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Egypt's Potential for Contagion

Category: World of Business


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Egypt's Potential for Contagion

 

 

By Richard Barley, WSJ, February 01, 2011
 
Egypt is sending investors a wake-up call about the risks in emerging markets.
 
For two years, investors have poured money indiscriminately into emerging-market assets that looked safe relative to stocks and bonds from debt-laden developed economies. But declines in U.S., Asian and European stocks and the rally in oil, bonds and gold reflect the real risk the Egyptian unrest triggers contagion that could affect the global economy.
 
One risk is that the political turmoil may spread. Tunisia and Egypt are reminders of how volatile and unpredictable emerging markets can be and that this needs to be reflected in their cost of capital. That could trigger flows of capital out of emerging markets back into developed markets, already buoyed by the brighter growth outlook for the U.S. Middle Eastern stock markets were hit hard over the weekend, and the cost of insuring the debt of countries, including Morocco, Saudi Arabia, Qatar and Lebanon, has risen.
 
 
 
A second possible source of contagion is via the oil price, which spiked 4.3% to $89.34 a barrel in New York Friday. Investors are concerned by the risk of an extreme event like the closure of the Suez Canal or potential for serious instability in big oil producers like Libya or Saudi Arabia.
 
A third risk lies in the response to the high food prices that are one of the factors behind the social tensions in North Africa and the Middle East. That raises the possibility of policy errors. Monetary-policy makers might tighten too quickly to stamp on inflation, or governments might try to ease the impact of price rises through food subsidies, weakening their fiscal positions.
 
Contagion will have winners as well as losers. Russia would benefit from higher oil prices; Brazil and other Latin American countries stand to gain from higher agricultural and commodities prices. But even if the turmoil in Egypt subsides, one lasting impact should be greater discrimination between emerging-market countries.
 
Write to Richard Barley at richard.barley@dowjones.com
 


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