Egypt in crisis

Tensions are simmering, and not just in Egypt: the financial markets are also growing increasingly nervous. One indicator is the price of oil. At the end of last week, it took a short break from its upward climb, but now it is once again on the rise.

Oil prices started to go up at the first sign of the unrest in Egypt. A barrel of US light crude oil is trading at around $90 and key oil producing countries are outdoing each other in their forecasts of where the price could end up.

In Kuwait, experts predict the price could top $110 if the unrest in Egypt continues. Venezuela voiced concerns that if the Suez Canal were closed, the price per barrel could more than double, reaching $200. That would be considerably more than the previous record high reached in 2008.

Martin Hüfner, chief economist at Assenagon Asset Management, has also warned of the grave economic danger posed by any stoppage of oil and raw materials transports via the Suez Canal – something that would surely trigger price increases.

Emerging economies particularly affected

Increased prices for energy and commodities present a particularly painful scenario for the world's emerging economies, which operate in a much more energy-intensive way than industrialized nations. Increased prices would lead to increased inflation and rising interest rates, which in turn would hamper purchasing power and economic growth.

Such a development would also affect established economic powers such as Germany, because export-based companies, regardless of their size, are profiting ever more from contracts from large emerging economies such as China, Russia, India, and Brazil, as well as contracts from important, smaller emerging nations such as Egypt.

Is the world facing the threat of a chain reaction leading to another global economic crisis? Martin Hüfner warns against assuming the worst. At the same time, though, he told Deutsche Welle that "we see the problems in the Arab region."

"We don't know yet how big an effect they'll have," he continued. "Everyone is worried and trying to prevent a major disaster from taking place, but no one can rule out the possibility that, in the end, there really will be a major disaster."

Money moving from emerging nations

No reason to panic, in other words, but no reason to relax, either. That's the view of many experts working at the Frankfurt stock exchange, Germany's most important market. Investors are acting accordingly, moving money out of Egypt and other emerging nations, and investing in more politically stable industrialized countries.

It's hard to predict what sort of effect this reaction could have, says Rupertus Rothenhäuser from Macquarie investment bank. "I see it like this: investors are giving it some thought. The risks are not something you can just dismiss," he told Deutsche Welle.

There might be bigger economic opportunities to be had in emerging countries, but these are accompanied by bigger political risks, Rothenhäuser said. Developments in Tunisia, Egypt, Thailand, and Cambodia have shown this, and he predicts the same will be the case in Nigeria, given the upcoming elections there.

"You have to be clear that an investment in an emerging nation is by no means a sure thing," he said

Economic cycle influencing investors

Rothenhäuser added that it's not just the current political crisis in North Africa that is causing money to be diverted away from emerging nations and their growing economies.

"It also has to do with the fact that the economic cycle in emerging nations is a bit further ahead than in industrialized nations," he said, offering the example of China, where interest rates have been raised repeatedly to stem inflationary pressures and rein in a wildly growing economy. "But when you talk of higher interest rates, you're automatically talking about increased risk, and that's something which is like poison to share prices."

While stock prices are dropping in the affected countries, they've been increasing in New York, Tokyo, Paris, and Frankfurt since the start of the year. In Germany, for example the DAX index hit a three-year high to kick off the week starting Monday, February 7.

Author: Ulrich Barths (dc)
Editor: Sam Edmonds