INTERNATIONAL. One year after Egypt knocked global finance off the agenda at the World Economic Forum, Arab officials returning to Davos may struggle to drum up interest in the region.
Across North Africa, where uprisings ended the autocratic rule of three men, economic growth has stalled, stock markets have slumped and Egyptian bond yields are at a record, with the nine-month treasury bill at 15.802%. Foreign direct investment in the Middle East and North Africa last year was the lowest since 2005.
Failure to lure investments threatens to hinder the transition to democratic rule and may spark more deadly protests, while energy-rich states, such as Saudi Arabia, may struggle to diversify their economies and cut the world's highest youth unemployment rates.
“There’s certainly long-term potential in the Middle East, but that’s not necessarily a compliment,” said Michael Cirami, who helps manage US$12 billion at Boston-based Eaton Vance. “What’s unfortunate is that there’s so much low-hanging fruit and so much the governments can do to improve the situation.”
Even in the Persian Gulf, which escaped most of the turmoil, financial markets are struggling. Dubai, home to the world’s tallest building, has lost 41 of the 98 local brokerages active in 2008, while Kuwaiti trading volumes slumped almost 50 percent last year.
“A singular failure of the Arab world is that it has been unable to develop a private sector that is independent, competitive and integrated with global markets,” Adeel Malik and Bassem Awadallah, who is in Davos, wrote in an Oxford University study released last month.
Tens of thousands of Egyptians poured into the capital’s Tahrir Square overnight to protest against the interim military rulers and celebrate the anniversary of the start of the uprising that ended President Hosni Mubarak’s rule. Fireworks lit the sky before dusk while banners were erected vowing to avenge the deaths of civilians during the revolt, in which at least 846 people died.
A year ago, the Arab Spring burst onto the agenda of the World Economic Forum’s annual meeting on January 28 amid escalating protests. As the forum’s official schedule debated the outlook for the world economy, some delegates sat in their hotel rooms watching televised images of Cairo set ablaze and the changing Middle East dominated talk at the Davos party circuit that Friday evening, the highlight of the gathering’s social scene.
A year later, protesters accuse the army of mismanaging the country’s transition and using tactics similar to Mubarak’s to stifle dissent. Dozens have been killed in clashes between demonstrators and security forces in the past three months.
At least six panels at this year’s World Economic Forum are about the Middle East, including a televised debate on “The Implications of the Arab Spring” and an address by Tunisian Prime Minister Hammadi Jebali.
Other Arab officials headed to Davos include Mohamed Al- Mady, chief executive officer of Saudi Basic Industries, the world’s biggest petrochemical maker, and Rafik Ben Abdessalem, the foreign minister of Tunisia’s first elected government since the overthrow of President Zine El Abidine Ben Ali a year ago.
Tunisia’s benchmark stock index fell 8% in 2011, the first annual loss since 2002, while Egypt’s benchmark slumped 49%. Dubai’s benchmark stock index this month retreated to the lowest since May 2004.
“Investors are in a wait-and-see mode, but everybody realizes the potential can be great,” Yasser El-Mallawany, chief executive officer of EFG-Hermes Holding SAE, the biggest publicly traded Arab investment bank, said in an interview in Davos yesterday. “But today, you can’t oversell something at this conjunction.”
The lack of progress means the investors who remain are taking refuge in Qatar, the world’s top exporter of liquefied natural gas, which is preparing a US$88 billion spending plan to host the 2022 soccer World Cup finals, said Oliver Bell, who helps manage US$2.9 billion in Middle East and Africa equities T. Rowe Price International Inc.
Qatar’s benchmark QE Index (DSM) recorded the only gain among Arab stock markets last year, while its economy is estimated by the International Monetary Fund to have grown 19%, the fastest pace in the world.
Overcoming regional barriers is the “most important collective action problem that the region has faced since the fall of the Ottoman Empire,” wrote Malik, a lecturer at Oxford University and Awadallah, the former Jordanian finance minister who’s now the Secretary General of the Islamic Chamber of Commerce and Industry.
In the six-nation Gulf Cooperation Council, a political and economic alliance that includes Saudi Arabia, the United Arab Emirates, Qatar Kuwait, Bahrain and Oman limits on economic integration include a ban on banks opening more than one branch in another member country.
The alliance, established in 1981, has delayed plans on customs union until at least 2015. The decision to locate a proposed regional central bank in Saudi Arabia prompted the U.A.E., the second-biggest Arab economy, to pull out of a planned currency union.
“The GCC may be outperforming the troubled economies of the West, but it’s lagging many other emerging markets at a time when its wealth and the lift it receives from high commodity prices suggest that it should be in the vanguard of the emerging market transformation,” said Simon Williams, chief economist for the Middle East and North Africa at HSBC Holdings Plc in Dubai.
Saudi Arabia needs its non-oil economy to grow at an average rate of 7.5% in the next five years to lower total joblessness by half to 5%, the IMF said in a September report.
Israel’s economy, in comparison, grew faster than the rest of the developed world last year and its unemployment rate in October fell to its lowest level in at least 30 years.
About 27% of Saudis between the age of 20 and 30 were unemployed in 2009, official data show. Youth unemployment in the Middle East was 25% in 2010, the highest in the world, according to the Vienna-based International Labor Organization.
Saudi Arabia’s King Abdullah announced a US$130 billion spending plan last year to build homes and combat unemployment of 105. The program comes amid concerns Europe’s sovereign-debt crisis will hurt global growth.
Compounding structural hurdles in the region have been a series of setbacks and missteps that have sapped investor confidence and raised concerns about the ability for the region’s transition.
A decision by the Egyptian military, which took interim power in February, to turn down a US$3.2 billion loan from the IMF has quickened the slump in the central bank’s foreign reserves to 50% in 2011.
That helped send borrowing costs to their highest level since Bloomberg started tracking the data in 2006 and undermined the currency. Talks on the loan have since restarted.
Egypt’s economy grew 0.2% in the third quarter, compared with 5.5% in the same period in 2010, government figures show.
To be sure, not everybody is waiting. Carlyle Group LP, the Washington-based private-equity firm, said last month it bought a 42% stake in Saudi restaurant operator Alamar Foods.
Abraaj Capital Ltd., the Middle East’s biggest private- equity company, is in “advanced stages” of investing US$20 million in small and medium-sized Egyptian companies and is also targeting investments in Saudi Arabia.
The firm will be “making two or potentially three investments” in Egypt soon in industries including “agribusiness and information technology,” Tom Speechley, a senior partner, said yesterday in a Davos interview.
Investors are also excited about the prospect of Saudi Arabia, the world’s top oil exporter, opening its stock market to non-GCC funds, said Simon Kitchen, Cairo-based strategist at EFG-Hermes Holding SAE.
“As the dust begins to settle from the Arab Spring, I’m looking to see what action policy makers take, whether they look to respond with structural reforms that can lift trend growth rates or they elect to shy away from contentious policy change,” HSBC’s Williams said.