Ready for the aftershocks?

By Kathryn Gaw

31 Oct 2011

For a small market, Libya has had an indelible effect on the Mena region’s fund industry over the past six months. Almost every delayed launch, withdrawn investment and sluggish return can be traced back to volatility fears and oil panic stemming from a civil war which has dragged on, pulling the regional markets down with it. Between the closure of the country’s $2.2bn stock exchange in January, to the controversy surrounding the investments of its sovereign wealth fund (SWF), the Libyan financial sector has practically come to a standstill, and the aftershocks are beginning to be felt. “Without doubt the current war is economically damaging,” says Michael Barnes, managing director and head of sales and trading at Securities Africa. “The country will have to be rebuilt in terms of infrastructure and this will involve increased credit. Once investment rules are formalised, foreign investors can look for new opportunities, but a lot will depend on what rules are put in place.”

Unseen potential

Prior to January 2011, Libya seemed to be positioning itself as an attractive investment destination. Its SWF, the Libyan Investment Authority (LIA), had a global investment portfolio, bringing it to the attention of some of the world’s leading fund managers. Further, Colonel Gaddafi seemed dedicated to developing an independent domestic fund industry: in fact, the SWF’s $500m investment in London’s FM Capital Partners included a caveat that the hedge fund would train up young Libyans in hedge fund management. The country’s stock exchange was showing signs of liquidity, and Invest AD was confident enough in the market’s potential to launch its ill-fated Libya Fund at the end of January. Around the same time, S&P Indices announced plans to include Libya on an index for the first time, but these plans were shelved just weeks later as the severity of the civil unrest became apparent. Libya’s investment potential was clearly an attractive gambit for Mena-facing fund managers. In early 2010, Godvig Capital paid a visit to Tripoli to see if it was worth setting up a Libyan equity fund, but decided against it at the time. However, CEO Björn Englund told Mena FM: “Perhaps in a year’s time or so we will take a second look into that area again.”

Godvig is not the only fund manager to be keeping its eye on Libya. Silk Invest’s CIO Daniel Broby says that it may be interested in a commercial Libyan fund in five or 10 years time, but adds the current liquidity profile is not something its investors would feel comfortable with. Meanwhile, Templeton Emerging Markets Group executive chairman Mark Mobius says he would “definitely” be interested in investing in Libya in the future. “I’ve been there, I’ve been to the stock exchange, so we’re quite familiar with it,” he says. “They have the conditions to have a good stock market so I think it is a good opportunity there.” However, a number of things need to happen in order for Templeton to make its first Libyan investment. “They have to get the legal system in order,” says Mobius. “And then they have to get some form of law and order. I think that will happen and when it does it will be a great opportunity.”

Finding its feet

At the time of writing, fighting was still taking place in pockets of the country, and the majority of the international community recognised the authority of the National Transitional Council (NTC), and not Gaddafi. However, despite the turmoil, the building blocks for future financial stability are already being laid. Needless to say, it all comes down to oil, and crucially, the NTC now controls all of the country’s refineries. On the council itself, Ahmed Al Abbar is responsible for the country’s economic portfolio, while on the council’s executive board, Dr Abdullah Shamia deals with economics and Dr Ali Al-Tarhuni manages both finance and oil. However, the council and its board are largely untested and, since its inception in March, the NTC has only had experience of managing a war-time budget. Despite the best intentions of those involved, the bottom line is that inexperience makes investors nervous, and the NTC will have a lot of work to do if it wants to encourage new foreign inflows into the country. “The transitional government is untried and its personalities unknown,” says Broby. “The excitement of the new must now give way to the very real and difficult task of nation building.”

“As with all countries that have gone through some flux, investors typically want to wait and digest the new changes before any decisions are reached, so we believe it will probably take some time before investors are comfortable getting involved,” adds Barnes. “When the new rules are formalised, we will be able to make a more informed prediction.” However, once the NTC finds its feet, increased investor interest over the longterm in Libya is expected. The fundamentals are certainly still there. Despite the damage caused by the recent war, the country still has deep oil reserves and a low government debt. “Libya has potentially the most economic potential of the nations that were caught in the Arab Spring uprising,” says Barnes. “While the changes in Libya will no doubt be costly, we believe investors are hopeful in that the transitional government will establish a democratic nation offering stability, security and development.”

“It will take time for Libya to get its act together,” adds Mobius. “But that will be an interesting market. They do have a stock market in Libya and that’s an example of what could be done.”

According to Broby, it is the financial sector that represents the biggest and most immediately investable opportunity in Libya, and he predicts that banking joint ventures will lead the way towards improved liquidity. “Banks such as Saharah Bank do have access to customers, even if they don’t have access to capital,” he adds. “That will surely attract the adventurous.”

Adventurous seems to be the operative word when it comes to Libyan investments. Investors would have to have a nerve of steel to take a position in the market before the new government has been properly established, but amid all the chaos there is more than a glimmer of potential.