Despite its obvious Sino-centric economic and political manifesto, the Belt & Road Initiative is growing in importance in the Middle East as witnessed by increasing bilateral trade, infrastructure developments and investment agreements, all having a need for insurance.
Five years since its launch, interest in China’s Belt & Road Initiative (BRI) is gaining momentum in the Middle East. Over 70 countries around the world have signed up to be part of this trillion-dollar megaproject, including all the six GCC countries. China is reportedly spending $150bn a year in the countries that have signed up, and according to a Swiss Re Institute report, total investments in BRI countries outside China are expected to amount to $5tn by 2030.
BRI is marketed as a string of economic projects along the overland ‘belt’ that connects China to Europe via Central Asia and Turkey and the maritime ‘road’ that links China to North Africa via Southeast and South Asia, and, aimed at ‘fostering stronger cooperation among participating countries in terms of economic activities, and in social and cultural aspects’. The economies along the land and maritime trade routes, especially cash-strapped Central Asian governments, are expected to benefit from increased investment, job creation and improved geopolitical relationships.
The Middle East was originally absent from the BRI blueprint, said the Swiss Re Institute report, mainly due to the volatile political and security situation in many Gulf states and ongoing sanctions against Iran. However, given that China has several strategic partnerships with countries in the region that extend beyond energy, the Middle East has been included in the BRI strategy.
“They [Middle East countries] already have solid trade links with China as suppliers of natural resources, and as a gateway to Africa and Europe,” said Swiss Re Institute senior economist Rajeev Sharan. “Discussions are underway on key cooperation projects such as in manufacturing operations, container terminals and railways.
“In our view, the fruition of these projects will only expand the Middle East’s role as a hub for China’s exports to Europe and Africa,” he said. “Further, with member states of the GCC seeking to transform their economies and reduce dependency on oil, we see opportunity for Chinese investment into a number of non-oil sectors in the region, including trade, real estate, high-tech and renewable energy.”
Coface CEO of MENA Hassen Bennour agrees. He said, “China’s trade ties with the Middle East have deepened dramatically since 2001, fuelled in part by increased petroleum sales and several substantial joint ventures in the energy and manufacturing sectors.
“Now, the Gulf countries are less focused on fuel deals and manufactured imports and more on high-tech ventures with China in the fields of construction and renewable energy. The opportunities are mostly in the energy, construction and financial sectors.”
Markel International (Dubai) senior executive officer, senior underwriter & head of Middle East Leroy Almeida is equally optimistic. He said, “The investment opportunities are expected to come mainly from infrastructural requirements in the form of roadways, railways, airports, ports, etc, which will stimulate a tremendous demand for financial institutions and governments to step up financing the funding gap that will be needed to build these infrastructural requirements.”
Not just for SOEs
The BRI was initially seen as dominated by Chinese state-owned entities (SOEs), said Baker McKenzie Habib Al Mulla partner & UAE head of international arbitration Andrew Mackenzie, “however, the sheer scale of the ambition means there will be opportunities for local companies who can work hand-in-hand with Chinese SOEs.”
Currently, major BRI players include China Communications Construction, China State Construction Engineering, PowerChina, Sinomach China Railway Construction, China Railway Group, CNPC and State Grid. The major financiers of Chinese companies include the China Development Bank, the Export-Import Bank of China and the Silk Road Fund, which was established in 2014 with $40bn of initial total capital. The Asian Infrastructure Investment Bank (AIIB) and the New Development Bank are the major financiers of projects in BRI countries.
But China will not be able to fund fully the BRI, so by 2030, over half of BRI-related projects will be funded by private capital, multilateral banks and foreign investments, according to a report by Baker McKenzie titled ‘Belt & Road: Opportunity & Risk’.
“The south-to-south nature of trade across the BRI is an exciting development for local companies in the Middle East,” said Mr Mackenzie. “The UAE is the largest export market for Chinese products,” he said, “and with BRI, that should only expand.”
He added, “We expect the growth in trade through the region to lead to opportunities for local companies, for example, making it easier to trade to new cities or with new counterparts.”
Insurers to benefit
According to Swiss Re Institute estimates, BRI-associated projects in countries outside of China will generate demand for commercial insurance, translating into accumulated premiums of $28bn by 2030.
Mr Almeida cited construction, marine and project cargo, trade credit, political risk and political violence as some of the biggest categories of risks that are expected to be covered.
“The growth in trade activity and infrastructure projects will increase the volume of insurable assets, investments and transactions,” said Mr Bennour. “The complexity of the political, economic and cultural situations in countries along the BRI will influence the intrinsic desire for stakeholders involved in the BRI to mitigate and cover the risks associated to the projects.”
He added, “All insurance markets along the BRI route, as well as global reinsurance hubs, will contribute. They will support the resilience and delivery of the giant projects and secure ultimate trade activity by providing expert risk analysis and financial capacity to transfer risks.”
“We see many opportunities for reinsurers,” said Mr Mackenzie. “The infrastructure projects will need to be insured, whether the insurance products relate directly to the projects themselves – for example, surety bonds, or they are a step removed, such as indemnity insurance for the professionals working on the projects,” he said.
“Once the improved infrastructure is in place, that should lead to more ships and more cargoes. As the players become ever more sophisticated and international in their approach, we expect the demand for increasingly complex insurance products to rise,” Mr Mackenzie said.
Challenges abound
The BRI is seen as a high-stakes game and “the biggest risk would be related to a slowdown in Chinese economy”, said Mr Bennour. “This would put pressure on oil prices and restrain the trade volume within the project,” he said. “On the other hand, companies within the BRI countries may not have the necessary knowledge and experience regarding the way of doing business in China and the payment modalities. Therefore, they would need reputable partners and good advice to succeed.”
Chinese banks have limited experience in assessing credit risk in the BRI region, Mr Bennour said. As a consequence, demand for sovereign guarantees or credit insurance will be a big category of risk to be covered, he said.
“Additionally, the relatively low credit ratings of some countries across the BRI route are reflecting some potential payment defaults,” he said. “One must also remember that there can be major differences in legal regimes across the BRI regions, and companies may not have adequate legal protection. So, if the BRI fails to contribute to economic prosperity across the countries due to financial or legal issues, then it may result in a financial turmoil for China.”
“Historically, the UAE has not always had the easiest regulatory regime to navigate,” Mr Mackenzie said on the challenges facing insurers and reinsurers in the Middle East. “The government is tackling this head on, with new laws on arbitration and on foreign investment – just two examples of the great strides the UAE is taking.”
He also pointed out that there has not always been a strong appreciation locally of the need for insurance, although that too is changing as “prospective insureds become more sophisticated and internationally minded, so we expect the appreciation of risk to grow, and insurers to produce tailored products to fit that growing demand”.
On the one hand, insurers and reinsurers face the challenge of providing expertise and capacity to meet risk-mitigation and risk-transfer needs. On the other, they need to do this in an affordable and efficient way in competitive and yet developing insurance markets, said Mr Bennour, pointing out that the maturity and awareness of insurance markets in BRI countries are generally below the global average, and the depth and breadth of insurance coverage are relatively small.
The role of insurers and reinsurers in the BRI will gain more clarity as more projects roll out. Multinational players with expertise in cross-country exposure and alternative risk capability will play a critical role in the risk-management strategy for all stakeholders, with the support of local carriers. M
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BRI-related strategic partnerships
The BRI economic corridors – of which there are six – do not formally include the GCC states. However, it is widely accepted that any type of bilateral cooperation can be considered to serve the growth created by BRI.
Saudi Arabia
Crown Prince Muhammad bin Salman and his ministers visited Beijing in 2016 during which he indicated that the BRI is “one of the main pillars of the Saudi Vision 2030, which would make China among the kingdom’s biggest economic partners”. During the visit, the two sides signed 15 MoUs for projects associated with the kingdom’s economic transformation.
In March 2017, a state visit by King Salman culminated in the signing of $65bn worth of deals, including schemes to develop refineries and petrochemical plants. In addition, Chinese and Saudi companies signed 22 agreements involving joint investment opportunities.
UAE
An MoU concerning cooperation on BRI was signed between China and the UAE during President Xi Jinping’s visit to Abu Dhabi in July. Other major agreements and MoUs in energy, finance, agriculture and e-commerce were also signed. Among these, Abu Dhabi National Oil Company awarded contracts worth $1.6bn to China National Petroleum Company to conduct onshore and offshore surveys to find new oil and gas reserves.
Trade between the UAE and China reached an estimated $60bn in 2017 – and China is now Dubai’s number one non-oil trading partner. There are about 4,200 Chinese companies operating in the UAE and the DIFC is expected to be an indispensable driver of the BRI growth.
The DIFC Courts – the judicial arm of the DIFC – signed an early-stage agreement in May this year with the University of Oxford to explore the development of judicial systems, including arbitration and protection of large-scale investments relevant to the BRI. “In particular, BRI countries need to find ways in which judgments and awards issued from each BRI country or territory can be enforced in other BRI countries,” DIFC Courts said in a statement.
Turkey
Turkish President Recep Tayyip Erdogan had declared the country’s continued interest and cooperation with China through the BRI. Turkey’s Middle Corridor Initiative – a trade route which runs from China to Kazakhstan, Azerbaijan, Georgia to Turkey, and provides another gateway to Europe via the Black Sea – has been broadly integrated with the BRI. Turkey and China signed an MoU in 2015 to align the BRI with the Middle Corridor Initiative, aimed at strengthening economic, security and anti-terrorism cooperation.
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