Desert storms

Feature | 1 July 2016
Desert storms

Arabia Monitor's independent assessment of the MENA region reveals which nations are racking up valuable
cross-border ties, the countries being crippled by political infighting, and which states are on the cusp
of revolutionising trade routes in the region

Investors in the Gulf Cooperation Council (GCC) nations seemed to have largely ignored the Moody's downgrade on 15 May to credit ratings of Saudi Arabia, Bahrain and Oman, as was expected. Abu Dhabi, Qatar and Kuwait's outlook were also changed to negative.

  • A day after Moody's became the latest rating agency to reduce Saudi Arabia's credit rating to A1, the Tadawul All Share Index added 0.8% before closing. Saudi Arabian Mining Co. helped shore up stocks with a 3.8% gain.

  • Dubai's DFM General Index lost 1.2%, led by Emaar, which slipped 1.1% after reporting weak Q1 revenue.

  • After Moody's downgrade of Bahrain by one notch to Ba2, the Bahrain Bourse All Share Index slipped 0.2%.

  • If Bahrain materially outperforms fiscal and external forecasts, upward pressure could emerge.

  • Conversely, if these constraints intensify, downward pressure could continue.

  • Kuwait's SE Price Index fell 0.4% following the outlook revision.

  • Given the negative outlook, the likelihood of an upward movement in the ratings would depend on significant improvements in the country's institutional strength, as would be evidenced by sustained fiscal and economic diversification.

  • Ratings could be lowered if slower growth undermines Kuwait's wealth levels, measured by GDP per capita,
    or if domestic political stability were to significantly deteriorate, or if geopolitical risks were to escalate.

  • Moody's cut Oman's credit rating by one notch to Baa1. Oman's MSM 30 Index was little changed. The stable outlook reflects low levels of government indebtedness could counterbalance potential downside risks.

  • But GCC stocks faced downward pressure on 23 May after oil prices weakened (though oil prices have risen 80% from their lows) and as trading volumes begin to shrink ahead of Ramadan and the summer holidays.

 

 

No output freeze in 2 June OPEC meeting

Oil prices rose significantly in April, on hopes for the Doha meeting of oil producers, with Brent going from US$36.4/bbl on 1 April to US$41.6/bbl on 18 April, the day of the meeting. Despite the lack of outcome, they had risen further, to US$50.3/bbl as this report went to press.

  • Subsequent upward movements have been mainly driven by supply outages in Nigeria, Libya, Venezuela and Canada, with 3.3 million barrels per day (bpd) offline worldwide.

  • Outages have been partly offset by Iran's return following the lifting of sanctions (figure 1), which - as we expected - has been quicker than many analysts were forecasting.

Recent Saudi oil policy injects a new element of politicisation and uncertainty: the removal of oil minister Ali Al Naimi in favour of Saudi Aramco Chairman Khalid Al Falih, a close ally of activist Deputy Crown Prince Mohammed bin Salman, proposals for the initial public offering (IPO) of 5% of Saudi Aramco, and the Doha outcome.

  • However, the underlying economic motivation for Saudi production policy remains: an attempt to regain market share and drive out high-cost competitors.

  • No deal on output is expected in OPEC's 2 June meeting (this report was published in May 2016, before the OPEC meeting on 2 June took place), given Saudi Arabia's insistence that any deal be conditioned on Iran's participation, and OPEC's loss of credibility with Russia. A deal is possible by November once Iranian production stabilises, but by then may be moot.

US production has continued declining, but drilling will pick up if prices exceed US$50/bbl.

  • While prompt prices have risen significantly since January, longer-dated futures prices (three years and more) have fallen with
    the prospect of resilient shale oil output,
    a slow drawdown of high inventories and
    a strengthening dollar.

Iran and India strengthen economic, scientific, and cultural links

The agreements and memorandums of understandings (MoUs) signed during Prime Minister Narendra Modi's two-day visit to Iran
on 22-23 May are set to deepen bilateral ties in
a number of areas.

  • The most significant agreement was the deal signed by Iran, India and Afghanistan for developing the Chahbahar port (across from Oman) which will give India access to Afghanistan and central Asia through a new rail and road link, bypassing Pakistan entirely.

  • The distance between Kandla (in the western Indian state of Maharashtra) and Chahbahar is less than the distance between Delhi and Mumbai (figure 2).

  • The route through Chahbahar would save Indian businesses significant time and money when exporting to Afghanistan, central Asia and beyond.

  • Chahbahar would also serve as the point of origin for the proposed Iran-Oman-India pipeline, carrying Iranian natural gas to India.

  • Located east of the strategically sensitive Strait of Hormoz, Chahbahar would also be an important deep water port for Iran.

  • The two countries will also explore the possibility of setting up a joint-venture aluminium smelter in Iran.

 

 

Bilateral trade between India and Iran is currently about US$14bn with the balance of trade heavily in Tehran's favour.

  • India was Iran's second largest export market in 2014 (figure 3), mostly on the back of Iran's 350,000 bpd of crude oil exports to India.

  • India is Iran's top rice supplier, accounting for the bulk of its annual requirement of 1-1.2m tonnes. Iran imported nearly 1m tonnes of rice in 2014, with 93% coming from India.

While the tallies of Iran's elections vary from one source to another, one thing is certain: the moderates and reformists gained ground and ousted leading hardliners. (The tallies vary because of the absence of a traditional political-party system, the fluidity of the country's factions, and the confusing characterisation between moderates, reformists, conservatives and hardliners).

  • The results have therefore raised hopes that Iran's new parliament might be more cooperative with President Hassan Rouhani.

  • But there is no clear majority on Rouhani's side and, therefore, the stances of independent members - who make up 84 out of the 290 parliamentary seats - will be crucial. (The independents tend to coalesce into political blocs only after a new parliament convenes,
    in this case on 27 May).

 

 

 

Three possible scenarios can be drawn:

  1. The Independents could form their own political bloc. This would then mean that neither Rouhani's camp nor the hardliners build an absolute majority.

  2. They could split the legislature into blocs of equal weight, thus giving rise to a 'hung' parliament that slows down rather than facilitates decision-making.

  3. Or, independents could vote on a case-by-case basis, most probably throwing their weight behind Rouhani on economic policies while siding with the hardliners on socio-political matters.

Even if Rouhani is able to draw enough independents into his bloc and use them to build an absolute majority, the 290-member parliament is weak compared to other powerful institutions, such as the Guardian Council and the Supreme Leader's office.

  • On 24 May, the new Assembly of Experts chose Ayatollah Ahmad Jannati, one of the few hardliners to secure re-election to the assembly in February, to head the clerical body.

  • His re-election is a sign of the considerable power and influence the hardliners still have through the Guardian Council and the Supreme Leader's office.

 

 

Libya's tug of war

An escalating power struggle between the UN-brokered Government of National Accord (GNA) and renegade General Khalifa Haftar could disrupt oil exports and undermine efforts to fight ISIS.

  • On 20 May, Haftar officially refused to bring his forces - the Libyan National Army (LNA) - under the GNA.

  • The western-backed GNA had urged a unified command centre to coordinate the fight against ISIS in Sirte. Haftar insists that before he could consider unification, the militias supporting the GNA should be disbanded. Many of these militias include Islamists opposed to Haftar.

  • The tug of war between the GNA and Haftar is not the only power struggle in the country. Despite international support and a mandate to rule, the GNA is barely in control of Tripoli, while various militant groups continue to maintain a stronghold in several parts
    of the country.

  • The best-case scenario sees that, under international pressure, the GNA and Haftar at least cooperate on issues of common interest, most importantly the fight against ISIS.

  • But such cooperation has yet to materialise. Militia forces from Misrata - allied with the GNA - have in recent weeks taken the lead in the costly offensive against ISIS as they advance towards its stronghold of Sirte from
    the west.

  • Haftar's LNA announced over three weeks ago that it was launching a two-pronged attack on ISIS from the east and south of Sirte.

  • But instead of helping the Misratan forces, Haftar has focused on extending control over 14 oil fields and facilities in the Mirada and Zilla basins.

  • The worst-case scenario sees increasing clashes between militias loyal to the GNA and Haftar's forces, undermining efforts to create a unified national army to fight ISIS.

  • There has been sporadic fighting between Misratan militias and Haftar's forces in the area south of Sirte, specifically near Zilla.

  • There are also reports of clashes between Haftar and Ibrahim Jodhran's Petroleum Guards, which supports the GNA and its Tripoli-based National Oil Corp (NOC).

  • The baseline scenario is that it remains quite unlikely that Haftar will cede power to the GNA until he is given guarantees that he would be commander-in-chief of a unified national army.

  • Meanwhile, western governments will likely proceed cautiously when arming and training GNA-approved forces so as not to fuel the power struggle. (A meeting of foreign ministers in Vienna on 16 May called for exceptions to be made to the UN embargo against arms shipments to Libya to supply the GNA).

  • That is why many western governments are talking about a limited support role, like sending special units to protect state institutions and train local army and police forces, but not heavy weapons that could trigger an arms race between the GNA and Haftar.

  • Despite remaining embargoed, Haftar is still able to receive illicit deliveries from friendly Arab nations like Egypt and the UAE.

Exports from Marsa el-Hariga port resumed on 19 May after an agreement was reached in Vienna between the Tripoli-based NOC and the new
oil company in the east. The deal is expected
to increase Libya's crude production to over
300,000/bpd.

  • The terminal in the east of Libya had been a subject of dispute after the Tobruk-based House of Representatives (HoR) tried to sell crude independently on 25 April.

  • The move prompted the UN - with support from the US and European governments - to place the eastern terminal under a three-week blockade.

  • The blockade halted production from the eastern oilfields of Messla and Sarir, which are controlled by renegade General Khalifa Haftar.

Egypt tourism: how strong art thou?

The 19 May air crash dealt another potential blow to the country's already struggling tourism sector. It comes barely six months after the downing of a Russian aircraft in Sinai, and two months after the hijacking of another EgyptAir plane that eventually landed in Cyprus safely.

  • Tourism revenue was US$500m in Q1 2016, sharply down from US$1.5bn in the same period in 2015.

  • Prior to the onset of Arab Spring, Egypt received US$12.5bn from tourism (5.7% of GDP); at its peak in 2008, the sector printed revenue of US$11bn (6.7% of GDP).

  • In 2015, tourism revenue was down 15% to US$6.1bn (2% of GDP).

  • Before these incidents, the government had announced that it aims to attract 12 million tourists by end-2017, through increasing the presence of EgyptAir abroad, and working with low-cost airlines.

  • Following the 1997 Luxor Massacre, the Arab Spring and the 2013 overthrow of Morsi, tourist numbers dropped by 11%, 23% and 35% respectively, but bounced back within a year (figure 4).

Whether the 19 May air crash was terrorism-related or not, further incidents of this kind coupled with increasing insecurity inside the country, could undermine the government's
efforts to win back foreign tourists.

 

 

Iraq: patience wearing thin

As predicted, a continuation of the current political impasse in Iraq's parliament, as well
as protests in Baghdad, threaten to destabilise
the capital amid a new offensive against ISIS
in Fallujah.

  • On 20 May, protestors loyal to influential Shia cleric Moqtada al-Sadr broke into Baghdad's Green Zone for the second time in three weeks. But while the previous breach was largely peaceful, the second was marked by
    a sharp escalation of unrest.

  • The previous breach was perceived as an embarrassment for Prime Minister Haidar al-Abadi, and in its aftermath, the prime minister condemned the incursion and issued an arrest threat, prompting protestors to abandon the Green Zone.

  • The escalation therefore unveils increasing divisions between al-Sadr and al-Abadi; up until now, rather than seeking to bring down the prime minister, al-Sadr had been supporting him in his push to form a technocratic government.

  • The best-case scenario sees the latest episode in the protest movement keeping up the pressure on the ruling elite to push ahead with political solutions.

  • Since the last breach of the Green Zone, parliament has failed to meet and enact any reform.

  • Al-Sadr had vowed that his supporters would return if there were further delays in reform.

  • The worst-case scenario sees protests heating up, especially if further deadly attacks on Shi'a communities claimed by ISIS occur.

  • On 11 May, more than 200 people were killed in the mainly Shia Sadr City - a Baghdad suburb named for its community's support of the influential cleric.

  • Attacks of this kind are fuelling the frustration of protestors who are already angered by delays in approving a new technocratic cabinet.

  • The baseline scenario is that an escalation in protests will further polarise relations between al-Sadr and the main political blocs that are unwilling to enact reform. More worrying is that all sides are highly armed, so there is a potential for an explosive situation.

  • In the meantime, policy paralysis is exacerbating Iraq's fiscal and public expenditure decision making, combined with an apparent general rise in corruption to grease the wheels.

On 10 May, the Central Bank of Iraq sold dinar-denominated local bonds worth US$1.2bn, as part of efforts to plug the government deficit (12.3% of GDP). This represents Iraq's first local bond issue since 2003.

  • The issue is the first tranche of a US$4.2bn bond plan announced by the Ministry of Finance in January.

  • The bonds mature on 14 March 2018.

  • Iraq already issues treasury bills to domestic banks and has international bonds outstanding.

  • Iraq is rated B- at S&P Global Ratings, six notches below investment grade.

  • Fitch issued its first assessment on Iraqi debt in August 2015, assigning it the fifth-worst junk grade.

Morocco, China's new strategic partner

During Moroccan King Mohammed VI's visit to China on 11 May, 15 bilateral agreements were signed with Chinese president Xi Jinping, and more importantly, the two countries decided to upgrade their relationship to Strategic Partnership.

  • Morocco's BMCE Bank of Africa signed two MoUs with China Africa Fund, to support African development projects in infrastructure, automotive manufacturing, renewable energy, and agriculture, among others.

  • The second MoU between BMCE, the Haite Group, and Morocco-China International is to establish a Sino-Moroccan Industrial Park in Morocco, along with US$1bn fund for further developments.

  • Morocco's bilateral trade with China reached US$3.5bn in 2014 from US$1.1bn in 2004. China has become Morocco's 6th largest trading partner.

  • China exports to Morocco mainly include green tea, light industrial products, particularly cathode valves and tubes (devices that control electric current between electrodes in an evacuated container), textiles and electronic products.

  • Despite the upward trend since 2004, Chinese imports of cathode valves and tubes from Morocco accounted for 26% of Morocco's export of these goods but only a meagre 0.1% of total 2014 China imports of these goods, underscoring ample room for growth (table 2).

  • China also imports phosphates, chemical fertiliser and cobalt sand from Morocco.

  • A free trade agreement to further boost trade is being discussed. This could help open up China's exports to West Africa and Europe via Morocco, and is also a perfect opportunity to increase Morocco's exports to China.

  • Morocco received more than US$10m in Chinese FDI (foreign direct investment) in 2014, from only US$1.8m in 2004. Most Chinese capital was invested in projects such as fish farming, motorcycle manufacturing, and plastic production.

  • China is looking to implement its Renminbi Internationalisation Strategy in North Africa.

  • A three-year currency swap deal worth US$1.5bn was also signed with Morocco to facilitate trade.

  • In the meantime, its financial expertise has attracted China Exim Bank to set up its first North Africa Representative Office in Rabat and Bank of China is to open the first Chinese commercial bank branch in North Africa.

 

 

Yemen's negotiations at a snail's pace

With some GCC countries joining the chorus of international pressure, peace talks between the government and Houthi rebels are expected to continue in Kuwait. However, the two sides' efforts to form a political road map remain stuck.

  • A decisive victor is yet to emerge from the military conflict in Yemen. As a result, GCC countries are losing enthusiasm for continuing the fight.

  • The protracted conflict and its heavy humanitarian toll have harmed the image of the GCC in international public opinion.

  • The continuation of the war of attrition is also not serving the interests of Saudi Arabia as it wants the world to focus on its Vision 2030 instead.

  • The best-case scenario sees government and rebel delegations continuing the negotiations, especially given the added pressure from GCC countries.

  • The Emir of Kuwait, Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, met with Yemen's government delegation on 18 May, urging them to resume talks. This was followed by another meeting on 21 May in Doha, where the Emir of Qatar, Sheikh Tamim bin Hamad Al-Thani, played a crucial role in convincing the Yemeni government to resume peace talks.

  • Oman is also believed to be playing a behind-the-scenes role to prevent the collapse of the negotiations.

  • The worst-case scenario sees talks collapsing if there is no agreement on a road map.

  • After over a month of negotiations,
    no significant progress has been made on any of the main sticking points.

  • The most significant sticking point is around UN Resolution 2216.

  • The government delegation insists on full implementation of the resolution while the Houthis are seeking a different course of action to the one at the heart of 2216. (The resolution stipulates that Houthi militiamen must surrender control of state institutions and withdraw from cities occupied earlier. The Houthi delegation insists on first establishing a unity government in which they would play a role).

  • The baseline scenario is that the peace talks will progress slowly. In the meantime, Hadi's government forces will continue to focus their efforts on rolling back AQAP's territorial gains this past year. But ISIS could also test the government's ability to consolidate control over liberated areas.

  • In recent weeks ISIS has expanded its attacks on pro-government forces in southern Yemen. The latest was on 23 May, when a suicide bomber killed dozens of men queuing to enlist.

  • ISIS is also expected to exploit the recent losses of AQAP in order to strengthen its foothold in the south.

 

This report was produced by Dr Florence Eid-Oakden & the Arabia Monitor Analyst team. For the complete study, see here: http://bit.ly/22InHMd

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