The Investment Stability of the Arab Winter

The Arab Spring presented investors with unique investment opportunities and participation in the process of re-building North-African nations. Transitional justice and political change have been historically known for bringing forth foreign investment players who can shape these emerging economies despite the political and regulatory risks. And these risks do exist.
Surprisingly, however, some nations portray these risks as marginal, thus depicting a rather rosy investment climate. If you happen to be interested in the Egyptian market, for instance, the Egyptian General Authority for Investment's website offers you the following proposition: "Political stability allows businesses to be confident that the economic policies that attracted them to invest in Egypt will remain in place."

On a similar note, the IMF had predicted in the spring 1% economic growth for 2011 in Egypt and a quick recovery. Yet, these modest numbers are doubtful in light of current, renewed political turmoil, and one might wonder whether emerging economic policies will, in fact, remain in place. The Egyptian protesters who reject Egypt's militarism are back to the street.
Those who take advantage of low valuations and bet on the future of North Africa question how sustainable the reconstruction process is if the political revolution is so fragile. While Egypt is the case in point, where millions have been marching the streets against the current regime, similar scenarios could appear in other parts of the Arab world where the political transition is still a work in progress.

A transitional government faces several strategic challenges, and I am not referring exclusively to security matters in times of crisis. Redistribution of wealth by adopting new economic policies and legislation may not receive the political capital from the future permanent regime. Moreover, transitional regimes can be driven by the urgent need to swiftly change past practices while ignoring the importance of well-informed policy making process or securing investors' legal and economic stability.

The solution requires a multidimensional approach. First, governments should work with the opposition and multilateral forums to bring expertise, professionalism, and credibility to the process. Foreign investors will be inclined to get involved in investments in breakthrough ventures if they tag along other investors who are experienced in such transitional periods. The role of OPIC in the Egyptian economy can serve as an example. Second, while this transitional period tends to attract uncertainty and political fragmentation, the government should invest all available resources to centralize the interaction with foreign investors in the country. Multiple foreign investment agencies and inconsistencies can lead to the wrong expectations and legal disputes down the road. This has been an issue even for some highly developed economies, as a French investigative report concluded last year with respect to French multiple foreign investment agencies.

Finally, the government's attempt to attract investors by providing subsidies and tax breaks in times of crisis can be perceived as corrupted and unjust. It is precisely the timing that makes such a common policy tool so controversial. Any foreign investment benefits should not be implemented instead of a comprehensive approach towards fostering local investment and development.

The investors themselves should do their homework. For instance, in addition to the fact that the Egyptian stock exchange went down 47% since the transitional military council was announced, the political risk involved in the current movement can have a direct impact on investments and returns. There are several ways foreign investors can protect themselves against a backlash from a new permanent regime. Insuring that the investor comes from a state with a treaty with the country in question that can protect the investor down the road is a key factor. Investors can insist on inclusion of a stabilization clause that freezes the regulatory status when the investment is made.

In addition to the traditional political risk insurance, those investments which are qualified to receive Multilateral Investment Guarantee Investment (MIGA) insurance policies can enjoy a very effective dispute settlement regime thanks to a multilateral diplomatic process that identifies risks in advance and monitors ongoing investments to avoid unnecessary conflicts at a later stage.

The current and recent pictures of riots in Egypt, Morocco, and perhaps other parts of the Arab world, question the sustainability of the rule of law in those countries in time of transitional regimes. The world of investment in emerging markets is fast moving and quite often ignores the sensitivities and constrains of the existing governments. More attention should be given to this process so we are all better informed. Better economies and better results will follow in the coming year.

An earlier version of this article appeared in