Building bridges over troubled waters

06 December 2018
Even by the unpredictable standards of the Middle East, the past 12 months have been alarming for business. The hope is for calmer waters in 2019

The 2018 G20 Buenos Aires Summit from 30 November to 1 December provided Saudi Arabia’s Crown Prince Mohammed bin Salman with an opportunity to put behind him the difficulties of the previous two months. The summit allowed Prince Mohammed to re-establish his presence, renew relationships with key allies and begin mending fences with those who have been critical.

A high-profile high-five with Russian President Vladimir Putin and discussions with other leaders suggested that it was mission accomplished. Despite this, it was reported that the crown prince appeared uneasy at the annual gathering of leaders from the world’s 20 biggest economies. And that his unease appeared to be mirrored by the behaviour of other leaders, many of whom were reported to have been reticent to engage with Saudi Arabia’s crown prince.

The awkwardness in Buenos Aires suggested how the perception of the kingdom in the eyes of many outside the region might have been affected by the fallout from the killing of journalist Jamal Khashoggi in the Saudi consulate in Istanbul on 2 October.

Riyadh has said Khashoggi was killed by ‘rogue operators’ and has promised to punish the perpetrators, but lingering suspicions have made international politicians and business people wary of dealings with the kingdom.

In Washington, US President Donald Trump has doubled down on his support for Riyadh, but the incident has also been described by Robert Jordan, US ambassador to Saudi Arabia from 2001-03, as “the worst moment in US-Saudi relations since 9/11”.

Beyond the immediate drama, the overtly politicised climate in the region is also proving less than optimal for the various Middle East governments looking to press forward with plans for economic diversification – a perennial goal for the region, but one lent fresh impetus by recent economic conditions.

For decades, the oil-exporting governments in the region have sought to meet these needs by reinvesting their petrodollars in state-run infrastructure projects and subsidised living, but the crash in oil prices in 2014 revealed that this model can no longer be sustained.

The sharp fall in revenues over three years of low oil prices spawned large budget deficits and rising debts that could only be brought under control by cut backs in public spending that have knocked all areas of the economy. Led by Saudi Arabia, the region has tried, with limited success, to roll out reforms that will replace the state-centric model with a private sector-led model driven by private and foreign investment.

Unexpected events

Perhaps the most damaging legacy of 2018 is the harm done to investor confidence in the region by a series of unexpected events that climaxed with the Khashoggi affair.

Even by the unpredictable standards of the Middle East’s ever-shifting political landscape, the past 12 months have been alarming. In addition to lending a new twist to the deep geopolitical rivalry between Riyadh and Tehran, which has most recently manifested itself in conflicts across the region from Lebanon to Yemen, Iraq and Syria, the reintroduction of US sanctions on Iran has destabilised the Iranian rial and placed huge pressure on moderate president Hussein Rouhani. It has also strengthened the hand of hardliners in the Islamic Republic and fuelled an increase in Iran’s hostile rhetoric towards the US and its allies in the region.

Even while the White House has granted temporary sanction waivers to some international companies doing business in Iran, the promise of strong enforcement of the sanctions is likely to see Tehran acting out in more unpredictable and destabilising ways.

GCC rift

Within the GCC, hopes for a thaw in the 18-month GCC diplomatic crisis were knocked on 3 December when Doha announced it was to leave oil producers’ group Opec on 1 January 2019 after 57 years of membership. The Gulf state said it wanted to focus on gas production. But it is also a sign that the GCC rift remains as severe as ever.

After the tumult of 2018, regional policymakers have a difficult line to walk between calming troubled waters in order to restore confidence, while at the same time trying to maintain a solid commitment to tough economic and social reform policies at home.

At the same time, they will seek diplomatic solutions without losing ground in the international arena just as governments across the region are under increasing pressure.

As ever, US engagement is a key element in resolving many of the contentious issues in the region. However, while President Trump has shown unwavering support to Saudi Arabia, the success of the opposition Democratic Party in October’s US midterm elections, coupled with bipartisan anger at Saudi Arabia over Yemen and Khashoggi, mean that the US’ position in the region is uncertain just as Russia and China are increasing their involvement.

The hope is for calmer waters in 2019. The outlook is for more turbulence.

MEED’s 2019 Yearbook will be published in print on Tuesday 18 December

  • Provides an outlook for the region in 2019
  • Examines opportunities and investments
  • Explores the project market landscape
  • Assesses the risks and challenges ahead
  • Delivers unrivalled expert analysis and insight
  • Provides comprehensive sector-by-sector analysis

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