Amid a deteriorating security outlook across much of the Levant and North Africa, comparative political stability in the GCC, KRG, Tunisia and the prospect of a nuclear deal with Iran provide opportunities for trade and investment in the year ahead, despite a reduced oil price, writes Zaineb Al-Assam, senior analyst at IHS.


Several noteworthy developments in the last year are likely to have an impact on the business and trading environment across the Mena region in the year ahead. Chief among them is the rise of the Islamic State in Iraq and Syria and its affiliates in North Africa, followed by the dramatic fall in the price of oil, and nuclear negotiations between Iran and the P5+1 (China, France, Germany, Russia, the United Kingdom and the United States) with a view to reaching a political agreement by March 2015. Finally, the ascension of King Salman to the throne in Saudi Arabia in January 2015, whilst unlikely to signal changes in policy direction domestically, will probably instigate subtle shifts in foreign policy, indirectly shaping the operating environment for countries vulnerable to political and financial instability including Egypt and Lebanon.
1) Islamic State

What is the outlook for the organisation in 2015 and how does this impact business opportunities and risks in the Gulf and Levant?

The Islamic State (IS) is only seeing its territorial control successfully challenged in mixed towns and cities on the periphery of its caliphate. In Iraq, Shia and Kurdish fighters have no interest in fighting the Islamic State in Sunni-dominated areas including Mosul, and Iraqi Sunnis do not want to be ‘liberated’ by Shia forces, since they will likely exact vendettas on their community.

In Syria, prospects for a moderate Sunni opposition to topple Bashar al-Assad have all but evaporated. Al-Assad shows little sign of being toppled while his opponents have become increasingly radicalised through the rise of al-Nusra Front in western Syria, with the conflict assuming even greater sectarian dimensions as a result.

Outlook: The strongest indicator for IS decline in Iraq would be the formation of a National Guard supported by the central government that enables the Sunni community to confront IS. More broadly, unless the central government can effect national reconciliation (through amendments to de-Baathification, disbanding militias, judicial reforms, devolution of power from the centre to the provinces and a commitment to cutting state corruption), the IS will probably continue to thrive.

Implications: Despite the IS showing no signs of weakening, it is only likely to be able to take and hold territory where it has a semblance of local support and where the state has scant control. It is very unlikely to be able to push into the Kurdistan region or southern Iraq (through which Iraq’s trade with Turkey and Iran is unlikely to be interrupted), still less the Gulf states despite its vast territorial ambitions. In the longer term however, Saudi Arabia, Tunisia and Jordan, which have seen the highest number of foreign fighters joining the Islamic State’s ranks, are vulnerable to increases in terrorist attacks as some fighters return.


2) Post-uprising North Africa

How have North African countries fared since the 2011 uprisings and where are risks and opportunities for trade and investment greatest?

Tunisia is arguably the only success story of the 2011 Arab Spring. December 2014 elections marked the conclusion of Tunisia’s three-year post-revolutionary transition to democracy which is likely to reduce political instability and civil unrest risks. The government will remain dependant on external financing for several years, but relative stability and policy predictability will likely facilitate foreign investment. Egypt in contrast has undone its democratic experiment but stability risks being undermined without meeting popular expectations for an improvement in living standards. Egypt is highly dependent on aid from the Gulf for the foreseeable future which is likely to entail a low contract cancellation risks for investors from the GCC and increased efforts to settle disputes relating to Mubarak-era land privatisation deals favourably to ensure ongoing Gulf investment. Terrorism risks are increasing but will be less likely to impact the Suez Canal or army-owned tourism assets, in contrast to softer economic targets in Cairo and the northern Sinai.


3) Oil price

Who are the winners and losers of a low oil price? Are any projects affected?

Of the region’s major oil producers, Iran is one of the worst affected by the drop in oil price, particularly given that a cap on exports due to sanctions prevents Iran ramping up production to alleviate the shortfall in oil revenues. Iran is likely to weather a lower oil price in the short term. The Rouhani administration has proven that it is much better able to manage the economy than its predecessor, reducing inflation and appreciating the currency. While Iran’s economy is far more diversified than Iraq’s and Saudi Arabia’s, which in theory would make it less vulnerable to oil price fluctuations, 40% of Iran’s businesses are exempt from paying taxes and another 21% of business, according to a 2012 study by Iran’s Expediency Council administrative assembly, is done informally. President Hassan Rouhani’s attempts to reform taxation in the 2015/16 budget are likely to be met with resistance internally and are unlikely to be implemented in the near term. The combined effect of the low price and sanctions is likely to increase Iranian motivation for a nuclear deal in 2015.

Iraq’s oil exports form 95% of government revenues. Although the government will prioritise the payment of energy companies and is unlikely to make unfavourable revisions to oil contracts, financial constraints may force the government to delay new projects for the expansion of oil production from the south, power generation and construction of infrastructure that would support improved services to its population, particularly in the south, which remains poor despite possessing 80% of Iraq’s oil resources. More generally, less resources at its disposal makes it more difficult for the government to provide financial incentives for the political interest groups it needs to keep on side to stave off fragmentation, including the Kurds.

In the short term, Gulf States and Algeria are relatively insulated due to large savings accumulated during boom years of high oil prices. Across the GCC, high-profile state-backed infrastructure projects are much less likely to face non-payment and cancellation risks. Although this risk increases for commercial and leisure developments, projects related to the Qatar World Cup in 2022 and Dubai World Expo in 2020 are at lower risk of being cancelled.

The clearest beneficiaries are fuel importers Lebanon, Jordan, and Tunisia, where a lower oil price offsets upward pressure on forex reserves caused by reduced tourism.

The Tunisian government will be dependent on external financing for several years but relative stability and policy predictability will likely facilitate foreign investment. Similarly, Morocco has been a clear beneficiary of the fall in global oil prices, particularly given that it has coincided with the end of diesel fuel subsidies on January, which passed without unrest.

Egypt is a more complicated case. It is an importer of fuel so aided by low oil price but it is almost wholly dependent on aid from Saudi Arabia, Kuwait and the UAE to reduce outstanding debt to foreign oil companies, finance its expenditure commitments, sustain foreign-currency reserves and potentially avoid sovereign default.

Furthermore the low oil price does little to resolve Egypt’s energy dilemma: how to meet growing domestic demand for energy in order to mitigate unrest while incentivising the ongoing participation of foreign energy companies, which are still owed US$3.1bn. Egypt is a marginal net exporter of oil and has had to divert natural gas production for domestic use (natural gas is required for most of Egypt’s industries and power generation). Egypt is also seeking to import gas from Russia, Algeria and Israel; however Algeria is facing the same issue of soaring demand and cannot continue to supply Egypt in the longer term. Popular opposition to importing Israeli gas is likely coupled with high terrorism risks to the pipeline through which it will be imported.


4) Alliances and rivalries in the region

How are new alliances and personal relationships impacting the business environment in the wake of the Arab uprisings and Syria’s civil war?

Civil war in Syria and the rise of the Muslim Brotherhood (MB) and MB-aligned Islamist groups in North Africa prompted new alliances and rivalries which, on balance, have been detrimental to overall stability in the region. Saudi Arabia and Qatar backed rival groups in Syria and whereas Qatar (and Turkey) strongly backed the Muslim Brotherhood in Egypt, the prospect of Islamists gaining political power was perceived as politically destabilising elsewhere in the GCC, notably in Saudi Arabia and the UAE, leading to a rupture in ties with Qatar. The army-led overthrow of the democratically-elected Muslim Brotherhood government in Egypt prompted the new Saudi-supported Sisi government to break off ties with Qatar and ban the MB. While the loss of Qatari aid and investment was replaced with that from Saudi Arabia and other GCC states, Egypt’s loss of Qatari gas cannot be easily replaced.

Meanwhile, the conflict in Syria is the single biggest obstacle to a rapprochement between Saudi Arabia and Iran, which in turn inhibits a regional security framework that would help bring about an end to conflict in Syria, Iraq and greater stability in Lebanon.


5) Iran nuclear talks

Is a nuclear agreement likely and what opportunities are likely to emerge as a result?

The leadership of both Iran and the US believe a deal is in both of their interests; however both are constrained by their domestic audiences. Ultimately, any deal will require Iranian Supreme Leader Ali Khamenei’s final approval.

For a deal to materialise, Iran will have to agree to curtail its uranium enrichment programme, and the P5+1 will probably have to abandon its current insistence on access to all sites earmarked for inspection by the International Atomic Energy Agency (IAEA), especially military ones such as Parchin, and will have to present an accelerated schedule for the lifting of sanctions.

The easing of sanctions will be essential for foreign investment inflows to Iran. In the event that Iran and the P5+1 group of countries reach a final nuclear agreement, Iran’s economy would open up to foreign investment over the following one to three years, depending on the sector and the speed with which sanctions are removed. The government is likely to provide incentives to attract foreign investment. For example, Iran’s integrated petroleum contracts (IPCs), which are expected to be unveiled soon, provide long-term contracts to foreign firms, and the parliament’s swift approval of a bill on September 22, 2014 provides a 100% tax break on income from exports of services and non-oil and agricultural products.

In the event of a failure to reach a nuclear agreement, Khamenei is likely to withdraw his support for President Rouhani and the negotiations, reducing the likelihood of a future nuclear agreement. Furthermore, the risk of further US sanctions will grow from 2016. Although President Barack Obama is likely to veto Congress until then, this could be overturned by a two-thirds majority.