Research & Commentary Results

On Aug. 24 Algeria broke off its already minimal bilateral relations with Morocco, declaring this was due to the kingdom’s “hostile actions” and accusing it of involvement in the wildfires that struck the Kabylia region earlier that month. The heightened tension between the two countries brings into focus regional uncertainty and may spell the end of their limited collaboration in the energy sector.

There is a puzzle in the profits of Gulf Cooperation Council (GCC) firms, especially conglomerates. Even as the size of GCC economies has grown considerably in the last two decades, corporate profits have been flat. With a goal of economic diversification to expand private sector business and job opportunities for citizens, the imperative to create an environment for growth is acute for regional governments. Tarek Fadlallah, CEO of Nomura Asset Management Middle East and a member of the Program on Economics and Energy Advisory Council, lays out some of the challenges for Gulf economic diversification and improved corporate profitability.

Speaking at a public event earlier this month, Egyptian President Abdel-Fattah el-Sisi made the surprise announcement that the next step in the country’s economic reform agenda will include the removal of bread subsidies. He becomes the latest in a long line of presidents to target the bread subsidies that provide cheap sustenance to a country of (now) over 100 million people at a huge cost to the state, although none of his predecessors ever successfully managed to remove or significantly reduce them.

الدولتان في الشرق الأوسط اللتان تتمتعان بأعلى توقعات نمو لعام 2022 هما إسرائيل ومصر. وتقدر مؤسسة فيتش سوليوشنز أن الناتج المحلي الإجمالي على مستوى منطقة الشرق الأوسط وشمال إفريقيا سينمو بنسبة 3.6% في عام 2021، بعد انكماش بنسبة 4% في عام 2020. هنا نجد أن مصر وإسرائيل هما الدولتان الوحيدتان في المنطقة اللتان يُتوقع نمو اقتصادهما بما يتجاوز حجم مستويات ما قبل كوفيد-19.

Amid typical governmental absenteeism, Hezbollah’s Secretary-General Hassan Nasrallah announced on Aug. 19 that the party had secured fuel shipments from Iran. He asserted that the first of many fuel tankers would set sail to Lebanon that same day. Hours later, U.S. ambassador to Lebanon Dorothy Shea declared that the U.S. was working closely with Egypt, Jordan, and the World Bank to find solutions to Lebanon’s crippling fuel shortages. Shea’s comments imply a U.S. willingness to loosen Caesar Act restrictions that would otherwise prevent Lebanon from importing natural gas and electricity through Syria from Egypt and Jordan respectively. The two announcements have been in the making for weeks, but both come at a time when Lebanon’s physical and human infrastructure is crumbling in the absence of essential fuel supplies and energy sources.

One of the most consequential changes in the Middle East’s geopolitical map is happening at the water’s edge. Along the entire eastern rim of the Mediterranean basin, global and regional actors are engaging in a spate of port capacity expansions, new private port construction, and the sell-off of major state-owned ports that will determine who sits atop the region’s global trade flows for decades to come. The international competition to rebuild Beirut’s port is one key puzzle piece in this larger process that is reconfiguring the Levant’s maritime commercial architecture and, as a consequence, the geopolitical contours of the Middle East.

The possibility that the Lebanese government could opt for China to reconstruct Beirut’s port has raised alarm in Washington and European capitals given China’s already outsized commercial port presence in Egypt, Israel, and Greece. Increased Chinese involvement in Lebanon’s port operations could consolidate Beijing’s hold over the commercial connectivity architecture of the Levant. Re-orienting global commercial flows between Europe, the Middle East, and Asia according to Beijing’s priorities would make China’s Belt and Road Initiative a dominant organizing principle in the international relations of the Middle East. The most effective way to offset China’s ambition may be to facilitate Mediterranean rivals France and Turkey to jointly rebuild Beirut’s port.

The two countries in the Middle East with the highest growth expectations for 2022 are Israel and Egypt. Fitch Solutions estimates that MENA-wide GDP will grow by 3.6% in 2021, after a contraction of 4% in 2020. Egypt and Israel are the only countries within the region expected to grow their economies beyond the size of their pre-COVID-19 levels for 2021.

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The future of economic growth in the GCC is looking better than some analysts expected in the depths of the downturn in 2020. What may be different in this recovery compared to previous economic crises in the Gulf is a more limited fiscal policy space, and more variance among GCC countries in their ability to rebound with smart stimulus. As the global economic recovery now strengthens oil demand, taking advantage of this interim period of the global energy transition will mean accelerating government spending in areas where it can make a long-term impact on productivity growth and increased labor force participation among citizens in the private sector, especially women. Some governments will be able to accelerate productivity, including using highly skilled foreign labor and favorable long-term residency regimes, and others will be simply treading water to satisfy immediate demands of their populations.

While Western banks saw their valuations drop substantially during the first 18 months of the COVID pandemic — and have yet to recover — the declines among Saudi banks have been smaller and their valuations are now closer to, if not above, their pre-pandemic levels. Identifying the drivers of this seemingly contradictory trend helps us better understand the shifts within the Saudi banking sector and the growing impacts of policies related to Vision 2030, the country’s long-term economic development and diversification program.

Although it is home to the Horn of Africa’s main transshipment hub, a host of foreign military bases, and a booming local service sector, Djibouti faces a number of major economic challenges, including new and growing competition, dangerous reliance on Ethiopian power and water supplies, climate change, and high levels of debt. This is why Djibouti needs a Plan B for what comes next after the presidency of its long-time leader, Ismail Omar Guelleh, in power since 1999.

STMicroelectronics, one of Europe’s leading semiconductor manufacturers, will very shortly inaugurate a new production line in Morocco to manufacture electronic chips for American electric car pioneer Tesla. The production line is the latest example of a larger trend among international firms to look to Morocco as an attractive location for “nearshoring.” Through Rabat’s smart infrastructure investments and careful management of its foreign partnerships, Morocco has already exploited this trend to emerge as Africa’s leading automaker. Now with an auto chip production line dedicated to electric vehicles (EVs), Morocco is positioning itself to become a center for EV production while turning itself into a strategic component of Western semiconductor supply chain resilience.

Lebanon is steadily plunging into total darkness. Decades of political bickering, weak governance, and vested interests have taken their toll on the power sector and are developing into economic and humanitarian crises. A long-term strategy focused on improving the sector’s governance is needed. In the short term, however, immediate actions such as distributed renewable energy and out-of-the-box financing mechanisms should be taken to avoid the darkest hour.

In spite of the growing political distance between Riyadh and Abu Dhabi, it was economic factors that played the key role in the UAE decision not to support the extension of the OPEC+ agreement until the end of 2022, thus putting on hold the cartel’s decision to increase production in the coming months. The OPEC+ agreement in place since December 2016 may have finally run its course. The medium term will see a changed landscape among oil producers, not just in the GCC, but globally as they compete for customers in emerging markets, the only place where oil demand is expected to increase after 2030, and as they attempt to transform their businesses across energy products. The national oil companies that can access capital, attract new investment, offload assets, and be nimble enough to grow across energy lines, whether it be hydrogen, solar, or even natural gas, will be the ones that thrive. Producers like Libya, Iraq, Iran, and even Russia and Saudi Arabia may be at a disadvantage in accessing new investment and pursuing transformation. The future of OPEC and its ancillary partners is one of intense competition and divergent time horizons for hydrocarbon exploitation.

The Biden administration’s goals in climate policy, renewable energy infrastructure investment both domestically and globally (the Build Back Better World, or B3W, initiative), and its Middle East policy may be on the verge of a collision. While the administration would like to dial back its engagement in the Middle East at least militarily, the region will be essential to meeting U.S. foreign and domestic energy goals.