Whatever the attractions of investing in North Africa, and there are many, it has the distinct disadvantage of a reputation for turmoil. More than three years since the emergence of the Arab Spring, a political transition that was welcomed by many, the region seems plagued by unrest.
To be sure the pattern is more mixed than the sometimes lurid headlines suggest. Egypt, by far the largest state in the region, is once again ruled by a military government with few qualms about domestic repression. At the other end of the scale, Morocco, although ultimately still ruled by a king, has remained relatively stable. The situation in Tunisia, the place where the Arab Spring began in December 2010, is somewhere between the two.
Nevertheless, the perception of the region as dangerously unstable is not confined to the general public. A survey of 1,500 global experts conducted by the World Economic Forum in late 2013 predicted that rising social tensions in the Middle East and North Africa would be the most significant global challenge of 2014. The associated study pointed to ideological fissures in the region and argued: “The lack of trust among competing parties, an atmosphere of intolerance in the public arena and, more generally, the failure to put inherently fragile transitions on a stable path, are all to blame for the increased tensions.”
This anxiety about the region applies to many financial professionals too. “You talk to investors and the shell closes on them and they don’t want to hear about it,” says Baldwin Berges, managing partner at Silk Invest. In his view, they are losing out on opportunities as a result.
The paradox is that some of the factors that provided the impetus behind the Arab Spring in the first place are also potential positives for investment. North Africa has a young, dynamic, increasingly educated population with a rising middle class. Most of the population favours higher living standards and many want a shift away from autocratic rule. This is the raw material that could help provide the basis for economic development.
Ghadir Abu Leil Cooper, head of EMEA at Baring Asset Management, sees the drive towards political transition as capable of helping to unleash dynamism in North Africa. “In theory, this should make the region much more interesting and much more able to fulfil its promise,” she says. Although success is far from guaranteed, it could make the region more of a mainstream investment destination.
Although it is not wise to ignore the politics in such an unstable region it is possible to assess its likely economic impact. To do this, let us describe the main characteristics of the North African region before examining the strengths and weaknesses of Egypt, the most important country in the region, and touching on an important trend in Morocco, the second most important nation from an investor’s perspective.
Although there is some debate about what exactly constitutes North Africa, it is most often taken to refer to the African countries that border the Mediterranean – Algeria, Egypt, Libya, Morocco and Tunisia. Sometimes countries further south, such as Mauritania, Sudan and Western Sahara, are included but these are economically marginal and are not usually classified as North African from an investment perspective.
North Africa should also be distinguished from the Middle Eastern countries of south-west Asia including Iran, Iraq, Saudi Arabia, Syria and Turkey. However, there are important economic ties between this region, particularly the countries of the Arabian Peninsula, and North Africa.
Within North Africa, Egypt stands out as having by far the largest population and economy. Algeria is second by both metrics but, like Libya, it is not amenable to western portfolio investment. From an investment perspective, Morocco is the second most important country, with Tunisia, small in both economic and demographic terms, trailing behind.
The entire region was, to a greater or lesser extent, affected by the Arab Spring of 2010. The upsurge started in Tunisia when Mohamed Bouazizi, a street trader, set fire to himself. He became a symbol for popular grievances, including discontent at high unemployment, corruption, repression and rising food prices. Protests soon spread to Egypt and other parts of the Arab world.
In both Egypt and Tunisia the ousting of geriatric presidents was followed by a period of uncertainty. In Egypt’s case, a Muslim Brotherhood candidate, Mohamed Morsi, was narrowly elected president in June 2012. However, he was forcibly removed by the military in July 2013. New presidential elections are scheduled for this July.
Before moving on to the investment specifics it is worth noting some aspects of the background to these uprisings. It is commonly noted that North African countries are relatively young – the median age in Egypt is about 25 compared with 40 in the UK and 46 in Germany – and unemployment is high. Both points are correct but they are not sufficient to explain the Arab Spring. They have been true for many years but the upsurge in protests is of relatively recent origin.
Perhaps more to the point is that youth unemployment was not only high but an increasing proportion of the jobless was educated. Countries such as Egypt and Tunisia struggled to satisfy the aspirations of a rising middle class.
Despite Egypt’s well-publicised problems, the country has considerable potential. In both economic and investment terms there is substantial scope for growth.
Mina Toksoz, an associate fellow of Chatham House who has worked as an emerging-market specialist for several financial institutions, points to the prospects for increasing consumption. “There is huge positive potential,” she says. The emergence of a much more broadly based middle class in recent years is a key factor. Privatisation has enabled it to spread beyond its traditional base in the public sector.
Hesham Saad, the Cairo-based investment director for Silk Invest, takes a similar view. “In Egypt you have a middle class that has ambition,” he says. He cites the rising number of cars in the country as an example of this trend. “Investors fail to recognise this pattern.” In his view, the country is much more similar to Turkey, which has enjoyed rapid growth in recent years, than Syria, which is devastated by civil war.
He says this development translates into investment opportunities in the consumer sector, including telecoms, which he describes as “very promising”. “The market is cheap and potential is high,” he says.
The economy is also capable of growing more steadily with further investment. Toksoz points to the banking sector as reasonably well-managed but inefficient at present. “If you had a bit of proper reform the banking sector could really expand and have a wider deposit base in the population,” she says. “It should also be able to provide credit to small and medium enterprises.” She also points to the oil sector as capable of benefitting considerably from additional finance.
Saad focuses more on the investment fundamentals. In his view, relatively low valuations mean that investment returns could be strong. He also identifies strong potential for corporate growth and the increased liquidity in the market.
Not everyone accepts that the market is currently cheap. Barings’ Abu Leil Cooper is positive about the Egyptian case in the long term but is not invested there at present. She says one reason is that valuations are not sufficiently attractive.
Finally, it should be remembered that Egypt’s negatives could easily be turned into positives. As Marco Ruijer, an emerging debt manager at ING Investment Management, says, “turmoil always creates opportunities”.
Several managers pointed out that, with greater stability, the tourist industry could enjoy a renaissance. That, in turn, would bolster Egypt’s much-needed supply of hard currency. An upsurge in foreign direct investment would have a similar beneficial effect.
Another possibility is that Egypt will finally agree a loan with the IMF after more than two years of on-and-off negotiations. Such an agreement would, among other things, depend on Egypt agreeing to cut subsidies on food and fuel. If it were agreed, it would also unlock funds from other sources such as the EU.
Despite the attractions of Egypt, it also has many weaknesses. These are not always apparent to those without specialist knowledge of the country.
Toksoz, whose Economist Guide to Country Risk will be published this year, points to several. Heavy reliance on external finance is one. “They are basically surviving on handouts from Gulf states,” she says. Qatar supported the Muslim Brotherhood government, while Saudi Arabia and the United Arab Emirates have backed the military. “It’s the only thing that’s keeping things ticking over from a foreign-currency and payments point of view.”
Capital controls pose a particular risk for portfolio investors. Foreigners who invest in the equity market face the possibility of not being able to withdraw cash if foreign exchange reserves become critically low and extensive capital controls are imposed. Indeed, selective capital controls are already in place, up to a point, as investors have to go through administrative procedures to have access to foreign currency.
It should also be noted that the military plays a large part in the economy. Its reach extends far beyond military items to reportedly include many consumer goods industries. Investors in the country could find themselves with some unexpected competitors.
Morocco shares many of Egypt’s strengths but fewer of its weaknesses. Silk Invest points out that an under-appreciated aspect of the Moroccan story is the expansion of some of its largest companies into Francophone Africa and beyond. This trend has picked up since the advent of the economic crisis in Europe.
This drive is apparent in several sectors. Maroc Telecom, the largest telecoms company in the country, has taken majority stakes in Burkina Faso, Gabon, Mali and Mauritania. The three largest banks – Attijariwafa, BCP and BMCE – have all expanded southwards in recent years, as have some insurance companies. Moroccan property companies, such as Addoha and Alliances, are also part of the trend.
Morocco is, arguably, less troubled than its peers but for most external investors the region as a whole presents a tantalising mix of substantial risks and potential opportunities. Ruijer probably speaks for most when he describes North Africa as “a work in progress until they have a stable political environment”.