Guest post by Douglas Johnson, a New York-based investment banker and Islamic finance specialist. He is chief executive at investment banking firm Codexa Capital. This post originally appeared in Codexa’s regular newsletter to investors.
Tahrir Square may be closer to Tiananmen Square than a mapmaker would lead you to believe.
After the 1989 uprising in Beijing, Deng Xiaoping accelerated economic reform. The Chinese have never looked back; their worst annual GDP growth figure since 1990 was 7.6% in 1999.
Explaining China’s growth trajectory is more complicated, of course, than extrapolation from a single event. But one common theme throughout this period has been China’s anxiety over recurring civil unrest—actual and threatened.
Social turbulence, along with an ineffective pension system, are fundamental propellers of Chinese economic policy.
We see potential for an equally constructive economic scenario unfolding from unrest in the Islamic world.
Our view aligns with commentators who argue that recent turmoil has less to do with an obscure if reprehensible video, and more with failed economic prospects at the most individual level. Remember, it took some two years for the Chinese to formulate a balanced response to their problems.
Indeed, the entire Muslim world is not ablaze. The shopping malls in Dubai are as relaxed as ever. The countries in greatest turmoil seem to be the ones with the biggest headaches to sort out, in the realm of food, shelter, jobs, and other basic needs.
The contrast is sharp between one end of the Islamic world and the other.[caption id="attachment_688" align="aligncenter" width="580"] Source: World Bank via Codexa Capital[/caption]
GDP for 2013 should be up 4%-to-5% in Malaysia and may reach 6%-to-7% in Indonesia. In Kuala Lumpur, a group of demonstrators marched through the city and handed a letter of complaint to officials at the US Embassy.
Matters were less smooth in Jakarta, but protests outside the US consulate in Medan—a more conservative city—were expressive, not violent.
We see glimpses of what the future could hold for many Muslim-majority economies. At opposite ends of the size spectrum, the successes of Qatar and Turkey speak for themselves.
There is foreshadowing elsewhere. Iraq announces a massive infrastructure program; Morocco holds its own in attracting foreign investment; Jordan is a percolating technology center.
As odd-man-out amid regional economic debilitation, Saudi Arabia looks almost like an African lion or Asian tiger, with GDP coming in at 5.5% for the second quarter. Given the Saudi propensity for fiscal stimulus, we’re likely to see better-than-expected results over the year ahead.
Escalating growth across the Islamic world will be an indirect benefit of policy moves by the Federal Reserve, the European Central Bank, and the Bank of Japan. We may soon begin to think of proactive, rather than reactive, investment strategies in many corners.
Unfortunately, an umbrella solution―similar to what we saw from Beijing in the 1990s―isn’t possible because of the fractional nature of these geographies. But vibrant domestic policies can go a long way toward complementing the international backdrop.
The investment outlook for large swaths of the Islamic world may actually strengthen, because of or in spite of, events of recent weeks. Stock-price buoyancy on the Egyptian and Karachi exchanges, amid continuing public outrage, may presage coming improvements.