Analysis: Tunisia crisis could hit investment across region

LONDON Mon Jan 17, 2011 1:22pm EST

An armed police officer stands guard in the Ministry of Interior near the Parliament building in Cairo, January 17, 2011. REUTERS/Asmaa Waguih

An armed police officer stands guard in the Ministry of Interior near the Parliament building in Cairo, January 17, 2011.

Credit: Reuters/Asmaa Waguih

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LONDON (Reuters) - The political upheaval in Tunisia has dealt a heavy blow to planned stock and bond listings in the country and also has the potential to send rising portfolio flows across North Africa and the Gulf into reverse.

Repercussions from the violent protests that unseated the regime of President Zine-al-Abidine Ben Ali on Friday are being felt from Jordan to Morocco, with stock and currency markets falling and debt insurance costs surging across the region.

The first and biggest hit has of course been on Tunisia.

While the unseating of Ben Ali, who ruled Tunisia with an iron fist for more than two decades, is widely seen as a positive, the chaos has sent Tunisian stocks plunging 15 percent and the cost of insuring exposure to Tunisian debt has almost doubled since the start of the year.

"It will impact people's short-term investment strategies but from a long-term perspective what can come out of this can only be an improvement on what they had before," said Daniel Broby, chief investment officer at Silk Invest.

Tunisia started the process of appointing a new government on Monday but Broby, who is underweight Tunisia, said investors would need real political clarity before venturing in again.

Barclays forecast the immediate economic cost, falling tourism receipts and direct investment flows, would cut 2011 growth to 4 percent from 5 percent.

The Tunisian stock market is tiny, comprising just 0.7 percent of the MSCI frontiers index and with a market capitalization of just $10 billion -- a tenth of that of Egypt or Morocco.

But with a steadily growing economy and reasonably profitable companies -- including those that provide rare exposure to Algeria and Libya -- the bourse had been luring a steady trickle of fund inflows, with about 25 percent of the free float estimated to be in the hands of foreigners.

However, initial public offerings that were set to add liquidity and raise Tunisia's investment profile, are now almost certain to be delayed. State-run Tunisie Telecom, which had hoped to become the first Tunisian company to list in Europe via a listing in Paris, appears to have become the crisis' first victim.

The company was due to start meetings with European investors over the next week, but market participants were doubtful those would now go ahead.

"The advisors to the IPO will in our opinion have to err on the side of caution and delay to the second quarter or beyond," said Broby.

Arranging bank Credit Suisse declined to comment.

A few other companies were also expected to list in Tunisia this year following the stock market's 20 percent rally in 2010 and valuations that are above average for emerging markets.

Another likely casualty is Tunisia's first Eurobond in two years, which was planned for early 2011, part of Tunis' plans to borrow $2.7 billion in total this year.

But with the risk of credit ratings downgrades, there is little chance the issue can go ahead before the political situation stabilizes and debt insurance costs return to normal.

"Clearly, the government will have to revisit those plans," said Richard Segal, director of emerging markets at Knight Capital.

CONTAGION RISK

Foreigners smarting from losses on Tunisia are also becoming wary that similar events to those of recent days could unfold across neighboring countries, with the potential to hurt their much larger allocations in other North African and Gulf states.

The Middle East and North Africa (MENA) region has become popular with portfolio investors in recent years despite thin liquidity and restrictions on foreigners in many countries.

"This does make a difference in Tunisia and makes you wary of the rest of North Africa, especially where you have one leader in place for a long time," said Oliver Bell, senior investment manager at Pictet. "People are going to be wary of allocating more capital."

Tunisia's economic and demographic challenges are not unique in MENA where population growth is outpacing economic growth everywhere and average youth unemployment is almost 30 percent. That compares to 16-17 percent youth unemployment rates in Latin America and eastern Europe, World Bank data shows.

"The risk of a spillover of Tunisia's crisis to the rest of MENA is not negligible in our view," Barclays analysts said in a note, advising caution on Egypt and Jordan in particular.

BNP Paribas suggested taking a negative view on North Africa via a short Egyptian pound position on a three-month non-deliverable forward basis, betting the pound will depreciate nearly 5 percent to 6.10 per dollar.

Bell sold out of his Tunisian holdings shortly before the new year and, more significantly, he is also underweight regional giant Egypt which has generally been a favorite with investors but faces elections later this year.

Egyptian President Hosni Mubarak, 82, has been in power for almost 30 years and is widely expected to stand again in a September election. Fears of spreading unrest pushed Egypt's currency to six-year lows against the dollar on Monday while stocks fell 2.4 percent, their biggest daily loss in seven months.

"If alarm bells start ringing in Egypt, there's potential for quite a lot of money to come out," Bell said.

(Additional reporting by Isabel Coles in London; editing by Susan Fenton)

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