Rebecca Harding and Jack Harding, CEO and senior risk analyst at Delta Economics, highlight some of the most interesting risks and trends across the Mena region in 2014.
We at Delta Economics forecast that Mena’s trade will grow by nearly 5.1% during 2014, and this is a more positive forecast than we have made for some time. Countries that are forecast to grow particularly quickly during the course of the year include Iran, Lebanon, Bahrain and Libya. There is evidence of diversification in the region: five out of 25 of the world’s top shale gas exporters are in Mena and countries such as the UAE, Saudi Arabia, Oman and Qatar are showing sure but steady growth from politically secure backgrounds and, critically, substantial existing contributions to world trade.
But this forecast must be seen against the regional risks. Syria’s trade has been decimated by its crisis and since the beginning of the year our overall regional growth forecast has dropped from 5.2% to below 5.1%. We are expecting trade growth to have halved by 2016.
Trade, unlike many other economic indicators, is especially vulnerable to geopolitical risks. Trade embargoes are the first things to be imposed to leverage a diplomatic solution and as a result, trade remains highly vulnerable to persistent instability. We are forecasting that this is likely to affect smaller trading nations more than the larger trading nations (in trade value terms).
The future of trade finance for the region, particularly in the UAE, Qatar, Saudi Arabia and even Morocco is strong, but has to be insured against the risks of contagion from the instabilities in the smaller trading nations. Areas of particular strength for the region will include commodities and infrastructure products as oil, gas and petrochemicals continue to dominate exports and as countries within the region seek to diversify beyond these sectors (figures 3 and 4).
The civil war has decimated Syria’s exports already and will continue to do so. In 2010, some reports put Syria’s export value at US$2.7bn, however after years of civil war, exports have dropped to just a quarter of that and will fall further. Unemployment is around 50% and investment has all but ceased. European nations have also imposed sanctions, for example, stopping bank loans to Syria. It is estimated in some circles that it may take Syria up to 30 years to recover.
What to watch
There is little chance of a miraculous recovery in Syria. Most predict a further deterioration in the situation, especially given President Assad’s rejection of peace talks. John Kerry recently said: “It is very clear that Bashar al-Assad is continuing to try to win this on the battlefield.”
This conflict has been called the quintessential proxy war. The largely Sunni opposition has drawn support from, amongst others, Saudi Arabia, Qatar, Turkey and Al-Qaeda. On the other side, Syrian government forces (which are Alawite – an offshoot of Shia) have the backing of Lebanon’s Hezbollah and Iran and also China and Russia, although not for religious reasons. It has split the Middle East, which has strong sectarian divides. Although there hasn’t been any spill-over in terms of all out conflict in neighbouring states, it has served to increase tensions in many of these countries and even led to increases in terrorism.
Major civil unrest, widespread violence and political uncertainty. Prime minster Maliki is a Shia and is accused of persecuting the Sunni minority. Nearly 8,000 people were killed in 2013, the highest death toll for five years. In spite of Maliki promising concessions to Iraqi Sunnis (such as constructing roads and bridges in Anbar), the violence is unlikely to abate while religious and ethnic divides exist. The prospect of a civil war cannot be ruled out.
What to watch
Growth in Iraq is still high, but is likely to be stifled by unrest and mounting violence. Companies will find it much harder to establish a safe footing in the region. While Syria remains as turbulent as it is, Iraq’s security is also under threat as they share a large border.
Protests in Egypt pushed oil prices to over US$100 a barrel in 2011 as oil traders became concerned that protests could spread across the Arabian Peninsula. Further disruption to the Suez pipeline cannot be ruled out while tensions are still apparent. There are still widespread concerns over a return to an authoritarian state. Compared with Tunisia, for example, Egypt’s post-Morsi political transition has not been progressing particularly democratically and many, mostly western, states are concerned over the role of the military in public life. Elections next year will provide a clearer picture, but most expect Abdel Fattah al-Sisi, the commander-in-chief of the Egyptian Armed Forces, to win by a landslide.
There is also the mounting risk of terrorism, with new, Al-Qaeda-linked, terrorist group Ansar Bayt al Maqdis calling for all tourists to leave the country. This is worrying and marks a clear shift in strategy – away from targeting military and police towards targeting civilians; a move that could severely undermine the economy.
What to watch
Russia has provided public support for presidential candidate al-Sisi, “the people’s choice”. While tensions are still apparent in Ukraine and the EU is distracted, Russia is attempting to expand its influence in Mena; trade growth with Russia will indicate that this relationship is strengthening.
Morocco escaped relatively unscathed from the widespread unrest across Mena in 2011. Politically it is one of the more secure nations and, as such, has enjoyed continuing high levels of tourism over the last few years, unlike its close neighbours Tunisia and Egypt, which had their tourism industries devastated by the uprisings. Tourism contributes around 10% of Morocco’s economy.
However, some analysts are unsure as to whether the seeming immunity to uprisings will be permanent. Standard and Poor’s downgraded Morocco’s outlook to negative, based on the fact that unemployment is high and inflation is increasing. If dissatisfaction over political reforms were to be added to the mix it could set off a wave of unrest. The fear that Morocco could be next in the wave of civil unrest damaged investment in 2011.
There is always the worry that if protests were to flare up again across the region again, Morocco may not remain immune this time. In this sense Morocco is somewhat hindered by its geographical location.
What to watch
Morocco is keen to bolster bilateral trade with India in key sectors such as pharmaceuticals, agriculture and renewable energy. But India is keen to play a larger role in these sectors in the Mena region, so Morocco is not the only country to keep an eye on.
Recently, UN inspectors have reported freer access to Iran’s nuclear facilities. Progress in these talks is big news not only for Iran’s economic prospects, but also for international investment. Indeed, after sanctions were eased the Iranian foreign minister Javad Zarif declared Iran to be “safe, stable” and “open for business”. Some analysts have already noticed improvements in the Iranian economy. There is, of course, the risk of further sanctions being imposed in the future if Iran’s nuclear programme begins to take a more aggressive direction or if UN inspectors have their access to Iran’s nuclear sites restricted.
However, at present, the situation seems to be progressing well. A more positive relationship with the rest of the world would be hugely beneficial to all concerned.
Iran’s support for Assad’s regime in Syria could potentially damage relations with the international community. Iran has committed a large amount of resources and intelligence to Syria and has been seen as the reason for Assad’s negotiators breaking off talks early in Geneva. Iran’s involvement is serving to prolong the conflict and is a huge concern for the international community and others working to resolve the crisis.
The Iranian Revolutionary Guard’s influence over Iran’s economy is a potential cause for concern. In the past the Revolutionary Guard, a branch of Iran’s military, has been heavily involved in development projects, however some sources say that they have begun to reduce their involvement in the
What to watch
Monitor talks over nuclear power closely, as well the international community’s response to Iranian involvement in Syria. Progress in these talks will be a huge boost to the Iranian economy, however there are still a number of potential flashpoints that could disrupt the potential for stability.
Arab Spring protests have subsided in Jordan. Some believe the crisis in neighbouring Syria has diminished their appetite for protest. Jordan has taken on a huge number of refugees which has been a heavy burden on the economy. From December 2012 to December 2013 Jordan has seen a 400% increase in Syrian refugees (from 140,477 to 560,059). A UN report estimated that this has cost Jordan around US$5bn. Jordan has lamented the fact that it has only received around US$800mn in financial assistance from the international community. However, the US has pledged to give more.
Some Jordanians are concerned over rising extremism from Syria. Jordan shares a long border with the ailing state and given the number of Syrians who have already crossed into Jordan, ties to extremism and the potential for violence and further civil unrest should be something to think about for investors.
What to watch
Jordan is thought to have the seventh-largest reserves of shale in the world, with oil shale deposits lying beneath around 70% of the country, and it is very keen to exploit these. Some industry experts believe that Jordan’s shale reserves can be accessed more easily than those in other countries where the process has proved to be somewhat controversial. The method used to extract shale oil in Jordan would be entirely different than that used to extract shale gas elsewhere. It could produce the equivalent of around 40 billion barrels of oil. Estonian companies have taken a keen interest in Jordan’s shale, along with companies from Brazil, Russia and the UAE.
On February 14, protestors once again took to the streets to mark three years since the start of demonstrations in the country which have claimed more than 90 lives. Last year the UN announced its dismay at Bahrain’s treatment of activists, which included the use of torture. Tensions are still running high in the country and there is very little evidence of either side bending to the other’s will, especially given that the much larger Saudi Arabia is a mostly Sunni country and lends its backing to the Sunni royalty in Bahrain.
Economically, a risk is an easing of sanctions against Iran. According to the IMF, Bahrain is vulnerable to a “sustained decline in oil prices” and the situation in Iran is highly likely to begin to drive oil prices down once they are able to begin shipping the commodity to more countries again.
What to watch
Further evidence of its efforts to exert more influence in Mena, India recently met with a top Bahraini business delegation in the hope of further strengthening ties between the two countries. They signed a series of deals ranging from healthcare to financial services. Increased trade-related activity with India will give a strong indication of trade-based growth.