For countries in Middle East and North Africa (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 notes that Iran wants to get back on track with the 2015 nuclear deal agreement, which is likely to be the long-term desire of an incoming 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 cautions that overall, there should be no expectation of quick progress.
Saudi Arabia is already anticipating a shift in the attitude towards the Middle East with the incoming Biden administration. Saudi Arabia is trying to resolve the dispute with Qatar and reported to be holding exploratory talks with Israel. This is all part of ensuring alliances are built against Iran isolation becoming less intense and perhaps also seeking to improve long-term relationships in the region. However, a formal establishment of relations with Israel like the UAE remains difficult, as Saudi Arabia is more conservative on the potential adverse diplomatic and reputational consequences of such a move.
Qatar optimism also needs to be cautious, given that talks to resolve the three-year dispute are only starting and are multi-country rather than bilateral. The UAE is concerned that Turkey has too much influence in Qatar, but Qatar is reluctant to undermine its close and supportive relationship with Turkey. Progress on a genuine end to the dispute will likely be slow.
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 recovery. 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.
The main instability risks in the region are Iraq, Syria and Yemen—all remain at the very high-risk level. The situation in Iraq is deteriorating and concerns are growing about domestic unrest and violence increasing this year. Political, economic and security crises are the cause, with some being a consequence of the Trump administration using Iraq in its moves against Iran.
Yemen is expected to improve with the Biden administration likely to pressure Saudi Arabia and Iran into engendering an improvement.
Syria will not likely change, with the Assad regime having the upper hand domestically but little priority of a new Biden administration to get involved.
Egypt’s overall risk rating remains high, held up by the political violence rating remaining very high.
In 2021 with COVID-19 pressures likely to eventually ease, domestic protests against suppression will likely be evident. The government will not be quick to back down, partially as international players such as France are still supportive of Egypt’s buffer role in the region, partly overlooking domestic issues surrounding human rights.
Finally, Libya’s overall risk score remains very high, with six out of the nine categories being very high, including political violence. Tensions remain between the Turkey-based Government of National Accord (GNA) and General Haftar in Sirte and eastern Libya (supported by Egypt, Russia and the UAE). An improvement in oil production in recent months is at least some progress, but the situation remains tense. The new Biden administration is also unlikely to get engaged in trying to broker a peace deal, as the US started distancing itself from Libya under Obama and Biden.