The global financial crisis does not seem to distinguish between countries and regions or between sound and weak economic fundamentals. It seems that we have been through this before.
During the Asian crisis and later the Russian default of the mid 1990s, an analyst is quoted to have said that Yeltsin went to bed drunk and Brazil woke up with a hangover. Brazil was so far removed from Russia in terms of economic fundamentals, yet it did not seem to matter to traders and investors.
The strategy at the time - seemingly repeated now - was to sell anything liquid.
While some markets in the Middle East and North Africa are feeling the repercussions of the current financial tsunami, this may nevertheless present an opportunity for those from the Middle East with money to invest in their own region. The drop in some places been steep. According to press reports, this year Saudi Arabia has recorded a 40 per cent drop in the value of its stock market. Others have recorded losses as well but not as large.
It is not exactly clear that the reaction of Middle Eastern markets are directly tied to the global financial crisis but more from an overall sense of panic that has manifested itself with the belief that the region’s banks must have had large exposures to western and particularly US banks and markets. But regardless of whether this is true or not, investors would have cashed out just as traders punished Brazil in the 1990s.
The Middle East and North Africa has yet to fully integrate into the global economy in terms of direct foreign investment. Asia and emerging economies by far beat the region when it comes to attracting such capital. Moreover, despite talk of Arab and Muslim unity, the region still lags in inter country investments and capital flows. At a time when some of the region’s oil producers have record oil revenues, not much is invested in the region itself but rather overseas and mostly in western markets with the US and Asia taking the lead.
The region’s Sovereign Wealth Funds are among the largest in the world and are being expected to come to the aid of US and European financial institutions. Not long ago, investments by these entities were not only shunned but opposed as in the Dubai World purchase of the US ports.
This time, these funds may not be so fast to come to the rescue of the west. Some of these funds have already lost money from investments in the US. Among them, Kuwait is reported to have lost $270 million from investments in Citigroup. While in North Africa, the Algerian press is wondering if the country’s 130 billion plus in foreign currency reserves is in good hands assuming it is in foreign banks.
This has brought calls to stay closer to home and in markets that are well known to the regions’ sovereign wealth funds and other investors.
In the medium term, those in the region with surpluses are likely to concentrate on their own neighborhood. The need for investments is great and the potential for good, but more importantly these days, stable returns, is high. On the downside, the Middle East and North Africa as a whole cannot compete with Asia, the US or Europe for that matter when it comes to the issues of transparency, governance, rule of law and the protection of property rights. But given the current financial turmoil everywhere else, the region offers the chance to invest in calmer markets.
Asia will be next on the list. Unlike the US or to a lesser degree Europe, Asia is more welcoming to investments from the Middle East.
Middle Eastern funds are sensitive to how they are perceived particularly after the debacle of the US ports purchase. None of this means that the US will be totally left out. No market in the world has the depth and size as well as the choice of instruments of that of the US. 700 billion dollars worth of US securities will soon be available in the world market and Middle East investors will bid for some of it because the money has to be invested somewhere. And no one can ignore a market of that size. However, the immediate beneficiary of the current financial turmoil may well be the capital deficit countries in the Middle East and North Africa and in some cases their own economies.
Professor Mohammed Akacem teaches political economy of the Middle East at Metropolitan State College of Denver.