The economic outlook for the Middle East and North Africa (MENA) remains weak through 2020 as the region faces barriers to growth. Significant challenges include hydrocarbon dependency, security issues, and the general business environment. Factors that will help to mitigate those challenges over the next five years include the removal of sanctions against Iran and a shift by oil-rich nations toward more market-oriented economies.
Oil-rich economies of the region (Algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) are all highly dependent on hydrocarbon revenues. This is being exacerbated by weak oil prices.
However, a low vulnerability as measured by high foreign exchange (FX) reserves, high sovereign wealth fund assets, and large crude oil reserves will help mitigate this dependency to a degree. In this context, Algeria, Bahrain, Iraq, and Oman are the most vulnerable to the oil price downturn, while the UAE, Qatar, and Kuwait are best placed (but still highly vulnerable).
The security issues in the region are well documented, with civil wars raging in Syria, Iraq, Yemen, and Libya. Furthermore, the insecurity has opened the way for militant action by radical groups such as Islamic State (IS) and al-Qaeda in the Arabian Peninsula (AQAP). Such actions range from sectarian attacks against Shi’a mosques to attacks on tourists in Tunisia and the bombing of the Russian airliner out of Sharm El-Sheikh.
This violence impedes day-to-day business activity, local and regional supply chains, and longer-term investment. Although steps are being taken to bring the situations under control, we do not expect the security situation to be fully resolved by the end of the decade. Indeed, there is potential for countries such as Lebanon and Jordan to become caught up in the violence.
A third barrier to growth in the region is a number of structural issues that impede investment at present and will do so into the medium term. Looking at international gauges, such as the World Economic Forum’s Global Competitiveness Index, the World Bank’s Doing Business Survey, Transparency International’s Corruption Perceptions Index, and the World Bank’s Governance Indicators, the region fares poorly.
Dun & Bradstreet does not believe that these structural issues can be addressed until well into the medium term and will therefore remain a barrier to investment, business opportunities, and growth over the next five years at least.
Lifting of Sanctions on Iran
On the positive side, the lifting of the majority of international sanctions on Iran in January 2016 has opened the world’s 28th largest economy to return to the global stage. This has already resulted in a number of huge deals. The lifting of sanctions should also see considerable investment into the energy sector, tourism, finance, and business services. This will benefit not only Iranian companies, but also regional and global trade, investment, and supply chains.
However, it is important to remember that sanctions could be reintroduced at any time if Iran is deemed to have contravened the nuclear deal. More importantly, a number of US sanctions predate the nuclear dispute and are unlikely to be lifted in the medium term. Indeed, we expect that, should a Republican be elected US president, the US would likely support further sanctions, ensuring that risks for US businesses dealing with Iran remain elevated.
Liberalization of the Gulf States’ Economies
Finally and paradoxically, low oil prices will actually boost investment in the longer term in the region as the oil-rich governments are forced to liberalize their economies.
The GCC governments, to varying degrees, are already moving towards a more market-oriented economy through privatization programs, considering the use of public-private partnerships for their massive infrastructure programs, and cutting back their welfare spending. This should see foreign-investment opportunities open up in these countries over the next few years.
Dr. Warwick Knowles is the Deputy Chief Economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow, UK, he covers global issues and the Middle East and North Africa for D&B Macro Market/Country Insight Products. Previously he taught Middle East politics and political economy for almost a decade at both Newcastle and Durham Universities and has published widely on regional issues and the hydrocarbon sector.