Arab Spring investor excitement fizzles out amid anti-U.S. backlash

Analysts agree that Arab Spring states are still far from closing the chapter on their transitional phases, following the 2011 backlash against autocratic governments. The former regimes had left them mired by decades of retrograde economic policies and countless episodes of fiscal corruption.

An attack in Libya on the U.S. embassy last week, which killed the American ambassador and other diplomats, was a curtain-raiser for global Muslim outrage over the amateurish American anti-Islam film, which mocked the Prophet Mohammed.

In Egypt and Tunisia, protesters were seen flying al-Qaeda flags as two protesters were killed in Tunis, and one in Cairo, as they battled with police forces outside U.S. missions.

he upheaval comes at a critical time for the newly-democratic Arab Spring nations. Although monetary backing from the United States and the International Monetary Fund had begun to roll in, Middle East North Africa investors assessing recent political unrest are now burdened with concerns over fiscal stability and geopolitical risk.

“The recent events will bring foreign investors to reconsider their assessment of risks associated with the political transition in Arab spring countries,” senior economist for MENA at Barclays Capital, Alia Moubayed, told Al Arabiya English.

“Investors may therefore put on hold or delay their planned investment in the short to medium term, notably in Tunisia and Libya, but to a lesser extent in Egypt where the government’s action to limiting the damage of such attacks was bolder,” adds Moubayed.

To forecast, or begin even rough guesswork, on how these newly-democratic countries will measure up against recent unrest, an interesting gauge is to look back at any political and economic progress made during their post-revolutionary phases.

The deadly U.S. embassy attack in Libya exposed the country’s problem with armed militia groups and the sluggishness of the supposed “Western-friendly” government which was slow to protect the embassy. But to what extent is this a “new” risk for investors?

“Libya’s fragile security and weak state capacity will continue to pose risks to investors, but much of this risk is already accounted for in investors’ plans in this case,” Moubayed said.

“This all depends on how long this [the protests] will actually prolong,” says London-based Middle East economist Said Hirsh, mulling over whether the hostility will wane or the protests will become less violent.

“If the events last week were a one-off and we begin to see a reduction in protests then effects should be short-lived.

“This is not first time such events happened, there have been protests against anti-Islam cartoons and other attacks on the religion. The economic costs should not be huge if we regard it as a one-off,” Hirsh said with reference to Egypt and Tunisia, but singled out Libya as a separate case.

The general lack of law and order in Libya, Hirsh noted, will be the major hindrance to the country’s fiscal state.

However, any damaging impacts on the oil producer’s economic potential will most likely not affect the hydrocarbon segment of the economy.

Libyan oil production began its resurgence in September 2011, following the deposition of Muammar Qaddafi’s regime and the gradual consolidation of control over most parts of the country by the National Transitional Council and affiliated opposition militias.

Crude oil production was estimated to have recovered to at least 1.4 million barrels per day by May 2012, after suffering a near-total disruption in the previous months of intense fighting, according to OPEC records.

“As long as Libya continues to produce oil, someone will buy it. There will no doubt be a big economic impact on Libya, but it would be on the non-oil side of the economy,” says Hirsh, underlining the country’s currently frayed relations with the U.S. since the embassy attack.

In 2011, when NATO forces secured the downfall of former Libyan leader Muammar Qaddafi, the West had played both a military and financial part in supporting the opposition.

“Libya now needs the Americans, among others, to retrieve stolen assets from previous regime. Any deterioration of relations with the outside world may delay the return of assets from abroad,” the economist said.
Odds-on, the knock-on effect would be a decline in government spending and a tightened noose around the country’s economic potential, particularly if the domestic economy also takes a hit. Libyans may be less encouraged to spend, with increasing uncertainty over the future, and reluctance to invest in their own country.

But for Tunisia, the nation at the vanguard of the 2011 Arab Spring uprisings, the aftermath of the political upheaval has not measured up to investor expectations, Hirsh said.

“After the revolution, economically and politically Tunisia appeared to be becoming stabilized and it attracted international help. But in the past few months we’ve see a reversal in this.

“There have been internal problems between the parties and the coalition, indecisions on policy and the protests are now another setback,” Hirsh noted. The internal political quagmire comes in spite of the fact that Tunisian government leaders had declared earlier this year their intention to pursue business-friendly policies.

In 2011, the Tunisian economy was in its dying days; the revolutionary unrest cost the country as much as $8 billion, or nearly 10 percent of the nation’s gross domestic product.

Now, any government indecision could take a toll on important tourism revenues; a slowdown in foreigners’ visits could hamper growth and job creation. For Tunisia, that may also test the country’s banking system, writes Dubai-based economic analyst and columnist Una Galani, which is heavily exposed to the tourism sector.

For Egypt, however, analysts are mostly predicting a brighter fiscal outlook.
“Egypt is attracting international help, political conditions seem to be more certain, and the country has stabilized a lot since the May/ June presidential elections. This is a setback, like the many Egypt has seen, that should not lead to prolonged violence,” Hirsh said.

If the unrest protests continues, economic recovery and tourism could be stalled which will be a huge hit to foreign investment.

But luckily for Cairo, most foreign capital and assets are coming in from Gulf Arab states, Hirsh noted.

“In this case, Gulf foreign investments are better as those from the West are much more sensitive to political instabilities. But there’s still space to improve relations,” Hirsh added.

Investors in the Middle East and North Africa are perhaps now more aware of the risks that anti-Americanism and radical Islam pose, particularly as the Spring has resulted in a growing number of Islamists engaged in the region’s political systems.

“The Arab uprisings have increased the region’s appetite and tolerance for protest. With weak institutions, and the reluctance of new leaders to take a hard line for fear of a domestic backlash, even legitimate demonstrations can easily spiral out of control with profound implications,” Galani said.

Following the Tahrir Square protests this week, which brandished strong anti-U.S. sentiment, President Barack Obama labeled Egypt as “neither a friend nor an enemy” to the United States. The phrase left many political experts stumped; it was seen as a bold remark that left many with no analytic resolve.

Earlier this month, Obama extended an invitation to Egyptian President Mohammed Mursi to visit America, just after the United States was about to conclude an agreement to extend more than $1 billion of budget support and debt relief to Egypt.

Hirsh said the stern response from the United States following the protests, be it to Egypt or Libya, need to be measured against expected U.S. election-year rhetoric, as Obama seeks election to a second term in the White House.

“The U.S. president wants to appear more robust, rather than be seen as weak, in the election run-up,” particularly as presidential candidate Mitt Romney has been quick to comment that the United States should get tougher with Egypt. The Republican suggested on Friday that Egypt needs to ensure the security of foreign diplomats in the country or risk losing the $1.3 billion in aid it receives each year.

But while discussions over aid and budget support may now be met with sterner U.S. faces, Moubayed at Barclays Capital expects that financial promises to Egypt will be met, particularly after the U.S. guaranteed a much needed $485 million Eurobond issuance from Tunisia back in July.

“Both countries [the United States and Egypt] understand the critical nature of this support for consolidating the strategic relations between them,” Moubayed added.

But more broadly, the economist expected that financial aid to Arab Spring economies “will come increasingly under more scrutiny by western public opinion” as it changes in line with the untamed Middle East North Africa developments.

A new bout of Mideast “transition risk,” as noted by Galani, will now have to be weighed more heavily by investors as they consider new opportunities in the new democracies.