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Security challenges
Anti-government protests in Iran have subsided but public opposition and further international isolation, while unlikely to bring about regime change, have changed the regime. The US has dropped any pretense of pursuing re-entry to the 2015 Joint Comprehensive Plan of Action (JCPOA – the nuclear deal) while other international powers have joined Washington in issuing fresh sanctions. Neither Iran nor its regional adversaries and the US will actively pursue confrontation this year, but looming sanctions relief clauses in the JCPOA in October will force a reckoning with Iran’s continued enrichment, domestic repression and weapons proliferation. Whether that reckoning includes military action will depend on whether the US and its regional partners retain enough diplomatic capability to strike a pragmatic de-escalatory nuclear and security accord, now that the JCPOA is effectively a dead letter.
Pakistan will struggle with dire economic and energy crises and a rising militancy challenge in the run-up to elections scheduled to happen no later than 2023. The governing and opposition blocs are bitterly divided on how the election should be run, setting up the possibility that the loser will fail to acknowledge defeat. Although the military is unlikely to directly intervene, volatility and violence will remain key features of Pakistan’s political landscape in 2023, and will keep the army on standby. Political instability will be directly tied to sovereign risk as the government will grapple with unpopular IMF-mandated reforms amid high inflation, a depreciating currency, and a widening current account deficit. Energy shortages and lasting damage from 2022’s catastrophic floods will accentuate economic fragility.
In Yemen, prospects for a peace settlement will remain poor after the collapse of a UN-brokered nationwide truce in October last year. While Saudi Arabia is conducting back-channel diplomacy with the rebel Houthi movement via Oman, the Houthis see gains to be had through further fighting. Hostilities are likely to escalate throughout 2023 in major areas of territorial competition such as Taiz, Marib, and Dhalaeh provinces. The Houthis will continue to clash with pro-government forces and seek leverage by targeting infrastructure that is critical for the government, including ports and oil and gas export facilities. Minimising re-Houthi escalation is as much as can be reasonably expected.
2023 is likely to be the year that the government of Syria comes out of the regional cold. Turkey ended its diplomatic freeze of the regime in Damascus with meetings in Moscow (Russia) on 29 December 2022: Ankara appears to favour re-engagement if it means preventing the recognition of an autonomous polity for Syria’s Kurds in the east of the country. On 4 January, the UAE’s foreign minister met with President Bashar al-Assad in Damascus. Behind these moves remains substantial Russian influence, with Moscow primed to retain the Assad regime as a beachhead in the region after its incursion of Ukraine has complicated its relations in the rest of the region. Regional re-engagement is a geopolitical necessity for Syria as neighbouring states look to counterbalance each other. Neighbouring states will also have interests in the possibility of population returns. But the process will remain gradual, with any reconstruction funds and trade continuing to be significantly complicated by US sanctions.
Economic opportunities
The breakneck pace of Saudi Arabia’s Vision 2030 development plan will continue amid ongoing pressure to deliver projects from tourism to industry and everything in between in record time, while the civil war in Yemen will remain a persistent spectre. The non-oil sector will grow further, with tourism and hospitality in particular doing well, boosted by government investment. The year will likely start to see sifting of some of the more realistic mega-projects from the more fanciful. Companies will need to decide once and for all how much they want to access and compete within the Saudi market, with the deadline for the establishment of regional headquarters on 1 January 2024.
This will be the UAE’s year to shine as it hosts the COP28 climate conference in November. Abu Dhabi will look to maximise the exposure from the UN conference to gain new plaudits and win round detractors, all while announcing new local and international renewables projects and climate initiatives. After an unexpected revenue boost during 2022, investment in domestic industries will remain high, with renewables and food security the top items on the agenda.
Iraq finished 2022 with a record USD 115bn in oil revenues and is set to pass a bumper annual budget in the coming weeks. Spending on salaries, already a major toll on the national finances, is likely to rise by around 50%, while the government is prioritising increased spending on the nation’s parlous healthcare system. Public demand for largesse and a supportive parliament will ensure a budget is passed regardless of whether the government strikes a deal with the autonomous Kurdistan Region over oil sector management and funding. The government is also likely to progress stalled energy project agreements with international firms signed in 2021. Stuffing the already bloated state payroll will likely bolster the government politically, keeping at bay a political and protest challenge from the now-dormant Sadrist movement. But doing so risks squandering what may be the country’s last opportunity to start meaningfully investing to tackle urgent environmental and infrastructure problems, while increasing the sovereign’s fiscal fragility.
Oman’s budgeting has been set on a sustainable path for the coming year, with Muscat’s challenge now delivering strategic investments and diversified growth. The 2023 budget will keep sovereign creditors happy with restrained spending and conservative estimates of oil and gas revenues. A tight-laced budget will not meaningfully delivery on growth ambitions, leaving growth delivery to state-owned enterprises, privatisations and foreign capital and direct investments. Green hydrogen will be the primary sector to watch: the government has spent the last two years getting framework agreements with investors in place and shaping its regulatory competencies, but 2023 will have to be the year of substantial foreign capital commitments to deliver on ambitious project goals. Other sectors primed for deal-making in 2023 include telecoms, health and financial services.
Struggling sovereigns
Egypt entered 2023 facing a mounting sovereign debt and currency crisis which the government will struggle to prevent from causing socioeconomic damage in the coming months. The government has been undertaking social spending cuts since 2016 while relying on costly short-term external debt to spend liberally on security and prestige projects. Sovereign creditors have slashed their exposure to Egypt’s debt, driving a fiscal and balance of payments crisis that has piled pressure on the local currency as the dollar costs of key imports have risen sharply. Major dollar injections are needed to end a currency and dollar liquidity crisis that would drive higher poverty and invite civil unrest in the coming months.
Tunisia will walk a perilous tightrope between budget cuts and civil unrest in 2023, posing significant political stability risks for President Kais Saied’s increasingly autocratic government. Priced out of issuing new conventional sovereign debt to finance its yawning deficit, and with alternative revenue streams scant, the government has cut costs, most recently by slashing water subsidies. Protests will remain frequent and disruptive, instigated by the powerful General Union of Tunisian Workers (UGTT) union and other worker’s group over low pay and rising costs, citizens decrying inflationary impacts on food and fuel, and by political groups opposed to Saied’s consolidation of power in the face of very low public legitimacy. Securing further IMF – and potentially, Arab Gulf – financial support will be a prerequisite for Saied’s government to avoid economic collapse and debilitating popular unrest.
Source: Control Risks
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