MENA Crisis: The Key Risk to Global Recovery and Stability

Date: March 22, 2011
Pages: 46
US$ 1,295.00
Report type: Strategic Report
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A Pivotal Moment History In The Making

The wave of popular protests that has swept across the Middle East and North Africa (MENA) since January constitutes the biggest shake-up to the region for at least a generation, and its impact will be felt for many years to come. The unrest also poses the biggest risk to the global economic recovery this year, not least because it is causing oil prices to spike higher.

Although it is still too early to determine whether the unrest will lead to genuine democratisation or renewed authoritarianism, it is clear that most countries' political risk profiles will remain elevated for the foreseeable future. The countries that have already seen regimes ousted are entering uncharted territory, as they transition to a new political order, while the states that have yet to see change will be bracing themselves for all eventualities.

Democratisation is now a realistic possibility, but the path will not be easy, and any attempt to hold back the tide will risk greater unrest.

Although rising inflation has fuelled discontent, the protests are being driven by more fundamental issues, such as a lack of democracy, high unemployment, poor opportunities for social advancement, anger at perceived government corruption and high inequalities, significant demographic youth bulges, and in some cases, ethnic and sectarian strife.

We deem Algeria, Bahrain, Iran, and Yemen to be most at risk of further unrest, although we emphasise that virtually no state will be completely immune to public protests. Egypt will remain in a delicate transition to democracy, and if the people's hopes are dashed, further protests could erupt. In Bahrain, the growing demands of the Shi'a majority could transform the polity, with major implications for Saudi Arabia, which fears unrest among its own Shi'a minority in the oil-rich Eastern Province. Saudi Arabia also fears that Iran may be instigating unrest in Bahrain to increase its geopolitical influence. Ironically, Iran itself is at risk of severe political upheaval, due to its deteriorating economy and tighter international sanctions, and we see scope for regime change in both Saudi Arabia and Iran by the end of this decade.

Libya's descent into civil war represents the most immediate risk to the region and Europe. The country's oil supplies are of key significance to the EU, but southern European countries also fear a massive influx of refugees from the country. Even if Colonel Qadhafi is formally removed from power, Libya's wounds will take a long time to heal, and the ensuing power vacuum could necessitate Western military intervention. In addition, chaos and lawlessness in Libya could allow Islamist extremists to establish a greater presence in the country.

More broadly, the crisis in MENA has served notice to authoritarian regimes around the world that they are not immune from popular uprisings. Governments in Venezuela, Belarus, several African countries, Central Asia, North Korea, Myanmar, and even China will become ever more vigilant to the possibility of public unrest, although idiosyncratic factors mean that a domino effect will not necessarily ensue.

As far as global financial markets are concerned, the combination of supply-side risks to oil and massive political uncertainty in a strategically important region is bad news for risk trades. As investors re-price for higher oil prices and political volatility, equities and emerging market (EM) currencies are likely to suffer while the dollar and G7 fixed-income instruments should benefit. The implications for the medium-term global macroeconomic outlook are much more difficult to ascertain at this stage. These will ultimately depend on key political developments, the extent to which the situation in Libya deteriorates and whether the key oil-producing states Algeria and Saudi Arabia are affected. The risk scenarios are becoming much clearer - indeed, we see the potential for oil to exceed US$120/bbl in the short term. In our view, global markets have underestimated the potential risks stemming from MENA and this will result in a tactical re-pricing, especially in risk-dependent 8 Business Monitor International Ltd mena crisis: the key risk to global recovery and stability assets in emerging markets. Nonetheless, we maintain that as yet, the core factors underpinning our global recovery view (banking sector stabilisation, accommodative monetary policy and mitigation of treasury crisis risks in Europe) remain in play. There is thus a potential for markets to overreact on the downside, in the event that dire political risk scenarios do not play out.

Our global macro team has modeled a 'worst-case scenario' in which oil prices spike to US$200/bbl.

This showed that a move to US$200/bbl followed by a sharp drop that left prices at an average US$90/bbl in Q1 2012 would shave about 0.5pp from our 3.1% US growth forecast in 2011. In the eurozone, growth would be trimmed by around 0.8pp from 1.8%. Unsurprisingly, on a global basis, net oil importers would be harder hit in the near term, with Turkey (where growth would be cut by 1.6pp in 2011), South Africa (1.4pp), Singapore (1.7pp) and India (1.2pp) among the worst off. The hit to real GDP growth in 2012 could potentially be worse if oil prices do not subside, but suffice to say that a period of US$200/bbl oil, even if only brief, would pose severe risks to global growth, inflation and policymaking.

Asia's economic growth is particularly vulnerable to high oil prices, because most countries in the region import more than 90% of their oil needs. India, Vietnam, Indonesia, and South Korea are among the most vulnerable countries, with the former two already suffering from high inflation and oil import bills.

European economies are also likely to be hit by high oil prices, and policymakers in the continent will also be wary of the security risks of Libya's descent into chaos. However, one relative beneficiary is likely to be Russia. Although there are several Russian oil firms with stakes in the Libyan oil industry, high oil prices are generally positive for the Russian economy, provided that any price surge does not tip the global economy back into recession.

For Latin America, higher oil prices are a doublededged sword. Venezuela is the most notable beneficiary, although high oil prices may exacerbate structural deficiencies. Mexico and Colombia are also likely to see higher exports, but oil importers such as Chile and Peru could be major losers. Indeed, the latter two countries will also suffer from lower copper prices brought on by global risk aversion. On the other hand, Chile and Peru also have strong fiscal positions, allowing them to weather the storm.

The impact of higher oil prices on sub-Saharan African (SSA) economies will vary widely. Production is concentrated in a few key countries including Nigeria, Angola and Sudan, with most other nations being net importers. Measuring the impact on individual economies is also complicated by the fact that many countries are exporters of crude and importers of refined oil (or vice versa), not to mention that various governments will have in place different policies on subsidies at the pump. On balance, though, the impact of higher oil prices is likely to be negative for headline growth: consumers' budgets are already tight; governments' finances are still recovering from the last downturn; and inflation, having hit a cyclical trough in H2 2010, is now clearly on the rise.
executive Summary
A Pivotal Moment
History in the Making
Mena Regional Political Outlook
Beyond the Crisis
A new and Uncertain Era
Conventional Wisdom Overthrown
Which Countries are at Risk, and Why?
Structural Political Reforms on the Way?
Democratisation Will Take Time
Ripples Beyond the Middle East
  Table: Political Unrest in Mena
Indicators: Algeria, Egypt, Libya, Morocco, Tunisia, Israel, Jordan, Lebanon, Syria, Iran,
Iraq, Yemen, Saudi Arabia , Qatar , Bahrain , UAE , Oman , Kuwait
Global Markets
Mena Crisis
our Thoughts on Global Implications
Chart : Supply Risks Driving Prices
Front-month Brent Crude (top) & WTI, Us$/bbl
Could Markets Over-react?
Chart : Higher Oil Prices Weighing on Broad Macro
Exchange Rate - Us$/eur (top) & Ftse 100 Equity Index (bottom)
The Worst Case Scenario: Oil to Us$200/bbl in Q2
Chart: Bouncing Inside th e Downtrend
Germany - Generic 10-year Bond Price, Eur
key Market Views Update
Chart: Eurodollars Suggest Markets Pulling Back From Early Rate Hikes
Global - Euro-dollar December 2012 Futures Contract
  Table: Open key Market vie ws
Indicators: Poland Wig20, Rub/basket, France Cac40, Zambia Lusaka All-share, Thai
Baht/us Dollar, Jpy/gbp, Mexico Tiie Rates Future (dec 11)
  Table: 2011 Closed key Market Views
Indicators: Peru Lima General Index, new Zealand Nzx50, Clp/us$, Indonesia Jci
Oil Market Outlook
a Super-spike?
Risks Still Firmly to the Upside
Chart: Upward Momentum in Place
Front-month Brent Crude, Us$/bbl Weekly & Monthly Chart (bottom)
Macro & Market Implications of Another Surge
Chart: Copper Losing Ground
Three-month Copper, Us$/tonne
Chart: Eyeing Recent Highs
Spot Gold, Us$/oz (weekly Chart)
Sub-saharan Africa Economic Outlook
Libya Unrest
Market and Macro Implications for Ssa
Liquid Equity Markets Vulnerable
Chart: hit by Risk Aversion
Jalsh (top) & Semdex (bottom) Equity Indices
Currencies Under Pressure?
Chart: Shilling at Risk
Kenya - Exchange Rate, Kes/us$
Fixed Income: Bearish Local Debt View Reinforced
Chart: Muted Reaction
Ghana - us$ 2017 Global Bond, Yield %
Macroeconomic Impact
Chart: a Mixed Picture
Africa - net Oil Exports (% of 2011 Nominal GDP Forecast)
Table : Higher Oil Prices for Africa
Indicators: Angola, Botswana, Cameroon, Cote D’ivoire, Ghana, Kenya, Mauritius, Mozambique,
Namibia, South Africa, Sudan, Tanzania, Uganda, Zambia, Zimbabwe
Latin America Economic Outlook
A Mixed bag for Latam
Macro Impact of Oil Price Surge
Chart: not all bad News
Latin America - net Oil Exports (% of 2011 Nominal GDP Forecast)
Table : Higher Oil Prices for Latin America
Indicators: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
Latin America Markets
More Risks Than Opportunities
Assessing the Impact of Mena Tensions
Chart: Looking Toppy
Peru - Igra Equity Index
Chart: Stuck in th e Doldrums
Brazil - Bovespa Equity Index
Chart: Wedged in
Venezuela - US$ Global 27 Bond, Yield %
Europe Economic Outlook
Oil Surge the Main Risk
Shock but no AWE
Chart: Paying th e Price for Oil Dependency
Europe - net Oil Demand, % of EU Total
Business Monitor International Ltd
Special Report
The Nature of the Shock
Chart: Pipeline Pressures
Eurozone - Energy Prices, % CHG Y-O-Y
The Policy Response
Scenario 1: Pressure on
Chart: Heading North
Europe - Headline Inflation, % CHG Y-O-Y
Scenario 2: Pressure Off
Chart: not yet in the Danger Zone
Europe - Real gdp (% CHG Y-O-Y) & Brent Crude Oil
Stability Concerns
Chart: Destabilising Forces at Play
Europe - Real Interest Rates, %: uk (top) & Germany (bottom)
Russia Economic Outlook
A Potential Beneficiary
Mena Market Impact Will be Limited
Chart: no Great sh Akes
Russia - rts Equity Index, US$
Chart: no Major Panic
Russia - Exchange Rate, Rub/basket
Asian Political Outlook
Upheaval Risks
Political Contagion Unlikely in Asia
Chart: an eye on Asian Outliers
Asia - Short- and Long-term Political Risk Ratings
Chart: Potential Trigger
Asia - Social Stability Scores
Chart: Peaceful Settlement or Disorderly Disputes?
Asia - Characteristics of Polity (top) and Society (bottom)
Chart: Political Cost of Inflation
China, Egypt, India, Pakistan, Vietnam - Inflation, %
A Closer Look at Asian Giants
Asia Economic Outlook
The Spectre of an Oil Surge
Who is Most at Risk?
Growth to Weaken, Inflation Will be Transitory
Chart: Rupee Heading to inr 48.00/us $
India - Exchange Rate, Inr/us$
Indian Sensex, Rupee Most at Risk
Kse100 Correction not Over
Mena Crisis: the key Risk to Global Recovery and Stability
Chart: Support a Long way Off
Pakistan - kse 100 Equity Index
Vietnam at Risk From Further Energy Hikes
Medium Term Political Risk Premium to Rise
Chart: ch Inese Stocks Pricing in Political Risk?
P/E and P/B Ratios for Shanghai Composite & S&p500
Egypt Political Outlook
Cairo’s Power Shift
the Geopolitical Consequences
Egypt’s Pivotal Significance
Egypt’s Future Strategic Orientation: Four Scenarios
Chart: a Potential Sphere of Influence
Egypt - key Geopolitical Vectors
Egypt’s Future Relations With key Countries and Regions
United States: a Cooler Dynamic
Israel: Enemies Again?
Arab World: Following Egypt’s Lead?
Iran: a new Ally or Rival?
Horn of Africa: Greater Activism?
China: new Opportunities?
Libya Political Outlook
Civil war Risks
Factors to Consider
Tripolitania at war With Cyrenaica
State Collapse Risks Rising
Western Security Concerns: Refugees and Terrorism
Libya Headed for Long-term Instability
Bahrain Political Outlook
Shi’a Unrest
Geopolitical Implications
Saudi Arabia Political Outlook
The House of Saud
Long-term Stability in Serious Doubt
Increasing Turbulence Ahead 45
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