It has been a turbulent year in the Middle East and North Africa, with the initial euphoria of the Arab Spring giving way to frustration and protracted struggles between protesters and entrenched regimes in Syria and Bahrain, and a bloody ground war in Libya.
In common with most policymakers and financiers, analysts covering MENA were caught unawares by the initial speed and scale of the revolutions in Tunisia and Egypt, and have since been scrambling to make sense of the unfolding situation and what it means for the region’s economies and markets.
But while no one called the timing or scale of the Arab Spring, analysts based in the thick of the action, rather than observing from their desks in London, New York or even Dubai, were able to provide a much more nuanced and immediate sense of what was going on.
Simon Williams, HSBC’s chief MENA analyst, was in Cairo on January 25, when the protests began in Tahrir Square, and provided daily updates to clients based on his conversations with protesters and building on his more than 15 years of experience living in and covering the region.
He has subsequently released a series of reports detailing the post-revolution challenges facing Egypt, and the implications for investors – that the long-term depreciation of the Egyptian pound is both highly likely and appropriate.
In Q3, he published No going back (with Elizabeth Martins), arguing that the Middle East’s demanding demographic profile, coupled with medium-term weak rates of economic growth will ensure that pressure for change persists. He argued that only three of the 17 states in the region had the wealth to sustain the oil-based, public sector-led models that have characterized the region for the past 40 years.
Other research houses were quick to spot that political risk had led to many sovereigns and corporate debt and equities in the region’s more stable nations being oversold during the first quarter of the year.
In March, Exotix issued a buy rating on Dubai 2020 sovereigns when yields hit 8.5% – they subsequently fell to around 6.3% by early August. Similarly, they advised a buy on Saudi property developer Dar al Arkan’s 2012 floating-rate note when yields hit 14% in March – they subsequently fell to around 8%.
But while Exotix and others correctly called that the contagion risk in Saudi Arabia, Qatar and Dubai had been vastly over-exaggerated, an eye-catching report by Jadwa Investment analysts Brad Bourland and Paul Gamble in July pondered the longer-term future for Saudi Arabia.
The report concluded that major doubts over the size of the country's remaining oil reserves and future production capacity and spiraling central government expenditure would likely see it begin to run budget deficits by 2014, which would become severe by 2020, with major ramifications for regional economies. While this remains very much an out-of-consensus call, it nevertheless re-energized the debate about the region’s long-term potential given its political rigidity and continued reliance on oil.