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Now what?

Political upheavals and their implications for the real estate sector in the MENA region

First economic ramifications of the political turmoil in MENA: rise in oil prices and slowdown in economic growth, increased market volatility and downgrading of sovereign ratings. 

While economists, analysts and investors are still assessing the implications of the ongoing political unrest, some repercussions can already be detected, such as a rise in the oil prices, downward revisions to certain forecast economic growth rates, increased market volatility and the downgrading of certain government sovereign ratings.

Economic growth: a different impact for different economies in the region

Tensions that are accompanying protests in certain countries like Bahrain, Yemen, Oman, Syria, Jordan, Egypt, Libya, Algeria and Tunisia are causing disruption to business activities, investment and tourism. This disruption is expected to weaken economic growth in these countries and may even cause economic contraction in some cases, such as in Libya.

Clearly the impact will vary between different countries in the region. For non-oil economies, the expected economic slowdown will be amplified by the increase in oil prices and its effect on inflation and consumption. As such, we witnessed a number of sliding revisions to forecast economic growth rates for these countries. For countries rich in hydrocarbons, forecast growth remains relatively valid and is supported by the rise in oil prices and the expected higher oil output (despite restraints from the Organization of Petroleum Exporting Countries) in addition to increased government spending on large infrastructure projects. The new public expenditure plans announced in the Gulf Cooperation Council (GCC) countries are massive and are expected to build up domestic demand in these countries.

Aligned stock market reaction across the region: increased volatility with a general downward trend

The protests that are spreading across MENA increased the political and security risks in most of these countries. Whilst the impact of regional upheavals on economic growth varied between oil- and non-oil-exporting countries, their impact on the regional stock markets was somehow aligned. Uprisings in Tunisia and Egypt raised the risk premium attached to different stock markets in the region in January and February for instance, as many foreign investors pulled out of a number of local stock markets.

Thus, the rising political risk in the region increased stock market volatility. For example, in the first week of the riots in Egypt the stock markets in the United Arab Emirates (UAE) fell by around 5%, before recovering and then falling again by around 1.5% on the day riots broke out in Bahrain in mid-February. 

Besides the increased volatility, regional unrest has weighed on market performance for the first quarter of 2011, whereby a general downward trend was noted across the region. In line with the general stock market decline in the region, the Standard and Poor’s (S&P) Pan Arab Indices, which comprise indices for 11 markets in the region, declined by 8% year-to-date.

Short-term political risk is higher than ever, resulting in a series of credit ratings cuts and CDS spikes 

Although the protests and ensuing political reforms are expected to have a positive impact in the medium- and long-term, the short-term political risk is higher than ever. This has been clearly reflected in a series of credit ratings cuts and spikes in Credit Default Swaps. In a statement issued on March 15th, 2011, Fitch Ratings mentioned that “increased political risks are leading to downgrading in certain Arab Governments’ ratings, which is resulting, in turn, in increasing these countries’ CDS rates and cost of funding.” The statement came in conjunction with the agency’s action on Bahrain’s sovereign ratings, as it downgraded the Bahraini Mumtalakat Holding Company’s (Mumtalakat) long-term issuer default rating (IDR) and senior unsecured rating from A- to BBB and the short-term foreign currency IDR to F3 from F1.

The following day, Moody’s downgraded Egypt’s ratings to Ba3 from Ba2, and S&P cut Tunisia’s ratings to BBB-, one notch above “junk” status, after it cut Libya’s rating four notches on March 11th, from BBB+ to BB. 

In line with mounting political risks, the cost of insuring sovereign debt for a number of Arab countries also rose significantly.

The rising cost of government and company debt will leave companies facing additional financing costs, curtailing profits and pushing up prices, as well as threatening the viability of debt rescheduling programs.

Political risk and capital flight 

If, as a result of the political instability, investors become concerned about the safety of their investments, capital can quickly leave an economy causing interest rate increases and depreciating the domestic currency. 

While certain bankers and economists insist that they have not seen any flight of capital from the Middle East so far, others confirm that there have been substantial outflows of funds from different countries in the region. However, what is certain is that, should political unrest drag on, it will only be a matter of time before we see the long-term investors reallocating their capital. 

The capital flight and sovereign rating downgrades will lead to a decrease in the availability of funds. Noticeably, Qatar and the UAE have received large amounts of funds flowing from Bahrain, as they have so far escaped political protests, increasing liquidity levels in both markets. The question that now begs itself is: are these transfers passing in transit or have they reached their intended destination? 

Reduced levels of economic growth, increased cost of funds and capital flight are all elements pushing properties prices in one direction: downwards. 

Reduced levels of economic growth in the nonoil- exporting countries will impact property prices negatively

When economic growth slows down, consumption decreases and unemployment levels increase. This will have a direct, negative effect on real estate prices as demand for properties decreases. However, the varying impact of regional unrest on economic growth throughout the different countries in the region would result in a varied effect on property prices in these countries as well. While property prices in non-oilexporting countries are affected by the forecast slowdown in economic growth, prices in the oilexporting countries are maintained as economic growth remains supported by the increase in oil prices and large government expenditure budgets.

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