The success of the Muslim Brotherhood in Egypt’s parliamentary elections in early December capped a year of unprecedented change that has redrawn the region’s political landscape.

The Freedom and Justice Party’s (FJP) success – taking about 40 per cent of the vote – followed victories by Islamist parties in Morocco and Tunisia in November and October, and provides a clear indicator of a political shift in the region that can be expected to continue in the coming year, in Libya, Yemen and beyond, where there have been promises of electoral reform following protests and violence.

[The region has] moved from a speculation-driven economy to a policy-driven economic environment

The sequence of elections now under way reflects the denouement of the first act of the so-called Arab Spring that began on 17 December 2010 in the central Tunisian town of Sidi Bouzid, when fruit seller Mohammed Bouazizi doused himself in paint stripper and set himself alight in front of the town’s municipal offices.

Uprising trigger

Frustrated by falling living standards and a lack of job opportunities, and angry at years of harassment and abuse at the hands of local authorities, the catalyst for Bouazizi’s dramatic act came after a humiliating argument with local policewoman Fedya Hamdi that culminated in him being slapped to the ground.

The frustrations of Bouazizi were shared by millions of young Arabs across the region and Bouazizi’ death two weeks later triggered a Tunisian uprising, which spread across the region, toppling long-standing regimes in Tunisia, Egypt and Libya and fundamentally destabilising those in Syria and Yemen. They have forced constitutional reform promises in Morocco and Jordan. And other markets including Qatar and the UAE have accelerated democratic reforms. Further change is inevitable. 

The Arab uprisings have realigned the region’s political landscape with uncertain and potentially far-reaching consequences. But despite the region-wide nature of the uprisings, it is important to note that they are not a pan-Arab uprising, driven by a single political movement.

Instead they have been a series of local uprisings shaped by local factors that have been connected by economics, the downturn in growth combined with poor living standards and rising costs of food and fuel. These same issues have driven large-scale and frequently violent protests around the world, including world centres such as Athens, London and New York. 

The protests have been facilitated by huge changes in communications technology, such as online social networks, secure mobile messaging and satellite television, which have connected people, providing inspiration and intelligence.

Government response

How the uprisings have played out in each market has also been shaped by local factors, and particularly by the government response. So the descent into civil war and regime change in Libya was a direct consequence of Muammar Gaddafi’s brutal crackdown in Benghazi and by international military intervention through NATO. While the toppling of Hosni Mubarak in Egypt followed an intervention to remove the president by the Egyptian Army that wanted to avoid an escalation in violence against its people, and which realised that the end of the ageing Mubarak was inevitable. 

In consequence, the economic impact on different markets has varied. Evidence of this can be seen in the IMF’s growth projections for the region in 2011, made before, during and after the uprisings, which shows clearly the changing fortunes of the regional economies.

The worst-affected markets, in terms of economic output, have been those at the heart of the storm – Tunisia, Egypt, Bahrain and Syria, which, coincidently, are all oil importers and have well-established tourism industries.

Libya, while still at the early stages of development following years of sanctions and under investment, started 2011 as a market that many businesses were tracking closely for new opportunities, following the real-estate downturn in the Gulf. Its emergence ended abruptly as civil war broke out and economy ceased to function for much of the year.  

Across the region, investor and business confidence slumped in the first half of the year, as companies stopped spending and suspended expansion plans in the face of uncertainty.

The Libya turmoil, in particular, pushed oil prices up throughout the year with peaks of more than $120 a barrel in early March, as the oil markets fretted about the overall effect on supply. In the end, there was no disruption to supply as Saudi Arabia increased output to offset the Libya production outage.

The increase in oil prices, which are forecast to average about $103 a barrel in 2011, placed additional economic and fiscal pressure on the oil-importing states as they needed to increase fuel subsidies in order to avoid further exacerbating social tensions. But for the oil-exporting states, it delivered another year of increases in revenues and budget surpluses. It is no coincidence that the strongest economies this year are the Gulf oil exporters.

Middle East hub

Dubai has also benefited from the Arab Spring. Having almost bankrupt itself three years ago through over-leveraged real-estate speculation, the emirate found itself well placed with business, tourism and logistics infrastructure to provide a hub for regional businesses and travellers, keen to avoid the perceived risks in markets, such as Egypt, Jordan and Bahrain. 

The oil producers have also been able to address some of the immediate issues highlighted by the Arab Spring by throwing money at the problem. And throughout the year there have been a series of economic benefit packages announced in the GCC aimed at appeasing locals. These have centred on salary and pension increases for state employees, combined with investment in social infrastructure, particularly housing.

The long-term benefit of the spending is questionable, however. While driving up government expenditure in the short term, it offers little in the way of investment in economic diversification or job creation. Worse, it pushes up the fiscal break-even point for government budgets, raising the risk of deficits or spending cuts in 2012 or 2013 should oil prices fall.

The high oil prices made the GCC the fastest growing region in the world in 2011, and the macroeconomic outlook remains strongly positive with gross domestic product growth in the GCC set to average more than 7 per cent in 2012. However, the risks to growth have increased.

The IMF is forecasting growth of 3.9 per cent for the Middle East and North Africa (Mena) based on an average oil price outlook of $90 a barrel in 2012, down from $103 a barrel in 2011. Oil exporters’ growth across the Mena region is projected to be 4.9 per cent, and 7.2 per cent in the GCC.

The impact on the non-oil private sector has ensured the economies remain more heavily skewed than ever towards hydrocarbons. As a consequence, any dip in oil prices will have a proportionally larger impact than it would have before the uprisings.

Oil prices are projected to fall marginally in 2012 to an average of about $90 a barrel for the year as a result of the impact of the Eurozone debt crisis and sluggish US growth. This remains a historically high level and demand growth will continue to come from the emerging markets. But any significant shocks in these economies could trigger a sharper correction.

Economic divide

It is debatable whether the Arab uprisings have advanced the cause of social, political and economic reform. And they have certainly increased the regional divide between the wealthy oil exporters and poor oil importers.

IMF economic growth forecasts for 2011*
(PERCENTAGE) Oct 10 Apr 11 Oct 11
Qatar 18.6 20 18.7
Iraq 11.5 9.6 9.6
Saudi Arabia 4.5 7.5 6.5
Kuwait 4.4 5.3 5.7
Algeria 4 3.6 4.9
Morocco 4.3 3.9 4.6
Oman 4.7 4.4 4.4
UAE 3.2 3.3 3.3
Bahrain 4.5 3.1 2.9
Iran 3 0 2.5
Jordan 4.2 3.3 2.5
Lebanon 5 2.5 1.5
Egypt 5.5 1 1.2
Tunisia 4.8 1.3 0
Syria 5.5 3 -2
Yemen 4.1 3.4 -2.5
Libya 6.2 na na
*Represents the forecast for 2011 published at various dates. na=Not available. Source: IMF

In 2011, reform stalled in the wealthier states, which have kept a lid on instability, while the poorer states have become more uncertain. However, it seems likely that the demand for change will continue to put pressure on the Gulf monarchies and that there will be further reform announcements in the region in 2012.

Despite the uncertainty, a strongly positive macroeconomic foundation remains, with the GCC still the engine of the regional economy. But the shape of the economy has changed. Over the past three years, it has moved from a speculation-driven economy to a policy-driven economic environment. Business must therefore be aligned to the region’s policy priorities.

Saudi, Qatar and the UAE offer the best business opportunities in near term. And depending on how quickly government is restored, Egypt offers many opportunities due to the scale of the population, direction of government policy, FDI trends and historic links.

Iraq and Libya offer long-term potential, but remain difficult to access and uncertain in the short term.

Break-even oil prices ($ a barrel)
  2010 2011
Algeria 95 95
Bahrain 92 100
Iran 70 86
Iraq 90 102
Kuwait 56 50
Libya 55 na
Oman 58 74
Qatar 25 38
Saudi Arabia 75 80
Sudan 140 na
UAE 55 84
Yemen 130 150
na=Not available. Source: IMF

Oil prices

Christine Lagarde, managing director of the Washington-based IMF, warned in early November of a ‘lost decade’ for the global economy as demand stagnates. Economists and analysts are already revising their forecasts for oil demand and prices for the coming year.  

Most expect to see an escalation in oil price volatility in 2012, citing conflicting geo-political scenarios and macroeconomic trends. While the global economic picture has been weak since 2008, there is barely any spare oil production capacity, leaving limited cover for any potential shocks to the system.

For some analysts, oil prices should already have reached the $150 a barrel, given the political instability in the Middle East and North Africa, but prices have been held back by macroeconomic concerns in Europe and the US. This trend is likely to continue into 2012, with the oil markets balanced, but not slack.

In its October Middle East outlook, the IMF forecasts an average oil price of $90 a barrel in 2012, down from $107 in 2011. This would go some way to balancing the budgets for many of the region’s governments, but others are more pessimistic, with the UK’s HSBC Group and the US’ Citigroup predicting a price of $86 -90 a barrel.

Saudi Arabia has hinted that it wants to defend a $100 a barrel oil price, although it has not yet published its budget for the coming year. Fiscal balances are important to all the Opec producers and if prices do drop below this, things will get uncomfortable in the kingdom, but of all the Middle East oil producers it is in the strongest position to endure lower prices.

Not everyone in the region will be comfortable. The break-even price for Algeria, Bahrain and Iraq is above $95 a barrel for 2011. Citigroup estimates the 2012 break-even budget price for Saudi Arabia at $88 a barrel, Oman $94 a barrel and $125 a barrel for Bahrain.

The Arab Spring has made this threshold of spending even more relevant compared with previous years because of the pressure on governments to invest in projects with a quick social payoff, such as industrial schemes providing jobs, or simply increasing subsidies to ease inflationary pressures.