Thursday, January 27, 2011

Contagion in the Middle East

With the protests in Egypt reaching more violent levels (three protesters have been killed), and the revolt that took place in Tunisia already, the possibility of further outbreaks are imminent. Already Yemen has seen taking to the streets, like the Egyptians.

Already the EGYPT index has plunged, in the last five days, from around $19 to $16.50. The Yemeni riyal has depreciated to 213 riyal to the dollar. These figures shouldn't be surprising, but we might want to take look at other countries in the region as well. If violence spreads, as it appears to be, we will have to look at the violence from two, opposing, economic points of view.

Firstly, we have the somewhat more obvious issue of civil war. Countries' economies, expectedly, tend to suffer during times of internal strife. For areas like Africa or the Middle East, places which are not particularly attractive to investors to begin with, these spurts of regional conflict could send the few, brave foreign investors fleeing to the hills. Markets in those countries will plunge, and we will most likely see some rapid depreciation. But what about the aftermath of conflict?

Here is my second view, and it is of a notably more positive bent. Assuming that these countries don't entirely collapse in on themselves, they will emerge with some form of (hopefully) functioning government. Now, there will be much rebuilding to be done, however, their economic outlook may not be as dour as it might appear. Large oil exporters would probably like their currencies to depreciate a little bit, though probably by different means than violence. When there currencies depreciate, their good become cheaper to foreigners, and their exports become more attractive. I'm guessing that for exporting economies (which many oil countries are), recovery from war is less painful than for those with trade deficits. There is of course the political bonus from a resolved conflict. Namely, dictators may be overthrown (always good), and if the new governments that emerge are truly stable, all those investors that stayed away might take a peek inside.

Let's hope these conflicts end sooner than later, and the recovery after may be a pretty profitable one.

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