Middle East Economies Stumble Amid Blood in the Streets

From the Palestinian Authority to Iran, violence and uncertainty keep the stock markets mired in limited investment, low growth and even lower confidence.

Stock markets in the Arab world, still reeling from the 2008 global economic crisis, have been dragged down by the ongoing strife in Syria, Egypt and other countries in the region.

Egypt: Market gains since Morsi's ouster

12-month returns: 12%

Stock market capitalization: $56 billion

Per capita GDP: $3,111

On July 3, for the second time in two years, rioting crowds managed to overthrow a sitting president – this time the Moslem Brotherhood's democratically-elected Morsi. Millions of Egyptians, mostly young, swept into the streets hoping the event would signal a genuine social and economic revolution.

The benchmark index of the Cairo stock exchange’s 30 leading stocks, down 4% at mid-year, jumped 7.3% the day of Morsi’s overthrow after climbing 18% over the preceding week-and-a-half. The index, however, still remains 60% off its peak in 2008, before the global crisis. Meanwhile government bond yields fell by the sharpest daily rate ever recorded and the cost of insuring the Egyptian government against insolvency skyrocketed.

Egyptians are clearly frustrated: 25% of the population lives under the poverty line, 4% more than in 2010, and the country suffers a 13% unemployment rate with 80% of the unemployed under the age of 30. Food prices continue climbing, gasoline shortages are endemic and power outages are routine.

Egypt's foreign currency reserves are also rapidly shrinking, having already dissipated to about half their former level since the overthrow of ex-president Hosni Mubarak. In an effort to stem the tide, Egypt recently received a $5 billion infusion from Qatar, but still desperately needs a $5 billion loan from the International Monetary Fund. The IMF, however, insists that Egypt first eliminates its government subsidies.

Egypt's economic woes don't end there. Its debt has soared to $33 billion, tourism has taken a sharp downturn and economic growth has slowed from an annual 5% during Mubarak's last five years to just 2% or less.

Syria: March towards economic collapse

12-month returns: 56%

Stock market capitalization: $0.9 billion

Per capita GDP: $3,289

The loss of over 100,000 lives, along with international sanctions and a collapsing economy, hasn't prevented the Damascus stock market from rallying 56% over the past year. This statistic must be taken with a grain of salt, however. The market is very small and trading is extremely thin. Also, since the central government is the economy's leading player and manipulates market forces, the market rally likely doesn’t represent Syria's true situation.

The devastating civil war pitting President Bashar Assad's army against rebels has cost tens of billions of dollars, leaving millions injured and homeless along with destroying much of the country's infrastructure. Private consumption has plummeted, annual inflation is reaching 40%, and the Syrian pound has sunk to under 200 to the dollar, from 45 before war broke out.

An end to hostilities isn't in sight and the future of Syria remains murky. The Institute of International Finance recently said Syria's economy shrunk 20% in 2012 and that all its foreign reserves will be depleted by the end this year.

Jordan: Energy crisis and refugee problem

12-month returns: 2.6%

Stock market capitalization: $23 billion

Per capita GDP: $4,878

Jordan has managed to escape the Arab Spring revolts up to now, but the economy of the Hashemite Kingdom is stuck in the doldrums. Unemployment is running at 13%, the budget deficit has been running at 5% to 6% of GDP for years and the country is highly dependent on foreign aid, mainly from the United States. The situation is well reflected by the local stock market, which since the beginning of 2013 has remained absolutely flat, as it has been for several years – 60% below its peak level in 2008.

Since the revolution in Egypt, Jordan has also been suffering an energy shortage: 88% of Jordan's energy needs were based on Egyptian gas. To make matters worse, Jordan has also had to contend over the past two years with over 500,000 refugees arriving on its borders from Syria.

The energy and refugee problems have put a sharp dent in Jordan's budget and are expected to deepen its budget deficit to 9% of GDP. The country recently signed for a $2 billion loan from the IMF and has plans to raise another $2 billion through bonds backed by U.S. government guarantees. The kingdom is hopeful that an agreement to import gas from Israel's Tamar drilling will help pave the way for the economy's recovery.

Palestinian Authority: Distorted, dependent structure

12-month returns: 12%

Stock market capitalization: $4 billion

Per capita GDP: $1,679

Since its heyday in 2008, the Palestinian stock market in Nablus has shed 35% of its value with no movement over the past four years. The market, in existence for 15 years, has less than 50 companies and trading is extremely thin. Its more notable listed companies include Palestine Development & Investment (Padico), Jerusalem Cigarette, Nablus Surgical Center, and Golden Wheat Mills.

The market's Al-Quds Index has only registered a 2% gain this year, reflecting the economy's troubles. The PA budget is invariably in deficit and requires massive external infusions. In 2012 growth slowed to 6% from 11% in 2010 and 2011 and further slowdown is likely to occur in 2013.

Tel Aviv University researchers Dr. Ephraim Lavie and Yitzhak Gal recently published a study highlighting the distorted and dependent structure on which the Palestinian economy is based. While the economy experienced 50% growth in local consumption over the past decade and a significant rise in government expenditures, it has come to rely on foreign assistance without resources being allocated towards generating future growth and value.

But the advent of renewed peace talks seems to have brought new hope: In July alone, with U.S. Secretary of State John Kerry engaging in regional shuttle diplomacy, the Palestinian stock market shot up 10%. Investors apparently sense that renewed talks could lead to a dramatic improvement for the Palestinian economy's flagging economy.

Lebanon: Spillover of Syrian fighting deadens tourism

12-month returns: 1%

Stock market capitalization: $30 billion

Per capita GDP: $15,750

Lebanon was one of the few countries that hardly felt the effect of the global crisis. Quickly recovering from damage sustained in the Second Lebanon War, its growth rate reached 8% in 2008, second only to China. Over the following two years, growth continued at 6% to 8% and tourism flourished.

But in 2012, the battles in Syria between Assad and the rebels threatened to spill over into the land of cedars, with Lebanese factions choosing sides. Most Sunnis supported the rebels, while Shiite Moslems led by Hezbollah rallied to support the Syrian president. Tensions came to a peak in May when 25 people were killed within a week in fighting in the country's north.

The spillover didn't bode well for the local economy. Income from tourism – accounting for about 20% of GDP – has fallen 13% since the beginning of the year. Foreign investors – accounting for another 20% - suspended part of their investments and growth came to a grinding halt. Refugees, mostly Sunnis, began flooding the country's border with Syria.

The effect of the Syrian crisis turned the clock back on the Lebanese stock market, just as most developed markets were managing to recover from the global crisis. From April to June, the stock market's benchmark index fell 10% as battles spread across the border. Fears for Lebanon's security and overriding concern over the possible renewal of civil war between the its ethnic and religious factions have cast a thick pall over the country's economic outlook.

Iran: Bubble could transform into liquidity crisis

12-month returns: 147%

Stock market capitalization: $220 billion

Per capita GDP: $7,211

Despite not being an Arab country Iran is a major economic force in the Middle East region. The election the moderate candidate, Hassan Rohani, as president two months ago propelled the Tehran stock market's TEDPIX benchmark index to a new record level. Since 2008 the index has soared 400%, 147% over the past year alone.

The phenomenal performance by the market, with its nearly 350 listed enterprises, seems odd, considering that the country's economy shrank 2% last year and has been subject to severe international sanctions for over two years due to its nuclear program. Many analysts are therefore warning that the stock market bonanza is a bubble that could burst in the not-too-distant future.

Experts claim the 40% devaluation of the Iranian rial against the U.S. dollar over the past decade, owing to the sanctions, has played a key role in the stock market's climb. The central bank has also helped the government reduce the national debt, causing a collapse of government bonds in the market and increasingly driving investors towards to put their money into stocks.

The experts stress that the market's performance is largely artificial, arising from questionable monetary policy and the effect of the sanctions. These same experts warn of the development of hyper-inflation, as well as the growth of financial and real estate bubbles which could soon burst and force the country into a severe liquidity crisis.

AP
AFP