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May 28, 2013 12:09 am
Economic hardship has driven the popular uprisings and wider discontent sweeping the Arab world and the troubles of funding private sector growth have been a big part of that.
While financial conditions in the region vary widely – from cash-rich Gulf petrostates to the beleaguered north African and Levantine countries – companies of all sizes have suffered similar constraints stemming from harsh government policies and difficulties in securing finance.
“The Arab spring was not just a crisis about the state – its ability to reform, redistribute and represent ordinary citizens’ interests,” said Bassem Awadallah, a former Jordanian finance minister, and Adeel Malik, an academic at the University of Oxford, in a presentation at the London School of Economics this month. “It was also a crisis about the private sector – or, more appropriately, its weakness.”
Many business people and economists agree that one of the great tasks during this era of political and economic change is reform of the private sector, with banks, finance houses and rich individual investors all required to play an important role.
While the uprisings have in some ways complicated matters further for companies, squeezing sources of capital and ramping up the cost of debt, they have also opened new possibilities by toppling autocrats and making others think more about the development they need to keep their populations happy.
The big question is whether the finance sector can, as some maintain, exploit the spirit of entrepreneurship that has always been present in the region’s myriad small businesses and is growing stronger as a younger generation presses for change.
“Small and medium-sized businesses remain the region’s beacon of hope and the anchor of the international community’s economic vision for the region, thanks in part to their success over the past decade,” said Vali Nasr, dean of Johns Hopkins University’s School of Advanced International Studies, in an article on the International Monetary Fund website in March. “But this vision is also based on the belief that there is still ample capital in the region – from local investors who are far more comfortable with political risk than western investors – that could keep that dynamism alive.”
For now, the Arab spring has thrown into confusion many of the positive predictions about the growth of the private sector. Countries praised in the past for making progress in generating investment, such as Tunisia and Egypt, are in post-revolutionary turmoil. Mr Nasr points to how domestic investment in Egypt fell 10.5 per cent in 2011, with foreign investment plunging more than 90 per cent to just $500m.
Efforts are focusing on reviving sources of funding that have sputtered or stalled. At the same time, business people and economists are pressing for finance to be freed up in Gulf oil-producing states that have mostly been free of political trouble. These countries have seen the growth of companies stunted by restrictive laws, conservative lending practices and a culture of offering the populace generous state benefits and lucrative government jobs.
The sense is that, with notable exceptions, unhelpful government policies and unadventurous thinking from financiers are still stifling companies.
Lending to the private sector in the Arab world lags behind that in most of the world’s other big economic blocs, according to World Bank figures. Domestic credit to the Middle East and north Africa stood at just 35.1 per cent of gross domestic product in 2011, compared with 61.4 per cent in sub-Saharan Africa, 115.3 per cent in east Asia and the Pacific, and 135.9 per cent in the European Union.
Financial problems include the Catch-22 confronting entrepreneurs in Egypt, where banks often require three years’ worth of financial statements before they will approve a loan. This effectively makes it impossible for them to give credit to start-up businesses.
Financial institutions in some countries are growing even more cautious about lending, stung by the political instability around them and the unravelling of the relationships they enjoyed with toppled autocratic regimes.
In Tunisia, where long-time leader Zine al Abidine Ben Ali was overthrown in January 2011, the rate of non-performing loans in the banking system rose from 13 per cent in 2010 to 16 per cent in 2011, “largely due to the failure of large businesses associated with the former ruling family and its associates”, according to the European Bank for Reconstruction and Development.
In this increasingly hostile environment, some entrepreneurs desperate for funding face dangers from consultancies that offer them capital at inflated prices and charge hefty advisory fees – what one entrepreneur describes as “equity loan sharks”.
The financing of private business is also hampered by longstanding legal obstacles, notably the criminalisation of debt. When the owners of ailing companies are jailed in the United Arab Emirates because they cannot honour their obligations to repay creditors, it is hardly an encouragement to future entrepreneurs with big ideas but no certainty of success.
A further problem is the stop-start attempt to increase the access to finance of the family companies prominent in the region’s economies, particularly in the Gulf. While some are thinking of tapping stock markets for fresh capital to expand, relatively few have been prepared to stomach the increased disclosure and transparency such a leap entails.
But continuing with the status quo could itself be risky as well as unexciting. The epic and continuing Saudi Arabian dispute between Maan al-Sanea and the Algosaibi family has shaken preconceived notions that kinship will act as a guarantor of stability and a stay on damaging public legal disputes. Many dynastic businesses are now transferring to second and third-generation owners, increasing the likelihood of destructive family rifts over ownership and strategy.
While the list of problems may seem long, many observers say there are plenty of promising solutions, with angel investors and venture-capital funds filling some of the gaps left by reticent banks and private equity companies.
In Egypt, groups such as Cairo Angels are providing investment to a wide range of start-ups and are attracting the interest of international institutions such as the World Bank. In Jordan, where on-off protests have put increasing pressure on the monarchy, the fast-expanding information and communications technology sector has enjoyed growing success.
The flourishing of these kinds of possibilities, even amid adversity, is one of the main justifications cited by those who are optimistic about mobilising finance to fuel business growth.
In a recent article, Ashraf Zeitoon, a former adviser to the governments of Dubai and Jordan, and Yasar Jarrar, a fellow at the Dubai School of Government, said government seed funding, angel investors and venture capitalists would help provide the financial heft to support a dynamic – if suppressed – business culture that predates the Arab spring.
As they put it: “In under a decade, a buzzing entrepreneurship ecosystem has been created by and for the youth of the Arab world.”
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