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Political Risk

The Arab Spring's Impact on Cross-Border Trade and Investment

Daniel Wagner | November 1, 2011

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The focus of so much of the information flow from the Middle East and North Africa (MENA) this year has been on the political dynamics associated with the ongoing upheaval in the region. Indeed, in the handful of countries where the Spring has triggered—or is in the process of triggering—change, the news really has been mostly about politics in the eyes of the rest of the world. But the "perpetual" Arab Spring has naturally negatively impacted the trade and investment climates of the specific countries affected, as well as having had a profound effect on neighboring countries, companies, and entities that engage in business in MENA.

The Arab Spring has come to affect the psychology of cross-border traders and investors more generally, as the idea of radical political change is now in the back of the minds of many who do business in countries that have not been affected by the Spring. As has been repeatedly demonstrated this year, radical political change can erupt without warning.

Effect on Gross Domestic Product

Businesses in Egypt, Libya, Syria, Tunisia, and Yemen have had to adjust to a harsh, new, and costly reality. The International Monetary Fund estimated in October 2011 that the Spring countries had collectively endured $56 billion in losses, with $21 billion having been eroded from gross domestic product (GDP) and $35 billion lost as a result evaporating income and rising costs.

Libya was the worst affected, with a staggering loss of 29 percent of GDP. The conflict in Libya had cost Tunisia up to $2 billion in lost trade and tourism revenues as of July of this year, according to Tunisia's central bank governor. Libyan trade and tourism accounted for an estimated 5.5 percent of GDP in 2009. Since January, Tunisia's overall tourism business has plummeted by more than 40 percent. Even though Tunisia has now held elections, the lingering uncertainty in Libya and Egypt will surely continue to negatively impact the Tunisian economy. The knock-on effect is undoubtedly similarly painful in a variety of other countries in the region and beyond.

Effect of Islamic Economic Systems

The fact that Islamists are in the process of seizing power in Egypt, Libya, and Tunisia does not make life any easier for businesses there, nor inspire much confidence among foreign traders, investors, and lenders. It also raises questions about whether business life will ever be the same in any of these countries.

Some formerly radical political entities, such as Egypt's Muslim Brotherhood, have already begun to try to change their image inside and outside the country—even before it has assumed power—in anticipation of assuming power next year. Now, the Brotherhood would like the world to know that it supports a free market economy, but the new government's aspirations to be seen as promoting social justice will constrain the profit motive.

The Islamic economic system is not based on price as the method of distribution of goods, but rather on how to distribute benefits to all citizens. It is the idea of potentially blending capitalism with sharia law in countries that did not do so previously that is perhaps most unsettling for Western businesses, as the manner in which the two shall interact cannot be known in advance.

Role of the Military

Also unnerving is the question of what future role the military will play in these countries. In Egypt, for example, the Egyptian military invested heavily in the economy in the 1960s and 1970s and is now estimated to own up to 40 percent of the economy. The military wants a peaceful transition of power because it is focused on maintaining its own power and prolonging its income. To the extent that whatever comes to rule Egypt does not interfere with the military's ability to operate as it has for decades, it probably doesn't matter all that much to the country's current military's leaders.

Looking Ahead

An important consideration—which no one can know in advance—is what comes next. We are in uncharted waters based on the sheer scope and scale of the political change that has occurred this year in MENA, but also because of the ongoing Western fiscal crisis and the West's inability to effectively influence the course of events in the region. It is reasonable to assume that instability and uncertainty will reign throughout the region for at least the next 1–3 years, but the stability that was taken for granted in the region will perhaps never return. And, as has been demonstrated in Libya, future political change in MENA should not be presumed to be peaceful and orderly.

So, where does that leave businesses that simply want to trade, invest, or lend in these countries? There can still of course be quality transactions in difficult environments—the trick is to be able to identify them and to be able to protect oneself through the use of credit and political risk guarantees and insurance. The Spring has also affected businesses' ability to do so. The underwriting process has become more conservative, insurance capacity more limited, and general appetite curtailed, but underwriters can still tell a good deal from a bad one. The challenge—for businesses of all types—will be to be able to determine whether it is even worth attempting to engage in business in countries undergoing fundamental political change.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management firm based in Connecticut (USA), and author of the forthcoming book "Managing Country Risk".

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