Political transitions scare Arab investors

Saudi Arabia's stock market joined a region-wide sell-off yesterday as investors in Arab economies vote with their feet amid widespread violence and political uncertainty.

Posters supporting a candidate in the Egyptian parliamentary elections are displayed in Cairo. The election is scheduled to start from Monday. Amr Nabil / AP Photo

Saudi Arabia's stock market joined a region-wide sell-off yesterday as investors in Arab economies voted with their feet.

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The Tadawul All-Share Index slipped 0.47 per cent, taking losses on the region's largest bourse to 8.5 per cent so far this year. That followed intense selling pressure in Egypt last week, with the benchmark EGX 30 Index falling 6 per cent on Friday as fighting raged in Tahrir Square in Cairo. Egyptian stocks have lost almost half their value since the start of this year.

Even stable countries such as the UAE have seen valuations decline this year, with Dubai down 17 per cent and Abu Dhabi down 11 per cent.

The political vacuum in Egypt and Libya, violence in Syria, and new administrations in Morocco and Tunisia are muddying the outlook for longer-term investment too, economists say. Flows of foreign direct investment into the Arab world are expected to fall by 17 per cent to US$55.1 billion (Dh202.34bn) this year, according the Arab Investment and Export Credit Guarantee Corporation, based in Kuwait.

"The Arab Spring has been damaging to foreign investment," said Jarmo Kotilaine, the chief economist at NCB in Saudi Arabia. "The difficulty is there's no clarity on the rules of the game and with a political environment being contested it's potentially unpredictable for foreign investors."

Parliamentary elections in Cairo are scheduled to take place tomorrow, marking the beginning of a six-month period of political reform.

Economists expect transitional and newly-elected governments in Egypt, Libya, Morocco and Tunisia to tread a fine line between populism and free-market reform.

Under Hosni Mubarak, the former president, Egypt earned a reputation as a darling of foreign investors, thanks to its efforts in scaling back barriers to business. But in the rush to please restless demonstrators in Cairo, there is a risk of some reforms being swept away, say economists.

"Transitional regimes can be driven by the urgent need to swiftly change past practices while ignoring the importance of well-informed policy process or securing investors legal and economic stability," wrote Efraim Chalamish, an economy and security analyst in a research note.

Tunisia's newly elected assembly has come under pressure from protesters to distance itself from Qatar, a wealthy foreign investor perceived to be behind the rise of Ennahda, the moderate Islamist party that won the most seats in the Constituent Assembly.

Business in Tunisia has been disrupted by industrial action by workers at BG Group based in the UK, which is Tunisia's largest natural gas producer, and Tunisie Telecom, owned 35 per cent by the Dubai investment company Emirates International Telecommunications.

In Egypt, several business leaders have been convicted of corruption and had deals revoked by the new authorities. Hussain Sajwani, the chairman of Damac, a property company based in Dubai, was convicted of corruption over a 2006 purchase of land near the Red Sea and sentenced to five years in jail. He has called for international arbitration of the conviction.

The Justice and Development Party (PJD), a moderate Islamist movement, claimed victory in Morocco's elections yesterday.

The party had promised to push through reforms to attract more private investment in the economy, but will face populist pressure to address youth unemployment at more than 30 per cent and a budget already in deficit.

On Thursday, Sheikh Mohammed Bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces, joined government officials from Qatar and Kuwait to set up a $2.5bn sovereign investment fund to support Morocco's tourism sector.

The country's ability to attract more tourists has been constrained by Morocco's limited finances.

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