Country Risk in MENA

Bahrain (BHR)

Bahrain’s overall risk remains at medium.  Salman bin Hamad Al Khalifa remains Crown Prince and Head of Government. Political interference is medium and legal & regulatory risk is also at a medium level. There remain tensions in Bahrain between the majority Shia population and the minority Sunni population. The Shia population are opposed to the government and feel marginalised in terms of healthcare received and opportunities in the labour market. As conflict continues in the Middle East, Bahrain are trying to re-establish relations with Iran after a period of tension between Saudi Arabia and Bahrain with Iran. However, they remain allies with the US and Israel (Iran’s rivals) having joined a US military coalition, the ‘’multinational security initiative’’ in order to protect shipping lanes being attacked by Yemen’s Houthis. But, Bahrain remain largely out of the picture and the risk is not seen as significant with Bahrain’s risk of doing business rated as a medium low with an attractive tax-free environment for investors and businesses. According to the IMF, the economy is set to expand by 3.6% in 2024 and 3.2% in 2025. Bahrain are big exporters of aluminium and petroleum and strong prices for these commodities should support moderate growth in the next year alongside a continued strong FDI to GDP ratio. Inflation at 1.4% in 2024 and 1.8% expected for 2025 is likely to boost private consumption in Bahrain which will additionally support growth. After strong positive current account surpluses in recent years supported by high energy prices, their current account surplus is set to reduce modestly from 6.9% of GDP in 2024 to 5.3% in 2025, according to the IMF. An issue however for Bahrain is government debt which is expected to be 126% of GDP this year and increase next year to 128.7%. Bahrain is vulnerable to changes in commodity prices with oil prices in the market being below the fiscal breakeven price in Bahrain, the issue worsened by OPEC+ extending their oil production limits into 2025. Sovereign non-payment risk and the inability of the government to provide fiscal stimulus are both at medium high levels. In addition, their limited ability to raise tax revenue is making debt a cause for concern. However, neighbours such as the UAE and Saudi Arabia could offer some form of debt support as they have done in the past. The currency of Bahrain is the Bahraini dinar, which is pegged to the USD, with 1 BHD being 2.65 USD. With the Federal Reserve expected to begin a cutting cycle at the end of the year, this could allow Bahrain to cut rates which are currently held at 6.25%. Banking sector vulnerability is medium with Bahrain having become a hub for international business.

Egypt (EGY)

Egypt’s overall risk level remains high. Political violence remains very high, with political interference and legal & regulatory risk at high. The cost of living crisis continues to cause discontent that could threaten protests against high inflation and unemployment, and the government continues to remain wary of civil unrest.  Additionally, the war in Gaza is hurting the economy via lower tourism and less ships passing through the Suez Canal.  Geopolitically, the war in southern Gaza risks a refugee crisis, which Egypt wants to avoid for many reasons.  Egypt is reluctant to scrap the Camp David deal with Israel, but could increase pressure further on Israel in the coming months to end the war in Gaza.  However, Egypt also wants to avoid Gaza protests, which could backfire and become protests about the regime. Meanwhile, the extra USD 5 bln agreed with the IMF has been followed by the needed devaluation of the Egyptian pound, plus promises of fiscal tightening and structural reforms. The Egyptian Pound has stabilised after the 62% March devaluation, while the central bank has hiked interest rates to 27.25%. Much depends on getting inflation down to single digits eventually, but this will not be achieved in 2024 and 2025, with the IMF now forecasting 32.5% and 25.7% for the two years, respectively. The currency problems are now secondary, as the World Bank has also committed USD 6 bln and European Union, USD 8 bln; while Saudi Arabia is expected to buy real estate, though perhaps not on the huge scale of UAE’s USD 35bln mega investment on the Mediterranean coast.  President Sisi’s bias towards mega projects and need for support from the army also suggests that multi-year fiscal consolidation will likely disappoint.  However, the external funding not only helps the currency, but also allows smooth sovereign debt payments. Sovereign non-payment risk is at high. The government Debt/GDP ratio is forecast to drop to 82.6% in 2025 and is then projected to come under better control. The risk of doing business and the inability of government to provide fiscal stimulus remain at medium high.

Iran (IRN)

Iran has a very high overall risk level.  The risk of political violence is high, while political interference remains very high. The election of more reform minded President Pezeshkian has been somewhat restrained by a conservative parliament, which helps explain only the incremental improvement in the cabinet.  These internal tensions also help explain why the new President is keen to emphasize Iran’s right to retaliate against Israel for the killing of a Hamas leader in Iran. Both sides have also raised the stakes in terms of potential military actions in any future crisis after April attack on Israel and counterattack on Iran and this could mean a broader risk hangs over Iran.  The outcome of the U.S. presidential election could also complicate regional security, if Donald Trump is elected president, given his strong anti-Iran stance. Nevertheless, Iran does not want a war with Israel.  Additionally, domestic public unrest about the cost of living/inflation crisis, restriction of freedom and economic mismanagement could mean that escalation against Israel could fuel anti-regime protests.  Economic protests were seen in May and the risk of further protest exists. On the economic front, Iranian economy continues to struggle due to sanctions and geopolitical tensions. Annual inflation is projected by the IMF to remain high at 37.5% in 2024 and 32.5% in 2025. Until inflation comes down, it will restrain growth close to 3% and also remain a cause of political instability.  With high political inference to control reoccurring protests, legal and regulatory risk remain very high and the risk of doing business is also at high. Elsewhere on the regional front, Saudi Arabia and Iran do not want a regional escalation of the war in Gaza and also want a de-escalation of tensions between Iran and Saudi Arabia.

Iraq (IRQ)

Iraq remains at a very high level of overall country risk, including a very high level of political violence. Though the Mohammed Shia al-Sudani government has seen some relative stability compared to the previous turbulence in Iraq since 2003, the government does not control Iran backed militias.  Earlier this year this led to a U.S. attack on these militias, after three U.S. soldiers were killed in Jordan. Any escalation between Iran and Israel could also spillover into Iraq.  Meanwhile, the government is still putting pressure on the U.S. military to withdraw after 20 years, though this could be delayed until September 2025. Additionally, tensions in Kurdistan remain.  All of this fuels the fractures in Iraqi society prompting widespread corruption, overreliance on fossil fuels and the rule of law remaining weak. Legal and regulatory risk, supply chain disruption and risk of doing business also remain at very high rating against this backdrop.  GDP growth is set to rebound to around 1.4% in 2024 and 5.3% in 2025 due to a better oil market outlook, with inflation under relative control at 4.0% in 2024. However, the ongoing current account deficit (due to overspending on imports), means that the currency remains under some downward pressure. This means exchange transfer risk remains at medium rating.  Sovereign non-payment risk has risen from a medium-high risk to high, both due to too high fiscal spending, caused by elite interests, and the current account deficit. The inability of the government to provide fiscal stimulus also rose from medium-high to high for the same reasons. The political violence and associated political instability mean that structural reforms are also not moving forward, which is restraining the required increase in the non-oil sector.  

Jordan (JOR)

Jordan’s overall risk is medium high. King Abdullah II remains Head of State. Political violence and legal & regulatory risk are medium high. The war in the Middle East is providing many challenges for Jordan. Jordan have made clear their priority to keep their own people safe and have condemned the war as the conflict continues between Israel and Hamas. In April, Jordan shot down Iranian drones aimed at Israel that entered their airspace. Jordan have many refugees enter from Syria as well as Palestine and they continue to fear that war has the potential to spill over the border in the Middle East if things escalate further. The risk of doing business is therefore at a medium high level. The IMF anticipate 2.6% growth in real GDP this year and 3% in 2025. Jordan’s economy is showing lots of strength and resilience despite the crises in neighbouring countries. Boosting growth is tourism, public investment on infrastructure, such as lots of investment on a healthcare program. Jordan can continue to realise gains from export-led growth, though a still large current account deficit’s trajectory is likely to continue in 2025. The IMF estimate a current account deficit of -4.5% in 2025 from -6.3% this year, as Jordan’s biggest export (fertiliser) has risen in price in recent years. Additionally, Jordan are benefiting from USD 130 million worth of support from the IMF, after its first review, the project is said to be off to a ‘strong start’. Inflation is expected to be at 2.7% this year and 2.4% in 2025, which will likely lead to interest rates being cut from the current 7.5% level. In addition, the Jordanian dinar is pegged to the USD so rate cuts in the US at the end of the year alongside easing inflation in Jordan may help Jordan cut interest rates themselves. However, a major issue in Jordan is the climate risk as they are currently very water-scarce, the electricity and utilities systems are not very effective, however overall supply chain disruption is medium low. The IMF expect government debt to be 91.4% of GDP this year and 90.3% in 2025. So, the inability of the government to provide fiscal stimulus is high and sovereign non-payment risk is medium high, with lots of government revenue needed to service this high debt. 

Qatar (QAT)

Qatar’s overall risk remain medium low. The emir of the country remains Tamin bin Hamad Al Thani, who has reigned since 2013. Politically, Qatar has proven to be relatively stable with their tough relations with other countries playing the role as mediator in international diplomatic disputes reflected in their risk ratings for political violence and political interference being medium low. In the past 9 months, Qatar have been working alongside the U.S. and Egypt in attempting to broker a ceasefire-for-hostages deal between Israel and Hamas. Qatar helped to broker an agreement to temporarily halt the conflict in November, allowing over 100 of the 250 hostages to be released. However, Qatar have had difficulties negotiating a lasting resolution with both sides and has been reconsidering its position as mediator in the conflict. Supply chain disruption stays at a low level. As for the economy, according to the IMF, Qatar’s real GDP is expected to grow by 2.0% this year and still 2.0% in 2025.  Qatar remains one of the biggest exporters of liquefied natural gases. Thus they are expected to continue to operate a large current account surplus at 15.6% this year and 13.2% in 2025.  Given the USD peg for the Qatar Riyal, oil and gas price volatility can impact the economy and current account -- oil and gas are expected to fall in coming years and decades, which account for around 85% of fiscal inflows. However, with an expected fall in their general government debt as a % of GDP from 36.1% in 2025 to 32.6% in 2029, well below the anticipated averages of 72.5% and 80.1% in 2025 and 2029 respectively, among emerging market and middle-income economies, this should allow Qatar to continue their commitment in diversifying their economy, notably in sport and tourism. This comes as Qatar have expressed interest in hosting the 2036 Olympic Games after hosting major sporting events such as the FIFA World Cup and World Athletics Championships in recent years. This is demonstrated in the low risk in Qatari government’s inability to provide fiscal stimulus. The Qatari Riyal remains pegged against the USD at a rate of 1 USD to 3.64 QAR- which is keeping their current export-dependent economy competitive relative to their international competitors.  The risk of doing business remains medium low.

Syria (SYR)

Syria’s overall risk level stays at very high. Bashar al-Assad is President and has been since he took over from his father in 2000. Political violence and political interference remains very high. Conflict continues to devastate Syria, its economy and its people. At the moment, a large threat for Syria comes from conflict between Israel and Hezbollah. With Hezbollah having a strong foothold in Syria, they have been even more vulnerable to air strikes from Israel since the start of the war in Gaza last October. Since the start of the Civil War in 2011, economic conditions have significantly worsened in Syria, with more people being brought into poverty, deteriorating healthcare and a severe population fall from the conflict itself and immigration out of the country. All these factors make the risk of doing business in Syria very high and supply chain disruption high. The inability of the government to provide fiscal stimulus is medium high and the risk of sovereign non-payment is very high, therefore the government will struggle to raise finance to be able to increase expenditure to help overcome these issues both in the short run and long run. This is emphasised by the lack of support and funding from international donors and organisations such as the IMF and World Bank as well. Due to the increased tensions and security threat once again the Syrian Pound (SYP) has hit record lows. Syria continue to rely heavily on agriculture and with the increased climate threat and the damage from conflict, Syria have and will continue to rely heavily on food imports, a problem made more high risk by the significant recent devaluation of the SYP. However, inflation is extremely high, exacerbated by the removal of subsidies and fuel shortages, diminishing people’s purchasing power and therefore consumption in the economy, drawing more people into poverty. For example, in March this year, the UN’s World Food Programme (WFP) noted that the standard reference food basket cost for a family of five increased by 87% from the previous year. This inflation problem will make the Central Bank of Syria more likely to devalue the SYP in future periods, worsening economic instability. Consequently, exchange transfer is high. 

West Bank/Gaza (PSE)

A renewed focus on ceasefire talks needs to be watched closely, as it could produce a move towards an end to the military conflict.  However, making the peace is much more difficult, as Israeli opposition to a two state solution has increased since the start of the Gaza war. Israel’s previous plan was for a demilitarized zone with continued Israeli military presence indefinitely and non-hostile Palestinians to run Gaza. Even if Israel PM Netanyahu is replaced, the broad thrust of this plan will likely remain from Israel’s standpoint.  Israel wants the control of Gaza, but also want to deflect growing international pressures for a two-state solution that encompasses Gaza and the West Bank. The West Bank also continues to see violence between Israeli settlers and Palestinians, which is causing an unstable security and economic environment in the West Bank. The U.S. has also increased sanctions against a limited number of violent Israeli settlers, which is hurting business sentiment due to fears it will stop bank funding to the West Bank. All of this means that the overall country risk rating at high could worsen in the coming quarters, given the surge in political violence; collapse of Gaza economy; political flux in Gaza and West Bank; uncertainty of the post war political environment and reconstruction; and difficulty of managing the West bank economy and finances.