Roubini: Question marks in the Arab world
The report below comes courtesy of Nouriel Roubini’s team of analysts at RGE.
Two MENA governments have suffered massive blows in the past week. Extended protests in Tunisia forced long-time ruler Zine El-Abidine Ben Ali to flee the country, while Hezbollah pulled out of the deadlocked Lebanese unity government, causing its collapse. While the Lebanese government’s fall was only the most recent setback in a country that has seen the rise and fall of several governments, the events in Tunisia are reverberating throughout the Arab world. Despite Arab leaders’ insistence on the exceptional nature of the developments in Tunisia, the underlying triggers—weak employment prospects, stagnant incomes, rising prices and a lack of representation—are common in much of the region. Using a selected group of economic, social and political indicators, we assess the resilience of the region’s institutions in our latest MENA Focus.
It is difficult to predict if other regimes will go the way of Tunisia, but the volatile mixture of economic grievances will add pressure to fragile political institutions in the MENA region and could temper investment. Arab leaders’ immediate response of boosting subsidies on food and fuel as well as other social transfers and their hyper-vigilance about protests suggest that these regimes may muddle through. Also, we continue to see strong oil prices in 2011 supporting growth in the MENA region, one of the few in the world where growth will accelerate from the 2010 pace.
However, with commodity prices, especially food product prices, set to rise, we see several linked economic risks across the region. These include the deterioration of fiscal and external balances, financing issues and a clampdown on economic and social liberties, including access by foreign investors. Maintaining expensive subsidy regimes (and adding more government spending) will be particularly detrimental to the fiscal and external positions of oil importers. Some, like Jordan, may turn to bilateral aid. Others, including Tunisia, could face significantly higher financing costs and may be forced to delay international bond issuance and turn instead to local markets, possibly crowding out private investment.
These policies are unsustainable in the medium to long term. Subsidy measures will do little to dampen inflationary pressure, especially if governments pair them with higher public-sector wages and other types of fiscal support to soothe troubled populations. Moreover, as RGE noted in the last MENA Focus, the maintenance of social spending and subsidies may curtail planned infrastructure spending. All of this makes the macroeconomic and investment climate for fuel importers more uncertain. These trends are not consistent across the region, however. We believe that investors will continue to differentiate between the stronger and weaker balance sheets in the region, with oil exporters with ample savings (including US$1.8 trillion managed by the region’s sovereign investors) and more open investment climates continuing to attract the bulk of investment.
The situation in Tunisia remains uncertain, with the new government on the verge of collapse as opposition members have pulled out. Public protests continue, calling for a completely new government. Whatever government finally emerges will need to deal with the economic grievances that triggered the unrest while recovering from the chaos of recent weeks. We assume that the developments will dampen Tunisia’s growth in the current quarter by reducing its ability to attract investment and denting its crucial tourist revenues.
The demonstrative effect of the overthrow of the ruler is clear, as events leading to Ben Ali’s ouster were watched all across the Arab world on Al-Jazeera. Self-immolation, a potent symbol that many say catalyzed events in Tunisia, has been present in Algeria, Egypt, Mauritania and Yemen in a dangerous copycat trend. Failure to respond to the underlying causes could create further issues for rulers and stymie economic development. However, in some of these countries, the combination of continued transfers, strong military presence and political restrictions including limits on voting and public assembly rights could keep the regimes in place for some time.
Source: RGE Monitor, January 19, 2011.
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