beyondbrics

Investors nervously wondering which Middle East country could be wracked by political turmoil next agree on three likely candidates: Algeria, Jordan and Bahrain.

Other contenders include Yemen, Lebanon and Saudi Arabia, but the first two have been basket cases for so long that international investment is largely non-existent (although there is plenty of Gulf money in Lebanon). The latter is considered extremely unlikely to face trouble given the wealth the government can feed to its people.

On the other hand, Algeria has already seen widespread protests; Jordan’s king recently sacked his entire government and promised reforms; while Bahraini youths (mainly Shia, the majority of the population in a Sunni-ruled monarchy) have called for a day of rage on February 14.

After poring over data on past revolutions – including correlations with youth bulges, wealth and unemployment – Renaissance Capital has calculated that Algeria has a 4.4 per cent chance of becoming a democracy and Bahrain a 3.7 per cent chance. The Russian investment bank didn’t calculate the odds for Jordan.

What are the market implications? Well, Algeria doesn’t even have a stock exchange. And in spite of the questions hanging over the two countries, stocks on the Bahrain Stock Exchange (BSE) and the Amman Stock Exchange (ASE) in Jordan have held up better than most regional exchanges in the past month.

While the Dow Jones regional index has slipped 5 per cent since the start of the year, the ASE is flat, and the BSE has edged up almost one per cent, albeit on extremely low volumes.

Still, this may be more a reflection of the investor universe in the two markets. Both are dominated by local investors rather than international institutions.

Both Jordan and Bahrain are relatively large bond market borrowers too and credit markets indicate more alarm than equity markets. Credit default swaps on Bahraini debt have climbed to 238 basis points, higher than Tunisia’s 212 bps, while the price of Jordanian bonds have slipped.

But those who argue Jordan and Bahrain won’t be the next dominos to fall can point to several factors.

Jordan’s Hashemite royal family is still relatively popular among “native” Jordanians (less so among Palestinian Jordanians), and enjoys the backing of influential Bedouin tribes that dominate the security apparatus and armed forces.

In Bahrain, the security forces are considered loyal to the Sunni Al Khalifa royal family because so many are foreigners who have been granted jobs and Bahraini nationality.

Bahrain also has the resources to buy popularity among its populace, even though it is not as rich as its Gulf neighbours. Mainstream Shia politicians and clerics have tried to head off the planned demonstrations on February 14.

But it wasn’t long ago that conventional wisdom said Tunisia would remain in the grip of the Ben Ali family. When it fell, analysts were quick to stress why Egypt was not the same. Both assumptions were ripped apart by the Arab street.

Related reading:
Egypt file, beyondbrics