Instability and violence across MENA are still the main risks to the regional economic outlook, says Aon in its December 2019 Political Risk Newsletter. War is continuing to rage in Yemen and the situation remains tense in Syria, and has also taken a toll on countries like Jordan, Lebanon and Iraq.
Seven of the 14 countries across the MENA region either have a high or very high risk rating for the current quarter of the year. Across MENA though, no country experienced a change in its overall risk rating this quarter.
On the external front, growing global trade tensions are likely to trigger significant fiscal and financing pressures for MENA countries, clouding economic recovery.
Best and worst ratings
The UAE and Qatar exhibit the strongest rating at medium low, followed by Kuwait, Oman, and Saudi Arabia, which exhibit a medium risk level. In terms of political violence,
Egypt, Iraq, Lebanon, Syria, Palestine, and Yemen all have a very high risk rating, mirroring the internal and external conflicts these countries continue to face.
Risk ratings are standardised across each location, on a six-point scale ranging from low, medium low, medium, medium high, severe, to very high, with all risks updated once per quarter.
Yemen is the riskiest country in the region, with an overall risk rating of very high, which after four years of war should be of little surprise. The security situation may escalate following drone attacks on state-owned Saudi Aramco oil processing facilities in eastern Saudi Arabia in mid-September.
Saudi Arabia has an overall risk rating of medium, while the risk of political violence remains high. Tensions between Saudi Arabia and Iran are still a pertinent issue for the entire region, as well as the on-going conflict with Yemen. Saudi Arabia’s attempt to politically and economically isolate Qatar have also been largely unsuccessful. Relations with the EU have soured following the murder of journalist Jamal Khashoggi in November 2018, but bilateral relations with the US have improved under the leadership of US President Donald Trump.
Saudi Arabia is currently attempting to lessen its dependence on the oil and gas industry through its Saudi Vision 2030 project. It is making sizeable investments in manufacturing, technology, and mining projects across the country. However, on-going weak global oil prices have weakened the country’s fiscal position, although overall public debt remains low by EM standards at around 20% of GDP.
To finance the social and economic reforms, Saudi Arabia has floated a small part of its state-owned oil giant Saudi Aramco, aiming for a valuation of $1.7-2.0tn, but the listing has received relatively little attention in the US and Europe. China’s large investment stake in Saudi Aramco is a further sign that China’s influence in the region is growing, while that of the US may be starting to diminish in light of its own large shale energy industry.
Iran’s overall risk rating remained at very high this quarter on the back of the US decision to re-impose sanctions, resulting in a collapse of the Iranian currency and the wider economy. Recent anti-government protests in mid-November amid petrol price hikes have led to the deaths of dozens of people. To contain the demonstrations, the government has shut down the Internet, which will likely result in more widespread violent outbursts.
Furthermore, the US Navy has built up its presence in the region to protect the vital shipping lanes that pass through it. The Strait of Hormuz is critically important for global oil supply chains, as 20% of all crude oil sold on world markets passes through this strait. Previously the US unilaterally abandoned the Iran nuclear deal and re-imposed sanctions on the country, which has led to Iran breaching some of the limits on nuclear material. Renewed US sanctions will exacerbate structural economic weaknesses in Iran, which could lead to social unrest and an increasingly assertive Iran foreign policy. Additionally, institutional risk remains high as widespread corruption and weak rule of law contribute to high legal and regulatory risks.
Egypt’s overall risk rating remains high, with a slight deterioration in its banking sector vulnerability rating this quarter. In addition, Egypt has a very high risk in political violence, and high risk ratings in legal and regulatory risks, supply chain disruptions, political interference and ability of government to provide stimulus.
Nevertheless, Egypt’s economy is doing reasonably well, with growth set to accelerate to nearly 6% over the coming few quarters. In addition, Cairo is wrapping up its IMF-backed economic reform programme. Overall, the economy is rebounding on the back of recovering tourism, strong remittances, and newly discovered natural gas fields coming online. Egypt is three years into its $12bn IMF programme and hopes for a new IMF funding package by early next year. To unlock the funds, Egypt let the Egyptian pound depreciate sharply, removed most fuel subsidies, introduced a VAT, and raised electricity and transport prices. The tough reform programme was met by fierce public protests over the past few years, but the growth rebound should help to ease tensions.
Oman’s overall risk rating is medium, with a slight deterioration in the banking sector vulnerability sub-category. Nevertheless, risks are relatively low compared to regional peers. Oman remains highly dependent on the energy sector for growth, which accounts for around 60% of export revenues and three-quarters of government revenues. It should be noted that Oman does not possess large energy reserves, and reserves are diminishing quickly.
The government’s 2020 Vision Plan aims to boost investment and tourism, financial services, and ports. There are signs that recent reforms are bearing fruit, with the non-energy economy now accounting for two-thirds of GDP. On the political front, the succession question remains omnipresent, as the health of Sultan Qaboos Bin Said Al Said remains a concern.
Aon’s Political Risk Newsletter is developed in partnership with Continuum Economics, an economic research and country risk firm.