A little over one year ago, the world witnessed unprecedented events as political protests swept across the Middle East, taking down four long-standing autocrats and drastically changing the political landscape.
Given the extreme political, economic and social volatility, investors fled the region for much of 2011. In the long term, however, many countries in the Middle East should offer attractive investment opportunities because of extremely propitious demographic profiles.
The performance of stock markets shows investors are regaining confidence. However, private equity investments, which give a more meaningful indicator of long-term money, remain very depressed. The Arab Spring has been an important step toward political reform, but there is much further to go.
The Journey So Far
One year on, we can divide the Middle East into three groups. The first includes the vast majority of countries where there has been little to no change, with the incumbent regimes employing repression, financial inducements and limited concessions to stay in power. Saudi Arabia, the other Gulf States, Algeria, Morocco and Jordan are examples.
The second group contains those countries suffering violent instability and risk of civil war. This group consists of Syria and Yemen, two countries at important but uncertain junctures. In Syria, Bashar al-Assad remains in power, waging an increasingly violent war of attrition against fragmented Syrian opposition forces. Kofi Annan’s ceasefire has collapsed, and local human rights groups estimate the death toll at more than 20,000.
In Yemen, Ali Abdullah Saleh stepped down after 30 years in power, but the political landscape is extremely fragile. A failure to mediate between the country’s diverse groups could return Yemen to the brink of civil war.
Until recently, Libya was also in group two. However, the country’s first post-Gadhafi election ran surprisingly smoothly, with decent participation, few irregularities and the largest share of votes won by a broadly secular party. Yet forming a government will require complex coalition-building, and even the winning party consists of almost 60 organizations with diverse interests. Libya has decent prospects as an oil-rich state with a relatively small, well-educated population, but it could yet stagnate due to weak institutions and internal fragmentation.
Depending on how it progresses, Libya may graduate to group three, which contains Egypt and Tunisia. These countries have made the most progress toward democratization, removing long-standing authoritarian rulers and installing democratically elected administrations. Tunisia in particular has experienced an unprecedented transformation, with the legalization of 106 political parties, the release of 500 political prisoners and the lifting of press censorship. In Egypt, the situation is changing by the day with a finely balanced power struggle between the military and the new administration.
Oil and Stimulus
The transitions in Egypt and Tunisia should, in the long run, result in the emergence of an active private sector, new industries and a reinvigorated, consumer-led economy. However, the political situation is far from secure.
Regarding oil, the most relevant country is Saudi Arabia, where the regime has managed to buy off dissenters with a $130 billion stimulus package. The country is probably the most likely to remain peaceful, but the cost of the stimulus means the state now requires a higher oil price to balance its budget.
The problem for portfolio investors, however, is that there are few listed companies in the Middle East and many countries—including Saudi Arabia, the largest equity market—do not allow foreigners to participate in their markets.
The key question is whether the regimes that have made progress can survive the necessary transition to a more sustainable, broad-based economy or whether industrialization becomes the catalyst for full democratization.
With the opportunity to reap a sizeable demographic dividend, multinationals cannot afford to neglect the region, and most global companies have some operations in at least some states.
Last month, we highlighted the Arab Spring as an example of how the pre-financial crisis order has broken down (See “Finding Sustainable Growth in a Fragmented World,” Investment Advisor, October 2012). Indeed, the post-Arab Spring world has implications for broader global stability. As the political situations across the region diverge, we see increasing fragmentation in the region versus the pre-2011 status quo. Geopolitics both within the region and globally will become more complex.