Global risks…who manages them and who avoids them – Medhat Nafie

When the world was hit by the global financial crisis in August 2007, the countries most affected were those with active, open and liquid financial markets, and those with large investment funds holding securities such as stocks, debt instruments and bonds. Financial derivatives are distributed in all major markets.

At the same time, Egyptian officials announced that it had not been affected by the crisis, that its stock market was not affected by these effects, and that its banking system had not been damaged in any way. While taking this announcement with the necessary reservations, given that all markets and institutions must be affected through financial contagion channels, and that these effects arrive in the form of tsunami waves, perhaps a little delayed, but they will certainly come – I did not disagree with the content and content of the official announcement at the time, in fact, I often used it in my speeches and writings to explain the fundamental difference between risk management and risk aversion, which have their own characteristics and very different effects.

If Egypt’s financial and currency markets avoided the negative effects of the mortgage crisis, the bursting of the US real estate financing bubble and the collapse of major institutions such as “Lehman Brothers” and “Bear Stearns”, for several trading sessions… they also did not receive the positive returns achieved by institutions and countries that issued and traded securities based on mortgage-backed securities (MBS) for many years. Many financial derivatives, such as options contracts, futures contracts, swap contracts, etc., are used to hedge against price fluctuations of securities or products that are derivatives. These contracts and financial products now have independent trading markets and can bring profits to traders regardless of the traditional hedging objectives, where these instruments play a role similar to that of insurance policies against risks of personal and property accidents.

Since Egypt is one of the oldest countries that traded Platinum (Cotton) futures contracts at the Port of Basar Exchange in Alexandria since the last three decades of the nineteenth century, it has not yet regained the ability to issue and trade commodity derivatives. Until today, despite numerous attempts to create a derivatives exchange and to revive the Commodity Exchange, as we mentioned in our previous article, it remains a current contract exchange and has nothing to do with derivatives.

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Risk management requires experience and estimating the probability of failure and loss, and then maximizing returns and profits. As for risk avoidance, it is equivalent to stifling opportunities and inevitably losing all the gains that could have come. For example, stock exchanges around the world are facing a wave of losses, and transactions carried out according to the short-selling mechanism accelerate the wave of losses. But avoiding these risks does not mean not regulating this important tool, which must be activated together with the margin purchase mechanism so that the market remains balanced when it rises and falls. It is true that the US market regulator, the Securities and Exchange Commission (SEC), usually stops short-selling transactions in severe crises to prevent further collapse, but this practice is limited in time and is a form of crisis management that will soon disappear and disappear. Dealing with it according to this mechanism is back.

The details we mentioned are especially relevant to experts and can be applied to many aspects of human activity. For example, imagine if a country decided not to allow cars on streets and roads for fear of fatal accidents! Or a country decided not to use computers for fear of cyber theft! This last example reminds us of the new events of July 19, where Egypt was one of the countries least negatively affected.

When the world was hit by an electronic flaw due to an update of the famous cyber protection program Crowdstrike, some stock exchanges were disrupted, planes were forced to land, the systems of some financial, banking and media institutions were stopped, and then statements were issued one after another confirming that Egypt was protected from the threat of these “attacks”. After clarifying that the matter did not involve a cyber attack and was related to the aforementioned program, which is usually installed in the latest Microsoft operating systems, the statements issued by some Egyptian departments and ministries were modified to confirm that we are protected from the flaw. With these announcements, we are faced with several possibilities: we have better operating systems and protection programs than airports and banks in developed Western countries, or they are different systems and programs, but all of different quality, efficiency and modernization, some of them are unlicensed, or they are systems that are carefully installed and operated for this type… Based on the available information, it is impossible to determine these possibilities today, the truth may be a combination of all of them.

Despite the rare flaws and problems with these modern systems, it is likely that many outcomes must be achieved in about 95% of the cases, and less than 1% of the problems may be serious, which does not at all prompt us to avoid dealing with them, but it prompts us to think about how to develop it and manage its risks in order to maximize the benefits from it. Such crises are revealing warnings about the nature of the systems used by countries, the degree of their integration and connection with transoceanic systems, and the extent to which they are affected (positively and negatively) by trends in globalization and technological and digital transformation.

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When the corona crisis, the Russian-Ukrainian war and the Gaza war hit the world, we stressed that many of the negative economic effects in Egypt were a result of this, which shows how connected Egypt is to the global system and its openness to various markets. It is inseparable, we are either open and interconnected or closed and inward-looking. But the worry is that we are in between the two positions because we are severely hurt by the negative savings that are happening in the world, while we are protected from the positive savings that occur when some temporary crises hit.

I appreciate the official Egyptian trend of not allowing important data to be stored abroad through the famous “cloud” services, and I believe that the availability of such information in “servers” within Egypt is necessary for national security reasons, even if it happens at an additional cost. Having witnessed the development of several legislations concerning the availability of smart transportation services or information, and being one of the leaders of the digital transformation of the public business sector, I understand that Egyptian decision-makers are very eager to have information and not to ignore its possession for any reason, which undermines the legislative compatibility of most smart transportation operating systems. This conscious decision in Egypt is a risk management, not avoidance, because it is made after classifying and evaluating the risks and ensuring that the potential harms outweigh any benefits or rewards. This is very understandable in the information age, where information has become the most important source and means of value storage.

Many traditional manual systems and non-digital offices are immune to damage from technical failures, even electrical failures! But this does not mean that it is qualified to replace modern technology, which is more efficient, faster and safer than any other technology. But it is indeed not a good idea to rush into new things, and many modern inventions and discoveries should not be tested until their use is established, their performance and maintenance efficiency are proven, and they are suitable for the nature of the work. And the climate of the country where they are tested.