit rating, which had already been adjusted to “Default” by S&P Global in December 2023. Such downgrades reflect a deterioration in the perception of the country’s sovereign risk and can increase borrowing costs, making it more difficult and expensive for the country to borrow in the future.

The situation also highlights the role of major creditors in Ethiopia’s debt structure. Ethiopia’s total external debt stands at around USD 28 billion, with significant portions held by the IMF, World Bank, and Paris Club countries. In 2023, Ethiopia received temporary debt relief and a suspension of debt services from its government creditors, excluding China. However, despite these efforts, the country still defaulted on its December payment.

Another consequence is the potential for legal action by creditors. While loans from private entities do not have enforceable legal consequences under international law, other creditors with pre-existing exposure might expedite their claims against Ethiopia. This could lead to legal ramifications should creditors pursue litigation in international courts.

Also, the default may compel Ethiopia to reduce its imports, relying more on domestic production and depleting its reserves, which adds to the uncertainty of economic recovery. The sovereign default could also obstruct foreign investment, making future borrowing expensive or unattainable, and potentially impacting funding for critical projects like hydropower initiatives, road construction, and healthcare facilities.

Sovereign payment issues

As indicated above, Egypt remains a question mark for 2024, as well. Egypt has large debt and high debt service and we are curious to see how the government/central bank will intervene to stabilise the currency.

Bahrain also expected to have some difficulties with payments, due to relatively high public debt and persistent (even though declining) budget deficits, exacerbated by fluctuating oil prices, which are a significant source of national revenue. We are to see how they will manage the next large due debt payment.

Pakistan also suffers from high deficit, extremely thin reserves, scheduled to pay a debt service. From April 2023 to June 2026, Pakistan needs to repay USD 77.5 billion in external debt, which is substantial considering the economy with a GDP of around USD 350 billion. We expect that the IMF will play a crucial role in maintaining the debt sustainability of Pakistan.

Türkiye has also been a question mark because of their thin level of reserves, reliance on short-term external funding, and stable yet volatile politics, although it has a huge economy, solid capital markets and potentially access to additional middle eastern support, if needed.

Political risk to remain high

We anticipate that the level of political risks will remain high, primarily due to the conflicts in the Middle East (around Israel, potentially having wider implications and the shipping lanes affected by the Yemeni conflict), internal issues in Sub-Saharan Africa.

Countries like Madagascar, Cameroon, Congo, Equatorial Guinea, and Uganda are considered vulnerable to political upheaval due to unclear succession plans for longstanding presidents. Military leadership in Burkina Faso, Niger, and Guinea is also showing signs of instability.

Specific updates and impactful events

• KSA Regional HQ directive came into force.

Saudi Arabia had adopted new regulation for foreign companies to set up regional headquarters in the kingdom. The regulation, which requires firms to set up a local base in the kingdom or risk losing out on government contracts, came into effect on 1 January 2024. However, companies with foreign operations not exceeding one million Saudi riyals (USD 266,000) can operate in the kingdom without local headquarters. This is particularly relevant for companies involved in the megaprojects, such as NEOM.

• UAE restructuring law coming into force soon.

On 31 October 2023, federal law decree No. 51 of 2023 concerning Financial Restructuring and Bankruptcy was published in the UAE Federal Gazette.  The new law will become effective from 1 May 2024.  The new law repeals federal law decree No. 9 of 2016 on Bankruptcy. However, all regulations and decisions that were issued to implement the old law will continue to apply until they are replaced by regulations necessary to implement the provisions of the new law.

The new regulations, among others, will affect definitions, process of appointing experts, bankruptcy court decisions, will introduce the Bankruptcy Unit and amends the role of the Financial Restructuring Committee. There is so much more to it! If you are interested, please check our dedicated update on this matter.

 

All-in-all, there is never a boring day in claims and recoveries and we wish all our clients and partners a successful and prosperous new year!

Should you require any assistance with distressed debt/claims in your portfolio, please contact us at info@recoveryadvisers.com ! Please check the About us page to see which countries we cover.