Political Risk moving to the forefront

Markaz recently released a report analyzing recent political unrest in the region from an economic risk assessment. The authors note that analysts have linked current regional unrest with the 1989 fall of communism. However, Arab States differ from the Eastern European communist bloc in many ways. The former is a heterogeneous group while the only thing shared by Arabs is their ethnicity; no single economic, social or political policy unites the region. Arabs range from ultra-religious states to ultra-secular, thus in order to effectively compare what is happening now with historical events we would have to go much further back to the “Spring of Nations”. In 1848, high food prices coupled with demands for more civil liberties sparked revolutions across Europe using “new media”, i.e. printing press to spread the word. In present time, social networking sites like Facebook and Twitter have taken on that role.

 Political turmoil rarely comes out of the blue and, in this case, has its roots in macroeconomic factors. In Tunisia, the “Jasmine Revolution” was sparked by the self-immolation of a young Tunisian whose livelihood was taken from him; this was the catalyst, but not the cause of the revolution.

The same underlying macroeconomic/social factors like unemployment, poverty, inflation etc unite the protests across the region. As per Markaz study, the further away from the center a country’s indicators move, the more vulnerable it becomes.

In light of political risk assuming the role of “mother of all risks”, Arab countries vulnerability to changes appears to be on the rise, primarily on economic factors.

In this context, the report delves into the following:

1. Emerging “Big Picture”

While it’s true that there are some commonalities in the region, both political and economic, the differences are far more divergent. The MENA ex. GCC region is a populous (about 320 mn), poor (ave. GDP/Capita $4,400) and less developmentally oriented area than the GCC owing to a dearth of natural resources and more constrained budgets. The Gulf has a far lesser population (40 mn, over half of which is in Saudi Arabia), is richer due to an abundance of oil (ave. GDP/Capita $38,000) and is development-oriented with a Cradle-to-Grave welfare model offering guaranteed employment, subsidies, grants etc. Despite the differences mentioned above, there are a few shared macroeconomic imbalances. A main unifying factor in the two regions is the nature of rule which is autocratic (whether as a Republic or Monarchy) with very little in the way of democracy or political participation. This distinction is key to understanding how things are likely to unfold as the situation progresses. Like the rest of the Arab world, the GCC is characterized by an exceedingly young and growing population, labor market imbalances, inflationary issues and slow developmental reforms.

2. Impact on GCC governments and oil price

The short term impact of the turmoil has already presented itself through oil price shocks (26% YTD), CDS spikes, stock market declines (S&P Pan Arab -8% YTD) and credit rating cuts; while the short-term impact is palpable, it is the long-term effects that political analysts should be worried about.

Over the next few years, the authors expect to see increased government expenditure (especially Current) leading to increasingly bloated bureaucracies and reduced fiscal comfort as governments try to appease their citizens with welfare programs, monetary grants and subsidies.

The jump in oil prices (Brent is hovering around $120/bbl) is directly attributed to the regional unrest, specifically the conflict in Libya. Since the beginning of the year oil prices have jumped roughly 21%. If we look at countries with unrest Libya (1.8mn bbl/d), Algeria (2.13mn bbl/d) [and Iran (4.18mn bbl/d)], who together supply about a tenth of the world’s oil, prices are likely to stay high until the situation is mitigated.

3. Likely response to the crisis

Though the causes of the protests fall along similar lines, the responses have varied widely according to each country’s abilities. In the richer GCC nations, monetary appeasement has been the order of the day; with Saudi Arabia and Bahrain offering monetary grants and increased welfare spending to dampen unrest. The less affluent Arab nations (Jordan, Yemen, Algeria etc) have scrambled to make concessions and/or fast acting political reforms to quell civil protests, while the unique situation in Libya has resulted in open conflict.

4. Vulnerable Spots

The current uprising is more economic than political as triggers for discontent stem from strong economic underperformance especially issues like poverty, unemployment, inflation, etc.

From 2000 the average percentage of unemployed in the Arab World has been above 10%, double of what is considered the natural unemployment rate of 5%-6% in developed markets and higher than the 7.5% average for Emerging Markets. Moreover, the population in the region is exceedingly young, with an average of 50% below the age of 25; this causes a massive influx of labor market entrants year on year which job creation cannot keep up with.

The highest poverty level in the region is in Yemen with 45.2% of the population living under $2 per day and a GDP/capita of $1,230. This is followed, distantly, by Iraq with a 25% poverty rate and a GDP/capita of $2,625. In Egypt, almost 18 million people (or 20%) live under the poverty line, a figure which exceeds the population of Jordan, Libya, Kuwait, Bahrain and Qatar combined.

Based on the Food and Agriculture Organization of the United Nations (FAO), global food prices rose for the seventh consecutive month in January, increasing 3.4% from December’s peak levels where the index reached an all time high of 231. GCC countries have relatively low inflation levels due to high food subsidies which keep prices in check, although Saudi Arabia and Oman are experiencing high inflation.

About Markaz

Kuwait Financial Centre 'Markaz', with total assets under management of over KD 1.03 billion as of December 31, 2010, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997.

---