29.3.2011
By Simon Miller
The Middle East has seen an explosion in popular uprisings, beginning in Tunisia, feeding through Egypt and into Libya. The Tunisian protests began on 17 December 2010 following the self-immolation of street trader Mohamed Bouazizi who set himself on fire in protest at the actions of a municipal official. On 14 January this year President Zine el-Abindine Benn Ali fled to Saudi Arabia.
Inspired by Tunisia, protests have been seen in Algeria, Yemen, Jordan, Bahrain and Iraq among others. In Egypt, protests have led to the resignation of President Mubarak and a vow by the military that free elections will be held.
At the time of writing a French/UK-led force is imposing a no-fly zone over Libya after Libya’s leader Colonel Gaddafi failed to adhere to his own ceasefire and bombarded rebels in the east of the country and the rebels are moving steadily eastwards.
How did this happen? And what affect will it have on Western companies that joined the oil and wealth rush in the Middle East and North Africa (Mena)?
Wealth hides poverty gap
Before the uprisings, the Middle East had seemed to have ridden out the global recession well, and had avoided the financial tensions in other markets. However, as the International Monetary Fund’s (IMF) 2011 Outlook report noted regional banks and firms remained vulnerable to changes in global conditions.
It was against that backdrop that forecasters predicted growth of up to 5.5 per cent for the region and private sector credit was picking up although as the IMF points out “banks in some countries still need to address elevated non-performing loan ratios”.
However, the roots of public unrest were already in place when the IMF issued its report in October 2010. It warned that the Maghreb (western North African arab-speaking region) and Mashreq (east of Egypt arab-speaking region) alone will “need to create more than 18 million
jobs to absorb new labour market entrants and eliminate chronic and
high unemployment”.
It added: “This would require an average annual growth rate of more
than 6 per cent — given the labour market’s weak responsiveness to growth — compared with the 4.5 per cent achieved in the past decade.” Unemployment rates in Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia, have averaged about 12 per cent over the past two decades. “Such levels of unemployment imply substantial social and economic costs,” the IMF stated.
In his March Political Risks Briefing Anthony Skinner, associate director and principal political risk analyst at Maplecroft, noted: “Whilst differences exist between individual countries, unemployment, the high cost of living, corruption, the stifling of political dissent, a lack of freedom and violent security forces are amongst the primary sources of discontentment.”
Political risks
Many States and movements in the region are concerned about the current democratic trends and the speed of events. The autocratic House of Saud normally exercises a firm hold on the populace but even here, Saudi Arabia has had to release a $35 billion (£21.8 billion) programme to combat unemployment.
Even so tensions are still high. In Saudi’s Eastern Province, home to the Shi’ite minority, and also the location of the vast Ghawar oil-field, a cleric was arrested after he called for democratic reforms and a constitutional monarchy.
The House of Saud looks nervously to Bahrain where the Shi’ite majority are ruled over by the Island’s Sunni elite. Bahrain initially and brutally slapped down protests but, under pressure from the US, has held out an olive branch to protestors – letting Haq Leader Hassan Mushaima return from exile.
However there is still unrest in Bahrain. In mid-March protestors barricaded themselves around the financial district of the capital Manama and Saudi troops entered the Kingdom.
In his briefing paper for the Oxford Research Group, After Egypt, Professor Paul Rogers of the University of Bradford comments: “Across the United Arab Emirates and in eastern Saudi Arabia, there are significant Shi’a minorities, and the impact of the violence in Bahrain was sufficient to cause considerable concern among the ruling elites.”
The effects of this so-called Arab Spring are being felt across the region with protests from Morocco, Jordan and Yemen and even Oman, which was previously thought of as highly stable.
“Perhaps most surprising of all will be the unease being felt among
supporters of the al-Qaida movement, since the removal of hated “near-enemy” regimes such as that of Mubarak is being accomplished not by a radical Islamist upsurge but by a complex civil society phenomenon in which religion is just one factor,” says Rogers.
Further social and political upheaval will be exasperated by continued food price hikes.
“This may stoke further unrest in the MENA region, adding to the sense of frustration amongst the poor and unemployed and increase calls for a more accelerated pace of reform. The need for governments to placate
protesters by increasing subsidies for foodstuffs means that there is less money to spend on other areas of pressing need such as health, education and infrastructure,” said Skinner.
Indeed the World Food Programme has warned that an estimated 2.7 million people will need food aid as a result of the political turmoil sweeping MENA and has already launched a $39.2 million aid programme to assist 1.1 million people affected by events in Libya.
Oil
Of course the immediate global concern is the impact of oil supplies. To give an idea of the scale of oil production, pre-uprising Middle East oil producers were expected to see a 4.8 per cent growth in GDP, driven by oil production projected at 26.2 million barrels per day (mb/d) and 18.9mb/d were expected to be exported this year.
Although Egypt is not an oil producer, there were immediate concerns when protests began as the Suez Canal and the Suez-Mediterranean oil pipeline carry around 2mb/d. Fortunately, this distribution network has not been affected – as yet.
However, Libya’s near-descent into chaos is another matter. Libya is Africa’s third largest oil producer after Nigeria and Angola and has the largest crude oil reserves on the continent.
With global oil companies pulling out of the country, Libya has already cut oil shipments by 1mb/d according to the International Energy Agency (IEA), out of a total of 1.6mb/d, although this is tempered by a warning that information is poor due to events in the country. The Saudi’s are covering the shortfall according to the IEA but its heavy oil is a poor substitute for Libyan ‘sweet’ crude.
In addition, there is a suspicion that Saudi Arabia had already pushed output to 9mb/d and that it is doubted that output can rise by 3mb/d as claimed.
In February, WikiLeaks released a cable urging the US to take seriously a warning from a former Saudi government oil executive that Saudi Arabia crude oil reserves may have been overstated by as much as 300 billion barrels.
Geologist, and former head of exploration at Saudi oil company Aramco, Sadad al-Husseini predicted that the country could reach an output of 12mb/d in 10 years but could hit peak oil as early as 2012.
“According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi Arabian oil reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray,” said the Wiki-leaked cable.
Global spare capacity is thought to be around 4mb/d according to the IEA with crude stockpiles held by IEA member countries of around 1.6 billion barrels.
WTI oil futures had already crossed over the psychological $100 level for
the first time since 2008 with the Middle East dragging contracts and WTI and Brent spreads widening again to near record levels.
Analysts are warning that Brent oil could hit at least $150 a barrel this year and that $200 should not be unexpected.
With fears of an oil crisis, IEA chief economist Fatih Birol has warned that the world will have to live with high oil prices over the long term.
“The age of cheap oil is over, though policy action could bring lower international prices than would otherwise be the case,” he says.
In addition, Birol warns that increased fuel costs could damage Europe’s recovery prospects: “Europe is the weakest link in the chain of economic recovery. Seventy-five percent of gas prices in Europe are linked to oil prices. In a few months gas prices are going to increase.”
In its February oil report, the IEA warned that “the combination of higher prices, emerging inflationary pressures and instability in the Middle East is not a healthy one”.
“Under current assumptions for global GDP, oil price and oil demand, the global oil burden could rise to 4.7 per cent in 2011, getting close to levels that have coincided in the past with a marked economic slowdown,” it added.
Market sell-off
With fears of contagion, there has been a sell-off in most Middle East markets with Saudi, Dubai, Bahrain, Kuwait and Qatari financial markets and stock exchanges all seeing drops - with Saudi Arabia and Qatar both seeing three figure falls in indices as hot money seeks safer havens.
Currency markets were also hit. At the beginning of March, the Saudi currency markets were back to near their weakest levels in two year—those levels were achieved when protests began in Egypt in February—as investors hedged their exposure after unrest spread to Oman.
In addition, according to data provider Markit, sovereign debt insurance is pushing up sovereign debt costs.
On 3 March, the five-year Saudi Arabian CDS spread widened to 143bp from 136bp adding an extra $7,000 to the cost of insuring $10 million of government debt while the Bahrain spread widened 12bp to 313 and Qatar was up 4bp to 119.
Ratings agency Standard & Poors (S&P) has also reflected concern for the region with Bahrain, Egypt, Libya and Tunisia down-notched with Credit watch on negative implications while Jordan was given a negative outlook.
So what happens now?
In the immediate term, it appears that the protests themselves are against particular regimes and the desire for a better life.
“They are neither religion-based nor anti-Western,” says Goldman Sachs chairman Jim O’Neill in his Global Insight for March.
“These characteristics are especially encouraging as it is a marked shift from the past in terms of disturbances in the region,” he added.
Rogers warns that there are two basic issues that must be addressed.
Firstly, there will be entrenched elites that will be deeply reluctant to cede power to the majority.
“This does not mean the narrowest of elites that controlled states, such as those very close to Ben Ali and Mubarak – it refers more to a much wider group of people, numbering many tens of thousands in Tunisia and many hundreds of thousands in Egypt, who have happily enjoyed the fruits of the defunct regimes and will do their very best to maintain their position,” Rogers observes.
He also warns that even without a change of ‘accents’, all the problems of socio-economic divisions, unemployment and inflation will still be there and that the new political leaderships will have to carry people with them while beginning the process of economic emancipation.
John Vellis, head of capital markets, EMEA, at Russell Investments says; “The great fear would be developments analogous to 1979 in Iran, when the Islamic revolution drove oil prices to very high levels. If this were to be repeated (which at the moment is still a low-probability event in our opinion) then central banks would have to raise rates, and there would be at least in the short term an inflation and interest rate scare which could punch risky assets square in the nose.”
In addition, the political instability in Mena means that the business environment becomes less certain as the situtation remains foggy.
Whatever happens next, it is clear that Mena is in a state of flux where
uprisings could continue for years, affecting oil supplies and lucrative
contracts.
Only when the dust settles and tribal, political, religious and social differences have been addressed will we be able to see what the landscape will look like in terms of business opportunities and investment risks.
