1 June 2012Life

The Arab recoil

Bermuda Re spoke with Firas Abi Ali, deputy head of Middle East and North Africa (MENA) forecasting at specialist intelligence forecaster, Exclusive Analysis, about the implications of the Arab Spring and found that a mixed and complex picture of business opportunities, security concerns and demographic and political turbulence will characterise regional development in the coming years.

One of the first points to emerge from the conversation is the very real need to differentiate conditions on the ground. As Abi Ali explained, “even within specific countries such as Syria there are considerable disparities—in Latakia city for example, there is much less likelihood that heavy weaponry will be used in the next three months than in other parts of Syria. What we try to offer our clients is intelligence in order that they can understand and distinguish the risks they face across the region”.

Nevertheless, ongoing conflicts—whether in the form of civil insurrection or civil war—have encouraged some to shy away from doing business in the region, Abi Ali said. In the case of Syria, the country is “pretty much closed for business”, but for countries hit by recent civil strife such as Egypt and Tunisia “clients aren’t picking up and leaving en masse, although there are regions of concern”. Cairo, for example, will continue to see protests regardless of the outcome of elections, he said, although an informed assessment of threats and opportunities very much remains the order of the day.

One area where opportunities are evident is among those firms looking to secure coverage for terrorism and war risk. Abi Alisaid “Exclusive Analysis had experienced a rise in queries from concerned clients regarding such coverage with the potential for war between Iran and Israel being one of the leading drivers.” Some underwriters might find that the wording of terrorism contracts being offered to them also implicitly includes cover for war with Hizbullah, he said, which would probably be more expensive cover.

Elsewhere, there has been a marked rise in calls for coverage in Syria as “industrialists seek to insure their assets. Businessmen in Syria are exposed to attacks from army and opposition forces, which are engaged in attacks on the commercial assets of their suspected rivals”. At the same time, there has been pressure on wealthy businessmen to “provide financing to both sides, with those who refuse often facing the prospect of having their assets burned or looted”. Concerned companies are watching the evolving conflict closely to determine what implications the war will have on their long-term business prospects, Abi Ali said.

A region untapped

Business opportunities may be possible in a Benghazi-led eastern Libya. “If the region achieves some level of autonomy this will present opportunities for those considering investment in the hydrocarbon sector,” he said.

Calls for democratisation and greater regional autonomy brought about by the Arab Spring may yet pay dividends for foreign investors who have, to date, struggled to make headway doing business with often closed and nepotistic regimes in the region. As Abi Ali explained: “The emergence of new political actors taking control of large parts of government in the region is likely to mean that many of the vested interests that had been driving corruption over the last decade or two are going to be out of the picture. This will make it rather easier for people to do business in the region.”

Turning to the Gulf—where regime change has not been a component of the landscape—Abi Ali said that construction will continue to be a strong sector for Abu Dhabi, while for Saudi Arabia a combination of mining and hydrocarbon projects and a push to create a regional rail network would create significant business opportunities. Here, close connections to the ruling political and business elites that would mitigate risks from corruption and administrative delays are likely to provide the best recipe for success.

Significant challenges nevertheless remain. In Egypt, a Muslim Brotherhood-Salafist-led government “may seek to renegotiate some of the energy and mining contracts signed by the Mubarak government, in order to secure for the state a better share ofproduction and profits”. This would have negative implications for existing foreign investors, although it may also create opportunities for new entrants.

Libya, for its part, is threatened by the prospect of the country splitting into a Tripoli-led western half and a Benghazi-led eastern half, with security and oil revenues being the leading driver of this dynamic. “If the Tripoli government doesn’t manage to integrate militias into some form of national formation, and doesn’t offer the east a greater say in how revenues from oil extracted from there are spent, the risk of Benghazi aiming for secession rather than autonomy will increase,” said Abi Ali.

With the majority of the country’s oil fields in the east, secession by the Benghazi-led eastern half could have significant security implications. Although worrying, such a development could present oil companies with the opportunity to establish potentially lucrative contracts with the Benghazi-led faction, Abi Ali said. Finally, Iran will continue to be a significant regional concern. As Abi Ali outlined, the country can expect “more sanctions and more isolation” as it builds its nuclear capabilities. A likely strike by Israel would serve only to “delay, not end, its nuclear ambitions”, he said, with the reality being that the “world will have to accommodate a nuclear-capable Iran”. Such an outcome would have long-lasting implications for regional dynamics and stability and would probably “spur a regional race for the acquisition of nuclear technology”.

Demographic dynamics

Addressing future concerns, Abi Ali said that the MENA region’s future will depend very much on how economies such as Egypt, Libya and Tunisia “end up being managed after this transition”. The Egyptian and Tunisian governments have given “some indications that they will try to run their economies well”, but he added that the issue of regional demographics would place considerable pressure on future development.

States in the region have increasingly large urban populations that are “educated and underemployed, which is a recipe for civil unrest”. Unless governments attend to “basic living standards, housing, health care and sanitation”—and there are moves afoot in many states to address such concerns —there is potential for further unrest as a young, educated, but disgruntled population seeks to redress its grievances through the ballot box. However, “if protests and elections fail, then a turn to militancy would be more likely”.

It seems that a mixed picture will remain the order of the day for the MENA nations.