Markets fall as Cairo violence escalates

01 February 2011

The initial reaction on regional bourses has been negative, but long-term outcome could be positive

Investor fears that a prolonged power struggle in Cairo could lead to wider political and economic instability have been reflected in sharp falls in the region’s stock markets. The deteriorating situation in Egypt is also forcing companies to considering pulling out of the country.

Egypt’s stock exchange closed on 27 January after dropping 16 per cent. While in the Gulf, markets in Kuwait, the UAE and Bahrain were also hit. The Gulf bourses lost almost $10bn in a single session on 30?January. Saudi Arabia was the only market to close positively at 2.58 per cent.

“The impact on the financial markets of the broader region is looking more meaningful at this stage,” says Ann Wyman, head of emerging markets research at Japanese investment bank Nomura.

“We cannot gauge how much money has been pulled out on a day-to-day basis, but you can see the impact on the local equity indices,” says Wyman.

In particular, investors have been sensitive to companies with investments in Egypt, which has been a popular destination for Gulf investors. Dubai’s Emaar Properties, one of the largest foreign investors in Egypt, lost 8.3 per cent in value.

The assumption these countries are safe has gone and it is unclear how long this uncertainty will last. “The longer you have insecurity, the more investors will feel uncomfortable with their exposure to the region. They fear events similar to those in Egypt and Tunisia could spread elsewhere in the Middle East,” says Wyman.

Egypt’s tourism industry has been worst affected. While it only contributes 5?per cent to gross domestic product in Egypt, its contribution to employment is much greater. The retail sector has also been hard hit.

Despite the turbulence however, some regional analysts say there is potential for optimism. “Stock markets across the region have fallen sharply in reaction to the ongoing protests, but there will be a very strong rebound once confidence returns to the market,” says Shrouk Diab, vice-president of UAE investment bank Rasmala. In Tunisia, there is a growing mood of optimism regarding the economy following a week of calm. President Zine el-Abidine Ben Ali and his family had?infiltrated the business community, leaving little opportunity for others. This has now changed.

The current protests in Egypt could have a positive economic impact on the country once stability and security are restored. “What is happening right now in Egypt will have a positive impact both politically and economically in the long term. Economic overturn will not happen overnight, but it will bounce back once there is security and political stability and Egypt will become an excellent buy,” says Diab.

“If Egypt can follow Tunisia’s example and transition quickly, the long-term implications of this uprising will be markedly less.”

“The appointment of a vice-president is significant, it gives some sense of stability and a transition if Mubarak leaves. There may not be a complete regime overhaul, but its most corrupt influences can be filtered out in the next election,” says Diab.

With Hosni Mubarak’s decision to limit communication in the country, the economic ramifications will be much deeper. “Everything has come to a standstill, they will have to reinstate the communications,” says Diab.

While a growing number of cities in the region have seen their residents take to the streets in protest, including in Amman and Sanaa, similar protests are not anticipated in the Gulf countries. “Part of the frustration in Tunisia and Egypt was the political set-up where so-called democracy did not actually allow the people to be heard. The demand for democratic representation is not the same in the Gulf where governments are able to improve living standards,” says Wyman.
Opposition leaders in Syria are calling for a day of rage on the streets of Damascus on 5 February.

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