Thursday, April 24, 2014

Arab Spring: is Investment Momentum Broken?


Arab Spring: is Investment Momentum Broken?

 In my previous posts I touched the issue of political risks and mining:

·                  Expanding Mining Worldwide: Political Risks

·                  Mining: Political and Resource Nationalism Risks

A lot of attention in news coverage is nowadays dedicated to Arab Spring. Googling gives 130,000,000 hits: among them Wikipedia page, The Guardian’sArab spring: an interactive timeline of Middle East protests, and many others. In the contest of our business it is important to understand – how do the current events affect investment climate, and in particular – investments in mining sector? Generally speaking, besides specific industry peculiarities, investments in mining follow the common rules of investments.

Broken momentum, but mixed outlook – this exactly fitting term was applied to current situation with investments in MENA region (Economic Commentary by Arab Petroleum Investments Corporation Volume 6 No 910, SeptemberOctober 2011).  

The “wait and watch” approach is characteristic for investors. And quite naturally, most of them envision detailed studies of political risks and thorough due diligence of all projects with key focus on macroeconomic risks.

In this content, the picture of MENA looks very complex. Let’s look at the recent newswires:

What the population thinks:

·                  Qatar: 92% economy is getting better

·                  Morocco:  68% economy is getting better.

·                  Tunisia: 50% economy is doing better; 20%  doing worse and 27% “staying the same.”

·                  Egypt: 42% see conditions in their country “getting” better, versus 37% who said it is “getting worse”

·                  Syria:  34% economy getting worse ; 32% getting better

·                  Yemen: 19% doing better

·                  Iraq: 16% economy looks to be doing better

Top ranking H1 2011 M&A Deals:

·                  As to volumes of M&A deals: JordanUAE and Oman

·                  AS to deals valueQatarUAEKuwait

·                  Sectors: banking, education and healthcare, construction

Factors like political stability and security of income are at the forefront of investment decisions

·                  Secure and stable markets: Abu Dhabi, Dubai, Qatar, and Saudi Arabia

·                  Uncertain: Bahrain, Egypt, and Syria

Algeria, Bahrain, Iran, and Yemen are most at risk of further unrest

FDI inflows into 21 Arab nations are forecast to fall to $55.1 billion this year compared to $66.2 billion in 2010, the Kuwait-based Arab Investment and Export Credit Guarantee Corp. said in a report. FDI inflows into 21 Arab nations are forecast to fall to $55.1 billion this year compared to $66.2 billion in 2010, the Kuwait-based Arab Investment and Export Credit Guarantee Corp. said in a report.

Estimated cuts in FDI

·                  Egypt – 92%,

·                  Libya – 87%,

·                  Syria – 65% ,

·                  Bahrain – 35%

 Increase – 7 countries; the biggest – Saudi Arabia and Iraq

The London-based EBRD launched plans in May to expand into the region, after a wave of uprisings in the so-called Arab Spring, and wants to start investing in the area next year

The international community, especially the European Union, has pledged an aid package of hundreds of millions of euros in support of the Arab Spring inTunisiaEgypt and Libya, so as to help them continue on the path to democracy and rebuild their economies.

The Financial Times notes that many international companies have found themselves in a very delicate position as transitional governments in Tunisia, Egypt and Libya review foreign investments with links to former members of deposed corrupt and autocratic regimes.

MENA Venture Capital: “The private equity industry may be pausing to reflect on these changes of 2011. However, it is a pause to see how to clutch on the emerging opportunities whilst avoiding short-term risks,”

What about Private Equity?

“Most PE firms that participated in the PwC/INSEAD survey, continue to believe that the MENA region’s sound demographics and vast natural resources will spur economic growth in the next five years. This positive sentiment is largely driven by the growth propects of the Gulf countries, the economic engine of the wider region, which has remained largely sheltered from the political turmoil.”

These is one of the points that is listed in just released by PwC/INSEAD, Abu Dhabi report “The Next Five Years, MENA PE”

This screenshot form the report’s Contents Page gives a very clear picture:

A deep dejection feeling is overwhelming when we look on the report’s data and graphs. However, let us look at some positive signs:

·                  GCC countries remain largely unaffected by social unrest;

·                  investments to resume soon,

·                  fundraising efforts to continue.

And many survey participants offer some good advice:

·                  Better wealth redistribution

·                  Greater transparency

·                  Less corrupt environment

And of course, the top diagram of this report is the following: 

  © INSEAD and PwC

Thus, making any decision to invest may be linked to the above mentioned analytic.

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