2012 has been quite another rollercoaster year for the Middle East, including rocky transitions, flareups and protracted conflict. Meanwhile the region finally started benefitting from the lagged effect of higher oil prices. 2013 will no doubt bring more of the same, particularly as populations and leaders struggle to begin responding to economic grievances.
Here are a few key themes.
Elections and more elections: in H1 Israel, Jordan, Tunisia, Iran and likely Egypt will go to the polls for a series of parliamentary and presidential elections. While many of these polls will likely confirm current leadership, important shifts could take place within cabinets and within the parties – the coalescing of new opposition parties could be key in transitioning states. The busy election cycle could defer policy making and raise policy risks.
Dealing with subsidies and debt burdens: Transitioning countries largely bunted on plans to reduce subsidies on fuel in 2012, rolling back some of the easy subsidies and deferring some of the difficult ones. No one suggests going cold turkey, but meeting the IMF programs and stabilizing debt levels will require some dismantling of subsidies. Egypt remains a key one to watch as for different reasons are the GCC.
Higher breakeven oil prices : Continued spending needs and lower oil production suggests the oil price required to balance budgets will rise across regional oil exporters – Iran, Iraq, Algeria, Libya should all continue to run deficits, while surpluses should become smaller elsewhere. This means less funds for the regional sovereign funds, who in any case may face more encouragement to invest at home providing seed capital.
Moral hazard lives in the GCC! : Frothy conditions seem to be returning to the UAE, particularly Dubai where new projects are coming online, adding to those down the road in Abu Dhabi. 2013 is a year of relatively few loan repayments (2014 is a bigger deal), but nonetheless development companies, banks and others have an incentive to keep projects moving and get loans out the door. Rumors of sharp rent hikes and interest only mortgages are signs exuberance is alive and well..
Regional financial competition: with liquidity modestly picking up already in 2012, and relatively benign global conditions, capital is coming back or at least staying home, Still, turnover on local markets remains low and local financial centers are vying for this capital
A Few Key Decisions Await in 2013
What to do about Iran’s nuclear program? Israel and the U.S. are running out of policy bullets. Israel’s new cabinet is set to be more hawkish (but the new U.S. one may not be). Obama’s new foreign policy team will have to grapple with the issue of breaking the deadlock from the get-go. Iran might have its mind elsewhere until at least after the presidential elections. Until then it has an incentive to play for time and preserve its lifeline – moderate oil exports at high prices.
What to do about Iraq’s role in OPEC? . Iraq is still enveloped in OPEC’s loose targets though not yet liable for a quota. It has an interest in deferring that decision to a later date (since most members push to continue pumping at current levels), though other members might rather lock them in. So far institutional issues suggest
What to do about Syria? The conflict has dragged on for almost two years, and is undermining not only the domestic security and economy but exacerbating that of the region. The longer the conflict drags on, the lower chance it has of rebuilding institutions and dealing with the distrust that militarization and deprivation has brought. Global leaders are still very reluctant to intervene.
Some Lurking Issues Will Become More Important
Iraq’s political stagnation and power grab. Tensions between the KRG and the federal government have already picked up in 2012 to skirmishes. With Al-maliki looking to consolidate power, taking over key institutions like the central bank, the risks of escalation are meaningful.
Spillovers from conflict zones: lack of resolution in Syria has already spilled over into its neighbors, exacerbating economic and political vulnerabilities. Yemen, too continues to be a source of instability, while conflict in Mali and Mauritania reflects a destabilization from Libyas uprising. Algeria, the major security power in the region will need to decide whether to tolerate intervention or to live with breakaway states.
Employing nationals: Creating jobs is becoming an acute problem. Saudi Arabia is pressing hard to lure Saudis into the private sector but structural mismatches still make this difficult. It may have to choose between meeting its commitments on social housing and other projects and Saudization targets.
Opting out from the political process: there has been an uptick in the tendency of opposition to boycott or opt out of the process, particularly in places where uprisings and protest were quashed. While this is still a nascent trend, and not present in most transition countries, broader opting out could reduce legitimacy and make transitions – economic, political.
Role of religious institutions: key religious institutions like Egypt’s Azhar have been elevated as a new authority – how will they react to this role, who will jostle to be the voice of the religious authority, moderates or not.
Role of the military: The new states, too are still adjusting the role of the military under civilian leadership. Egypt’s jostling is but the most obvious. Outside of North Africa, security concerns have become even more important, with military spending picking up across the oil exporters (And Israel).
Role of the IMF and multilaterals: The IMF, EBRD, and others have become much more active in the region, extending finance in 2012, often in tandem. In 2013 will come important decisions on how strictly to force countries to abide by their programs but how to avoid becoming a political football. Helping countries out of a negative feedback loop could remain difficult.
No doubt there will be some big surprises too.