Posts Tagged World Bank
Stock markets in the Middle East have taken a financial beating because of Arab Spring protests this year. Since crowds flooded Cairo’s Tahrir Square, Egypt’s EGX 30 Index has lost almost 45% of its value; Saudi Arabia’s Tadawul All-Share Index has lost nearly 10%, while the Dubai Financial Market General Index has fell nearly 20%.
Arab exchanges were already weak because of the effects of the 2008 financial crisis, which exposed issues with sovereign debt in the Arab Gulf. Only two IPOs this year were listed in the exchanges of the Gulf Cooperation Council countries (Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Kuwait and Oman). Both were in Saudi Arabia, and generated US$219m, according to PwC Capital Markets Middle East.
But adding further injury, a much anticipated bid to upgrade the United Arab Emirates and Qatar to ‘Emerging Markets’ status by index compiler MSCI was thwarted again this past week. Currently both countries are part of MSCI’s Frontier Markets index; analysts say an upgrade would’ve channeled up to US$70 billion into Gulf markets.
MSCI has twice previously put off a decision about upgrading the status of both countries. It said it would look at the issue again in June, but noting that concerns remain about foreign ownership limits, market liquidity, securities lending, and limitations on short-selling.
It is expected that the UAE won’t be ready for another review in June, but it continues to push for reform on its exchanges. Last July, the Dubai exchange consolidated with Nasdaq Dubai, the region’s first exchange open to investors and issuers of any nationality. Investors hope for a merger now of Dubai’s exchange and that of Abu Dhabi, the UAE’s capital. Earlier this month, Standard & Poor’s announced it would launch an index comprised of the Arab world’s 40 blue chip companies, in a bid to open the market more to exchange-traded funds.
The World Bank is bearish on immediate prospects for the Middle East and North Africa (MENA) region, particularly hardest-hit Egypt, Tunisia and Libya. “Foreign direct investment flows [to the region] fell by 7% in 2010 and by another 16% in 2011,” notes a new report on world investment and political risk.
“Despite recent announcements of investment intentions in North Africa by other countries in MENA, short-term prospects are not promising. With Europe under economic strain and uncertainties surrounding the political environment of Egypt, Libya, and Tunisia, FDI into North Africa is likely to slump for longer and rebound more slowly than the rest of the MENA region.”
The report also notes that though some investors pulling out of the region or placing plans on hold, recovery should begin in 2013. “Despite the recent turmoil, the longer-term outlook for the region remains promising and companies do not view the present unrest as posing a long-term barrier to doing business in that region.”
Considering the effect the Arab Spring has had on protests around the globe, the World Bank report adds that as an offshoot, “the recent events in the MENA region have accentuated the risks of political violence and non-honoring of sovereign financial obligations — not only in that region, but also more broadly.”
Like most Gulf nations, the United Arab Emirates (UAE) has little agricultural resources, forcing it to import the majority of its food supply. The oil-rich country brings in roughly 80% of its supply; Dubai, its most famous Emirate, imported over 4 million tons of food in the first half of this year alone.
Its neighbors are similarly active buyers in the food market. In September, Iran became the biggest buyer of Brazilian beef for the first time in its history. Such dependence is projected to only rise with time. According to the World Bank, the Arab region’s need for food imports is expected to increase by almost 64% over the next 20 years.
As a result, these Gulf economies and the region as a whole have found themselves particularly vulnerable to rapid global food price increases. The United Nations reported in September that its world food price index climbed 19% from last year, a rise from 194 to 231 index points.
It has translated into higher costs at the grocery store across the region. In the UAE, a survey by Gulf research group YouGov Siraj of over 1,500 residents found that over a quarter of respondents had been paying more for meat and fresh vegetables in the past six months. A summer survey by Middle East job site Bayt.com reported that after housing, over 40% of respondents said their biggest monthly expense was grocery bills.
Even in Qatar, which the International Monetary Fund recently named the world’s richest country in terms of per capita wealth, there is local concern about the price of food going up – prompted partially by the Qatari government’s recent announcement that it would hike salaries for nationals working in the government sector by 60%.
The World Bank study notes the Middle East and North Africa consume 30% of the world’s wheat. Any rise in the cost of bread, cereal and rice falls hardest on the largely South Asian expatriates in the region’s laborer class, wherein a worker’s monthly wages often do not exceed US$200 a month.
In response, Gulf governments have taken two different actions. Some are applying economic controls, mandating grocery stores in their countries to freeze prices of certain foodstuffs. In the UAE, hundreds of goods are price fixed until the end of the year. A number of international food companies have questioned the measure, including Unilever and Kraft.
Additionally, some Gulf nations are buying foreign land for food production. The UAE, Saudi Arabia and Qatar have made investments or have purchased freehold farms across the world. According to a study by Washington, D.C.-based International Food Policy Research Institute, the UAE is behind only China and South Korea as one of the top purchasers of global farmland.
There is added incentive for Middle Eastern governments to ensure that food prices remain at a low cost. A number of academic reports suggest that rapid food price increases in the region had a role to play in the popular discontent that led to the Arab Spring — unrest that Gulf countries such as Saudi Arabia have allocated billions in social spending to prevent from happening within their own borders.
Before the tumult of the Arab Spring, one of the biggest challenges to the rule of then-Egyptian president Hosni Mubarak was a lack of bread. In the summer of 2008, long queues and short tempers over bread shortages were enough that the army was called in to bake and distribute loaves to Egypt’s poorest.
Egypt’s bread protests were soon forgotten. But there now is a growing consensus among analysts and policymakers that rising food costs and food shortages are contributing to the region’s unrest. In a new briefing by the International Food Policy Research Institute (IFPRI), a Washington, D.C.-based think tank, researchers detail some aspects of the Middle East’s food security concerns, and how they relate to its ongoing turmoil.
“People’s satisfaction with their standard of living has deteriorated in most Arab countries in recent years, especially in Egypt, Libya, Bahrain, and other countries with civil disobedience,” noted the authors of the brief, Economics of the Arab Awakening: From Revolution to Transformation and Food Security, which included all of the Arab countries in the Middle East and Africa.
Food security has deteriorated in most Arab countries, the authors noted, due to high food-price inflation. For instance in Egypt, according to the World Bank, year-on food inflation in February was at 19%. “The proportion of people without enough money to buy food increased or remained unchanged in all but one of 12 countries examined,” the IFPRI brief noted. “Egypt and Sudan saw particularly large increases.”
Even in oil-rich Gulf countries, concerns over food price inflation have resulted in various government actions, including planning food reserves and forcing retailers to heavily discount certain basic foodstuffs. In the United Arab Emirates (UAE), the federal government has gone further, asking food retailers to agree to a six-month price freeze on certain items, while conducting store inspections to ensure prices do not increase in the month of Ramadan, when Muslim shoppers tend to buy more groceries. Prices for edible oil, sugars and rices last year in the UAE rose by 50%, according to local media reports.
These food security concerns have also led some Gulf countries to purchase farmlands in other countries for their own food production needs. The UAE has become one of the top purchasers of global farmland, according to IFPRI, while Saudi Arabia has made a number of farmland purchases in Africa. Government officials say that with direct access to food crops, they can save in import spending.
Stephen J. Kobrin, William H. Wurster Professor of Multinational Management at Wharton, says such land purchases risk reviving a colonial system in which large tracts are controlled by overseas interests that hire many of their own people, reducing the economic benefits to the host country. “The big question is, are you developing local skills or just creating an outpost of the investor country?” Kobrin says.
And more immediate, easier solutions for Arab countries to reduce import spending costs are available, according to an analysis by the World Bank, including improving logistics efficiency, and using risk-management tools to reduce exposure to price volatility and shocks.
The IFPRI brief also questions some of the measures Arab countries have taken in the wake of the unrest, such as raising civil employee salaries and lowering import tariffs. “Most, if not all, of these ‘firefighting’ measures were used by Arab governments before,” the brief notes. “These popular but costly responses have been inefficient in stimulating sustainable growth and poverty reduction. “
The authors recommend that Arab governments facing food security issues should seek to improve their “trade agreements, logistics, and infrastructure, as well as support for the agriculture sector in countries with agricultural potential. “
“While it is beyond this brief’s scope to determine whether living standards and food security played a large role in triggering the revolutions, results clearly show that in most Arab countries both indicators have worsened.”
Read the report here: http://bit.ly/jkN0kC