Some Thoughts on Tunisia's Implications for Investors

Through the Middle East, Tunisia's recent experience is prompting policy responses. Officials seem concerned that the ease at which the Tunisia's government was toppled could embolden the disenchanted elsewhere. High food prices and mostly soft growth prospects leave many countries vulnerable, especially non-oil producing Arab countries.

Several countries have begun implementing policies mean to diffuse and prevent social unrest. What stands out is the self-immolation, uncommon previously in the Middle East, has become more frequent, not just in Tunisia, but elsewhere too, like Algeria, Mauritania and Egypt.

Policy responses seem to mostly to be transfer payments from the government. For example, in Kuwait, all citizens will get a one-off payment of the equivalent of $3,560 and free food rations for 13 months starting in February. In Syria, reports suggest the government is putting a program in place, worth around $250 mln to asset 420,000 poor families. In Sudan, a governor of a state is providing free school meals and health insurance cards for 30,000 students and their families.

Most equity markets in the region are recording losses at the start of the year. Yet it is difficult to link the recent events in Tunisia to this. For example, Saudi Arabia's stock market fell to roughly three week lows today, but one of its biggest companies, Saudi Basic Industries (the world's largest petrochemical maker) missed earnings and the shares dropped the most in six months. The 1.1% decline of the main index snapped a seven week rally. We note that many investment banks have recommended Saudi shares on the back of higher oil prices. Some other Saudi companies, like Saudi Telecom also disappointed expectations.

There are three ETFs in this space. MES (Market Vector) and GULF(WisdomTree Middle East Dividend Fund) have market caps in the $20-$25 mln range. The third, GAF, (SPDR S&P) has a market cap of just below $200 mln. These are pointed out, not as an investment recommendation, but to indicate how some investors can acquire exposure to the region, if desired or to monitor developments in the region. A note of caution however, some funds may invest in South Africa which may not be a pure Middle East play.