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Conflict points and moving parts: Middle East update

While there has been much focus on North Korea as the biggest source of geopolitical risk this year, the Middle East has seen tremendous flux in recent months. This presents a challenge as great as, if not larger than, North Korea for the region’s political risk practitioners and investors, alongside the global economy at large.

Middle Eastern turbulence brings several stories into focus. First there are developments playing out in Syria. Second, Saudi Arabia is undergoing remarkable political and economic change, perhaps linked therein to a third factor – the continuing battle for regional supremacy between Saudi Arabia and Iran. We can add to this the long-running struggle between Israel and its neighbours; the Kurdish problem, plus fall out from mixed outcomes from the Arab spring in Egypt, Libya, and Tunisia; US disengagement from the region and Russia looking to fill the vacuum.

What is clear is that the Middle East is a region with many moving parts and potential conflict points.

Unlike North Korea, it is pivotal to the global economy, given its importance to energy supplies and its status within international capital markets.

The rise of the radical crown prince

In understanding the region, Saudi Arabia provides a good place to start, and the topic of the moment is the truly meteoric rise of Crown Prince Mohammed bin-Salman (MBS) to become heir apparent to aged King Salman.

MBS’ rise reflects a fundamental change in the model of succession from brothers, to down the line of sons.

On the plus side, MBS is offering more decisive government and a focus on addressing key underlying structural weaknesses in the country. This includes reform of the economy, the influence of religion over the nation, and also social factors with a focus on the role of women in society.

Saudi Arabia has the balance sheet for this vision to be realised (US$490 billion in FX reserves, a low debt ratio and state-owned assets to sell). But the revolutionary nature of the change suggests that risks are likely to come from vested interests (royal princes and the old religious establishment). MBS’ own relative lack of experience at 32 years of age also raises question marks for some as to how he will manage the delicate nature of palace politics alongside challenging foreign affairs.

Home reform versus growing toxicity

Creating a strong domestic economy is one part of the longer-term strategy of MBS and Saudi Arabia in confronting what it would likely describe as the number-one geopolitical threat: the rise of Shia Iran and the battle for religious and geographic supremacy in the region.

Saudi-Iran schism is building momentum, and we have an inexperienced Saudi administration feeling increasingly threatened and encircled by Iran, but willing to take a more interventionist/confrontational approach. Israel also likely feels uncomfortable with the growing strength of Iran and Hezbollah against its borders, especially coming out of Lebanon. All this comes as US leadership in the region is in a state of flux, resulting in a toxic, unstable mix emerging in the Middle East.

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Market Insight

Tim Ash

By
Tim Ash
Emerging Markets Senior Sovereign Strategist
Published 28 November 2017
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Published November 2017