Even as western nations in Europe and North America still struggle to come out of the throes of the economic recession set in motion by the Lehman brothers crisis , countries like India and China, which seemed insulated because of their higher growth trends, themselves face the threat of an economic backlash from the Muslim world instability.
Indian companies have several thousand crores of investments (conservative estimate is not less than Rs one lakh crores) in the Middle East at stake and with the political instability there is tremendous fear that they might not be able to protect their investments, leave alone the fact that the return on such investments could be obliterated.
The worst affected companies in India seem to be the infrastructure companies. One of them is said to be Punj Lloyd which reportedly has about Rs 10,000 crore of investments to protect particularly in Libya. The company’s stock slid in the stock exchanges following the Middle East unrest and the top management is drawing up plans to insulate itself against a huge financial crisis, industry sources said.
One of the unpleasant moves has been to downsize in the company people who were hired for projects which have not taken off. The trend is likely to spread to other companies having investments in the Middle East.
In fact, industry sources say, the Middle-East unrest is now forcing Indian companies to rewrite their plans. Companies desirous of getting a base in the Middle East are now shelving such plans. Some others have put such plans on the back burner. And some more are looking at shifting to a different location in the same region where risks are considered much less, business consultants’ claim. .Developments in Bahrain, in particular, are being closely monitored as several Indian companies have invested in that country. The real danger is when the crisis gets out of control and spreads to the more stable countries such as Saudi Arabia, Syria and the UAE.
Media reports quote Kalpana Jain, a senior director at Deloitte Touche Tohmatsu India, as saying “Indian companies are increasingly revaluating their investment plans in the wake of the ongoing crisis. We are keeping the political risk factor in mind while advising our clients. While some firms have put on hold some of their proposed investments, others are looking for alternate locations in the region that are safer,”
India FMCG firms jolted by the Egypt crisis. Some of the FMCG companies such as Marico, Asian Paints, and Dabur have reportedly temporarily suspended operations; The middle eastern region is said to contribute 3-8% revenue for these firms. The crisis could impact supply in the near-term. And prolonged unrest may seriously hit their financial revenues. 2
The Egyptian crisis has forced many Indian consumer companies to temporarily suspend operations; fearing earnings might be affected in case of a protracted crisis. Firms such as Marico, Dabur, and Asian Paints have shut down their Egyptian units and are watching the situation closely, company officials said. For more than a week now, the African nation has been convulsed by street protests, demanding an immediate end to President Hosni Mubarak’s 30-year-rule.
“If the unrest in Egypt is resolved over the next few weeks, we would see a minor impact on business on the supply side. However, if it continues for a longer period of time then the slowdown in Egypt and the neighboring economies could impact FMCG demand,” an analyst with Edelweiss Capital told the media recently.
Egypt has been a favorite destination for Indian investments as it offered attractive terms to Indian FMCG players with tax cuts, preferential trade treaties, and speedy approvals for business, in addition to the promise of high growth. Indian consumer firms have been tapping the African continent since it offered new growth prospects in the backdrop of rising costs and fierce competition contracting profits.
“There have been mass demonstrations and disruption of public life (in Egypt). Consequently, we have temporarily closed Marico’s factories as a safety measure,” a Marico official was quoted as saying in a statement before the stock exchange.
As Egypt serves as a manufacturing hub for the entire MENA (Middle East and North Africa) region, Marico claimed that prolonged closure could impact supply to the entire region. The MENA region accounts for 7-8% of Marico’ sales revenues. Its international business from Bangladesh, MENA and South Africa comprise 23% of the group’s turnover, sources said.
“We have initiated as a back-up measure, plans to supplement the MENA supply chain with supplies from India,” it said. The cost of delivery could however balloon and be worrisome if the firms look for exports from India or elsewhere.
Dabur, which reportedly draws 2.5-3% of its revenues from Egypt, has shut down its sole hair oil plant which was catering to the regions local demand. “If the unrest is resolved over the next few days and weeks, we would not see much of any impact on business. However, if the unrest continues for a longer period of time, there might be some impact,” Dabur is quoted as saying.
Dabur has manufacturing facilities in Nigeria and the UAE and it could find a easy out by sourcing products from there, investment analysts said. Dabur’s international business interests cover the Middle East, North and West Africa, EU and the US. Its brand ambassador here is the Dabur and Vatika brands which constitute 16% of consolidated revenue.
Emami, another leading consumer brand which reported a 90.59% stake acquisition in Pharma Derm SAE, claimed it would have to wait longer before it can launch any operations there.
Leading paint manufacturer, Asian Paints, has reportedly shut operations at its two plants in Egypt since the last week of January this year hoping that any resumption depends entirely on normalcy returning there. About 5% of the company’s sales come from Egypt, analysts said.
“As of now it’s more of a sentimental impact. No one knows how long this uncertainty will continue and if it were to continue for long, it would surely have a significant impact on Indian businesses in Egypt,” Ambareesh Baliga, Vice-president, Karvy Stock Broking, is reported by the media as saying.
Libyan crisis turns heat on Indian crude basket
The middle east crisis could have a serious impact on India’s oil business as well. The Indian basket of crude crossed the psychological $100-per-barrel mark over fears of supply disruption in the wake of the political turmoil in West Asia. However, the government ruled out any immediate hike in the prices of petroleum products.
Oil minister S. Jaipal Reddy has also ruled out any hike in the price of petrol, which is decontrolled. “We are watching the situation closely … if it spreads to other nations in the region it would have serious implications on the oil import bill,” oil ministry officials said.
Brent crude prices spurt to over $107 per barrel as concerns grew that the violence in Libya, a member of the Organization of the Petroleum Exporting Countries (OPEC) could lead to wider supply disruptions. India imports about one million tonnes of crude from Libya. The Indian crude basket, which comprises Oman-Dubai sour grade crude and Brent dated sweet crude in a 62.3:37.7 ratio, touched $101.67 a barrel recently.
Sources said oil companies were under pressure to avoid any fresh petrol price hike. “If the situation in the region deteriorates, it would further spike the global oil prices and domestic prices would be hit. There are fears that it could cross the pre-crisis level of $147 a barrel, burdening the fiscal deficit and impacting the inflation mitigating mechanisms of the government.
Indian Oil marketing companies are reeling under the cumulative losses of Rs 450 crore per day because of selling fuel products at prices below cost. The state-owned firms are incurring a loss of Rs 2.8 per litre on petrol prices, Rs 9.55 per litre on diesel prices and Rs 20.57 per litre on kerosene prices. The loss on LPG is pegged at Rs 356.07 per domestic LPG cylinder, oil marketing representatives said.
Minister of state for petroleum and natural gas R.P.N. Singh said, “Oil companies have increased the price of petrol (deregulated in June last) only by 13.5 per cent against the rise in petrol prices of 36 per cent in the international market, thereby absorbing a part of the increase in global oil prices themselves.” Analysts said if the government did not go for a price hike, the finance ministry would have to compensate the oil companies and this would increase the government’s fiscal deficit.
For the full fiscal, the three refining companies are projected to lose Rs 76,559 crore in revenues at current prices. For the first nine months, the finance ministry has approved the release of a cash compensation of Rs 21,000 crore to the three state-run fuel retailers.
“Rising oil prices will strain government’s finances and restrict elbow space higher outlays in critically important areas such as infrastructure, education and health, an investment banker pointed out. Your browser may not support display of this image.
Libyan crisis hits Indian markets
The stock markets in India too have felt the impact of the Middle Eastern crisis. Leading stock broking firms claimed that with the revolution entering its third phase in Libya, Bahrain and Yemen, concerns on global inflation and impact on investments have started ruling Indian markets. Since January 25, when the crisis in Egypt started building up, Brent crude oil has increased over 12 per cent from $94.59 a barrel to around $106. During the same period, the Indian basket, which represents a mix of Oman, Dubai and Brent crude rose 9.48 per cent to $101.67 per barrel, the highest in the current financial year.
Experts point to the sequential nature of the political crisis that started in Tunisia and say things could have turned more worrisome if the upheaval in the entire region happened together.“Oil prices started rising when the crisis in Egypt erupted but things started settling. The political developments in the region are happening, like a domino chain, so the impact is not much,” said Rajiv Kumar, director general, FICCI. The uncertain economic situation and worries about the corporate investment climate have started showing on the market, he added.
So everyone is on tenterhooks watching the Middle East crisis escalating and praying it would settle fast and oil prices don’t again take the runaway route that wrecked many economies world wide as precursor to the Double whammy of worldwide recession caused by the global meltdown following the Lehman brothers crisis in the USA.
The author is a noted financial writer and former Economics Editor of PTI.