Change in the Middle East and North Africa: Implications for Business

The recent civil unrest in the Middle East and North Africa (MENA) region has, for obvious reasons, attracted significant attention globally. With countries across the globe still working to recover in the aftermath of the 2008–09 global economic crisis, the turmoil in the MENA region has raised concerns that the unrest might have a further exacerbating effect on global trade.

Furthermore, MENA countries are home to a majority of the world’s oil resources, and there has been growing speculation that the unrest in the region will result in continued volatility in oil prices, which may derail the economic recovery process that started in mid-2010.

Overview:

To provide a basis for understanding the importance of the region, it is imperative to look at several specific economic indicators to understand the importance of the MENA region in the global economy.

» The region produced $2.3 trillion in Gross Domestic Product (GDP) in 2010, which accounted for 3.7% of the world’s GDP. (Figure 1)

» It accounts for about 59% of the global proven oil reserves and 35.3% of the daily global oil production. (Please refer to figures 2 and 3)

» Crude oil and natural gas imports from the region account for a major portion of energy consumption in the US, Western Europe, and Asia.

» In addition to oil, other industries of significance in the MENA region include petrochemicals, chemicals, textiles and garments, construction, education, tourism, finance and telecommunications

Risk:

Given the importance of the MENA economies to the global economy, the political crisis that has engulfed the region since the beginning of the last year is being watched all the more closely.

Companies that have a significant exposure to this region, such as European agri-food and textile businesses, and consumer goods producers in China and other Asian economies, have been impacted most severely.

In addition, supply chain disruptions and an increase in payment risks are adversely affecting companies globally.

In the long term, lenders and insurers are likely to reassess political risks in several emerging markets that are threatened by political unrest, which could result in higher credit and insurance costs for foreign and local companies. The crisis in this region is likely to exert upward pressure on hydrocarbon prices and associated business costs.

The figure 4 reflects the MENA economies’ risk exposure to the prevalent political instability:

Based on the political crisis and recent developments, MENA countries can be categorized into three risk zones as follows::

High Risk Zone: This includes Libya, Yemen, Bahrain, Syria, Iran, Lebanon, and Iraq.

As the Libyan civil war ended with the killing of its former dictator Moammar Gadhafi, the country is making progress towards peace. The interim government has scheduled elections next year and oil production is expected to reach pre- war capacity by June 2012. However, the political and security situation remains fragile as the government tries to deal with armed militias, hided weapons, and urban areas contaminated by still active mines. Syria continues to remain a battlefield between anti-government protestors and government forces. UN estimates that about 3,500 people have been killed so far in the government crackdown on opposition forces. Even after the Syrian government accepted a peace plan brokered by the Arab League to halt violence and convene talks with the opposition, the ground situation remains grim. Condition in Yemen has reached a stalemate as pro-democracy protesters are joined by armed tribals and Al-Qaida affiliated terrorist organizations in their struggle against President’s Ali Abdullah Saleh’s 33-year old rule. Local terrorist networks remain a matter of key concern for Iraq. The insurgents are increasingly becoming more violent and are staging large-scale attacks on the government facilities. Iran still reels under the UN Security Council’s sanctions for its alleged nuclear weapons program. The call for stricter sanctions is expected to be renewed as the recent International Atomic Energy Agency (IAEA) report indicts Iran in trying to pursue nuclear weapons.

All these factors put business and investments in these countries at high risk. Investors are likely to avoid any further deals in these countries in the near future.

Medium Risk Zone: This includes Egypt, Algeria, Jordan, Tunisia, and Oman.

In Egypt, the initial euphoria at the ousting of former President Hosni Mubarak has gradually eroded and factions have emerged: Secularists, Islamists and Christians, leading to frequent clashes. Pro- democracy rallies and sharp government crackdown is underway in Bahrain. However, the intensity of protests has decreased overtime. The political situation in Jordan and Oman is currently stable after crackdown on protestors by government forces and introduction of reforms. However, peace and stability remains fragile. Tunisia, from where the ‘Arab Spring’ started in early 2011, is largely stable after elections were held in October. The country has not reflected any further signs of major political unrest. Political situation in Lebanon has stabilized after the formation of the Hezbollah-backed government. Investors are likely to adopt wait-and-watch strategy with these economies.

Low Risk Zone: This includes Saudi Arabia, the UAE, Qatar, Israel, and Kuwait.

Protests in Algeria subsided after President Abdelaziz Bouteflika introduced a few reformative measures and imposed a harsh crackdown on pro-democracy protestors. After initial demonstrations, protests in Saudi Arabia fizzled out due to tight government controls and an economic reforms package announced by the government. Morocco remained relatively unaffected by the ‘Arab Spring’ after the king introduced economic and political reforms as soon as the protests began.

The UAE, Qatar, Israel, and Kuwait have been largely immune to protests; however, growing unrest in the neighborhood has negatively impacted business confidence in these countries.

Local consumer spending and investments remain strong and are driving growth in the region.

Implications:

With the growing public support for democracy, the MENA region is witnessing one of the most turbulent times in recent history. While some countries with strong financial muscle look to stave off political unrest by announcing public- friendly economic stimulus packages, for other economies, this is a testing time as prolonged political inertia, coupled with a lack of economic development, is likely to add fuel to the fire.

The MENA region will remain an important economic hotspot to watch as we go forward.

Authors: Prakhar Baghmar and Raghav Maheshwari, Strategic Services Practice