Mankind thrives on change and some of the greatest leaps forward have arisen in times of adversity. Timely then for Dr. George Abed, senior counselor and director for Africa and the Middle East at the Institute of International Finance, to deliver a presentation at the CFA Institute Middle East Investment Conference that focused on the transitions currently happening across the Middle East and North Africa (MENA).
While political hegemonies that have been in place for almost a century have been overturned in the space of a few months, countries including Egypt, Libya, Syria and Yemen, face an uncertain political future that may have costly economic implications. There is always a danger that a desire to alter all existing structures can actually damage a country’s potential. Abed hopes that political changes should not mean all progress made by previous regimes is erased but pointed to the poor showing of the MENA region in terms of international competitiveness.
Abed proposed three separate steps for reform, which, although targeted at the MENA countries, could easily be applied in Western Europe or the US. These included right-sizing the public sector, reducing uncompetitive wages and costs and investing in the future through education and technology.
By taking these steps, Abed believes the MENA countries could represent a great opportunity, not because of oil, but because of human capital. With a current 48% labor force participation rate, the Arab world lags well behind its emerging market neighbors. Of course, the limited role of women in the economy contributes to this figure, but reforms could change this.
So far so good, political turmoil can represent an opportunity for change that could drive the non-oil producing MENA territories out of the economic backwater they find themselves in. So where are the risks? Dr Abed made clear that the risks depend on where you stand. If you are from an oil-producing country your attitudes may differ widely from someone whose country lacks the resource. Here are some of the global and regional risks he outlined:
- Greek debt accord falters without clear action from Brussels.
- Euro area banks fail to recapitalize in the next three years prior to the unwinding of the long term refinancing operations.
- Political paralysis in Washington: One scenario could be a split between Presidency and Congress which leaves the serving administration unable or unwilling to deal with spiraling debt and fiscal deficits.
For oil producers, all of these could be bad news as a global recession could send oil prices spiraling downwards again.
- Libya fractures and the oil sector is disrupted. Spare capacity in oil production is at very low levels, so with Libya back to 75% of pre-disruption levels any local turmoil now could send global oil prices soaring.
- Iran sanctions escalate into military action. Who’s going to strike first, will it be Iran by closing the Straits of Hormuz or will it be Israel by striking at Iran’s nuclear capability? Either way oil prices would sky-rocket.
Abed contends that what connects these two global and regional scenarios apart from oil is that we will see local events driving the global economy. At the end of the presentation, the audience of investment professionals from around the globe took part in a vote on the Iran sanctions. The results were that roughly 5% thought that an Israeli strike was likely in the next 12 months. Perhaps that is cause for relief but perhaps it might also be wishful thinking.