In June 2010 I posted a blog on political risks for investors in the Arab world. The blog (and associated Perspectives note) argued that it was probably a mistake to lump all Arab countries together, and that risks were idiosyncratic among nations. Overall, the note reflected the view at the time that most investors were fairly sanguine about the risks in the Arab world.
In retrospect of course, we have all been found out following the events that started in Tunisia in January and spread across the region. This week MIGA hosted a panel discussion on ‘Investment Opportunities in the Wake of the Arab Spring’ to try and take stock of these events and consider their implications for investors. The discussion was lively and engaging and, while there was much debate, there was also some consensus around a few issues. My key take-aways from the event are:
- The term ‘Arab Spring’ is not that helpful as it conflates the unique experiences of various countries, some of which have heretofore not been even particularly ‘Spring’-like. For investors and MIGA, this means there is significant diversity in the types and scale of risks. Political risk in some countries may be over-priced due to investors lumping all countries in the region together. As an example, tourism has plummeted in Bahrain but actually increased in Morocco since January.
- Existing investors in the Arab World take a long term perspective and believe the fundamentals of the region remain strong: a young dynamic population and a growing economy. Opportunities abound, even in these difficult times. Some participants even went so far as to describe their outlook as bullish in the medium to long term. On the other hand, potential investors are taking a more ‘wait and see’ approach.
- Risks are different in the transition period, medium term, and longer term. In the transition period, it is about legitimacy of elections and treatment of the old elite. Political risk could decline in the medium term, but it will take a decade or longer for equilibrium to emerge in these markets and the process could be messy.
- Diasporas have an important role to play, in terms of both remittances and investment. There are many examples of diasporas now returning home with both international experience and funds that they wish to invest for both financial and developmental returns.
Circling back to my original post last year: while the probability of a political risk event has changed, interestingly, the premise remains the same. Here, please forgive me for quoting myself:
The most important message...is that risks vary significantly by country, by sector, and by project. As a result, it’s crucial not to take a one-size-fits-all approach to investing in the region.
That said, while the events in many Arab countries are still playing out MIGA stands ready to support investors with political risk insurance. Our focus in the region is in long-tenor infrastructure projects (including PPPs); supporting banks with branches and subsidiaries in the region, and supporting labor-intensive manufacturing and tourism.