The top 5 Middle East issues to watch in 2017

Many characterized 2016 as a disruptive year, but the first month of 2017 has hardly felt like a fresh start. The United Kingdom continues to prepare for Brexit, while freshly inaugurated US President Donald Trump has executed several of his key campaign promises in a series of dizzying executive orders. Closer to home, the Middle East and North Africa is similarly likely to remain turbulent over the next year. The following is what Control Risks sees as the five key trends driving risks across the region in 2017.

Shifting geopolitics

The profound shift in geopolitical relationships across the world will be mirrored in the Middle East and North Africa, where the key players are likely to realign their alliances and foreign policy priorities. Saudi Arabia, Egypt, Qatar and Iran will look to build or consolidate relationships with China, Japan, India and Russia in order to hedge against uncertainty surrounding the continued engagement by the US and Europe in the region. This, in turn, may lead to the main powers in the Middle East becoming closer to or more distant from other countries in the region – as has been seen recently in the tension in relations between Egypt and Saudi Arabia. This will make for a less predictable foreign policy environment in the region.

Although the world’s economic powers may look for new partners in the region, they will not abandon older allies. The UK is likely to look to renew economic relationships in the region as it seeks trade allies ahead of its departure from the EU. The Gulf Cooperation Council (GCC) states will work to ensure that their relationships with the American and British militaries remain strong, in part to maintain their security guarantees from the West in the face of what they perceive to be an emboldened Iran.

Such policy realignments are likely to play out in the commercial sphere when it comes to bilateral trade agreements and the awarding of contracts for major projects – particularly as many countries in the region push for infrastructure upgrades. Contracts may increasingly be awarded to non-Western companies as a means of building bilateral trade ties. GCC states will continue to provide other countries in the region with loans and investment pledges in order to build alliances and maintain regional security. They will also make broader joint investments with Russia, China and Japan. However, these will provide fewer large cash grants to countries in the region as they are increasingly forced to tackle their own budgetary shortfalls.

Fiscal consolidation and reform

Many countries in the region began to enact fiscal consolidation measures in 2016, as low oil prices continued to affect government finances. For oil-producing countries, this has meant coming to terms with unsustainable levels of spending. Meanwhile, some countries that import hydrocarbons have used the fall in energy prices as an opportunity to make less painful cuts in subsidies. Governments will continue to make adjustments through spending cuts, by reducing or eliminating subsidies, through restructuring the public sector and by finding new ways of raising revenue. However, their measures are likely to be less drastic than those in 2016.

Efforts to reduce government spending will continue to affect economic growth and dampen both public investment levels and consumer spending in many countries. These efforts will increase regulatory risks by leading to new or higher taxes and greater local content requirements. They are also likely to result in increased non-payment and contract frustration risks.

Vying for foreign investment

Countries across the region are attempting to attract foreign investors in an effort to diversify their economies and encourage non-oil growth. Many countries – particularly in the Gulf – announced such plans in 2016. However, investors this year will be looking for the extent to which governments are implementing reforms aimed at encouraging investment and economic growth.

We expect to see some progress in education, healthcare and e-commerce, particularly as governments look for ways to privatise selected functions. However, government interference will limit the extent of privatisation and liberalisation in sectors that are seen as closely related to state security interests, such as energy or telecommunications. Regulations are likely to continue to favour local investors.

Weakening of Islamic State

The reduction in the amount of territory held by Islamic State (IS) in Iraq and Syria is likely to prompt an exodus of militants who came from abroad to fight alongside the group. Many of these militants will be killed in battle some will be captured, while others will be recruited to organisations elsewhere in the region.

The remainder will likely return to Western Europe, Russia, North Africa or the GCC and join local extremist networks. This trend is unlikely to trigger any significant increase in the threat of attacks in the Gulf Arab states. This reflects the lower numbers of people from the GCC who travelled abroad to fight alongside IS, the fact that there are only limited militant networks in these countries, and the capabilities of the local security forces. However, Tunisia, Morocco, Lebanon and Jordan may face greater challenges in containing returning IS fighters.

Cyber threats: increasing activity

The Syria conflict and complex regional geopolitics are likely to have a significant impact on cyber threats across the Middle East. Iran has continued to develop its capabilities and is second only to Israel in terms of its ability to conduct cyber attacks on its geopolitical rivals (though other states are also seeking to develop these tools). Iran and these emerging actors will likely use activist groups to claim credit for the incidents, providing themselves with plausible deniability in order to complicate their victims’ ability to respond. These attacks are likely to target governmental bodies, symbolic targets and critical infrastructure.

Governments in the region are also likely to increase their surveillance and data-monitoring capabilities as they seek to ensure their own physical and cyber security. Increasing state regulation and cyberspace surveillance will present new challenges to domestic communication systems and indirectly affect companies, through issues such as regulated IT infrastructure requirements and strained internet service provision.

By: Allison Wood, Consultant