Issue One

IN THIS ISSUE
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Oil-exporting countries in West Asia and North Africa (WANA) continued to make structural changes to their economies over the last three months. Even as oil prices ticked upwards, countries determinedly pushed forward with their projects to diversify revenue sources and cut bloated budgets.

On the political front, policies of retraction reflected the ongoing economic slump. While friction points between longstanding adversaries remained steady, diminished rhetoric suggested a growing weariness to sustain rivalries on all fronts. Nevertheless, where some nations disengaged, others sought to fill the void.

Up against regional forces who have the full military and strategic support of the international community, particularly the US, Daesh is changing in identity and structure. While the terrorist group in its current form may be defeated, it is less clear how long coalition operations will last and how the group will metastasise domestically and regionally.

The humanitarian consequences of conflict, austerity, and social inequality grew more apparent over recent months, and serious questions over the devastation left in Daesh’s wake are beginning to surface, particularly following the recapture of Sirte in Libya and the large outflows of people from northern Iraq.

Trends

Overshadowing all other developments, the fight to corner Daesh in Syria, Iraq, and Libya is moving forward with support from the international coalition. The battle is being conducted at the national level by forces not always loyal to the respective central governments. Regional and domestic players have already begun positioning themselves to take advantage of the power vacuum, and the international community continues to provide decisive material and strategic support. We explore the ongoing battle against the terrorist organisation, the changing political chess game taking place in the region, the difficult economic environment, and the humanitarian impact of the conflict.

Countries

Tunisia’s new prime minister is leveraging international attention on the young democracy to garner urgent external investment and aid. Economic and political inequalities remain deep, and overall security is a primary concern.

Saudi Arabia has cut excess spending and is pursuing a spirited revenue diversification programme. The leadership has also taken steps to attract foreign investment while placing considerable attention on youth unemployment and the war in Yemen.

In Syria, all eyes are on Aleppo, where Damascus, with the backing of Tehran and Moscow, retook the eastern part of the city from opposition forces in late December. There is no silver lining in Syria’s protracted war, with the death toll in the hundreds of thousands and negotiation efforts having led nowhere.

Deep Dives

In the wake of the UK’s EU referendum, the GCC could be in a position to take advantage of a depreciated pound to further invest in – and attract talent from – the UK. However, key threats of a weaker pound to the GCC include reduced inflows, particularly in tourism, hospitality, and real estate.

On the sustainability front, regional policy-makers would do well to pay more attention to food security given its effect on national security, political and social stability, and economic growth. In order to ensure they are food secure, WANA countries could benefit from improved public-private partnerships to develop innovative solutions.

The Fight against Daesh

The battle in Syria, Libya, and Iraq

In the last quarter of 2016, across West Asia and North Africa (WANA), the fight against Daesh accelerated. After months of preparation, regional forces backed by a 68-member anti-Daesh coalition moved en masse to reclaim Daesh-held territory.

In Libya, the battle to retake Sirte was led by a force that, at its height in August 2016, consisted of thousands of fighters drawn from hundreds of loosely tied militias, mostly from nearby Misrata. After a summer push into the city and its surroundings by groups backed by the Government of National Accord, Daesh fighters were cornered – and subsequently vanquished – from the Ghiza Bariya district.

To the east, in Syria, US-backed Syrian Democratic Forces (SDF) launched Operation Euphrates Wrath with the aim of recapturing Raqqa. By December, the 30,000-strong force had expelled Daesh fighters from areas 24 km north and 50 km west of the city.

In Iraq, government-backed forces entered Mosul but faced a challenging street-to-street and house-to-house battle that Daesh had been preparing for since overrunning the city in 2014.

Now, Daesh’s state-building facade across the region has largely crumbled, leaving behind a destructive insurgency with nothing to lose.



US support is central
These offensives are largely being overseen by US strategic leadership: The push into Sirte was aided by US airstrikes and the US footprint in Iraq and Syria is even more evident. The Kurdish Peshmerga, Iraqi Security Forces (ISF), and SDF benefit from US weapons, embedded advisors, strategic airstrikes, and a constant stream of intelligence to and from the front lines.

In Mosul, looking past Iranian-backed Iraqi Shiite militias, the positive relationship between the US and many of the units engaged in the city – consisting of roughly 20,000 fighters – will afford it a significant amount of influence in how the battle is conducted. This is of great importance though is generally under-reported and underappreciated.


A domestic prize with many winners
Fighting to seize control of Mosul and Sirte was sold domestically as a means of empowering each city’s respective regional government, with Baghdad and Tripoli both celebrating Daesh’s retreat as a victory. However, in neither scenario was the central authority in full control of forces on the ground.

Nowhere was this more evident than in Libya: Although the unity government in Tripoli often claims it was planning and overseeing the Sirte fight, it exerted minimal, if any, authority. In addition, some militias who took part in the fighting reject the unity government’s legitimacy and carried out separate battles for personal or tribal gains, or to win favour with Western nations aiding the offensive.

The same goes for Iraq, where the fight for Mosul is being carried out by a constellation of forces that receive orders from differing, and sometimes opposing, stakeholders. Kurdish Peshmerga are holding territory just north of Mosul, explicitly looking to their own political leaders for military directives. Here, the central government in Baghdad can only hope to co-ordinate fighting.

From the south and into Mosul, the fight is being led by the ISF, though their size and high attrition rates could lead to the Popular Mobilisation Forces (PMF) taking a bigger role. With its leadership linked to Iran, the PMF has been key in the fight to take back Mosul. Acting independently of the central government, it has severed supply lines from the west and could potentially retake large swaths of territory north of Mosul.

Between the Peshmerga and PMF, Baghdad’s influence over Mosul’s recapture, and who will eventually control the remnants of the largely Sunni city and its surrounding towns, will depend on how and if their counterparts can co-operate.

Although the military move against Daesh could have been the key to overcoming adversarial regional politics, alliances have largely held strong and tensions remain.

Sectarian tensions beneath the surface
Despite frequent public outbursts between Iran and its Sunni neighbours, long-standing tensions are rarely overtly visible. Rather, the conflict lives on in proxy battles taking place across the region. These tensions, and the geopolitical struggle for primacy, were recently seen in the Hizbollah-backed election of Lebanese President Michel Aoun, a key antagonist against Syria during Lebanon’s long-running civil war.

Although the role of president in Lebanon is ceremonial, Aoun’s election does not benefit Saudi Arabia. Rather, it reaffirms Riyadh’s decision to withdraw from Lebanon’s deeply sectarian and complicated domestic political environment. But while this decision will strengthen Hizbollah and Iran in the near term, Saudi Arabia remains an important power-broker and financier to many Lebanese figures and enterprises. Indeed, Aoun, who recently accepted an invitation to visit the kingdom, understands the importance of mending ties. In this way, a pattern typically emerges in which the Saudis usually prevail in periods of peace and order, while the Iranians step forward in times of war and instability.


“Frustrated by a perceived lack of return on investment in regional partners, Riyadh may be adopting a more thorough realpolitik foreign policy.”

Cuts to discretionary spending and the cost of the war in Yemen have led officials in Riyadh to reassess aid to regional partners. It has been reported that aid to the Palestinian Authority has been stunted, and, in November, days after Egypt voted against a UN Security Council resolution demanding an end to Russian airstrikes on Aleppo, the kingdom indefinitely halted a $23bn aid deal to Cairo. Frustrated by a perceived lack of return on investment in regional partners, Riyadh may be adopting a more thorough realpolitik foreign policy.

Turkey leans into Iraq
During conflict, some regional forces retreat while others adopt more combative roles. For example, as Turkey’s relations with Russia, the GCC, and Israel have improved demonstrably, President Recep Tayyip Erdogan has become increasingly empowered to engage in operations along the country’s borders with Syria and Iraq.

Over the last year in Syria, Turkey has targeted and shelled Kurdish groups moving west of the Euphrates. In Iraq, however, it has supported Kurdish Peshmerga forces, bombed Kurdistan Workers’ Party (PKK) forces, and warned off Shiite militias, a stance that has contributed to feuding between Ankara and Baghdad over anti-Daesh operations in northern Iraq, particularly in Ninewa province.

Evidently, when it comes to securing its national interests, Turkey has taken a hawkish position.

With the Kurdish Peshmerga, PMF, and ISF moving forward in a co-ordinated offensive, rhetoric between Ankara and Baghdad has risen. Erdogan’s government seeks direct involvement on the ground to degrade the PKK’s military presence in northern Iraq and safeguard Iraqi Turkmen populations near the Turkish border. Erdogan’s projection of Turkey’s historic responsibility toward Iraq, coupled with the Turkish soldiers already stationed on Iraqi soil, recently led Iraqi Prime Minister Haider Al Abadi to call Turkish incursions an attack on "Iraqi dignity”.

If these tensions are further stoked, the US, which has thus far successfully mediated between the two nations, could potentially find anti-Daesh operations jeopardised. And, if Daesh is pushed out of northern Iraq, Baghdad will not only have to manage the grievances of disenfranchised local populations: It will also need to monitor Shiite militias, Kurdish territorial expansion, and Ankara’s appetite for a more prominent role.

After Daesh
In Iraq, with international focus squarely on the fight for Mosul, a considerable amount of thought should be placed on intra-sectarian relations and local governance. After the fight against Daesh, what comes next? Who will govern liberated Sunni areas of the country, and how? Thus far, little attention has been placed on ensuring the military battle has an effective and parallel strategy for overcoming social cleavages and ensuring good governance post-Daesh.

The same can be said of Libya, with Daesh expelled from the coastal town of Sirte by Misratan militias. However, the large tribes that once governed the city, namely, the Gaddafa and Warfalla, have long opposed intervention from Misrata and this tension could boil over in the post-Daesh era.


“Local and tribal dynamics must be viewed as a way of understanding how populations engage with the central state, especially following civil war.”

Local and tribal dynamics must be viewed as a way of understanding how populations engage with the central state, especially following civil war. Here, Iraq serves as a historical example of an extremist group’s ability to exploit a power vacuum and re-emerge after military defeat. After all, Daesh sympathisers can only be hosted in enabling environments. Tribes, local councils, or an umbrella of local families will play a central role in protecting the community from any resurgence of extremists.

Humanitarian crisis runs deep
Countries under pressure from fighting must also battle the humanitarian crises that follow from conflict.

Across WANA last quarter, the ramifications of protracted wars grew more acute. Six years of civil war in Syria have created 6.3m internally displaced persons, 4.8m refugees, and resulted in estimates of more than 400,000 deaths. As the last evacuees escape Aleppo and the anti-Daesh coalition steers toward Raqqa, there is no end in sight to the generational consequences of the Syrian war.

In Yemen, over the past three months, the humanitarian situation has reached critical levels amid reports of cholera outbreaks, famine, and the complete dismantling of already underdeveloped essential services. With salaries intermittently paid, citizens do not have the purchasing power to buy basic foodstuffs. As the most impoverished country in WANA, Yemen now has more than 14m people classified as food insecure, while nearly 320,000 children are severely malnourished.

Sources: OCHA, Relief Web, UNHCR, 2016

Following conflict, the human burden of budget cuts, subsidy reforms, and a shrinking public sector adds another layer of complexity.

In Egypt, growing deficits and looming austerity measures are hitting close to home. Cairo, already reliant on aid from supportive regional governments, has been hampered by terrorist attacks on tourist sites and reduced confidence in the Egyptian market, all of which have diminished its ability to induce foreign investment. With Central Bank coffers depleted and inflation rapidly rising, Cairo actioned a series of IMF-sponsored policies in an attempt to regain the trust of international markets; within a few weeks, fuel subsidies and currency controls had been lifted, and what started as a financial pinch morphed into a social crisis.

As WANA’s most populous nation squares up to important socio-economic challenges, its neighbours are watching. In the short term, Egyptians will struggle with an extremely weak currency and exorbitant prices across the board. However, in the medium to long term, policy-makers hope the economy will attract more investment. Egypt’s currency saga could serve as a cautionary tale to regional governments slow to respond to dwindling reserves, minimal government taxation, or an over-reliance on certain economic sectors.

Cutting budgets and weathering the response
With the landmark OPEC deal in early December, oil prices are holding at more than $50 a barrel, a two-year high. Nevertheless, in the last quarter of 2016, WANA’s oil-exporting countries pushed forward new taxes and fees as well as cuts to public sector expenses and subsidy programmes. A year after the collapse of global oil prices, financial markets have calmed and regional economies are adjusting.

Russian Energy Minister Alexander Novak and his Saudi Arabian counterpart Khalid Al Falih at an OPEC meeting in Vienna, Austria, on November 30, 2016. Heinz-Peter Bader/Reuters/phocal Media

Oil-exporting governments continued to borrow aggressively on international markets. By way of example, on October 19, Saudi Arabia’s inaugural international bond issue resulted in the sale of $17.5bn in government bonds, the largest sale of emerging market sovereign bonds recorded. Qatar, Bahrain, Oman, Kuwait, and the UAE also sold foreign and federal bonds during 2016. While mulling more expansive taxation projects, oil-exporting countries introduced new fees and targeted taxes: In Saudi Arabia, municipal fees increased, while Algeria froze public sector salaries and increased sales, petrol, and tobacco taxes.

The response to these cuts has been varied. In the GCC, Kuwaitis took to the polls to voice their displeasure. Running on an anti-austerity platform, the opposition won 24 of the 50 seats in the legislature – the largest turnover of seats of any election in the country’s history. Saudis expressed their displeasure through satirical images of the fiscal situation. In North Africa, the reaction has been more vocal. Tunisia and Algeria both saw civil society groups strike in protest of parliamentary bills mandating spending cuts and salary freezes.

Up against a fiscal wall, governments have had less room to weigh austerity measures against the social consequences of their reforms.

Money: A weapon of war
For regional countries embroiled in conflict, finances are an important front line. In a bid to corner the Houthi-Saleh bloc, Yemeni President Abdrabbu Mansour Hadi moved the Central Bank’s headquarters from Sanaa to Aden. Now, facing financial shortages, the Houthi-Saleh bloc has begun to see protests in Sanaa.

In Libya, a battle over the distribution of oil revenues is ongoing. Though Field Marshal Khalifa Haftar’s Libyan National Army holds Libya’s oil crescent, it does not control the Tripoli-based Central Bank – the recipient of oil revenues. And while Haftar is co-operating with the National Oil Corporation to  increase Libyan output, he will undoubtedly seek to leverage his military positioning for political gain.


“Although countries are adjusting to the reality, simply put, they have less money to spend.”

In all, WANA faces strong headwinds in the face of persistently low oil prices. Although countries are adjusting to the reality, simply put, they have less money to spend.

Regionally, the politics of retraction and more realist policies are punctuating tensions between neighbouring forces. While friction points remain steady, rhetoric between some entities, and the absence of certain voices, may suggest a growing weariness to sustain rivalries on all fronts. Nevertheless, where some voices disengage, others seek to fill the void.

And so, as a generational fight against Daesh inches towards operational success, the potential fruits of victory are already being claimed by contending actors.

This section focuses on recent developments in Tunisia, Saudi Arabia, and Syria. Tunisia’s new government rolled out austerity measures while leveraging its international darling status to attract new sources of investment. Saudi Arabia has been working to creatively minimise the oil-income deficit, while, in the background, its leaders also work to diversify investment portfolios, increase sources of revenue, and contain the war in Yemen. In Syria, as the battle for Aleppo comes to a close, the future for the organised opposition looks grim.

Tunisia

Fundraising for the young democracy

The underlying factors of years of political and social instability, economic discomfort, and general insecurity remain apparent in Tunisia. The links between economic ostracism and extremism are not being effectively addressed, and deep state-networks continue to undermine economic and social transformation, the latter of which might be further pressured by new austerity measures.

So, as post-revolutionary governments fail to meet expectations or deliver necessary reforms, Tunisia’s democratic transition continues. This has led to nationwide economic challenges and security threats, the latter aggravated by chaos in neighbouring Libya.

However, the establishment of democratic institutions, ideologically divergent political partnerships, and dialogue with civil society remain unique within the region. Tunisia’s educated and energetic youth are an important asset for long-term economic growth and will benefit from government reforms – still to be implemented – supporting competition and better access to resources. 

Tunisia on high alert
A state of emergency first introduced in July 2015 is ongoing, and the fight against terrorism remains the national priority.

Tunisia’s Achilles’ heel, its proximity to Libya, has affected internal security. As Daesh militants are cornered in the Libyan coastal city of Sirte, many fear a large Tunisian contingent of fighters could be making its way home, prompting Tunisian President Beji Caid Essebsi to issue a warning, via the media, about the consequences they face. By way of example, Ben Guerdane, a city 30 km from the border that has historical ties to extremist groups, is being closely watched by security forces. In the desert town, government officials recently seized three arms caches that included Kalashnikovs, rockets, and landmines.

But the spillover of conflict has not stopped Tunisia from wanting to remain neutral and non-interventionist in Libya’s war. Emphatic denials from the defence ministry over reports of US drones flying sorties from a secret Tunisian base revealed the country’s resistance to direct engagement, or perception thereof, in the quagmire next door. However, one month later, in November 2016, Essebsi confirmed their existence, highlighting their presence as a means to protect and surveil Tunisia’s borders – not launch strikes into Libya.

“While it remains on high alert, Tunisia seems to have grown increasingly resilient.”

While it remains on high alert, Tunisia seems to have grown increasingly resilient. After signing important pacts with co-operative governments, the country’s security services are working in tandem with US, German, UK, French, and Algerian armed forces.

New leadership, same (difficult) decisions
And, as it battles to hold back an increasingly unstable neighbour, it must also deal with an ever-changing political landscape. In August 2016, Youssef Chahed became the country’s seventh prime minister in less than six years; his government receiving political support from Ennahda, Tunisia’s Islamist party, and the secular-leaning Nidaa Tounes party. As it currently stands, this power-sharing agreement has given Chahed free rein to implement and roll out important structural changes.

Indeed, in the last quarter of 2016, Chahed sought to cement his role in the decision-making process and leverage his political capital to push through difficult, but necessary, economic reforms. With IMF and World Bank loans on the line and foreign investors skittish about entering the market, his progress has been closely monitored.

Tunisia’s economic health remains fragile. National unemployment sits at about 15% – less than half the figure recorded in rural communities – and tourism has fallen more than a third since 2014, the year before the Bardo museum attack that killed 21 tourists. The country’s external debt sits at $27bn, or 69% of GDP, foreign debt payments of at least $3bn are expected in 2017, and annual economic growth has averaged about 1.5% since 2011.

Passing a difficult budget and attracting foreign investment
Ameliorating the economic situation requires difficult actions. Internally, as part of its budget, the government has sought a pact with civil society on a package of financial reforms. Externally, it has worked to attract foreign investment.

The biggest obstacles to the reform programmes were the powerful labour unions: The Tunisian General Labour Union and the Tunisian Confederation of Industry, Trade, and Handicrafts, to be exact. However, in negotiating a compromise with the unions, namely by throwing out two tax increases and partially reversing plans to freeze public sector pay, the passing of the budget emboldened Chahed’s position as both a consensus-builder and decision-maker.


“In all, donors committed to providing Tunisia with approximately $14bn in aid or loans – an amount equivalent to the country’s 2017 budget.”

The government’s confirmation of a diluted 2017 budget increased company taxes, froze public sector hiring outside security forces, and introduced new fiscal rules to prevent tax evasion. Eventually, it could help rebuild investors’ trust in Tunisian economic institutions. Though the budget was "the most controversial in the history of the country", Chahed said at the end of November, austerity reforms will help balance the country’s public finances.

A diverse engagement programme highlights the Chahed administration’s resolve to pull the country out of its economic malaise. To attract financing from abroad, the government engaged in an international roadshow, targeting donors and investors in Washington, Brussels, Paris, London, and Rome. The roadshow was punctuated by the November launch of Tunisia 2020 in which 82 projects worth $18.9bn, spread over 20 sectors, were presented to foreign investors and lenders. In parallel, the Central Bank of Tunisia announced a plan to issue eurobonds of up to $1bn in January 2017.



While Tunisia engages in an international marketing tour, it remains primarily backed by France and Qatar: In the last quarter of 2016, former French Prime Minister Manuel Valls and Qatari Emir Sheikh Tamim bin Hamad Al Thani appeared as the opening speakers at the Tunisia 2020 launch. At the event Sheikh Tamim pledged $1.3bn in financial aid, while Valls announced France’s development agency would increase its annual contribution to the country by $261m.

Sources: Voice of America, BBC, 2016

Other major contributors included the European Investment Bank, the Arab Fund for Economic and Social Development, Saudi Arabia, Kuwait, and Turkey. In all, donors committed to providing Tunisia with approximately $14bn in aid or loans – an amount equivalent to the country’s 2017 budget.

To stimulate the economy in the short term, the government has restored phosphate production to 2010 levels and resolved a longstanding dispute with one of the country’s key gas suppliers. To ensure social, economic, and political sustainability, the government will need more such quick wins alongside its broader reform programme.

Solving youth and geographic inequalities
The 2017 state budget also aims to support a fund to catalyse youth innovation and develop a new public-private employer contract to encourage businesses to hire unemployed Tunisians. But such efforts are hampered by struggles to contain long-standing patronage networks and a pervasive culture of corruption. For youth, these unscrupulous practises undermine the already limited opportunities available to them. Almost 32% of young, university-educated Tunisians are unemployed, and access to credit and capital is difficult for those who are not wealthy or well connected. This has translated to 95% of the country’s youth lacking confidence in political parties.

Poverty and inequality remain profound and structural. Nowhere is this more evident than in a breakdown of the country’s GDP, 85% of which came from the coastal cities of Tunis, Sousse, and Sfax in 2015. Regional disparities between these developed coastal cities and poor interior communities are recognised as high priorities in economic development plans.

Source: Targa Consulting, 2012

Tunisia’s growth remains hampered by its proximity to conflict in neighbouring Libya, serious economic inequalities, and the push and pull of a young democracy still finding its feet.

Saudi Arabia

Economic savvy moves in turbulent times

Saudi Arabia has a low debt-to-GDP ratio, large domestic consumer base, and leadership determined to push forward with important social and economic reforms.

Investments in technology, increased clarity over its economic vision, and the opening of markets to foreign investors are also positive trends. The kingdom’s foreign policy is showing signs of maturity, and Deputy Crown Prince Mohamed bin Salman’s leadership has been central to ongoing reforms.

Having benefitted from decades of oil wealth, citizens are anxious about the current economic climate and related budget cuts. Nationwide austerity measures have also affected the kingdom’s relationships with regional partners.

Unavoidable budget cuts
By the end of 2016, the effects of austerity measures had become visible. Public spending dropped 19% by the year’s end, leaving the country’s expected overall 2016 growth at 1.4%. And, for a second consecutive year, the Ministry of Finance closed the annual budget on November 15, rejecting last-minute funding requests. Elsewhere, the Council of Economic and Development Affairs cancelled $266.7bn in projects and said it would settle all outstanding payments to the private sector. Likely in part due to these cuts, unemployment among Saudis rose to 12.1%, the highest level since 2012.

But the government views the cuts as necessary. In an April 2016 interview with Saudi-owned Arabiya television, Prince Mohamed gave an example of why some budgets had to be re-evaluated:

“When I enter a Saudi military base, the floor is tiled with marble, the walls are decorated and the finishing is five stars. I enter a base in the US, you can see the pipes in the ceiling, the floor is bare, no marble and no carpets. It’s made of cement. Practical. We have a problem with military spending.”

However, recognising the grievances fuelled by such widespread cuts, the government has sought to assuage citizens by being more transparent with its economic blueprint. In an unusual attempt to promote the country’s austerity plan, the minister of finance, minister of civil service, and deputy minister of economy appeared on MBC1’s popular talk show, Al Thamena, to explain the situation. While reactions on social media, an important indicator of Saudi society, showed many people were unconvinced, analysts expressed hope for similar public engagement strategies in the future.

Addressing youth anxieties
Saudi Arabia’s youth remain particularly sensitive to austerity measures. Job creation amid budget cuts and a trimming of payroll is difficult, and unemployment rates are highest among this segment of society: One-quarter of Saudis under the age of 30 are jobless, and 95% of new jobs go to expatriates. Although recent approval of a nationalisation campaign by the country’s advisory body, the Shura Council, will hasten job creation, it will likely not bridge the gap in employment figures.

On that front, the leadership has also been quick to respond. Citing high unemployment figures, King Salman dismissed the labour minister, who had been in the position seven months, replacing him with Ali bin Nasser Al Ghafis, the head of the Technical and Vocational Training Corporation, a network of schools training young Saudis in various trades. This potentially signals the leadership’s emphasis on youth employment initiatives and tackling high unemployment figures.

Sources: Saudi Arabia General Authority for Statistics; Bloomberg, 2016

Strong headwinds, but no storm
Despite strong headwinds, Saudi policy-makers are enthusiastic about opening the country to more foreign trade and investment. In an effort to increase capital in government coffers, Saudi Arabia sold $17.5bn of debt on October 19.

By and large, the sale indicated investors were confident the kingdom would pay back its debt. Structurally, Saudi Arabia remains a large economy with little debt – at 15%, it has the 16th lowest debt-to-GDP ratio in the world. Spending cuts have been visible and immediate; oil prices, through strong Saudi intervention at OPEC, will stay higher than expected; and the government continues to diversify its revenue base.


“In the short term, the Saudi fund will look to diversify its investment holdings and engage in local and regional tech collaborations.”

Part of this diversification can be seen in the deal between Saudi Arabia’s Public Investment Fund (PIF) and Japan’s SoftBank, agreed upon on October 13, to create one of the world’s largest private equity funds. PIF, which owns about $100bn worth of shares in Saudi companies, plans to increase its global investment holdings from 5% to 50% by 2020. In the short term, the Saudi fund will look to diversify its investment holdings and engage in local and regional tech collaborations. In the long term, the country hopes to use this financial influence to urge local companies to establish offices at home and, eventually, catalyse a techhub in the kingdom.

Yemen war dominates headlines
In strengthening its security, the kingdom has increased its monitoring and dismantling of extremist cells and protection of sensitive sites. In October, security services foiled a plot to bomb a World Cup qualifying football match in Jeddah between Saudi Arabia and the UAE. Saudi officials are also on high alert as police officers across the country remain the target of attacks.

Externally, the war in Yemen continues to dominate headlines. Riyadh, which considers the Houthi-Saleh bloc an existential threat, has expended considerable human and financial resources to contain the conflict and secure its 1,800 km border with Yemen. Meanwhile, Houthi forces continued their hit-and-run tactics from territory under their control on the border of three Saudi provinces. Along this stretch of the border, since fighting began, Saudi officials have reported the loss of more than 500 civilians. Overall, analysts estimate the war costs the country $200m a day.1

Source: Gulf States Newsletter, Issue 1025, November 2016

The October 8 airstrike by the Saudi-led coalition on a funeral hall in Sanaa refocused international attention on the war. Although the coalition’s Joint Incidents Assessment Team found that the strike – which killed about 140 people and injured hundreds more – resulted from poorly vetted targeting information, calls in the press to end the war grew and pressure mounted on Western governments to block military exports to the coalition.

The 48-hour ceasefire in November highlights the limited influence the international community, in particular US Secretary of State John Kerry, continues to have on both parties. Despite the short truce, the Saudi-led coalition continues to seek a peaceful resolution to the conflict. However, in a blow to peace efforts, the Houthis and their political allies formed a parallel government in Sanaa. UN Envoy Ismail Ould Cheikh Ahmed called the move “a new and unnecessary obstacle to peace in Yemen”.

Cementing the vision
Prince Mohamed continues to leave his footprint on Saudi Arabia’s government line-up, dismissing long-running Finance Minister Ibrahim Al Assaf in the last quarter of 2016. Al Assaf’s replacement, Mohamed Al Jadaan, is the former head of the Capital Market Authority, where he engineered the 2015 opening of Saudi Arabia’s stock exchange (Tadawul) to foreign investors. This pivot towards foreign investors is in line with Saudi Vision 2030.


“Riyadh is showing patience on multiple fronts, aware that a pinch today could translate into future opportunities.”

Elsewhere, King Salman appointed former Ambassador to Iraq Thamer Al Sabhan as minister of state for Arab Gulf affairs. Al Sabhan, the first Saudi Ambassador to take up post in Baghdad since Saddam Hussein’s invasion of Kuwait, was asked to leave Iraq after making statements on Shiite militias’ involvement in anti-Daesh operations. The role of minister of state for Arab Gulf affairs, a new ministerial portfolio, was created especially for Al Sabhan and highlights the kingdom’s renewed focus on GCC affairs.

On this note, in early December, King Salman conducted a tour of four GCC states. In the lead-up to the GCC summit in Manama, King Salman also stopped in Abu Dhabi and Doha before concluding his travels with a three-day visit to Kuwait City. The trip underscored efforts to work towards a GCC economic and political union and highlighted growing efforts to co-ordinate visions in respect to Syria, Yemen, and Iran, and ways to combat ongoing economic challenges.

Riyadh is showing patience on multiple fronts, aware that a pinch today could translate into future opportunities.

Syria

Has fighting reached a crescendo?

There is no silver lining in the country’s protracted war, which has killed hundreds of thousands of people. UN-led peace-building efforts have led nowhere and Damascus has grown empowered by regional developments. However, international alliances cemented after the government’s victory in east Aleppo could help push for sustainable solutions.

The swift recapture of east Aleppo was a definitive victory for the government and its allies, and leaves Idlib – largely controlled by several extremist groups – as the opposition’s only urban stronghold.

In other flashpoints across Syria, competing interests have delayed efforts to retake Raqqa. On a larger scale, uncertainty surrounding US President-elect Donald Trump’s Syria policy is worrying those opposed to the Syrian government and Iran, and GCC states have said they are prepared to increase support to Syrian opposition groups.

Pro-Assad soldiers walk through Aleppo's historic citadel, December 13, 2016. Reuters/phocal Media

Protracted vitriol, new alliances
An end to the Syrian conflict remains hampered by vitriol and divisive global politics. Two separate UN Security Council resolutions banning military flights and implementing a six-day truce in Aleppo were vetoed by Russia, its fifth and sixth since the beginning of the crisis. Following the battle for east Aleppo, Russia, Turkey, and Iran held a meeting in Moscow in which they issued the Moscow Declaration, calling for a nationwide ceasefire in Syria and for a resolution to the conflict. The participation of Turkey in this new alliance coupled with the outcome of the Aleppo fight are strong signs the declaration may yield results. More importantly, the fact the UN was not consulted and the US not invited reflects their growing inability to influence events on the ground.

In Damascus, new alliances and regional developments have empowered the government’s position. On October 17, a Syrian security delegation led by National Security Advisor Ali Mamluk (in his first official visit in more than five years) met Egyptian security officials in Cairo to discuss intelligence co-ordination and co-operation. Egypt, as with Russia, opposed the resolution banning military flights over Aleppo. In Lebanon, the presidential election of Hizbollah-backed Michel Aoun, who is pro-Assad, was another victory for the Syrian government. And Algeria’s foreign minister publicly congratulated Syria for the recapture of Aleppo, calling it a “victory against terrorism”. This support further strengthens Al Assad’s narrative of the conflict.


“In Idlib, however, internal divisions have begun to form, and the dominance of extremist groups in the province will validate the government’s position that the opposition is radicalised.”

The recapture of Aleppo: A turning point
In the last quarter of 2016, government forces steadily advanced into opposition neighbourhoods in east Aleppo city. Capturing important districts including 1070 Apartments and Dahiyat Al Assadforces soon advanced on south-eastern suburbs including Sheikh Saeed, resulting in a collapse of rebel defence lines and the recapture of the majority of east Aleppo city.

Shortly thereafter, both sides agreed to allow the opposition and civilians either to move to government-held west Aleppo or rebel-held territories farther west. The recapture of east Aleppo highlights two things: The government’s most significant victory since fighting began in 2011, and an irreversible defeat for the opposition, which now only controls one urban stronghold – Idlib.

In Idlib, however, internal divisions have begun to form, and the dominance of extremist groups in the province will validate the government’s position that the opposition is radicalised.

Source: Syria Live UA Map, 2016

Divergent interests in the north
In the last quarter of 2016, in northern Syria, Turkish-backed opposition forces fighting under the Euphrates Shield operations room confronted Kurdish-dominated Syrian Democratic Forces (SDF). Like the Kurds, these opposition forces seek to capture Al Bab village from Daesh, with the intention of taking Manbij soon after. The move would end Kurdish hopes of uniting two areas in northern Syria under Kurdish rule.

However, on November 6, Kurdish forces launched Operation Wrath of the Euphrates to drive Daesh from Raqqa. The US-supported move pre-empted and undermined Turkey, whose officials had expressed opposition to a Kurdish-led offensive on the city. By late December, the SDF had taken 1,300 sq km in the western part of the province.

It remains unclear whether the SDF can sustain a fully fledged attack on Raqqa if boxed in by Turkish-backed Euphrates Shield forces in the north.

Turkey’s focus on stymying and weakening the SDF may impact the latter’s ability to seize core Daesh territory in Syria. Division and enmity between Daesh’s enemies in northern Syria has likely provided the group some breathing room and time to prepare for fighting in Raqqa and Deir Ezzour.


“In an effort to apply pressure on Damascus, the EU placed sanctions on 16 Syrian government officials, including the Central Bank of Syria governor, based on accusations of crimes against civilians in Aleppo.”
 
In Damascus in September, local truces saw 1,600 residents and rebels from the opposition-held area of Moadamiyeh shift to rebel-held Idlib. And, in November, local deals reached in the rebel-held towns of Al Tal and Khan Al Shih led to thousands of gunmen and their families also leaving for Idlib. This truce follows previous local deals between opposition groups and the government, such as the evacuation of Daraya, to move civilians and rebel fighters with light weapons to opposition-held cities in the north.

In an effort to apply pressure on Damascus, the EU placed sanctions on 16 Syrian government officials, including the Central Bank of Syria governor, based on accusations of crimes against civilians in Aleppo. Since the beginning of the war, other members of the international community have slapped sanctions on prominent individuals, companies, and industries. However, it has been Syria’s economy and people that have been most affected.

Civilians bearing the brunt
The situation in Syria remains the world’s most critical humanitarian crisis. A recent report from the UN Food and Agriculture Organisation revealed 80% of households to be food insecure. This is in part due to international sanctions, ongoing drought, and starvation tactics employed by the government and, to a lesser extent, opposition forces in besieged neighbourhoods.

During the recent offensive in east Aleppo, hundreds of civilians died, tens of thousands were uprooted, and entire neighbourhoods were reduced to rubble. What remains of the town is deserted and Idlib has become the humanitarian epicentre for the displaced.

The Syrian narrative took notable turns during the last quarter of 2016; the situation remains dire and complicated.

This section explores how the UK’s impending exit from the EU could impact trade and investment flows with the GCC. In the ‘black elephant’ series, we explore food security in WANA – how each country fares, the effects of recent external shocks, and opportunities for improvements.

GCC and the Brexit Effect

Opportunities, threats, and inter-dependence

The UK will begin the process of exiting the EU no later than March 2017, says UK Prime Minister Theresa May, in spite of a recent court decision that could hamper procedures. Given the GCC’s close ties to the country, this could lead to a number of critical opportunities and risks for the region. Indeed, May’s appearance at the GCC Summit in Manama in December 2016 made clear her intention to target the GCC as a boon for post-Brexit economic recovery.

In the wake of the EU referendum on June 23, 2016, which saw the UK vote to leave, the British economy has been impacted through two key channels: Market sentiment and currency depreciation, the most visible example of which has been the dramatic decline of the British pound, which fell to a three-year low against the euro following May’s announcement. Since June 23, the pound has seen its value drop 18% against the US dollar – the lowest since 1985 – and was worth $1.2 on October 20.

Source: Bloomberg, 2016

Prior to the referendum, economists had forecast an immediate and significant impact on the UK economy – and consumer confidence – in the event the country voted to leave. Most of these dramatic predictions did not materialise: The UK services sector grew 0.4% in July, far better than expected, while GDP rose 0.7% between April and the end of June, according to the UK Office for National Statistics. Indeed, the OECD has since reversed its warning that the UK would suffer immediately from a Brexit vote, and revised its 2016 GDP growth forecast for the country from 1.7% to 1.8%.

Economic trade between the UK and its key partners has not changed significantly since the referendum; though, given the currency decline, these trade partners have been favourably impacted when receiving British exports. Looking at the current level of political rhetoric, relations with the EU have been somewhat affected, though it is in both parties’ best interests to minimise the effect of the exit.

Implications for the GCC
The UK and GCC have historically significant trade relations. Although 10% of UK exports make it to the GCC, only 2.7% of GCC exports make their way to the UK. This suggests any new trade duties or tariffs are unlikely to significantly impact the GCC. Given the weaker currency, the GCC will benefit from increased purchasing power in UK markets.

Furthermore, although the UK cannot legally sign a bilateral deal until it has left the EU, GCC and British policy-makers are in discussions about a free-trade deal.

Source: UN Comtrade Database, 2015

Despite short-term losses in financial markets, the GCC is unlikely to face lasting negative economic repercussions. GCC sovereign wealth funds (SWFs) and bilateral engagement in real estate markets serve as examples of how both parties could mitigate the UK’s exit from the EU. The devaluation of the pound has already increased GCC inflows to the UK, and London’s withdrawal from Europe could create deeper economic ties between the two.

Sovereign wealth funds
The GCC’s SWF holdings in the UK are vast and diverse. Qatar Investment Authority, for instance, bought department store Harrods for $1.8bn and has stakes in other companies such as Sainsbury’s, Barclays, Songbird Estates (the majority owner of Canary Wharf), and BAA, the parent company of Heathrow Airport. Other GCC SWFs, which tend to be more covert, are also deeply embedded in the UK’s real estate, transport, entertainment, and retail sectors. Despite the significance of these investments, overall GCC investments are large and diverse enough that market shocks will have little effect in the short term. GCC SWFs will absorb the impact of asset price and exchange rate movements associated with Brexit, making it unlikely that a drop in value of existing investments will weaken GCC governments' net asset position. Should the UK economy show more visible signs of long-term weakness, these investments could be relocated, thereby marginalising any risk.


“The decline of the pound weakens the purchasing power of UK investors in the GCC, an important real estate investor group in certain cities.”

Real estate
The decline of the pound weakens the purchasing power of UK investors in the GCC, an important real estate investor group in certain cities. For example, Brits were the second-largest investor group in Dubai real estate in 2015-16, contributing $1.1bn. According to property broker JLL, the initial impact of the referendum and resulting currency decline was a six-month extension to Dubai’s housing slump, which had been expected to end in the third or fourth quarter of 2016. A similar effect will likely be felt elsewhere in the GCC where UK residents have made real estate investments.

However, these trends are expected to reverse in the coming years as lower prices provide new investment opportunities. GCC investors will take advantage of the pound’s devaluation by investing in UK real estate. In December 2014, Abu Dhabi Financial Group (ADFG) agreed to purchase New Scotland Yard, the former headquarters of London’s police force, for $451m. The deal was finalised on October 31, 2016, with the decline of the pound saving ADFG more than 20% on the original price. With the pound still historically low, GCC investors will continue hunting for bargains.

British Prime Minister Theresa May and Bahraini King Hamad bin Isa Al Khalifa (R) join other leaders for a family photo at the Gulf Co-operation Council Summit in Manama, Bahrain, on December 7, 2016. Stefan Wermuth/Reuters/phocal Media

Implications, threats, and opportunities
The implications of Brexit on the GCC are multifaceted. Key threats include reduced inflows into the GCC due to the weaker pound, particularly across external-facing sectors such as tourism, hospitality, and real estate. Indeed, the number of visitors coming from the UK, and amount spent per tourist, is likely to decline and affect growth in non-oil sectors in the GCC.

On the other hand, slowed forecasts and an uncertain political landscape could lead to investors and businesses targeting higher growth markets and diverting investment flows to the GCC. This may also result in higher demand for regional bond issuances. Some UK businesses could even relocate to foreign cities including those in the GCC. In addition, investment outflows to the UK will likely experience higher yield beyond the currency discount.


“As governments and corporations trim their workforce, the GCC, thanks to the currency crunch, has become even more attractive for highly skilled UK talent.”
 
As governments and corporations trim their workforce, the GCC, thanks to the currency crunch, has become even more attractive for highly skilled UK talent. As the pound loses its value, UK talent will seek to capitalise by moving to countries with more diverse employment opportunities. Free-trade agreements with the UK are also likely to materialise as GCC leaders prioritise relations.

May has made the GCC a target for UK investment and bilateral trade. Meeting all six GCC leaders during her Manama visit, the British PM announced the establishment of a joint working group to unblock trade barriers; the UK’s participation in Dubai Expo 2020; and galvanised efforts towards new trade arrangements between the UK and GCC.

“I want to leave no-one in any doubt about the scale of my ambition or the extent of my determination to establish the strongest possible trading relationships between the UK and the Gulf.” 

Although these economies are deeply linked, the UK’s exit from the EU is unlikely to impact economic activity with the GCC. On the contrary, it could deepen and widen relationships. As London attempts to counteract the negative consequences of Brexit by engaging in deeper integration with the Gulf, GCC leaders seek to capitalise on this growing dependence.

Food Security

A challenge that can be pre-empted

Think of food security in WANA, and think of the ‘black elephant’ in the room: An issue with large ramifications that is visible to policy-makers but not being adequately addressed. Given its repercussions on national security, political and social stability, and economic growth, food security requires closer attention.

According to the UN’s Food and Agriculture Organisation, food security exists when all people, at all times, have physical, social, and economic access to sufficient, safe, and nutritious food that meets the dietary needs and preferences for an active and healthy life.

As an example of food security’s centrality in national and regional dynamics, Syria offers a cautionary tale to regional governments. IMF-backed structural reforms in the early 2000s created monopolies run by a narrow merchant class, and did little to ease years of economic uncertainty for poor, mostly Sunni, farmers in the rural north and south. Compounded by successive droughts – the worst in modern Syrian history – and long-term mismanagement of water resources, hundreds of thousands working in agriculture were left destitute, with many farmers forced into urban areas to work as casual labourers. The social stresses agitated by this created some of the underlying conditions for an uprising.

A man attempts to harvest wheat from a field on fire, which activists said was caused by shelling carried out by forces loyal to the Syrian regime, in Maarat Masrein, north of Idlib, June 6, 2013. Reuters/phocal Media

In 2016, in the wake of low oil prices, oil-exporting economies scrambled to restructure, diversify, and balance their spending. Alongside this, oil-importing economies felt the pinch of reduced remittances and foreign direct investment. As bureaucrats decided where to make spending cuts, achieving affordable food prices and ensuring the availability of foodstuffs may not have seemed like a priority. On the contrary, it is of fundamental concern to the livelihood of the people and the state.

The effect of external shocks on food insecurity
In WANA, more than 50% of food consumed is imported. With food affordability directly linked to fluctuating market prices and currency baskets, governments have few levers to counteract external shocks. Those countries dealing with population booms, increasing poverty, and/or protracted conflict face even steeper hills.


Although Egypt has notably improved its Global Food Security Index score, it faces a major food crisis. Like other countries in the region, its dependency on global food markets has been shaken by prices skyrocketing as a result of the recent dollar shortage. In a bid to fix this currency crunch, authorities have free-floated the Egyptian pound, and the country’s food subsidy system will also need to be revamped. In the short term this will increase real prices further, a move that has led to widespread discontent and a growing fear of localised riots or demonstrations.

The region’s food security status is also deeply linked to water scarcity, climate change, and environmental degradation. Resource-rich states are predominantly located in water-scarce locations, thereby limiting their ability to provide homegrown foodstuffs. Inversely, states with agricultural capacity often cannot harness or finance production without assistance.

There is a silver lining – regionally, the production and availability of food has increased in the past 15 years, and some countries offer good examples of how governments and the private sector can fill existing gaps.

Case studies in becoming more food secure
In the last 20 years, Morocco has made significant headway in reducing hunger and malnutrition. However, on a regional scale, the country sits in the lower half of the Global Food Security Index. In 2008, Morocco launched the Green Morocco Plan (Plan Maroc Vert) to leverage the agriculture sector’s existing capacity, which currently accounts for 13% of the country’s GDP and 40% of its workforce. The programme rests on a two-track approach: Large-scale investment in agribusiness, and reducing poverty and increasing economic access to food through supporting small-scale farmers in marginal areas.

Under track one, additional foreign investment was acquired through national buy-ins on techniques regarding the mechanisation, irrigation, and fertilisation of crops. The use of resource-efficient techniques such as drip irrigation and direct seeding also wooed investors. Under track two, policy-makers developed co-operatives for small-scale farmers. With 40% of Moroccans living in rural areas, their livelihoods are often tied to agriculture, an especially important sector given poverty in Morocco is largely a rural phenomenon.


“Impressively, Morocco achieved the UN’s Millennium Development Goal of halving extreme poverty and hunger two years ahead of the deadline.”

So far, the results bode well. The government attracted $1.5bn in investment by the end of 2015 through leasing farmland at 20-50% of its market value. Agricultural exports have risen and 11% more farmland is now in use, leading to the value of agriculture increasing from $7.6bn in 2008 to $12bn in 2015. Impressively, Morocco achieved the UN’s Millennium Development Goal of halving extreme poverty and hunger two years ahead of the deadline.

Elsewhere in the region, the techniques and resources used to target food insecurity differ greatly. In the Arabian Gulf, which has the most arid climate in the region, 98% of food consumed is imported. This dependence has led to policy-makers targeting sustainability and diversity to ensure the country can eventually weather any storm – be it a commodity price spike, shortage in the global market, or unruly climate.

As far as agricultural production is concerned, several Gulf states have invested in innovative farming techniques like hydroponics and new greenhouse technologies. Atmospheric water-harvesting technology could bolster domestic production by extracting water from humid ambient air, and aquaculture has become a key area for investment and an important part of the UAE’s food security strategy. Regardless, these technologies have a long way to go before they improve the ratio of imports to domestic production.

Source: UNFAO, 2016

The UAE has also spent significant resources on buying or leasing foreign farmland, but this strategy is not without its risks. Launching large-scale agriculture projects can be tricky, time-consuming, and costly. Politics should also be factored into these decisions. To avoid such pitfalls, agreements focusing on contract farming and investment in agribusiness, like the public-private partnership between the government and Al Dahra Holding, could shield Abu Dhabi from unwanted political consequences and provide more opportunities to the private sector.

Source: DW, 2016

Opportunities for policy-makers and the private sector
To spur investment and focus on food security, economic incentives can be provided to the private sector. Knowledge-sharing, for instance, can be especially advantageous to private sector partners by ensuring they make informed decisions.

Elsewhere, a good way to support smallholder farmers in WANA is by helping them enhance productivity, production, and competitiveness. As in Morocco, this can be done by supporting agricultural research and extension services through relevant line ministries and local authorities.


“In a region beset by turmoil, developing sustainable and strategic plans to achieve food security sits at the bottom of many government agendas.”

Other incentives such as interest-free loans or government grants – to fast-track the financing of climate-smart agriculture technologies such as crop diversification, water harvesting, and drought-resistant seed engineering – can also boost innovative production methods. So, too, can these measures be combined to maximise impact.

Though the context defines how policy-makers and the private sector can fill existing food security gaps in WANA countries, using public-private partnerships to implement innovative pilot projects is a good place to start.

Renewed focus on food security
In a region beset by turmoil, developing sustainable and strategic plans to achieve food security sits at the bottom of many government agendas. The inability of governments to ensure a safe, readily available, and affordable supply of foodstuffs could not only breed further turmoil, but may be the root cause of many societal grievances.



Postscript


While regional developments often make international headlines, it is important to consider how data points and local events fit into broader narratives on how the region evolves and changes. WANA is a complex Petri dish for a variety of global fault lines. In the fight against Daesh, or the retaking of Aleppo, governments remain dependent on external powers for strategic and material support. Looking forward, what will happen when new leaders of major powers step into the fold?

As much as there is regional interplay between powers, players, and proxies, developments shouldn’t be viewed in their thematic silos. As the UK exits the EU and looks to the GCC for bilateral investment, how will this affect UK policy elsewhere? In other words, will renewed UK-GCC relations mean more UK engagement in Yemen, Syria, or other regionally relevant dossiers?

When overlaying events and decisions made in the last quarter, it is difficult to differentiate between anecdotal incidents, trends, and long-term paradigm shifts. The tightening of belts will force important choices on direction and priorities, but the inability to protect vulnerable segments of society could proliferate the cycle of poverty. The long-term view here is foundational. Failure to create a basic social safety net today, such as ensuring food security, could lead to civil strife or conflict tomorrow.

The interplay between disciplines, events, nations, people, and geography may seem evident. But, all too often, events are described in silos and decisions made on impulse. Developments should be seen cutting through several lenses over the short, medium, and long term.

Research for the report concluded December 27, 2016.