Political Risk Map 2021: Pandemic Recovery Complicates Risks for Middle East and North Africa
Continued conflicts, depressed oil prices, weak governance, and a slow response to the pandemic spell years of recovery for MENA countries. Collapse of demand for energy and the corresponding effect on oil prices pose serious challenges for governments across the region. Economies such as Iraq rely heavily on oil to fund every aspect of government, and the possibility of poverty increasing is a real threat if oil prices fall further.
Low oil prices will have adverse effects on public debt dynamics and economic growth in all oil-exporting nations, but the consequences are not equal for the six Gulf Cooperation Council (GCC) states. Two in particular have potential trouble ahead: Bahrain and Oman. The break-even oil price for Saudi Arabia is US$76, but it is US$87 for Oman. With less support from the Gulf, Egypt, Jordan, and Lebanon are expected to become increasingly unstable as they contend with dissatisfied political bases.
Individual countries have responded to the pandemic with varying levels of authoritarian rule, but no major backlash has arisen. Most countries did well over the summer but are having trouble with a second wave of COVID-19. The GCC states are weathering the pandemic the best; these countries have well-funded healthcare systems, authoritarian rule, and ample cash reserves, at least in the short term.
With the reduced flow of funds from oil, Gulf nations — principally Saudi Arabia — are likely to reduce their security and financial support for countries such as Lebanon, Egypt, and Jordan, which can bring increasingly loud calls for action on security and employment opportunities. Israel and its neighbors are likely to increase their cooperation, but the conflict between Saudi Arabia and Iran has the potential to worsen still. Egypt may escalate conflict with its neighbors on the topic of water coverage concerning the Nile, and other countries may see water rights as a flashpoint for conflict.
The economic framework and geopolitics of North Africa will be heavily influenced by the race to establish commercial corridors between Africa and Europe, as the latter pivots its commodity imports away from more distant sources. China, Russia, Turkey, and the Arab Gulf states will play increasingly important roles in developing infrastructure projects to create these economic corridors in North Africa and beyond. European Union leadership will also play a key role in determining the extent of the global influence of these new initiatives.
Over the last year, China became the preeminent trading partner in Africa. Russia and Turkey, meanwhile, have expanded trade to levels five and seven times higher than the EU, respectively. The Arab Gulf states have also become prominent actors in Africa, leveraging a shared cultural heritage with their North African counterparts. Accessing North Africa’s proximity to the southern shores of the Mediterranean, increased flows of goods, resources, power, and capital is anticipated to come into fruition over medium-term forecasts. Over the next year, the Maghreb will continue to serve as an arena of intense global competition, as it sits at the nexus of vital trade and energy transit routes, in addition to industrial manufacturing value chains, that connect Europe, Africa, and the Middle East.
After years of economic stability and expansion, Egypt is facing a slowdown in GDP growth in 2021 to 2.3%, from 3.6%, as the pandemic’s longer-term effects persist. Egypt does not have the same challenges as other African states that have been heavily impacted by depressed oil prices, as the country sits as a net importer. This therefore presents an opportunity for Egypt to achieve cost savings on various commodity imports. A severe hit to the Egyptian economy, however, is seen in the tourism sector. The same restrictions are also having a considerable negative effect on the region’s exports and Suez Canal revenues.
Egypt’s fiscal reserves have sharply declined since February 2020, due to the capital outflows required to minimize the impacts of the pandemic and the economic stimulus package of LE100 million deployed by the Central Bank of Egypt. This has prompted Egypt to raise further debt from external sources. 2020 saw commercial lending from local banks and multilateral organizations far exceed many neighboring competitors on the continent, with Egyptian sovereign risk proving to be one of the most sought-after credit coverages in the credit insurance market for the fourth quarter. Egypt’s sovereign credit risk remains relatively high at 6.1; this is reflected in its B stable rating, which was reaffirmed in 2020, and will therefore undoubtedly attract close attention from external sovereign lenders.
Egypt is on the cusp of becoming a major exporter of power regionally, which may reconfigure the means of energy connectivity between Europe, Africa, and the Middle East. Simultaneously, Egypt is at the nexus of commercial transport for East Africa-Eastern Mediterranean countries. When added with the greater rail connectivity planned between Egypt and Sudan, a new north-south commercial corridor that joins White Nile countries is increasingly likely to come to fruition. A southern extension of the economic corridor, reaching Tanzania and other East African countries that coalesce at the Lake Victoria basin, means there is great potential for the fledgling East African Federation (a political union of Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda) to reap extensive fiscal benefits as well. With this in mind, Egypt will likely continue to shift commercial transportation from road to rail.
The Egyptian government is likely to maintain strong relations with Israel to consolidate on shared ambitions containing insurgencies on the Sinai Peninsula. Economic coupling with Israel while supplementing Gulf states also means war with Israel is highly unlikely over the medium to long term. Military aid to Libya is likely to continue, as it will serve as another avenue to neutralize the threat the Islamic State poses. This will extensively test the resources of the Egyptian military, as without Turkish military support in Libya, the army would be stretched due to preexisting military commitments in the Sinai.