POLITICAL DYNAMICS AND SECURITY CHALLENGES OF THE MIDDLE EAST AND NORTH AFRICA REGION, IN THE LIGHT OF OIL PRICE VOLATILTY

Transcription

1 POLITICAL DYNAMICS AND SECURITY CHALLENGES OF THE MIDDLE EAST AND NORTH AFRICA REGION, IN THE LIGHT OF OIL PRICE VOLATILTY Corporate Security DPDHL Group A special report prepared for the participants of the DHL Technology Conference in Dubai 2015

2 2 Global Security Situation Centre EXECUTIVE SUMMARY Lower oil prices and persistent political instability mean less optimism about the prospects for the Middle East and North Africa (MENA) region in 2015 and beyond. Without a clear political course to pursue, and with large-scale economic assistance diminishing, the near-term prognosis is more volatility. One of the strongest drivers of regional dynamics is the ongoing competition for dominance between Shia Iran and Sunni rivals, which is shaping the past, the present and the future of the region. Iran perceives threats from all sides and seeks to exert its influence throughout the Middle East by fighting proxy wars, especially in Syria, Iraq and Yemen. Geo-political reality is even more complex than it looks at 1. Oil Prices (US$ per Barrel) first glance Libya s proxy war pits a group in the west of the country that includes many Islamists called Libya Dawn which reportedly receives assistance from Qatar and Turkey, against an anti-islamist government that Egypt and the United Arab Emirates strongly support in the east. In Syria, the government receives support from Iran and Russia, while a wide range of regional countries and Western allies have supported diverse opposition groups that include the al Qaeda-affiliated Nusra Front. In Iraq, both the United States and Iran are supporting the Iraqi government as well as the Kurdish Peshmerga, while Arab states seek to work with the country s Sunni tribes to preserve their future interests. Yemen is the most recent country to fall into disarray. The Houthis, who have seized control of much of the north of the country, receive at least support from Iran, while some of the tribes in the oil-rich Marib Province and some of the separatist groups in the south receive Arab funds and arms to prevent a complete Houthi takeover. 50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dez Jan Brent WTI PLUNGING OIL PRICES 2014/15, SOURCE: Two factors determine the price of a barrel of oil: the fundamental laws of supply and demand, and naked fear Economist, March 2011 Regional Influencers Turkey Oil Well Tunisia Syrian Arab Republic Lebanon Jordan Iraq Iran, Islamic Republic of Oil Tanker Naval Presence Libya Egypt Saudi Arabia Military Intervention Qatar United Arab Emirates Yemen

3 Global Security Situation Centre 3 MAIN CONCLUSIONS Oil is not only an economic commodity; it is a strategic one as well. The key changes in oil markets are likely to have an impact on the political and security relations between producers and consumers in the MENA region. Sharp falls in the oil price raised key questions about both economic, political developments and stability across many oil producers in the MENA region. The oil shock will put domestic institutions under strain and possibly weaken the security environment. A sustained drop in the price of oil below US$90 per barrel could jeopardize the economic stability that many of the region s energy exporters have enjoyed following the tumult of the Arab Spring. Lacking the same budget surpluses and healthy balance sheets as their Gulf counterparts, some of the MENA governments, already feeling pressure from the Islamic State, will suffer if oil prices remain low in the long term. Collapsing prices and/or volatility could have negative short- and medium-term ramifications, because GDP growth in the Gulf states tracks the oil price. This increases macro-economic uncertainty and shortens planning horizons and is likely to weaken the balance sheets and test the resilience of key producers. Any lasting fall in the oil price and/or loss of market share (as might be associated with the boom in unconventional oil and gas) would represent a threat to the Gulf regimes, which rely on oil and gas revenues to fund both their domestic and foreign policies. Political risks are among the highest across emerging and developing regions the intensifying conflict in Syria and political developments in Egypt and Libya have heightened concerns of wider destabilization. Spill-overs from these countries, as well as bouts of social unrest and escalating security concerns, complicate economic management. Across the region, investment is restrained, deterred by socio-political uncertainties, lack of a credible medium-term policy agenda, and in Egypt and Lebanon electricity supply disruptions. Some of the most fragile states in the region Yemen, Libya, and Iraq have turned themselves into war zones with open-ended conflict, and are facing reduced revenues from oil sales at precisely the time when they are trying to build governing coalitions. A drop in oil prices in these oil-exporting states means they have fewer resources to expend on either patronage or weapons. If the situation persists, this might in effect lead to the rise of instability. CONTENT 1) Executive summary 2 2) Main conclusions 4 3) Introduction 6 4) Oil - What s the big deal? 7 5) Impact of low oil prices on the security situation 8 6) Rise of instability in Egypt 9 7) Better outlook for Lebanon 10 8) Iran s higher goals 11 9) KSA s emerging threats 12 10) Fragmented Iraq 13 11) Solvency issues of Syria 14 12) Yemen in disarray 15 13) Libya s competing futures 16 14) Conclusion 18

4 4 Global Security Situation Centre INTRODUCTION Price volatility is intrinsic in commodity markets, but has been advancing at a faster rate in the crude oil market in comparison to other commodities over the past decade, reflecting the status of oil as the most globalized commodity. During 2008, oil prices set record highs, jumping to over $147 per barrel in July. Protests in the Middle East and North Africa, particularly in Libya, caused an even steeper jump in price as investors grew concerned about the region s stability. However, since last summer, the price of crude oil has dropped drastically from $107 a barrel in June to less than $50 a barrel in January Companies in all sectors are examining the commodity markets to determine whether this drop is part of a long-term trend, or if we ll see a spike in prices in the coming months. Either way, current prices are presenting both opportunities and challenges for transportation and the logistics industry. Oil price needed to balance national budgets Libya Iran Algeria Nigeria Venezuela Saudi Arabia Iraq UAE Kuwait Qatar Source: Deutsche Bank and IMF $131 $131 $123 $118 $104 $101 $81 $78 $77 Brent crude price $77.7 (26 November 2014) $184 Looking back at 2014, what we are now witnessing is a fourth-quarter earnings boost from transportation, retail and industrial companies, all of which were big beneficiaries of last year s oil price collapse. Early reports and analyst data suggest solid increases in these areas because of increased consumer spending and reduced input costs. Lower energy costs typically lead to lower consumer costs and, potentially, increased cargo volumes; therefore logistics companies are also profiting from the situation. According to the American Trucking Association, for every one-cent decrease in fuel, the trucking industry saves an estimated $350 million. The vital transportation sector has been a beneficiary of lower oil prices. Not only will it experience direct savings derived from lower fuel prices, but the expected uptick in consumer spending will positively impact global trade, and, consequently, transportation. Also, lower oil prices are unquestionably a positive for the global economy. The IMF has estimated that a 10% change in oil prices would boost global GDP by 0.2%. Aside from the obvious macroeconomic benefits, sustained cheaper oil will provide a benefit for non-oil exporters. According to IMF estimates, price subsidies for fossil cost the world s governments a whopping $1.9trn in However, with oil prices now falling, these governments will not only benefit from a short-term decline in subsidy outlays, but could also potentially make longer-term gains if they take the opportunity to overhaul their wasteful subsidy systems. With some 65% of the world s conventional oil reserves, and around 35% of total global output, clearly the Middle East and North Africa will be feeling the full force of the recent oil price slide. Nonetheless, despite years of high government spending on national development plans and extensive welfare systems, many of the region s oil-rich states have arrived at this juncture well prepared, having accumulated largescale and external buffers over the past decade. Those especially well-positioned to ride out the impact of the oil price slump include Saudi Arabia, the UAE and Kuwait, but others such as Libya and Iran will find themselves more exposed. Nevertheless, the economies of oil exporters could be hurt, as oil accounts for more than half of their budget revenues and export earnings (in Yemen and Libya, oil constitutes more than 90% of total exports). Fiscal spending has been on the rise in these countries and they are likely to run larger budget deficits or their surpluses would shrink substantially. Their external accounts would also deteriorate, which could eventually put pressure on their currencies, which would probably lead to even more instabilities.

5 OIL WHAT S THE BIG DEAL? The Middle East and North Africa region contains the greatest concentration of oil-dependent economies in the world. The region accounts for nearly a third of seaborne crude oil and liquefied natural gas exports. The Middle East specifically the Persian Gulf also accounts for the majority of OPEC production and exports. Therefore, the Middle East is the region that is most exposed to volatility in global energy markets, and is the region that can cause the most variation, as seen by Libya s production fluctuations. A sustained drop in the price of oil below $90 per barrel could jeopardize the economic stability that many of the region s energy exporters have enjoyed following the tumult of the Arab Spring, and could therefore lead to a changing security situation. Many of the region s key producers Saudi Arabia, Kuwait, the United Arab Emirates, Libya and Algeria have hundreds of billions of dollars in currency reserves. Others in the region are not as lucky: high domestic spending and domestic economic problems have left both Baghdad (ravaged by war) and Tehran (hampered by sanctions) needing higher oil prices more than $100 per barrel to balance their budgets. Lacking the same budget surpluses and healthy balance sheets as their Gulf counterparts, these governments, already feeling economically challenged and pressured in terms of security by the Islamic State (IS), will suffer if oil prices remain low in the long term. Why is it important to understand the effect of oil prices on domestic economies and its implication for the security of key players in the MENA region? Simply because the Gulf lies at the intersection of regional conflicts and the competing interests of global powers. For business models dependent on oil consumption, volatility in the price has a direct impact on the net profit of companies. If we are able to predict the potential impact of the oil price on the security situation in the region, taking mid- and long-term outlooks, we will be able to make more prudent strategic decisions in the short term. Middle East Oil Production (as % of global production) Tunisia 0.1 Syrian 0.4 Iraq 3.0 Iran 4.9 Algeria 2.2 Libya 0.6 Egypt 0.8 Saudi Arabia 12,8 Kuwait 3.1 Qatar 1.9 UAE 1.9 Oman 1.0 Yemen 0.2 Bahrain 0.1 Numbers shown represent % of global oil production No civil unrest Minor unrest Unrest Major unrest Civil war Source: Energy Information Association Date as-of 2011

6 6 Global Security Situation Centre IMPACT OF LOW OIL PRICES ON THE SECURITY SITUATION The Middle East torn apart by the struggle between the Saudi-led Sunni conservative bloc and a rival alliance led by its Shiite nemesis Iran is witnessing a sudden rout in oil prices which has just added a new ingredient to the volatile mix. However, large surplus funds accumulated in previous years are likely to cushion Gulf budgets. On a direct level, poorer states that import most of their oil benefit from lower prices. Many Middle Eastern governments subsidize gasoline, diesel fuel, and electricity, and lower global oil prices mean lower subsidy bills. Yet many oil-importing countries in the Middle East are also labor-exporting countries. Egypt, Lebanon, Jordan, Morocco, and others send millions of highly skilled workers to work in the oil-exporting countries of the region, and these workers return billions of dollars a year to their families at home. At the same time, the billions of dollars that Gulf governments have passed to Jordan, Oman, and Bahrain since 2011 will begin to dry up. So too will the tens of billions that have flowed into Egypt from the Gulf, first from Qatari support for the Muslim Brotherhood-led government of Mohammed Morsi, and then Emirati, Saudi, and Kuwaiti support for the secular nationalist government of Abdel Fattah al-sisi. The Gulf states approach to the Arab uprisings was to treat them as an economic phenomenon, and they spent freely in the region to smother any contagion of regional instability. Now, the wealthier states are becoming more inwardly focused as they need to prioritize. While doing so, aid projects in neighboring states are taking longer than expected to get started, and Egypt s foreign exchange reserves are dwindling again. Some of the most fragile states in the region Yemen, Libya, and Iraq are facing reduced revenues from oil sales at precisely the time when they are trying to build governing coalitions. A drop in prices in these oil-exporting states means they have fewer resources to expend on either patronage or weapons. If the situation persists, this might in effect impact the rise of instability. Both phenomena diminish governments resilience in the face of terrorist groups such as the Islamic State (IS), Ansar al Shari a, and al Qaeda in the Arabian Peninsula. Their inability to effectively fight against terrorist groups might in turn enable greater efficiency and geographical reach of the IS and its affiliates around MENA. The more widespread the reach of IS, the more security concerns our businesses will face. The most fundamental challenge is this: Without a clear political course to pursue, and with large-scale economic assistance diminishing, the near-term prognosis is more volatility. Turkey Kobani Raqqa Syrian Arab Republic Damascus Iraq Baghdad Contested or controlled by ISIS Egypt Saudi Arabia Source:

7 RISE OF INSTABILITY IN EGYPT Global Security Situation Centre 7 Egypt s security and economic situation will be volatile in On the security side, President Abdel Fattah el-sisi has so far been unable to deliver on a promise to end a Sinai-based insurgency led by the extremist group Ansar Beit al-maqdis, which recently declared its affiliation to the Islamic State. The state s frequent use of lethal force against Islamist protesters is likely to foster the growing radicalization of the youth and Islamist protesters. This is likely to lead to an increase in the frequency of attacks against security and commercial assets, such as malls, banks, hotels, telecoms, power, energy assets and entertainment venues. The increasing trend has already been detected by the DHL Resilience360 tool, as seen on the chart above. Quick Facts Egypt Population: 84.2 million GDP (PPP): $553.6 billion 2.1% growth 3.2% 5-year compound annual growth $6,579 per capita Unemployment: 12.7% Inflation (CPI): 6.9% FDI Inflow: $5.6 billion From the economic side, Egypt is a net importer of oil for consumption. The fall in oil prices is expected to affect the economy through lower fiscal and external deficits, inflation and poverty rates. The World Bank estimates a positive impact of falling oil prices on growth, as lower oil prices can enhance the ability of the government and companies to secure adequate energy supplies at market prices of importing oil and gas, and hence can lead to higher production and capacity utilization and higher output levels. Also, lower oil prices may help the country gain additional energy supplies through the summer, avoiding blackouts, which in turn can help reinforce political and social stability. On the other side, Egypt is one of the major recipients of remittances, foreign aid and investment from GCC (Gulf Cooperation Council) countries, so it is likely that lower oil prices could lead to the reduction of the flow of funds to Egypt; however, only in the long term. More than three quarters of remittance inflows to Egypt are from GCC countries. The impact of the latter will depend on how long lower oil prices stick around.

8 8 Global Security Situation Centre BETTER OUTLOOK FOR LEBANON Improvement in the security situation following the adoption of a security plan in Tripoli (as shown in the Resilience360 chart), and the formation of a new government in February 2015, led to a slight improvement in Lebanon s economic situation and internal stability. The expected impact on growth is uncertain and depends on the length and expectations of the oil price decrease. Lower oil prices would benefit consumers and boost growth (with other conditions remaining the same) but on the other hand remittances from oil producing countries could come under pressure if there is a sustained decrease in oil prices. On the security side, with no end in sight to Syria s war, the refugee flow is likely to rise or, at best, remain constant. For Lebanon, this is deeply distressing. For the moment, the refugee issue remains a humanitarian and socioeconomic burden, but if current trends continue it will inevitably transform into a political and security challenge. The main threat to Lebanon s stability in the short term is not so much the Islamic State, but rather refugee militancy, that is the radicalization of local and refugee Sunni communities, which would be influenced by the conflict in Syria and the perceived alliance between the Lebanese Army and Hizbullah in the context of a broader Sunni-Shia war. Quick Facts Lebanon Population: 4.5 million GDP (PPP): $66.3 billion 1.0% growth 4.5% 5-year compound annual growth $ per capita Unemployment: 6.6% Inflation (CPI): 3.2% FDI Inflow: $2.8 billion One alarming occurrence is the fact that Hizbullah is coming closer to establishing a permanent presence in the Golan, hence the risk of conflict with Israel increases. Further airstrikes by Israel against Hizbullah are likely, and these types of incident carry a risk of escalating into a broader war between Israel, Hizbullah and the Syrian Army. Hizbullah is likely to be under pressure from Iran to not engage in a full-scale war, for fear that this would risk the failure of the ongoing P5+1 negotiations. However, Iran may also calculate that a war would increase Israel s isolation, and show the importance of engaging with Iran to prevent future conflicts.

9 Global Security Situation Centre 9 IRAN S HIGHER GOAL 2015 could be very difficult for Iran s economy, which is now drained on three fronts. Tehran loses billions of dollars per year to maintain the Syrian regime of Bashar al-assad, tens of billions due to falling oil prices, and hundreds of billions over the last few years due to economic sanctions. The failure of Iran and the P5+1 (the five permanent members of the UN Security Council plus Germany, also known as EU3+3) to reach a comprehensive nuclear agreement by their self-imposed 24 November 2014 deadline was no surprise. It is all putting a heavy economic burden on a population that is becoming more dissatisfied. In the chart above, we can observe the impact of new economic sanctions imposed in October 2014 by Washington on grievances of population (the number of protests went down significantly after nuclear talks resumed in Geneva in December 2014). In the event of a nuclear deal that leads to the lifting of oil sanctions, oil exports are expected to rebound to pre-sanction levels by As oil makes up about 80% of total export earnings and 50-60% of government revenues, the economy could grow substantially in this scenario. To counter the impact of lower oil prices, current and capital spending are being cut in the next fiscal year, while some capital projects will be put on hold. Quick Facts Iran Population: 77.1 million GDP (PPP): $945.5 billion -1.7% growth 1% 5-year compound annual growth $ per capita Unemployment: 13.2% Inflation (CPI): 35.2% FDI Inflow: $3 billion If a nuclear agreement is not reached, the economy will suffer dramatically, with negative consequences for both fiscal and external accounts, inflation, and the exchange rate. With no deal, cheap oil could mean a 60% drop in fiscal revenues. In this scenario, a loss of about 20% of GDP would be expected, and the economy would continue to shrink. This will put tremendous pressure on inflation, unemployment, the fiscal deficit and the currency. We assess that even the worst economic scenario would not change the course that Iran has been following in the last couple of years. It is led by a very simple reasoning that has tremendous geo-political implications on overall regional dynamics, and that is not to allow creation of a circle of Sunni extremism in the Middle East, especially in Syria, Lebanon and Iraq at any cost. As long as Iran pursues its higher goal, it is not likely that anything will change in the light of its support for the Syrian regime of Bashar al-assad, which is fighting against the Islamic State and more moderate Sunni rebels backed by the West and the Gulf monarchies. Other Iranian clients in the region such as Hamas and the Islamic Jihad in Palestinian territories and Hezbollah in Lebanon do not actually require large cash infusions from Tehran, as well as the Houthi government in Yemen.

10 10 Global Security Situation Centre KSA S EMERGING THREATS The Kingdom of Saudi Arabia (KSA), the world s largest oil exporter and OPEC s most influential member, could support global oil prices by cutting back its own production, but there is little sign it wants to do this. Although Saudi Arabia needs oil prices to be higher in the longer term, it has deep pockets with a reserve fund of some $700bn, so it can withstand lower prices for some time. The decision not to intervene could be interpreted internally as a political win, if it has a demonstrable impact on Iranian policy. Reduced export revenue will certainly hurt Iran. It has already tightened its belt under the constraint of years of sanctions, but certainly cuts could be made to its assistance of the Syrian regime. Quick Facts KSA Population: 30.0 million GDP (PPP): $937.2 billion 3.8% growth 5.5% 5-year compound annual growth $ per capita Unemployment: 5.5% Inflation (CPI): 3.5% FDI Inflow: $9.3 billion At the moment, the biggest threat to Riyadh and the Arab states comes in the form of the Islamic State (IS) and its control of territory in the cross-border regions of eastern Syria and western Iraq. As can be seen in the chart, the KSA is facing an elevated terrorism risk describing the rising trend in terrorist attacks (especially in border areas with Iraq) originating from the IS or Yemen, from al-qaeda in the Arabian Peninsula (AQAP). Saudi Arabia has been striving to unify Arab states in the face of the threat posed by the rise of the IS in Iraq and Syria. The jihadi group has made clear that its territorial ambitions extend far beyond its current area of operations, and has sought to mobilize support in Saudi Arabia, Egypt and across North Africa. Most of the Saudi ruling family regards the Iranian nuclear program as a purely military endeavor directed primarily against Iran s Persian Gulf neighbors. What unsettles Riyadh is less the idea of Iran one day actually using nuclear weapons, but more that Tehran could exploit a nuclear umbrella to support militant groups in neighboring countries and thus destabilize the Gulf region with impunity. But since 2013 at the latest, it has become apparent that Riyadh s worries extend far beyond the Iranian nuclear program to encompass more generally Tehran s striving for hegemony in the Gulf region and the Middle East. For that reason, Saudi Arabia would not in fact welcome any US-Iranian agreement on the nuclear program, because of the danger of Washington permitting Iran to establish regional dominance in return for nuclear concessions.

11 Global Security Situation Centre 11 FRAGMENTED IRAQ Despite the current turmoil, Iraq s oil exports have increased. However, due to lower oil prices, oil receipts were much lower during this period compared to the early months of This has exacerbated the fiscal deficit, projected at 7% of GDP in It has come at a time when spending is higher than usual as the government battles to regain ground from the IS, reflected in the Resilience360 chart. The IS appears to be advancing especially after September 2014 (the month in which the IS made big territorial gains). Quick Facts Iraq Population: 34.8 million GDP (PPP): $257.0 billion 4.2% growth 7.2% 5-year compound annual growth $7.391 per capita Unemployment: 16.1% Inflation (CPI): 1.9% FDI Inflow: $2.9 billion The draft 2015 budget which was based on an anticipated oil price of $70 per barrel is being revised to identify savings through a freeze on public hiring and rooting out abuses (such as the infamous 50,000 ghost soldiers1 ). Even with these savings, maintaining government spending in the face of falling oil revenues will pose a significant challenge. The situation is further complicated by the IS cutting off the main northern supply routes, raising the price on all imports, including food. This will make the country s universal food ration system, which is the sole source of nutrition for many Iraqis, more expensive to maintain and consequently lead to even more social instability in the country. Disruption to production at the Kirkuk oilfield as a result of the IS onslaught has further damaged government oil revenue. The costs of battling IS fighters, who People on the payroll of four military divisions who receive a pay check without showing up for work. control much of northern and western Iraq, and of meeting the humanitarian requirements of internally displaced people have risen sharply over the past year.

12 12 Global Security Situation Centre SOLVENCY ISSUES OF SYRIA The Syrian crisis is posing significant challenges to neighboring countries, and is having destabilizing effects on the whole region. Jordan and Lebanon have been severely affected by it, as they are hosting more than half of the total number of refugees, and economic, social and political pressures are high. There are also crucial implications for Iraq, particularly related to security. Quick Facts Syria Population: million GDP (PPP): $73.67 billion (2012) -2.3% growth / $1.700 per capita Unemployment: 14.9% Inflation (CPI): 29.05% FDI Inflow: $0.0 billion Although none of its foes has the ability to bring it down, the regime of Syrian President Bashar al-assad is likely, in 2015, to face its toughest challenges since the Syrian crisis started nearly four years ago. This may compel the regime to engage seriously with one or other of the diplomatic initiatives launched by various parties at the end of This, however, is a remote prospect. Alternatively, the regime may experience increasingly significant cracks within the ranks of its own social and institutional constituencies, as evidenced by theresilience360 chart above, where we are able see a rise in the population s social discontent. The regime is already struggling to keep afloat financially, but the deepening economic difficulties of its staunchest external allies, Russia and Iran, caused by the plunge in oil prices as well as economic sanctions, are set to intensify in This would make them more likely to curtail rather than increase their assistance. This will have knock-on effects for the regime s ability to absorb growing discontent within loyalist constituencies. These outcomes are caught between sharp rises in the cost of living, exhaustion of savings, and a lack of secure opportunities for investment on the one hand, as well as the regime s declining ability to support the national currency s exchange rate and real wages in the public sector on the other. Regime forces are already badly stretched, but societal discontent limits its ability to generate further combat manpower issues to meet the looming threat of the Islamic State, an increasingly assertive al-qaeda wing known as the Nusra Front, and more effective moderate rebels in the south. The question is whether the worsening economic circumstances of Russia and Iran will prompt the regime to lessen its burden in Syria, by pushing the Assad regime much harder to make substantive concessions toward a political transition. We assess that this option is unlikely, at least from the side of Iran, which is pursuing its higher geo-political agenda and competes for regional dominance with the KSA.

13 Global Security Situation Centre 13 YEMEN IN DISARRAY Yemen is in a state of flux, and much of this can be attributed to the rivalry of Saudi Arabia and Iran and their ongoing battle for regional dominance. While Houthi rebels retain control of the capital, President Abd Rabboh Mansour Hadi has retreated to the southern city of Aden, and the exact future of the nation is uncertain, especially in the light of the March 2015 Saudi-led military intervention. Lower international oil prices, combined with political instability and continued sabotage of the oil pipelines are expected to reduce oil revenues by about 2 percentage points of GDP in In addition, taxes from companies dealing with oil companies are likely to decline. Yemen also relies on remittances from expatriate workers in the Gulf the source of 90% of all remittances which may also be affected. Lower oil prices are expected to reduce prices of imported goods, however. They may also boost household consumption, especially for food items, as 55% of food products are imported. In addition, inflation is likely to drop, as food constitutes about 44% of Yemeni consumer spending. Yet to protect its currency and compensate for the drop in oil revenues, Yemen has been drawing on its foreign reserves. It will need ongoing assistance from its development partners if it is to avoid a balance of payments crisis in the coming years in which it is unable to afford critical imports. of influence at the expense of Saudi Arabia, at the same time as showing solidarity with an oppressed Shia sect. As can be seen in the Resilience360 chart, the overall trend in Yemen is deterioration of the security situation, and we assess that the erosion of state authority in Yemen is likely to accelerate in The future of the country is yet to be observed, and it is not known whether it may split into two (as a possible result of Saudi-led military intervention). Quick Facts Yemen Population: 26.7 million GDP (PPP): $61.8 billion (2012) 4.4% growth 0.9% 5-year compound annual growth $2.316 per capita Unemployment: 17.2% Inflation (CPI): 11.1% FDI Inflow: $133.6 billion Meanwhile, Saudi Arabia has perceived the ascent of the Iran-aligned Houthis on its southern border as a new front in its contest with Iran for regional dominance. For Saudi Arabia, preventing the rise of a resource-rich Zaidi Shia state on its southern border is a key element of its national security strategy. It is the largest backer of Yemen overall, providing roughly $1 billion to 2 billion per year to its southern neighbor, in part as an effort to keep the security situation there from spilling over its own southern border. Patronage to specific tribes allows the Saudis to exert influence on the Yemeni government. Moreover, Riyadh is likely to use the border with Yemen to its advantage, to provide weapons, equipment, and financial support to Sunni tribes that are already mobilized against Houthis in the area. The deteriorating economic situation elsewhere in Yemen would also increase Sunni tribes dependence on Saudi support, potentially prolonging the sectarian conflict. For Iran, facilitating weapons and supplies to an existing armed insurgent faction potentially in control of the Yemeni state presents it with an opportunity to expand its sphere

14 14 Global Security Situation Centre LIBYA S COMPETING FUTURES Libya is currently split between rival tribes and political factions with two governments vying for legitimacy since an armed group seized the capital city of Tripoli in August, forcing Prime Minister Abdullah al-thinni to relocate to the east. From an economic point of view, Libya s fiscal breakeven price is one of the highest among OPEC producers at $184/b, and will be even higher in In light of the downward oil price trend, the Central Bank of Libya will have to dig deeper into its own stock of foreign reserves, in order to finance fuel and food subsidies and public-sector salaries for Libya s two rival governments. Quick Facts Libya Population: 6.1 million GDP (PPP): $70.4 billion (2012) -9.4% growth 6.0% 5-year compound annual growth $ per capita Unemployment: 9.0% Inflation (CPI): 2.6% FDI Inflow: $702.0 billion Neither of the competing governments has prepared a budget for The price of not reaching an agreement is high, as oil production is currently at one-fifth of its pre-crisis level. The recent drop in oil prices combined with limited oil exports is expected to widen the deficit even further in 2015 and have effects on social stability. One quarter of the population is on the public payroll, and public sector wages have been increased by 250% since the 2011 revolution. With no increase in oil production on the horizon, the government will struggle to meet its obligations. The Tripoli-based rival parliament recently announced that it was considering lifting fuel subsidies which stand at 20% of GDP a move that would help close some of the widening gap between public spending and revenues. In terms of security, fighting factions in the western and eastern regions of Libya are currently locked in stalemate, but when more decisive outcomes emerge, we can expect the losers to once again target oil infrastructure to undermine their opponents recent victories. We assess that the security situation in Libya is likely to further deteriorate in 2015 and beyond, and have destabilizing effects on the region and violent spill-over effects. These are already being felt in neighboring countries, like Egypt and Tunisia, as well as Algeria and with no near-term potential in sight for containing groups allied to the IS we are witnessing these groups taking advantage of Libya s collapse into anarchy.

15 Global Security Situation Centre 15 CONCLUSION Why is it important to understand the effect of plunging oil prices on the dynamics and security situation in the MENA region? Because of the critical role that oil plays in business and the crucial role that the Middle East plays in the global oil market. You do not need to look hard to identify those sectors that could benefit most from lower oil prices. Firstly, retailers and wholesalers, as well as consumer-facing goods and services producers and providers, could benefit from increased purchasing power among their customer base as real discretionary incomes rise on the back of falling oil prices. In addition to stronger demand for goods and services, some of these input costs will edge lower as the cost of energy supplies fall and provide additional support for margins. Lower oil prices and persistent political instability mean that we have become less optimistic about prospects for the Middle East and North Africa in 2015 and beyond, depending on many factors including the very important issue of the price of crude oil. Forecasted regional growth is 3.5% (compared with almost 4% previously), well below pre-arab Spring levels. Although the economies of Egypt and Iran could be heading towards stabilization, the impact of lower oil prices will be felt not only in the major exporting countries of the Gulf but also in the rest of the region with the slowdown of cross-border capital flows. Simultaneously, the security outlook is unsettling. The vacuum in Syria, Yemen, Iraq and Libya is being filled by groups which are able to control and operate some of the oil installations. And there is clear danger at the border for neighboring states already under economic and political strain. Regional attention will remain focused on Iraq and Syria. We expect continued instability in Libya, where violence and port blockades have led to major oilfields suspending production, a revenue stream on which the economy is almost completely reliant. A complete Iranian withdrawal from Syria is unlikely, as it has demonstrated unwavering commitment to its proxy in the Levant. It is unclear what is going to happen with Yemen and how will AQAP IS will use the security vacuum there. At the bottom line lies this conclusion the MENA region in 2015 is returning to familiar themes: enduring economic pain because of falling oil prices while trying to manage the threat of regional terrorism. The most fundamental challenge is that, after 2011, no one is in any doubt that leaders who fail to deliver results can be deposed. After all, crowds brought down the last two Egyptian presidents who did not deliver. Without a clear political course to pursue, and with large-scale economic assistance diminishing, the near-term prognosis is more volatility caused by societal grievances and economic contractions as well as terrorism. For any further information, please feel free to contact the GSSC. Lana Djurkin-Koenig Phone: lana.djurkin-koenig@dpdhl.com For more information on DHL Resilience360: resilience360@dhl.com Disclaimer: This report is produced using unclassified open source information, analysts source network and Resilience360 Corporate Security Master Application. It serves informational purposes only, and the GSSC accepts no liability for the consequences of any actions taken on the basis of the information provided. The Global Security Situation Center (GSSC) is THE security information hub of the Deutsche Post DHL Group. It is a complex analytical and alerting center consisting of a group of experienced intelligence analysts collecting, analyzing and disseminating security information with the aim of facilitating decision making processes at corporate strategic level. The work of this group is supported by a wide range of external data providers, as well as an internal network of personnel and resources. DHL Resilience360 is a comprehensive supply chain and security risk management platform which helps to share security knowledge, and enhances internal communication and the sharing of security intelligence.

16 Deutsche Post DHL Group Headquarters Corporate First Choice Office Bonn Germany Issued: April 2015