EMERGING MARKETS: After the Arab Spring

The popular uprising generally referred to as the Arab Spring led to four governments being overthrown in the MENA region, with many others being forced to offer political and economic concessions to their populations in response to growing disturbances. Although the unrest clearly created uncertainty within the region in the short term, the hope is that it will ultimately lead to greater stability, as democratic governments start to supplant autocratic regimes.  But nearly two years after the protests began, how has the Arab Spring affected investor appetite for the region?

STAYING THE COURSE

When asked about their investment appetite following the Arab Spring, the majority of LPs (58 percent) and GPs (85 percent) said they intend to keep their investment in the MENA region unchanged – because they see their allocation as part of a long-term strategy, regardless of short-term instability.

LPs seem to be marginally more cautious than GPs: 12.5 percent of LPs said they were considering cutting their allocation to the region, while no GPs at all admitted to contemplating it. Some LPs remain concerned about financial stability following the Arab Spring and are increasingly demanding from fund managers a ‘soft commitment’ option that allows them to veto individual investments.

That said, there’s also a larger percentage of LPs considering increasing their investment in the MENA region – 29 percent, compared to just 15 percent of surveyed GPs.

NEW OPPORTUNITIES?

Although it is still too early to tell what the lasting impacts of the Arab Spring will be, the short-term consequences were already being felt in private equity markets.

Over half of surveyed GPs believed that the short run implications for fundraising following the Arab Spring will be negative in terms of launching new funds, fundraising for existing funds and reaching a final close. Only 11 percent of GPs felt the Arab Spring would have a positive impact on new fund launches – and there were none at all who anticipated a positive impact on existing fundraises.

However, a number of GPs did think there would be a positive impact on investing in portfolio companies, on the earnings of portfolio companies and on exit opportunities. Most notably, 39 percent of GPs said that the Arab Spring would have a positive impact on investment activity – because the uprisings will lead to new sectors being opened up to private investors and valuations coming down.

SHORT TERM PAIN

LPs were almost evenly split on whether the Arab Spring would create a more stable investment environment in the region. One pessimistic LP suggested that there were “too many political and social problems to be solved in the region”; however, another argued that governance could improve “if the new leadership is supportive.”

By contrast, the majority of GPs responded that the Arab Spring would definitely not bring about a stable investment environment, at least in the short term. Their main concern was that the new political structures were not established and stable – and that it could take many years for this to change. In the meantime, many managers are concerned about the additional uncertainty; they worry about their investments being exposed to unstable markets where valuations are low and exits are difficult to achieve.

However, GPs seem to be more hopeful about the longer term. As one prominent GP put it: “Democratic governments tend to be good for economies” and may bring about structural change in the countries of the region.

So the good news was that both LPs and GPs still see potential in the region. If MENA countries pursue market-friendly economic reforms, along with underlying legal and regulatory reforms, many commentators believe that opportunities could be significant in the future – because MENA is still a region in urgent need of capital investment.

NOT GIVING UP

As a direct result of the Arab Spring, many MENA governments are increasing their fiscal expenditure in order to stimulate job creation and infrastructure investment, while simultaneously providing political concessions in order to pacify their populations.

In Saudi Arabia, for example, state spending is set to exceed this year’s budget by approximately 40 percent, while Qatar has increased public sector workers salary and pensions between 50 and 120 percent. Although an overwhelming majority (73 percent) of LPs believe the announced reforms will have no impact upon their allocation to private equity in MENA, 23 percent plan to put more capital to work as the reforms make the region more investor-friendly.

MENA Market Reforms

ALGERIA
• Customs duties and VAT on food imports cut/suspended

BAHRAIN
• $5.3-6.6 billion housing development plan

EGYPT
• $960 million stimulus package with a 15 percent increase in salary and pensions for state employees

GCC
• $20 billion stabilisation fund for Bahrain and Oman

JORDAN
• $550 million stimulus package for increase in salaries, pensions and food subsidies

KUWAIT
• $104 billion development plan

MOROCCO
• $1.8 billion in extra subsidies to mitigate rising prices of basic goods

OMAN
• Introduction of unemployment benefits and increased minimum wage 
• Creation of 50,000 new jobs

SAUDI ARABIA
• $140 billion spending package
– Increase of minimum wage and introduced unemployment benefits
– 500,000 new housing units plan
– 60,000 more military and security jobs

SYRIA
• Reduced import tax on a range of basic goods
• $255 million fund for neediest families

TUNISIA
• Promise to create more jobs and free elections