Q1 2018: MENA Risks to Watch

The MENA region seemed to be calming down in 2017 – violence in Syria was subsiding, ISIS was weakening, Donald Trump seemed to be exerting his focus elsewhere in the world, and Arab states were implementing positive reform measures to address economic imbalances. However, key developments in the latter half of the year quickly marked the return of uncertainty in the region, complicating existing regional relationships and causing investor confidence to waver.

As security issues increase, tensions between Iran and its foes rise, and Trump’s Middle East policy becomes more erratic, the MENA region will enter 2018 with heightened political risks that are increasingly interconnected. To prepare for 2018, executives should:

  • Monitor short-term political risks that are acute in Q1 2018 and are increasing in likelihood, as listed below
  • Evaluate political risks based on the impact they have on demand and operations, rather than focusing on general rise in risk perceptions
  • Prepare contingency plans if any political risk has the potential to significantly impact commercial performance
  • Evaluate whether local teams have sufficient flexibility in rapidly adjusting their strategy if any key risks materialize

Insecurity in the Gulf Cooperation Council (GCC)

The risk of missile attacks from Yemen’s Houthis has not subsided. Since November, Saudi Arabia has intercepted numerous missiles from Yemen, latest one targeting the al-Yamama Palace in the capital Riyadh. In early December, Houthis also claimed to have sent a missile to a nuclear power plant in Abu Dhabi. This has not been confirmed by the UAE authorities, however the Houthi’s intention to expand missile attacks into the UAE and Saudi Arabia remain in place. While a missile reaching its target in the UAE or Saudi Arabia is not within FSG’s base case, its likelihood has been increasing significantly. An uptick in such attempts from Houthis can dampen tourist inflows into Dubai, and delay the much-needed boost to foreign investor confidence in the GCC.

A surge in violence in Israel and Palestine

In December, Trump unwound years of US foreign policy by announcing that the US will move its embassy in Israel from Tel Aviv to Jerusalem, essentially recognizing Jerusalem as Israel’s capital. The decision triggers the risk of violence that would severely dampen confidence and negatively impact business operations. For Palestinians, Trump’s stance is a formal declaration of what has been a reality for decades – that the US cannot serve as an honest broker between the Israelis and Palestinians, shattering any chance of reaching a peace deal between the parties in the foreseeable future. With little faith in the negotiation process, and demonstrations and confrontations already increasing following Trump’s announcement, the potential for a third intifada (uprising) breaking out increases. This would dampen consumer confidence and could cause short term declines in consumption in Israel.

Disruption to the Iran nuclear deal

Since Donald Trump’s presidential campaign, his primary goal toward Iran has been to rip up the nuclear deal. He took a step toward this goal in October by decertifying Iran’s compliance of the deal, triggering a 60-day period in which Congress could choose to reinstate nuclear sanctions on Iran. The deadline passed on December 14, with Congress taking no concrete action except advancing a bill that could inhibit Boeing’s commercial deal with Iran. For executives, this does not mean the threat of the US pulling out of the deal is over. Rather, uncertainty will persist, because Trump indicated he can withdraw from the deal at any time he chooses and a harsh stance toward Iran was reiterated in the US National Security Strategy. Executives should monitor an announcement from Trump in mid-January when he must again either certify or decertify Iran’s compliance with the nuclear deal. He is likely to continue to decertify Iran and provide more time for Congress to address the deal’s flaws. However, executives should also prepare contingency plans should Trump decide to take more aggressive action, which could become more likely if Iran heightens its support for Hezbollah in Lebanon amid tensions with Israel, and the Houthis in Yemen amid rising tensions with Saudi Arabia.

Insecurity in Lebanon

The above three events contribute to heightened risk in Lebanon, an outlet where tensions between Saudi Arabia, Iran, and Israel meet. Prime Minister Saad Hariri’s resignation, and then revocation of his resignation in November increases political uncertainty and dampens investor sentiment, while also bringing to light Saudi Arabia and Iran’s battle for influence in the country. Lebanon faces two primary risks. First, should Lebanon’s Hezbollah intensify its involvement in regional conflicts, despite Lebanon’s commitment to a regional dissociation policy, this could lead Saudi Arabia to place economic sanctions on Lebanon. Second, Hezbollah’s renewed focus on the Palestinian cause following Trump’s Jerusalem decision could provoke Hezbollah to attack Israel, raising the prospects for an Israeli-Hezbollah war.  

Deteriorating relations between Turkey and the US

A court case accusing businessmen and high level officials of Turkish state banks of violating Iran sanctions, has wide ranging implications. If the current case is followed by further indictments that formally accuse senior Turkish politicians, beyond just the former Economy Minister Zafer Caglayan, relations between Turkey and the US will further deteriorate. Furthermore, a potential OFAC (Office of Foreign Assets Control in the US) confirmation that Turkish state bank Halkbank has been guilty of violating Iran sanctions will have several implications for Turkey’s economy:

  • The Turkish lira will depreciate steeply
  • Turkish banks will face -albeit temporarily – difficulties in accessing foreign financing
  • The Turkish Treasury may have to step in to support liquidity in the banking system if there is a run on Halkbank’s deposits, further pressuring the already increasing budget deficit

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