Five things that will shape the Middle East in 2020

29 December 2019
MEED looks at five key events that will shape the outlook for business in the Middle East and North Africa in 2020
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Read MEED's assessment below of the five most significant issues that are likely to have lasting ramifications for the Middle East market in 2020 and beyond:

  • US presidential elections
  • Dubai Expo 2020
  • Saudi Arabia's G20 presidency
  • Lower oil prices
  • Projects market dip continues in the Middle East and North Africa
US PRESIDENTIAL ELECTIONS

US Gulf policy will never be the same

It is too soon to say what Donald Trump’s impact on the US will be in 2020 and he could be out of the White House before next year’s presidential poll. But in the Middle East, Trump has undermined principles guiding US policy in the region since Harry Truman became president in April 1945.

That was two months after Truman’s predecessor Franklin Roosevelt met Saudi Arabia’s King Abdulaziz al-Saud following the Yalta summit involving Soviet leader Joseph Stalin and UK Prime Minister Winston Churchill.

The encounter established the kingdom as the US’ key Arab partner for the post-war era; a source of the oil the West needed and a bulwark supporting a new regional status quo with the US as the dominant foreign power.

On 14 May 1948, Truman recognised the state of Israel just 12 minutes after it declared itself a nation. Arab oil and Israel are the priorities that have shaped Washington’s Middle East policy ever since. Every US president after Truman has had to struggle to reconcile the contradiction at its heart. That was until Trump, who has not even seriously tried.

Where his predecessors had two priorities, Trump has essentially only one. Unqualified support for Israel.

Elsewhere in the region, the president has acted in a way that pleases his domestic supporters and addresses what he believes are US national interests, not according to strategy.

He views relations with Saudi Arabia through the transactional prism of the kingdom’s influence over the price US consumers pay for gasoline and its willingness to invest in the US economy. It is a deal, not a relationship.

Trump’s failure to respond vigorously to attacks on Gulf shipping and Saudi Arabia’s Abqaiq oil centre, all blamed on Tehran, reflected his reluctance to intensify the White House’s involvement in Middle East conflict. It dealt a blow to relations between Riyadh and Washington, which were also being tested by Saudi Arabia’s lack of enthusiasm for Kushner’s peace plans.

The diplomatic crisis within the GCC in 2017, led by Saudi Arabia, the UAE and Bahrain, is a source of concern.

Washington sympathised with the kingdom but avoided taking sides in the dispute. The location of the US central command’s forward headquarters and air operations centre ensure there is little chance that this will change.

The campaign against Houthi rebels mounted by the internationally recognised Yemeni government, which is backed by a coalition led by Saudi Arabia, enjoys the administration’s support. But US weapons supplies to Saudi Arabia for use in Yemen were nearly prevented by Congress in July. 

There were also protests about Trump’s announcement in October that US troops were to be withdrawn from northeastern Syria to allow Turkish forces to clear border areas of Kurdish fighters. US troops remain in Syria nevertheless, but the move emphatically underlined Trump’s scepticism about US military action.

Iran is the place where there is the clearest break with the policies of President Barack Obama. Before he was elected, Trump promised to scrap the Joint Comprehensive Plan of Action (JCPOA) agreed in 2015 to restrict Iran’s nuclear plans and open the door to detente with the Islamic republic. Trump withdrew the US from the JCPOA in May 2018 and has since imposed comprehensive sanctions on Iran.

Election years rarely witness US presidents taking foreign affairs initiatives. The direction of the White House’s policies will not alter in 2020 unless a dramatic event occurs.

The US is now a net oil exporter and does not need Middle East petroleum, Israel has never been stronger and Iran is economically hobbled. Trump probably believes that is about as good it gets.

His potential Democrat presidential rivals in 2020 may be forced to agree. The appetite in the US for presidents with a vision for the Middle East is largely exhausted. It may not be restored regardless of who is in the White House this time next year or beyond.

DUBAI EXPO 2020

Expo’s vital spark

After six years of planning, construction and marketing, Dubai Expo 2020 will open its gates to visitors in October.

Over the subsequent six months, the event is expected to attract 25 million visitors to Dubai in addition to the 192 countries hosting exhibitor pavilions and thousands of participating companies.

Expo 2020 will be the first genuinely world-scale event ever held in the region and it provides everyone involved with a unique opportunity to promote themselves to the world.

And nobody is better placed to capitalise on Expo than Dubai itself, which is seeking to reinvent the expo concept as a high-level B2B platform for companies and governments to grow in the Gulf and surrounding markets.

Expo is about ideas and innovation, and finding new ways to live and work, and it could not come at a better time for a region that has been struggling for several years to set itself on a new trajectory.

It has been a tough five years for anybody doing business in or with the Middle East, and particularly for anybody doing business in the government sector, where tight fiscal spending controls and structural economic reform programmes have led to a sharp slowdown in spending.

With global economic growth losing momentum as result of the trade war between the US and China, the world’s two biggest economies, the outlook for oil prices is for more of the same. Oil is expected to remain at around $61 a barrel in 2020 and 2021, which is similar to the level seen in 2019.

This will mean that there will be no general rebound in government spending or in the business landscape in the Middle East and North Africa in 2020.

However, it does not mean that there will be any shortage of opportunities for companies in the coming year. There will be. The challenge for business is knowing where to look, and in being flexible enough to adapt quickly to new opportunities.

Expo can provide that vital spark of inspiration to re-ignite the opportunities in the region.

SAUDI ARABIA'S G20 PRESIDENCY

Riyadh steps into the spotlight

On 1 December, Saudi Arabia formally assumed the presidency of the G20 group of the world’s most powerful nations. The kingdom’s year in the chair of the G20 will culminate on 21-22 November 2020, when King Salman bin Abdulaziz al-Saud hosts the fifteenth G20 leaders’ summit in Riyadh.

The event will see the world’s most powerful politicians, business people and non-governmental organisations gather in Saudi Arabia to agree and coordinate global initiatives aimed at promoting economic stability, sustainable development, female empowerment, human capital enhancement, and an increased flow of trade and investment.

The summit provides the kingdom with an opportunity to present itself as a leader on the world stage, beyond the region and outside of the energy sector. And Riyadh clearly intends to take full advantage of the opportunity, announcing plans to host more than 100 events and conferences in the year ahead of the summit.

Conservatives in Saudi Arabia might be uncomfortable with Riyadh assuming such a high-profile position of international leadership. Saudi Arabia traditionally has preferred to do its dealings in private, away from the spotlight and Riyadh has long played the role of regional power broker, pulling its levers of influence – money and religion – from the background of events.

Traditionalists are uncomfortable at the increased levels of scrutiny and criticism that inevitably fall on the kingdom and its traditions as a result of a more visible and open international engagement.

Meanwhile, critics and opponents of the Saudi government, both inside and outside the kingdom, say its record on human rights, female empowerment and lack of transparency mean it is not suited to the role.

Saudi Arabia has little choice, however, and Riyadh’s policies are inevitable and permanent, if not always well executed.

The kingdom’s growing population is creating huge social pressures that can only be satisfied by new jobs and better living conditions, while the structural decline in oil prices means new sources of wealth generation are needed. Riyadh must not only continue to drive the diversification of the Saudi economy, but accelerate it. It must end the country’s dependence on oil, reduce its dependency on state spending, and continue to take steps to create an entrepreneurial economy that creates new jobs and allows Saudi Arabia to compete for investment and markets.

Increasing the kingdom’s international outreach is a key part of the reform agenda. Engaging with and leading international initiatives such as the G20 is an essential part of the plan. The G20 objectives align closely with the vision of Saudi Arabia’s modernisers.

Confusion over US policy in the Middle East has increased since 2012 and is unlikely to abate any time soon, leaving Saudi Arabia and other US allies in Abu Dhabi, Cairo and Manama to carve out new relationships.

LOWER OIL PRICES

Lower oil prices forecast for 2020

The US Energy Information Administration (EIA) is expecting the average price of crude to be lower in 2020 than in 2019 due to rising global oil inventories, particularly in the first half of the year.

In a statement released on 13 November, the EIA estimated that the average price for Brent crude will be $60 a barrel, down from $64 in 2019. The average price forecast for 2020 is 15.7 per cent below the average price of $71.2 recorded in 2018. The EIA also forecast that West Texas Intermediate (WTI) prices will average $5.5 a barrel less than Brent prices in 2020.

The EIA was one of the most accurate forecasters for this year’s prices. This time last year, the organisation said Brent would average $61 a barrel over 2019. As of 22 November, Brent’s average price for the year was $63.6. The EIA’s estimate was closer than the US’ Goldman Sachs and Bank of America Merrill Lynch, both of which forecast an average price of $70 a barrel.

Oversupply warnings

Like the EIA, the Paris-based International Energy Agency (IEA) has also warned about excess supplies in 2020.

In a report published in October, the IEA cut its oil demand growth figure by 100,000 barrels a day (b/d) for both 2019 and 2020.

Oil demand is still expected to grow by “a solid” 1.2 million b/d in 2020, the IEA said in its report. Factors that have dimmed the outlook for oil demand include the US-China trade dispute and issues surrounding the UK’s exit from the EU, according to the IEA.

The softening forecasts come despite actions to bolster prices taken by Opec and non-Opec oil producing nations. Since January 2017, Opec and a Russia-led group comprising 11 of its allies have implemented a deal to collectively withhold 1.2 million b/d of oil production.

Members of the Opec+ alliance, as the group has come to be called, unanimously agreed to extend their existing oil output cut deal until March 2020 at their meeting in Vienna in early July.

Earlier in November, it was reported that Opec and its allies are likely to extend existing oil output cuts when they meet in December. It is expected that existing cuts will be extended until mid-2020, with non-Opec oil producer Russia supporting Saudi Arabia’s push for stable oil prices amid the listing of state oil giant Saudi Aramco.

Aramco flotation

Aramco published its initial public offering prospectus on 9 November, confirming that it was to offer 3 billion shares of the company’s 20 billion shares at a price between SR30 and SR32 ($8-$8.5) during a two-week subscription period between 17 and 29 November – valuing the company at between $1.6 trillion and $1.7 trillion.

Efforts to bolster prices from the Opec+ alliance have been undermined by growing production from other producer countries, especially the US, which has brought on significant production capacity over recent years. The US’ capacity growth has mainly been due to unconventional production using hydraulic fracturing and horizontal drilling.

Efforts to support prices have also been undermined by global oil demand, which has failed to live up to expectations. Demand for oil in 2019 has been relatively weak amid slow global growth in the first half of the year and slower than expected demand from India, one of the world’s biggest oil-consuming nations.

Like the EIA and the IEA, Opec itself has predicted that the oil market will be in surplus in 2020. Crude futures show that oil traders are forecasting a drawdown in stockpiles next year.

There are various factors that could cause a drawdown in stockpiles over 2020. On the supply side, US sanctions are currently limiting exports from Venezuela. Additionally, lower oil prices could slow the growth of US shale production.

On the demand side, some investors and commodity traders are forecasting that the global economy will avoid a recession in 2020. If global growth beats expectations, this will support faster growth in oil demand.

The resolution of US-China trade tensions could also provide a significant boost to global demand for crude oil.

In a report published in November, UK-based lender Barclays highlights other wildcards that could impact oil prices over 2020. “Rising tension in the Middle East has led to concerns around the risk of a prolonged period of elevated oil prices,” said the bank.

The bank agreed with the EIA, IEA and Opec view that supply is likely to outstrip demand over 2020.

However, it said the “unpredictable geopolitical landscape is likely to keep the oil price in a range”.

Barclays said that, aside from geopolitical events, US shale output is likely to be a key supply-side factor that will have an impact on prices.

Looking at consumption, the bank said “demand in 2020 will likely remain lacklustre”.

It added that it is expecting Brent crude to “stay in a wide range of about $60 a barrel” over the next 12 months.

PROJECTS MARKET DIP CONTINUES IN THE MIDDLE EAST AND NORTH AFRICA

Four-year Mena projects market dip continues

Egypt’s construction sector

With some $4.7tn of projects planned or under way, the Middle East and North Africa (Mena) projects market looks in robust shape at the end of 2019. But you do not need to dig far below the surface to discover that the market has had anything but a good year in 2019.

While the total value of known projects has risen, the value of projects in execution has fallen sharply in 2019. The GCC, which saw a 16 per cent slump in the value of projects under way in 2019, was responsible for the lion’s share of the decline.

With some $2.3tn of projects planned across the Mena region but as yet unawarded, there is no doubting the potential of the region to produce an abundant supply of new project opportunities, particularly in the GCC, which accounts for about 67 per cent of all of the projects planned across the region.

At the end of 2019, some $292bn-worth of projects across the Mena region had entered their procurement stages, suggesting a strong pick up in awards in 2020. This is unlikely. With oil prices set to remain low and government spending controls in place, there is unlikely to be any large-scale, region-wide rebound in the projects market in 2020.

Uncertainty surrounding the trade war between the US and China and a slowdown in the EU economy are contributing to a slowdown in global economic growth and limiting growth in energy demand. As a consequence, oil prices are expected to average about $61 a barrel in 2020 and 2021, similar to levels in 2019.

 

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