For countries in MENA, three key issues exist on the political risk landscape: US/Iran relations under a Biden administration; Saudi Arabia’s role in the region and dealing with the economic fallout of COVID-19, according to the January 2021 edition of Aon’s Political Risk quarterly.
The report noted that Iran wants to get back on track with the 2015 nuclear deal agreement, which is likely to be the long-term desire of the Biden administration. However, the Democrats differ on whether the scope of the relationship with Iran should be wider and also encompass Iran’s ballistic missile capacity in the region.
This would be a hurdle for Iran. Additionally, with the Biden administration focused on domestic issues (COVID-19, racial inequality and climate change investment), progress will be slow and the first step will likely be a call for greater compliance by Iran.
The US will likely also back E3 (comprising France, Germany and the UK) demands that Iran does accelerate uranium enhancement capacity and limit UN inspector visits. If compliance is seen then it could open the door to negotiations on an interim deal, as a stepping stone to eventually fully recommitting to the 2015 agreement. This would be important to the region, as it would reduce Iran isolation and also provide the prospect of oil export waivers from the US or access to EU trade finance.
However, the US will have to be more balanced and ensure that GCC security concerns are incorporated into the discussions. The Aon report cautioned that overall, there should be no expectation of quick progress.
COVID-19
The economic fallout from the COVID-19 crisis will linger for countries in the Middle East. Though oil prices are rebounding, recovery to 2019 levels will be difficult as oil demand takes time to recover. Secondly, momentum towards climate change investment is accelerating in the wake of the COVID-19 crisis, while the Biden administration is expected to quickly rejoin the Paris accord and seek to green the US economy. Finally, OPEC+ discipline will reduce as the economic recovery broadens this year and this points the way to further reduction in the production cuts and restraint on the rebound in oil prices.
Libya and Iraq will likely see the largest deterioration in current account deficits in 2020, but Kuwait and Saudi Arabia are also projected to see a swing from healthy surpluses to current deficits of -6.8% and -2.5% of GDP respectively. Saudi Arabia’s current account deficit is now projected to remain through 2025.
This causes long-term political risk issues, as oil revenue is insufficient to support government expenditure, leading to hard choices between increasing taxation or reducing bloated public sector wage bills.
Additionally, persistent current account deficits also point to a rundown of excess overseas assets held by central banks and sovereign wealth funds and it is worth noting that Saudi Arabia’s public investment fund is to accelerate repatriations of foreign funds from $15bn per annum to $40bn to help fund government investment projects. M