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Two faces of the Arab Spring

The fortunes of Tunisia and Egypt are diverging rapidly since the Arab Spring. Tunisia offers encouraging signs but it is less influential.

Tunisia and Egypt sparked the Arab uprisings but their fortunes are rapidly diverging. The victory of an Islamist party in the Arab Spring’s first election should not scare away investors, as Ennahda’s win does not spell the end for Tunisia’s liberal economic model.

For example, Ennahda party leader Rached Ghannouchi, in one of his first post-election engagements, met stock market executives, saying he was supportive of new listings and foreign investors. Moreover, secular rivals to Ennahda have signalled that they would participate in a coalition with the Islamists, which bodes well for national unity.

State media has indicated that Islamic banking will not be imposed in Tunisia – contrary to Libya. After the extra judicial killing of Muammar Gaddafi, Libya’s new leader Mustafa Abdul-Jalil said his government would seek to abolish conventional finance in Libya, saying interest "creates disease and hatred among people".

Tunisia has long followed more liberal economic policies than Libya, Syria or Egypt, which are all experiencing messier transitions. Tunisia is also smaller. That makes divisions and competing vested interests easier to manage.

Tunisia’s stock exchange fell less than 3% in the three weeks before the election. In the second half of this year the index has outperformed global benchmarks. Yields on Tunisia’s Eurobonds rose only 100 basis points even as the former president was toppled. During the elections, there was no spike in Tunisia’s credit default swaps and no mass sell-off of its Eurobonds.

By contrast, in Egypt – which is heading for initial parliamentary polls this month – the stock index opened 5% lower last month when it reopened after clashes between police and Coptic Christians (the protests were incited by the destruction of a church by Islamist extremists). It was the exchange’s biggest fall since closing for seven weeks during the uprising against president Hosni Mubarak.

Egypt is trying to quell dissatisfaction through renewed spending for public-sector employees, but this is endangering public finances and crowding out lending to the private sector. It reinforces the patrimony-based economic model, whose failure caused the protests in the first place.

With foreign investors exiting, Egypt’s stock index and three-month treasury bills are trading at levels not seen since the 2008. Bank of America Merrill Lynch estimates the local banking sector will need to swallow additional government securities worth 7.7% of GDP ($20 billion) next year.

Declines in Egypt’s foreign reserves have already accelerated this autumn, leaving $24 billion – around $10 billion less than a year ago. Egypt turned down a $3 billion IMF loan in June but the $4 billion loan reportedly offered by Saudi Arabia and UAE might come with strings attached.

The resignations of Egypt’s prime minister and finance minister after the sectarian clashes were revoked after the military leadership persuaded them to stay. However, such uncertainty disrupts negotiations with external creditors. Meanwhile, radical Salafist parties increasingly challenge Egypt’s more moderate Islamists.

Tunisia could be an encouraging sign for what the Arab Spring might bring to the region’s economies. But if Tunisia’s small size makes it easier to manage than Egypt, it also makes it less influential in the region.

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