News Middle East27 Sep 2020

MENA:Instability and violence remain main risks - Aon update

| 27 Sep 2020

Instability and violence across the Middle East are still the main risks to the regional economic outlook, says the September 2020 Political Risk Quarterly Update.

The political risk newsletter, published by Aon and developed in partnership with Continuum Economics, says that across the Middle East, no country has suffered any change in overall risk. However, Palestine has seen a reduction in both political interference and exchange transfer risks, while Egypt has seen a reduction in the inability of government to provide stimulus. Yemen, Iran, Iraq and Syria are the highest risk countries at a very high risk level.

The increasing likelihood of a Joe Biden presidency in the US come November is causing many Middle Eastern leaders to rush to get things done before Mr Biden revives former US president Barack Obama’s diplomatic breakthrough with Iran. Crucially, Israeli Prime Minister Benjamin Netanyahu is keen to push ahead with the annexation of 100 Jewish settlements in the West Bank – the US has already recognised the annexation of Arab East Jerusalem and the Golan Heights.

Meanwhile, the UAE’s deal with Israel underscores that Palestine’s concerns have become low-priority for Arab powers compared to creating alliances against Iran.

Egypt

Egypt has an overall risk rating of high, while the risk of political violence remains very high. The regime has cracked down on dissent related to its handling of the COVID-19 crisis, with doctors and nurses critical of the regime being recently arrested. Once the pandemic is over, if repression does not diminish, there is scope for increased protests.

Meanwhile, the inability of government to provide fiscal stimulus has fallen to medium-high from high, as fiscal stimulus has been limited so far, and Aon expects Egypt to remain committed to its reform programme. Since March, the government has announced fiscal stimulus totalling EGP 180bn ($11.4bn) or 2.8% of GDP.

Externally, Egypt has threatened a military offensive in Libya if Turkish forces seize the port of Sirte, which is meant as a re-assertion of Egypt’s role in the region, implying that Russia and Turkey cannot carve it up without Egypt challenging them.

Palestine

Palestine has a high level of overall political risk, although the risk of political interference has fallen to medium-high from high. The normalisation of relations between the UAE and Israel (without securing concessions that benefit Palestine) has angered Palestine. This is especially so, given that Israeli Prime Minister Benjamin Netanyahu has said he still has plans for West Bank annexation and the agreement only points to its suspension. It highlights that Palestine’s concerns have become low-priority for Arab powers compared to creating alliances against Iran.

Meanwhile, the economy is heavily constrained due to Israel’s control of the borders. This feature has been highly problematic in the context of COVID-19, in that Palestine had to wait for Israel to decide on a lockdown before it could take action. Similarly, the central bank is in no position to provide a significant stimulus to fight COVID-19, and it does not control its own currency – the economy operates on a mix of Israeli shekels, Jordanian dinars, and some dollars and euros. Restrictions on the movement of goods are imposed through permit systems and import/export restrictions. Hence, access to resources is significantly reduced and the recent fall in exchange transfer risk to medium from medium-high is unlikely to last. Israel collects export taxes on behalf of the Palestinian Authority.

However, the Palestinian leadership’s severing of official ties with the Jewish state, during the row over annexation, has left Israel with $500-650m in Palestinian taxes, depriving Palestine of nearly two-thirds of its government revenue. The knock-on effect is that tens of thousands of Palestinian employees will receive less than half of their monthly salaries. In this context, COVID-19 has aggravated tensions significantly.

Libya

Libya’s overall risk score is among the highest in the world. The country’s already very high risk of political violence has recently risen due to regular terrorist attacks. In Libya, civil war is intensifying with the possibility of a conflict between Russia and/or Egypt against Turkey.

Egypt threatened to deploy troops to counter Turkey, which is sending arms, troops and Syrian militias to back the Tripoli-based Government of National Accord (GNA), while Egypt, Russia and the UAE back General Haftar, whose forces control Sirte and eastern Libya.

Foreign backers are pouring weapons into the two forces, openly breaching the UN arms embargo and the ceasefire announced on 21 August by the GNA. Haftar has not commented on the ceasefire, but his officials have dismissed it on the grounds that it is a distraction to allow the GNA to reinforce its troops to take the strategic port of Sirte. The odds of a direct conflict between world powers in Libya are high. While the blockade on oil exports has just been lifted, General Haftar has not commented on the possibility of full production resuming at the National Oil Corporation.

Iran

Iran’s overall risk level is very high, and it is driven by very high legal and regulatory risk. Beyond high political violence risk, the country has a high risk level on political interference, sovereign non-payment, exchange transfer and a high risk of doing business. Exchange transfer risk could even increase further, as the rial is collapsing from COVID-19 panic and US punitive measures, and as exporters now risk prosecution if they move foreign exchange revenues abroad. Less than half of foreign exchange revenues were repatriated over the past two years. On the external front, the US is re-imposing US sanctions on Iran. These were waived by the Obama administration in 2015 in the context of its nuclear deal with Iran, which the US withdrew from in 2018. Through the 2015 Iran nuclear accord, Teheran pledged to abide by limits on its nuclear programme in return for sanctions relief. Meanwhile, Iran has agreed to open two sites to the International Atomic Energy Agency, a sign of its willingness to cooperate with the deal.


 

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