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FINANCIAL TURMOIL & THE ARAB SPRING           Factors Influencing Economic Freedom                     Marshall L. Stocker...
REMARKS What Financial Turmoil ? Empirical Foundation Arab Spring: Economic Likelihoods Implications   “Prospects of s...
WHAT FINANCIAL TURMOIL?                          3
4 OCTOBER 2011                 Egypt 92% decline in                 FDI                 Libya 87% decline                 ...
“Some 218investments weremade by theseregional privateequity funds from2004-09, out of whichonly 14 have reachedexit…„Thos...
Tunisian President Ben Ali              resigns (January 14, 2011)                        Egyptian stock market down      ...
EGP TO US$ EXCHANGE RATE :CENTRAL BANK’S LOCAL ASSETS SKYROCKET                                        7
EGP TO US$ EXCHANGE RATE : 5-YEARSCENTRAL BANK’S LOCAL ASSETS SKYROCKET                                        8
EGP TO US$ EXCHANGE RATE : 5-YEARSCENTRAL BANK’S LOCAL ASSETS SKYROCKET                                        9
Brazil‟s Central Bankused currency reserves todefend Real over twoyears 1997-98Foreign currencyreserves dropped 40%($60 bi...
FINANCIAL TURMOIL SUMMARY FDI plummets Private equity broken; no funding Public equity market crash Foreign currency r...
FINANCIAL TURMOIL SUMMARY“Its an off the record conversation, but am truly terrified   now.After my meeting at the ministr...
EMPIRICAL FOUNDATIONS FOR IMPLICATIONS                 TO ECONOMIC FREEDOM                                     13
EMPIRICAL FOUNDATIONS(∆) Economic Freedom                        (∆) Financial  Conditions“Equity Returns and Economic Fre...
EMPIRICAL FOUNDATIONSEqual Weighted Average Equity Returns (1970-2002)                                           Equity Re...
EMPIRICAL FOUNDATIONS: STOCKS REACT        ∆ Economic Freedom             ∆ Stock Index Price                             ...
EMPIRICAL FOUNDATIONS                                                Annualized Percentage Currency Change vs. US$        ...
EMPIRICAL FOUNDATIONS                                                  10-Year Sovereign Bond Redemption Yield Spread     ...
EMPIRICAL FOUNDATIONS                                              Annualized Percentage Currency Change vs. US$          ...
EMPIRICAL FOUNDATIONS                                                                    Currency Return OUTLIERS         ...
EMPIRICAL FOUNDATIONS SUMMARY   Change in Economic Freedom   Equity    Returns   Economic Freedom   Government Debt    Y...
EMPIRICAL FOUNDATIONS SUMMARY: THEIRS Equity Market Size as Percentage of GDP (Li  2002, LaPorta 1997) Total Market Capi...
ARAB SPRING: FACTORS INFLUENCING               ECONOMIC FREEDOM                               23
ECONOMIC FREEDOM OF THE ARAB WORLD   Current financial markets may indicate a    current decrease in economic freedom.  ...
FINANCIAL TURMOIL & ARAB SPRINGINFLUENCING (AREAS OF) ECONOMIC FREEDOM Subsidies (expansion or rationalization) Capital ...
“The economicuncertainty has beenexacerbated bydeteriorating security…The …lack ofefficient policing hasbrought higher cri...
IMPLICATIONS FOR POLICY MAKERS &                       INVESTORS                               27
EGYPT’S CREDIT RATING DOWNGRADED (10-10-11)   Downgraded Egypt‟s long-term default and    currency ratings to “negative” ...
Over the past month, whileaffirming that the country is“committed to a free market”the interim government alsobanned three...
FINANCIAL TURMOIL & THE ARAB SPRING           Factors Influencing Economic Freedom                     Marshall L. Stocker...
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Financial turmoil & the Arab spring:Factors Influencing Economic Freedom

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Financial turmoil & the Arab spring:Factors Influencing Economic Freedom

  1. 1. FINANCIAL TURMOIL & THE ARAB SPRING Factors Influencing Economic Freedom Marshall L. Stocker MBA CFA www.freedom-economics.com
  2. 2. REMARKS What Financial Turmoil ? Empirical Foundation Arab Spring: Economic Likelihoods Implications “Prospects of stability and internal conflicts in the Arab world are still fundamental stumbling block to economic freedom.” –Economic Freedom of the Arab World 2010 2
  3. 3. WHAT FINANCIAL TURMOIL? 3
  4. 4. 4 OCTOBER 2011 Egypt 92% decline in FDI Libya 87% decline Syria 65% decline 4
  5. 5. “Some 218investments weremade by theseregional privateequity funds from2004-09, out of whichonly 14 have reachedexit…„Those GP’s will notraise new funds andwill disappear‟” 4 OCTOBER 2011 5
  6. 6. Tunisian President Ben Ali resigns (January 14, 2011) Egyptian stock market down 44.1%EGYPTIAN STOCK MARKET: 13 OCTOBER 2011 6
  7. 7. EGP TO US$ EXCHANGE RATE :CENTRAL BANK’S LOCAL ASSETS SKYROCKET 7
  8. 8. EGP TO US$ EXCHANGE RATE : 5-YEARSCENTRAL BANK’S LOCAL ASSETS SKYROCKET 8
  9. 9. EGP TO US$ EXCHANGE RATE : 5-YEARSCENTRAL BANK’S LOCAL ASSETS SKYROCKET 9
  10. 10. Brazil‟s Central Bankused currency reserves todefend Real over twoyears 1997-98Foreign currencyreserves dropped 40%($60 billion to $36 B) =Received IMF foreigncurrency loan($41 billion = 8.7% of ?GDP)Real peg broke (Jan. „99)Announced 8%devaluation become 66%HISTORY LESSON (?) 10
  11. 11. FINANCIAL TURMOIL SUMMARY FDI plummets Private equity broken; no funding Public equity market crash Foreign currency reserves depleting (Egypt) Egyptian currency peg holding…. 11
  12. 12. FINANCIAL TURMOIL SUMMARY“Its an off the record conversation, but am truly terrified now.After my meeting at the ministry of finance, I would like to assure u all: we are humped. Totally, irrevocably, HUMPED!Btw, the strikes are not why we are humped. We are for other reasons entirely.” 12
  13. 13. EMPIRICAL FOUNDATIONS FOR IMPLICATIONS TO ECONOMIC FREEDOM 13
  14. 14. EMPIRICAL FOUNDATIONS(∆) Economic Freedom (∆) Financial Conditions“Equity Returns and Economic Freedom” Stocker, M.L., Cato Journal, Vol. 5, No.3, Fall 2005“Economic Freedom: A New Investment Heuristic” Stocker, M.L., working paper 14
  15. 15. EMPIRICAL FOUNDATIONSEqual Weighted Average Equity Returns (1970-2002) Equity Returns & Economic Freedom 10% 8.55% 6.68% 7.51% Equity Market Return Average Annualized 5% 0% Bottom Fourth Third Second Top -5% -3.75% -10% -9.45% % Change Econom ic Freedom Quintiles“Equity Returns and Economic Freedom” Stocker, M.L., Cato Journal, Vol. 5, No.3, Fall 2005 15
  16. 16. EMPIRICAL FOUNDATIONS: STOCKS REACT ∆ Economic Freedom ∆ Stock Index Price Stock Index Price ∆ Economic Freedom 0.394** ∆ Size of Gov‟t n.s. ∆ Legal System & Property 0.229** Rights ∆ Sound Money 0.158** ∆ Freedom to Trade Int‟l 0.202** ∆ Regulation 0.438**“Equity Returns and Economic Freedom” Stocker, M.L., Cato Journal, Vol. 5, No.3, Fall 2005 16
  17. 17. EMPIRICAL FOUNDATIONS Annualized Percentage Currency Change vs. US$ by Economic Freedom Quintile EMERGING MARKETS 1970-2004 6% 3.0% Annualized Currency Return 4% 2% 0.9% 0% -2% -4% -2.2% -6% -8% -10% -8.2% -8.1% (LOWEST) Freedom Economic Freedom Quintile (HIGHEST Freedom)“Equity Returns and Economic Freedom” Stocker, M.L., Cato Journal, Vol. 5, No.3, Fall 2005 17
  18. 18. EMPIRICAL FOUNDATIONS 10-Year Sovereign Bond Redemption Yield Spread over 10-yr U.S. Treasury by Economic Freedom Quintile 1985-2004 140 Yield Spread (basis points) 120 Yield Spread 100 Yield Spread w/o Japan 80 60 40 20 0 (LOWEST) Freedom Economic Freedom Quintile (HIGHEST Freedom)“Economic Freedom: A New Investment Heuristic” Stocker, M.L., workingpaper 18
  19. 19. EMPIRICAL FOUNDATIONS Annualized Percentage Currency Change vs. US$ by Economic Freedom Quintile ALL MARKETS 1970-2004 6% 3.9% Annualized Currency Return 4% 2.9% 1.8% 2% 0% -2% -1.1% -4% -6% -8% -6.3% -10% (LOWEST) Freedom Economic Freedom Quintile (HIGHEST Freedom)“Economic Freedom: A New Investment Heuristic” Stocker, M.L., workingpaper 19
  20. 20. EMPIRICAL FOUNDATIONS Currency Return OUTLIERS by Economic Freedom Score ALL MARKETS 1970-2004 50% Annualized Currency Return vs. US $ 40% 30% 20% 10% 0% -10% 3 4 5 6 7 8 9 10 -20% -30% -40% -50% (LOWEST) Freedom Economic Freedom (HIGHEST Freedom)“Economic Freedom: A New Investment Heuristic” Stocker, M.L., workingpaper 20
  21. 21. EMPIRICAL FOUNDATIONS SUMMARY Change in Economic Freedom Equity Returns Economic Freedom Government Debt Yields Economic Freedom Currency Exchange Rate 21
  22. 22. EMPIRICAL FOUNDATIONS SUMMARY: THEIRS Equity Market Size as Percentage of GDP (Li 2002, LaPorta 1997) Total Market Capitalization Increases after Capital Control Liberalization (Levine, Zervos 1998) Privatization Effects Excess Market Returns (Perotti, van Oijen 2000) Idiosyncratic Equity Market Liberalization leads to Excess Market Returns (Henry 2000) GDP Growth, Investment & Productivity Rates (Gwartney, Lawson 2004) 22
  23. 23. ARAB SPRING: FACTORS INFLUENCING ECONOMIC FREEDOM 23
  24. 24. ECONOMIC FREEDOM OF THE ARAB WORLD Current financial markets may indicate a current decrease in economic freedom. Subsequent policy decisions that increase Economic Freedom may quickly appear in financial markets as financial euphoria. 24
  25. 25. FINANCIAL TURMOIL & ARAB SPRINGINFLUENCING (AREAS OF) ECONOMIC FREEDOM Subsidies (expansion or rationalization) Capital controls Privatization: Nope; Entrepreneurship: Yes IMF: Foreign Currency loans Transparency Monitor (yields, reserves, stock market) 25
  26. 26. “The economicuncertainty has beenexacerbated bydeteriorating security…The …lack ofefficient policing hasbrought higher crimelevels, with armedgangs robbingmotorists andattacking factoriesand warehouses.”9 October 2011DON’T FORGET SECURITY 26
  27. 27. IMPLICATIONS FOR POLICY MAKERS & INVESTORS 27
  28. 28. EGYPT’S CREDIT RATING DOWNGRADED (10-10-11) Downgraded Egypt‟s long-term default and currency ratings to “negative” as wavering political decisions continue to delay economic growth. “Fitch has previously said it expected the sharp fall in foreign currency reserves…to start being reversed by external support in [quarter four;] the delays to the political transition are now causing concern, with reserves continuing to fall, and the global backdrop less supportive.” 28
  29. 29. Over the past month, whileaffirming that the country is“committed to a free market”the interim government alsobanned three privatizedcompanies; two of whichwere owned by foreigninvestors.-Daily News Egypt 10-10-11 WHICH IS IT? 29
  30. 30. FINANCIAL TURMOIL & THE ARAB SPRING Factors Influencing Economic Freedom Marshall L. Stocker MBA CFA www.freedom-economics.com

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