Political tensions and FX volatility emerge as key risks
For a brief video overview of these events, please click here.
Executives will continue to rely on the Middle East & North Africa (MENA) region to perform well in 2023 and support the EMEA portfolio. The region’s energy exporters will provide opportunities, mostly due to supportive commodity revenues. Meanwhile, key large markets such as Egypt and Turkey hold considerable economic risk. Achieving targets will require risk monitoring and scenario planning. From a global perspective, changes in Fed policy and oil prices are critical for the region’s outlook. More details on those events can be found in our Global Events to Watch for 2023. However, there are also numerous local events that companies will need to prepare for.
- Lebanon/Israel maritime deal collapses: We expect the maritime border deal between Lebanon and Israel to remain in place as part of our base-case assumptions, as it benefits both countries economically. However, there is a downside scenario of the deal falling apart. With a more right-wing party in government, Israel can decide to pull out of the agreement, especially potentially with supporters of Itamar Ben Gavir pushing the Knesset to enforce such a decision. Alternatively, Israeli transgression into Lebanon could also provoke Lebanon to breach the agreement, causing it to collapse. This scenario could prevent international energy firms from exploring Lebanon’s potential offshore gas fields and thus any potential commodity revenues for the country.
- Iran nuclear deal is reached: Unfortunately, our base case assumes—considering the Iran protests, increased Russia-related tensions, and rising nuclear enrichment by Iran—that a nuclear deal between Iran and the US is not going to take place within 2023. Still, there is a low-likelihood scenario where Iran reaches an agreement with the EU and US to revive the nuclear deal in 2023. This would bring back Iran as a viable market for Western firms, unlock Iranian oil to global markets, and possibly limit tensions in the region. However, the triggers of this event prove how low of a likelihood that it has, e.g., a change in the supreme leader, a change in Iran’s regime, or a significant rise in protests and sanctions that really further pressure the government to change its policy.
- Social unrest in Morocco: While within our base case, we don’t expect major unrest in Morocco, we are watching the potential implications of severe cost pressures on the country’s political outlook. A scenario where social unrest in Morocco intensifies due to poor living conditions and threatens the government or even the regime could occur. This is only emerging as a small possibility after several years of worsening living conditions caused by a pre-pandemic EU slowdown, followed by the mobility restrictions of the pandemic, and now surging inflation and slow growth. Persistently high food inflation, continued unemployment rates of above 12%, or a deterioration in external relations, particularly with Tunisia and Algeria, could be drivers.
- Iraq descends into chaos: Our base case already assumes tensions will remain high in Iraq in 2023, with risk of protests and government instability continuing. However, we are concerned of a downside risk of even further escalation. Political conflict could escalate into armed conflict between Iraq’s rival Shia factions, where Al Sadr’s militia (Jaysh Al-Mahdi) engages in large-scale military confrontation with Iran-backed groups (Coordination Framework). Heightened instability will prevent policy formation and parliamentary sessions and will result in weeks of political uncertainty and security risks.
- Israeli aggression in the region: A new government in Israel that will be influenced by new extremist and ultra-nationalist influences could raise rhetoric against Arab citizens and neighbors as well as trigger more widespread insecurity in the region. Potential direct attacks into Lebanon, Syria, or Iran would become a possibility.
- Iran becomes a nuclear power: While we don’t expect Iran to become a nuclear power within 2023, executives should monitor that possibility and its potential repercussions. Monitor a downside scenario, where following years of allegations that Iran is close to developing nuclear weapons, Iran finally announces that it has developed nuclear weapons. This will rapidly escalate its shadow war with Israel and may lead to a direct (non-nuclear) confrontation. Alternatively, it could become a deterrence, with both sides now having nuclear capabilities. Such a conflict would have a destabilizing effect on the whole region and could involve support from the US and Russia on behalf of Israel and Iran, respectively.
- Protests in Iran escalate: Our base case does not assume major regime change in Iran, but possibly only minor regulatory/legal reforms from the government to satisfy its population. A low-likelihood risk event would be the re-emergence of protests in 2023 at even more intense levels, or ongoing further escalation of late 2022 protests, which could shake the standing of the regime. While it is difficult to picture what a new regime would look like in Iran, executives should monitor the risk of a period of instability, in which the regime is weakened but supported by Russia, and bringing in a new regime model is difficult because of opposition movements.
- Israel normalization with Saudi Arabia: Our base case assumes no normalization between Saudi Arabia and Israel, mainly because the current government in Israel is unlikely to honor Saudi Arabia’s main demand of creating a two-state solution. However, such a normalization in relations would become possible if a new government comes to power in Israel or if the US administration pushes for such a solution ahead of the 2024 election.
- US sanctions Middle East countries over Russia: While our base case does not assume new major sanctions on Middle East & North African countries in 2023, the risk of such economic and regulatory disruption should be monitored. If the tensions between the West and Russia further escalate in 2023, this could increase the level of pressure coming from the West onto MENA countries to reduce their political and economic relations with Russia. In a downside scenario, Turkey would be the top target of Western sanctions; however, even if not via direct sanctions, the UAE, Egypt, Algeria, and Saudi Arabia could come under indirect pressure as well. Such tensions would trigger currency volatility in relevant markets and hurt business relations.
- Post-election instability in Turkey: While the likelihood of this event will change as we near the election, multinationals definitely need to monitor the risk of heightened instability after Turkey’s elections in Q2 2023. If no presidential candidate wins more than 50% of the votes in the first round, and the opposition wins more seats than the incumbent government in parliament, this scenario could trigger some currency volatility for a few weeks until the second round of presidential voting. Moreover, a win with a very small margin for either side could trigger protests or demand for recounts or re-voting in certain cities, which could extend the period of elections and again trigger FX volatility.
- Egyptian pound crashes: While our base case assumes ongoing but controlled depreciation in the Egyptian pound, executives will need to monitor the risk of an uncontrolled crash. If—in a downside scenario—Russia/West tensions escalate, energy market shocks cause oil prices to shoot upward, global inflationary pressures resurface heavily, especially for grain, and investors return to their emerging-market sell off strategies, the Egyptian pound could come under severe pressure. Efforts to further gradually devalue the currency could backfire and trigger an uncontrolled depreciation of more than 30% within a few days. While, eventually, the currency would be stabilized by FX support from either development banks, multilateral organizations, or Gulf allies, such an event would hurt economic confidence and purchasing power in the country.
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