At the same time, the Arab Spring gave rise to Islamist governments who aspire to move from a total dependence on foreign loans (usually granted by the European Central Bank, the World Bank or the IMF) towards more viable and Shariah compliant models: namely raising funds through Islamic financial markets.
Notably, the way is paved for Islamic finance to be introduced in the region, but will the industry players be there — are GCC oil producing countries willing to play a greater role in the region? Though the challenges are considerable, it is in their interest to get involved, namely by investing in infrastructure projects.
Islamic funds expected to flow in post-revolution states
According to Ernst & Young’s Islamic fund and Investment Report 2011, Islamic funds under management are estimated at US$3.5 billion in the US and US$0.5 -1 billion in the UK, Luxembourg and France. In contrast, Islamic assets are nil in both Morocco and Libya while they remain low in Tunisia, Algeria and Egypt.
This geographic distribution is likely to change: investors trust might be undermined and funds could outflow if western market turbulences persist. Predictions are leaning more towards growing Islamic finance activity in the MENA region. Islamic banking in the region is predicted to reach US$990 billion by 2015 against US$416 billion in 2010, largely due to revolutions in North Africa, as estimated by Ernst & Young in their World Islamic Banking Competitiveness Report 2011.
As a matter of fact, political regimes in North Africa have always shown some reluctance in embracing Islamic finance. Now that Islamists are in power, Shariah compliant investments are welcomed to tap into the opportunities offered by the region, including hydrocarbon reserves and accumulated wealth in Libya and Algeria coupled with human capital reserves in most of the other countries.
GCC investments could have stabilizing effect
Injecting funds in the countries affected by the revolutions is not an option for the GCC, it is rather dictated by geopolitical strategies. A report by Geopolicity — an economic intelligence consultancy advising institutions and governments — argues that uncertainty over the outcome of the revolutions requires an Arab leadership, especially from countries spearheading regional change such as Qatar and Saudi Arabia.
The west is struggling with its own domestic problems and only wealthy oil producing states can offer help programs to the economies weakened by the protest movements. This is particularly true since GCC members benefited from oil prices increase ($30 per barrel) during the Arab Spring. Qatar registered 30% earnings growth followed by 24% in Saudi Arabia, which is primarily owed to petrochemical sector, as reported by Global Investment House in August 2011.
Actually, it is in their own interest to support the post-revolution countries: first it would allow a shift of Arab leadership from Egypt to the GCC and most importantly, the stability of the whole area depends on that of the new democracies. But the latter is threatened if the youth expectations are not immediately addressed.
Employment and enhancing the quality of life are at the forefront of the political agenda of the new governments as well as for the regimes keen to avoid further protests. The task is hard to achieve with fragile economies and high unemployment rates.
In 2011, debt to GDP reached 64.43% in Egypt, 53.63% in Morocco and 42.8% in Tunisia, while Algeria and Libya usually record a surplus in their public finances. Unemployment rates remain high in the region with 14.7% in Tunisia, 10.4% in Egypt, 9.7% in Algeria and 9% in Morocco in 2011.
Furthermore, the revolution bill amounts to US$12.5 billion in North Africa (Libya, Tunisia and Egypt) according to Geopolicity. Notably, there is urgent need for foreign investment in the region and the IDB has understood the dilemma: the best way to create jobs is though economic growth and the first choice is to launch infrastructure projects.
At the annual meeting of the World Bank Group and the IMF held in September 2011, Dr Ahmad Mohamed Ali, the president of the IDB, declared that: “The recent developments in some Arab countries make it imperative for the IDB Group to assist in the country-owned formulation and implementation of an employment-focused reform and development agenda.
In this regard, the IDB Group has formulated a multi-tiered program to assist the affected Arab countries in achieving better alignment between economic growth and employment generation objectives.” Amongst others, the program focused on infrastructure projects. The IDB established an Arab facility for infrastructure in cooperation with the World Bank which is intended to mobilize up to US$1 billion to support economic growth.
The Cross-Border Trade Facilitation and Infrastructure Program is about to be launched by the IDB, the Arab Fund for Economic and Social Development, the Arab Trade Financing Program, the African Development Bank, the World Bank, the European Investment Bank, and the Agence Francaise de Developpement.
The IDB has announced an Interim Assistance Strategy for Egypt and Tunisia with a financial envelope of US$2.5 billion and US$1.5 billion respectively which would cover the period 2011-2013. Overall, the cumulative net approvals for 19 MENA member countries totaled US$39.5 billion which constitutes around 52% of the total approvals of the bank since its creation in 1976.
Lessons from the past
History shows that vast infrastructure projects are an immediate remedy to absorb unemployment and resurrect ill economies in record time. When Roosevelt took power in 1933, the US was still suffering from the great depression sequel: unemployment of 25%, a regression of 33% in the GDP and investment decline of 89%.
To boost the US economy, the New Deal plan proposed big public infrastructure projects. By 1937, unemployment had decreased by 10.7%.
A second example is Marshall Plan, a US-sponsored program designed to assist European recovery post-World War II. The US feared that unemployment and poverty would encourage communism within western Europe.
Hence, US$13 billion was invested in reconstruction projects for a period of four years. The plan helped the beneficiaries to increase their GDP by 15-25% during the stated period.
Prospects for Islamic infrastructure funds
North Africa, particularly, has the potential to attract private infrastructure funds. The Collaboratory for Research on Global Projects (CRGP) of Stanford University, recently edited research on Private Infrastructure Investment Opportunities in Islamic Countries.
The major country selection criteria as presented by the study are as follows: population, GDP growth, size of private infrastructure investments, IDB commitment for infrastructure financing, regulatory environment/ease of doing business and political stability.
In 2009, North Africa showed a satisfactory level of attractiveness in a study that encompasses the 56 members of the IDB. The results could be explained by the importance of the population and the relatively important GDP growth.
Besides, between 2000 and 2010, private activity in infrastructure in the Middle East and North Africa was concentrated on Egypt, Algeria and Morocco. These countries accounted for more than 61% of total investment in the region.
Private infrastructure investments could be further encouraged by the recent IDB commitments. As mentioned earlier, their net approvals for the MENA region post-revolution are equivalent to 52% of the cumulative net approvals since 1976. Finally, the hope for greater transparency and less corruption could stimulate private investors.
The choice of Islamic infrastructure funds, instead of conventional, is rather favored by the nature of governments that are gaining power over North Africa. Moreover, the GCC sponsors are not likely to show any objection to the Islamic option.
Challenges ahead
Investors should be concerned with political stability. The battle against the military regime persists in Egypt, and the resilience of the new government in Tunisia is not yet tested. Furthermore, Libya still sees armed groups and the street reaction in both Algeria and Morocco is yet uncertain.
Pertaining to the results of the CRGP research, the attractiveness of these countries to private infrastructure investors is to be reviewed. The study was conducted in 2009, and is surely an indicator of the region’s potential, but the revolution came at a cost and these economies are facing hardship. To reassure the fears, institutional and insurers are promoting a new product: Political Risk Insurance (PRI). The CEO of the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) is enthusiastic about an Islamic version of this product. PRI could protect the investments of IDB members against the risk of war, civil disturbances, not honoring of sovereign financial obligations of the country of domicile, and so on. He concluded: “In short, the region has both challenges and opportunities, and ICIEC will deal with them accordingly.”
Amal El Haouti is an Islamic finance consultant at the Islamic Financial Product Development Center of the Islamic Development Bank. He can be contacted at
[email protected]
.