The Middle East is headed into the unknown, on that everyone agrees — but the speed of events in Egypt and elsewhere has left analysts and financial markets struggling to find their bearings.
The sheer range of potential near-term scenarios, from benign reforms that relieve social tensions and promote growth to the collapse of order and all-out wars, means that the simplest forecast for investors is to expect more volatility.
Seeking templates, 1990s eastern Europe may offer some. But, again, the key lesson may be how diverse the changes may be.
Some experts predict the past month's largely unexpected dramas — the fall of Tunisia's strongman, impending departure of Egyptian President Hosni Mubarak and political shifts in Yemen, Jordan and elsewhere — may presage seismic change across the Arab world.
Some see that as ultimately leaving the region a more stable place to invest. Others are alarmed, fearing heightened risk of conflict, militancy, extremism and oil supply interruptions.
"There are clearly some very different scenarios out there," said Lars Christensen, head of emerging markets analysis at Danske Bank. "There are those whereby you get liberalization across the Middle East that could be very market positive.
"But you also have the low probability-high impact scenarios whereby you get disaster in countries like Saudi Arabia."
The fall of the Berlin Wall in 1989 opened up trade and brought political reform and prosperity to dozens of economies. But it also heralded a decade of civil war in the Balkans as well as new regimes where investors struggle to secure returns.
Realizing the diversity of outcomes is crucial.
"Could you have predicted in 1989 that the Czech Republic would do well and Ukraine less so?" said Christensen. "Perhaps. But you might still have been surprised by the unexpectedly good performance of Poland — and it was not a good time to be in Yugoslavia."
OIL MARKETS WATCH
Where to invest, and also when will be as vital as ever.
Fortunes for investors in Russia alone proved hugely volatile over the past 20 years — which saw a coup, uprisings, property and market booms, switches from near-anarchy to authoritarianism, wars and energy supply interruptions.
No model is perfect. Not only is the Middle East not eastern Europe, the 2000-teens are not the 1990s. Times and tools have changed. The rise of social media sites and Internet and mobile phone penetration within the region complicate forecasting.
Most analysts agree sites like Twitter acted as a political accelerant, but with the technology so new few pretend they genuinely know how it will affect events in the longer term.
In trying to predict what comes next, experts are inherently influenced by their own long-held assumptions, fears and hopes.
Like the emigre Poles, Czechs and Russians who went home in the 1990s, the Westernized Arab academics flying to Egypt now to join protesters on the streets are full of hope they are seeing the beginning of regional liberation.
But Western experts and policymakers who have spent the last decade worrying about militancy focus their attention on violent forces in the shadows, ready to take advantage of disorder.
For now, the speed of events and the huge divergence of potential opinions make it hard to gauge exactly what markets expect. Oil markets look to be pricing in a modest heightened risk of supply interruption, with Brent crude passing through $100 a barrel from around $95 at the start of the year.
But traders are watching closely and experts warn prices could prove volatile in the coming weeks and months.
"Price breakouts due to geopolitical reasons have become more likely," said Barclays Capital in a note, saying oil market confidence over spare capacity last year looked to be ebbing.
For oil traders, the main focus has been Egypt's Suez Canal — so far unaffected by onshore chaos — but the elephant in the room remains Saudi Arabia.
The probability a repeat of events in Cairo and Tunis in Riyadh or Jeddah is still generally regarded as low — albeit higher than it was seen to be even only a couple of weeks ago — but the potential global market impact would be huge.
SAFER THAN BELGIUM, RISKIER THAN FRANCE
Some talk up the risk. Like Egypt and Tunisia, Saudi has ageing rulers and some disaffected populations, notably reflecting regional and religious differences with the ruling house. The Saudi royal family relies on a U.S.-armed military — and Washington's approach to events in Egypt showed it can pull support from long-term allies when the tide turns.
Others say such parallels are overstated. They point to the differences between the Gulf oil economies and poorer North African states, citing the Saudi kingdom's huge oil wealth in particular giving it more flexibility to placate the masses.
Credit default swaps (CDS) markets have been pricing in a higher risk of sovereign default across the region, with rates for Egypt, Tunisia, Morocco and Lebanon well over a third and sometimes almost twice levels at the beginning of the year — although most premiums have eased marginally since Friday.
Long-held assumptions of Saudi stability meant its CDS were barely traded until mid-January, rising to 113 basis points according to monitor Markit from a quoted 70 on Jan 18.
It would therefore cost $113,000 to protect $10 million Saudi five-year debt against default or restructuring. That remains well below Egypt's $355,000, Tunisia's $192,000, Morocco's $193,000, Bahrain's $385,000 or Lebanon's $385,000 — although it is approaching Israel at $133,000.
It also means the Saudi kingdom remains seen a better credit risk than Greece, Portugal, Spain, Italy, Ireland or even Belgium, priced on Wednesday at 146 basis points.
But after Egypt and Tunisia's revolts, the world's largest oil producer is now priced riskier than France — 87 basis points — and almost twice as risky as Britain where it costs $60,000 to protect holdings of $10 million in government debt.
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