Investors from the Gulf and elsewhere are re-examining their strategies as they gauge the economic consequences of the political change sweeping the area.
North Africa's populous countries in recent years positioned themselves as receptive to foreign investment and tourism, even as their political systems stagnated. Outside investors, in turn, put billions of dollars into Egypt, Tunisia, Algeria, Morocco and other parts of a region that has experienced robust economic growth for years. Tourists, too, came by the millions.
But with the ousting of Tunisia's government, along with violent clashes in Egypt, Algeria, Yemen and Lebanon, new questions are being asked about the demographics and economic growth that made those countries ripe for investment. Analysts now say foreign investors are taking a stance more cautious than ever before over the region, which has suffered a sudden flight of capital in bond, equity and currency markets.
"While the underlying pure business potential in those countries remains strong, foreign investors will need to assess their short and medium-term positions," says Ghanem Nuseibeh, a partner at Cornerstone Global Associates and the head of GCC at Political Capital. "It is not unlikely that political change will be protracted and lead to fragile regimes before more stable ones return. Until this change happens, those countries will be much less attractive as investment opportunities for Gulf investors."
On the tourism front, operators have stopped selling Tunisia as a destination, although they are still taking bookings for Egypt and the rest of the region.
"If the uncertainty remains for the next few weeks that will definitely put in jeopardy the summer season," says Chiheb ben Mahmoud, the senior vice president at Jones Lang LaSalle Hotels Middle East and Africa. "Lebanon is a big question because tourism has been booming."
If the turmoil continues, operators will shift their emphasis to destinations elsewhere on the Mediterranean, including Greece, Turkey and Cyprus. Meanwhile, some flights to and from Egypt have already been cancelled, raising the spectre of trouble for regional carriers if lucrative routes through Cairo and other Egyptian cities get cut off for an extended period.
At present, Tunisia is struggling to form a new government amid fresh demands to exclude members of the old regime and a request last week for an international arrest warrant for the deposed president Zine al Abidine ben Ali, who fled to Saudi Arabia after this month's coup. Protests are continuing in Egypt following the announcement by the president Hosni Mubarak on Friday that he would appoint a new cabinet. Demonstrations have also taken place in Algeria, Morocco and Jordan over youth unemployment, poverty, high prices and corruption.
The turmoil has sent stock markets into a downward spiral. Tunisia's market has fallen by 9.7 per cent since the beginning of the year, and Egypt's fell more than 10 per cent on Thursday. Government bonds in the region have felt the sting, with prices for Egypt's 30-year bonds shedding about 11.9 per cent this year. And credit ratings agencies have begun to revise their assessments of north African governments' financial stability. Moody's Investors Service downgraded Tunisia about a week ago, and Standard & Poor's put the country on watch for a possible ratings cut. Fitch Ratings revised its assessment of Egypt to "negative" on Friday.
"Although we don't expect a wave of regional political instability, we see Egypt, Algeria and Jordan, and to a lesser degree Morocco, as most vulnerable [to economic and political factors that have caused protests]," Kai Stukenbrock, a Standard and Poor's analyst, said in a report on Friday.
The knock-on effects for companies with ties to north Africa are also becoming increasingly apparent. About US$2.6 million (Dh9.5m) flowed out of shares in Abu Dhabi's Dana Gas on Wednesday, according to the Abu Dhabi Securities Exchange. Dana has natural gas concessions in Egypt. Arabtec and Drake & Scull, two Dubai-listed contractors with Egyptian connections, have also seen their stock prices fall in recent days.
"There is a lot of nervousness, as you can imagine," says a fixed-income trader in Dubai who asked not to be identified. "But it is not as if people are coming in and saying 'I had no idea this was going to happen.' You would have to have your head buried in the sand not to have any idea this might happen" after the events of the past couple of weeks.
He says some investors are selling out of their positions until the volatility subsides, while others are establishing short positions in the hope of profiting if conditions deteriorate further.
But, like other observers, investors are having a hard time gauging the risk of further political disintegration. There are few rules regarding the succession in many north African governments. As a result, risk consultants say it is hard to identify factors that might precipitate a sudden change in the political landscape. "I think a lot of people will be keeping a close watch on their regional strategy," says Philip Worman, a partner at GPW Political Risk in London. "No one really called Tunisia at all. Egypt has a population of 80 million. It's much bigger and far more important. It's not a homogeneous region. It's not like there's a unifying cause like you saw post-Soviet Union where you saw the fracturing of the state."
Tunisian analysts say it is unlikely a new government will endanger foreigners' investments or close the country to foreign involvement. Given Tunisia's lack of natural resources and its dependence on trade and tourism, they say no new government could afford to do so. Yet the crucial element for north Africa might be just how long the uncertainty lasts.
"The key test is the speed [with] which Tunisia returns to normality," Mr Nuseibeh says. "The longer it takes, the more difficult it will be to convince foreign investors to return."
Charles Robertson, an economist with Renaissance Capital in London, who issued a research report last week entitled After Tunisia: Who's Next?, says most outside investors are probably content to sit on the sidelines until the turmoil subsides.
"To be honest, I think most investors right now will be stepping back and waiting," he says. "You can't predict politics well. There is a guidance you can make on political risk but once it is growing, you don't know what is going to result."
* with reporting by Rebecca Bundhun
breagan@thenational.ae
