Emerging Markets: Analysing the Outcomes of the Arab Spring

Emerging Markets, IMF Editions, October 215

The Arab Spring was supposed to elevate a host of nations from the strictures of authoritarianism to a newly free status in which they would thrive. The truth is, in the three North African states that saw regime change, the reality has been far harder than any protestors would have imagined.

Until recently, Tunisia was the Arab Spring’s success story. Uniquely among those states that witnessed revolution in 2011, it has transitioned to a democratic process, including successful and respected free elections at both the parliamentary and the presidential level.

But even at the start of the year, the country faced challenges: the economy was in a mess, FDI low, the banking sector weak, society restless and youth disaffected. And then came the attack on western holidaymakers in the resort of Sousse on June 26, killing 38 people; beyond the human tragedy, it has also crippled Tunisia’s recovery, perhaps beyond repair.

“Security incidents threaten the nation’s economic outlook, investment activity and the travel and tourism industry, a key contributor to GDP to the tune of over seven percentage points,” says Elisa Parisi-Capone, analyst at Moody’s.

The impact has been stark. Earlier in the year, Moody’s was expecting 3.5% growth for 2015 and 4.5% in 2016. Those sunny projections are abandoned now. “The growth forecast has plunged to below 1% currently in view of the 50% decline in European visitors from a year ago,” she says.

The attacks, and their consequent impact on tourism, then have knock-on effects at numerous other levels. “In our view, both fiscal and external rebalancing will occur at a slower pace than anticipated due to additional security-related expenditures and support measures for the tourism industry, and a rapidly shrinking services balance in Tunisia’s balance of payments,” says Parisi-Capone. The attacks are also likely to dampen any appetite for FDI – which was weak already, but beginning to show positive signs – as investors stay absent.

One shouldn’t underestimate how important it is, though, that Tunisia’s politics have survived a difficult transition. That, and an improved funding environment (Tunisia raised US$1 billion in a 10-year bond from international investors in January), underpin Tunisia’s Ba3 rating which, even today, is stable. “The public administration and civil society’s ability to navigate the four-year transition process between 2011 and 2014 in the face of social upheaval and security disruptions attests to the country’s robust institutional framework,” says Parisi-Capone. Tunisia’s government is commendably broad-based, and has to be, since there is a wide range of opinion and belief in Tunisian politics from secular to Islamist and it is vital both sides feel represented.

The problem is, the attacks may undermine all this too. Even before the attacks, tensions were rising in society as the economic benefits people expected from the revolution failed to appear. Not enough people have jobs and there are severe regional disparities in wealth distribution. Tunisia has a clear plan to revamp its economy, spelled out in its Development Strategy for 2016 to 2020, which envisages an economy that can grow at 5% a year for five years, “based on higher value-added economic activity, a more inclusive regional growth pattern, and improved employability of Tunisia’s educated youth and workforce,” Parisi-Capone says. But for this to happen, a range of structural reforms (some of them linked to an IMF package) need to get underway, particularly the restructuring and recapitalizing of the public sector banking system, fiscal reform, a PPP framework and a new investment code. Yet the political wherewithal to effect big changes like this is undermined when many in the electorate are unhappy.

On the plus side, the world wants Tunisia to do well: major nations and institutions want there to be at least some evidence that a largely peaceful transition to democracy is possible in the Arab world. And there is no shortage of donor willingness to help.

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Egypt represents something of the reverse of the Tunisian experience. In contrast with Tunisia, there is reason for hope about its economic outlook; also in contrast with Tunisia, it didn’t last long as a democracy.

Politically, Egypt is not quite the success story that protestors had envisaged. After the protests of January 2011, Hosni Mubarak was overthrown; an election followed, appointing Mohamed Morsi and his Muslim Brotherhood to power in June 2012; but all that happened was another round of protests, then a military coup in July 2013, elevating Abdel Fattah El-Sisi to President. It’s true that El-Sisi did win an election in 2014, but it was one the Muslim Brotherhood was banned from contesting, so one is left with the uncomfortable conclusion that Egypt is, politically, right back where it started, with a military-backed strongman and no true democracy.

Economically, though, it’s doing much better despite (or because of) the bypassing of the electoral process. Moody’s upgraded its rating on Egypt as a whole from Caa1 to B3 back in March, the first positive movement after six notches worth of negative ones since the revolutions, reasoning that macroeconomic performance was improving, external vulnerabilities were declining and that there was a credible commitment to fiscal and economic reform.

“Our rating evolution since the second revolution has been positive,” says Steffen Dyck, analyst at Moody’s. “That is a clear indication we see positive trends: the stabilization in terms of both policymaking and the security situation, both of which will help to stabilize the economy at large. We are seeing a pick-up in growth, and a gradual reduction in the fiscal deficit and in government debt levels.

“Saying that, we also see stark challenges for the country, which include for instance a still tense security situation.”

To take the positive view, Egypt has come up with a credible fiscal plan and set targets that appear to be achievable: an improvement in the fiscal deficit to 8.9% of GDP, a reduction in employment from 12.8% (in March) to 11.5-12%, and lower public sector wage bills, subsidies and interest payments. “The publication of the government’s medium-term macro fiscal framework was an important step in our view, laying out a gradual reduction in the fiscal deficit which we think is credible,” says Dyck. “The Egyptian government didn’t want to overpromise.”

In fact, lately Egypt has, if anything, overdelivered. Revised electricity prices announced on July 30 were promising. And to general astonishment, it opened an expansion of the Suez Canal two years early in July, a US$8 billion project largely funded through domestic liquidity via investment certificates.

“The Suez Canal expansion is commendable: it’s amazing to see how quickly that has been implemented,” says Dyck. “The expansion itself is only a first step – the government has bigger plans to make the whole area into a logistics hub.”

There are, it must be said, some doubts about the hopes for this expansion: the canal’s officials believe that it will generate $13.2 billion by 2023, up from $5.3 billion today, with the number of ships per day more or less doubling from 49 to 97 per day. The increase in capacity might allow that, but it’s not quite the same as being certain the global demand will be there to make it happen. “The published projections of the Suez Canal authorities would require a significant pick-up in global trade which seems unlikely at this point,” says Dyck.

Similarly, even if Egypt is growing, its needs are growing too. “Economically, it’s getting better, but it’s not good enough,” says Angus Blair, founder of the Signet Institute in Cairo. “The key statistic for me is 2.6%, and that’s population growth. That is an enormous strain on water, food security, health and education. Every year there are two million new Egyptians and that adds an enormous political element to the economic mix.”

Nevertheless, the pace of the canal’s expansion was impressive, and is intended to send a message to foreign investors that Egypt today is capable and ready to welcome FDI. Several other indicators are also promising. Moody’s upgraded its outlook on the Egyptian banking system from negative to stable in July, although the banks’ high exposure to government securities (accounting for 43% of assets and nearly seven times their equity) is a concern. The rating agency expects GDP growth to increase to 5% for the fiscal year ending June 2016, up from 4.5% in 2015 and 2.2% in 2014.

The question remains about security, however. When one ousts and (in may cases) condemns a democratically elected government and its supporters, it should not be a huge surprise when they try to fight back. Whether through that or through ISIS, which is becoming increasingly powerful in neighbouring Libya and Tunisia, there is clearly a threat.

“Political risk is relatively high and one of the limiting factors,” says Dyck. “We have to admit the current government was instrumental in bringing stability to the country that is necessary to foster investment. But some of the underlying tensions are still in place.” At the very least, the government will need to find a way of enfranchising – and employing – the many young people who overthrew Mubarak in the first place, demanding change.

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Then there’s Libya. If the experience of revolutionary aftermath in Egypt and Tunisia has been disappointing, in Libya it has been disastrous. The Gaddafi regime has been replaced by a hopelessly splintered and divided country with two separate governments.

“You know, people are really fed up,” says Abdulmagid Breish, one of two men who believes himself to be chairman of the Libyan Investment Authority, in his case in Tripoli. “The people in the street, the silent majority, is fed up. The country has been liberated from a brutal dictator, everyone was hopeful, there was enough money to rebuild the country, and nothing happened. Four years later you can still see the same potholes, except they’re bigger.

“There are no airports, there’s no infrastructure work on anything, hospitals, schools, law and order. It is four or five years of wasted opportunities. Even the fighters on the battleground are fed up. They want to go back home.”

This is probably the only thing that he and the other man who believes he runs the LIA – Hassan Bouhadi, in Malta, backed by the House of Representatives-recognised government in Tobruk – agree upon, even to the point of using the same words. “People are fed up,” he says. “During the last year all Libyans have seen the result of divisions, of putting personal interest above the national interest. Everyone knows how rich in resources Libya is, and everyone has realised that what is happening today is a waste of these resources, and that we are not being responsible to the next generation of Libyans.”

The hope is that this sense of disaffection is eventually what will put Libya back together. Both of those responses, from these two men who are at loggerheads with one another in the courts, were to the same question: why should there by any optimism that a unity government will be formed? But perhaps just the hope of something better will be enough. “The Libyan people as a whole believe that unity is the only way forward,” says Bouhadi. “We need to be courageous, to see eye to eye and work together. I think that what’s happening today is superficial. I don’t think the current problems are deeply embedded in the social structure of Libya.”

Two separate factions of the country’s sovereign wealth funds kicking the crap out of each other in the English High Court is hardly helpful to this ideal, but perhaps this court will be what prompts some form of reconciliation, and in particular the multi-billion dollar litigation against Goldman Sachs and, then, Societe Generale. Both today are being conducted through a receiver, BDO, with the two Libyan parties having to communicate through it rather than talking to each other. But all sides recognise the lunacy of this conceit; perhaps it’s in a furious suit against the world’s most powerful investment bank that Libya’s feuding parallel institutions will finally find some common ground.