Our columnist imagines a letter to regional chief executives, outlining the opportunities and risks facing those doing business in the Middle East in the coming months.

Memo to: Chief Executive Officer

From: Head of Research & Strategy

Subject: Keep smiling, but create contingency plans

Mr. CEO, I’ve noticed you seem chirpier these days. Could it be that oil prices are on the rise? Or is it that growth across the Middle East is perking up slightly? Yes, headaches for our business remain, but the prospect of high, single-digit growth rates this year is a reason for optimism. 

In fact, you’re probably feeling rather pleased with yourself. Faced with tough economic times over the last two years, you cut the Gordian knot by making the organization leaner while refocusing commercial strategy on resilient sectors with well-heeled customers. Well done! We should start to see the payoff in the second half of this year. Indeed, we’re not the only ones: according to an EMIR survey of your peers (100 regional CEOs of blue-chip companies), 57 percent of respondents expect their MENA businesses to grow above 5 percent for the first half of this year. To put that in context, that is 16 percentage points more than those who were expecting growth above 5 percent for the first half of last year (41 percent), when asked the same question a year earlier.

Thanks to stronger oil receipts, easing government austerity, and an expected uptick in private sector activity, regional bosses are planning a base-case scenario for the MENA portfolio that is based on a gradual improvement in growth. What’s more, while PMI — a gauge of non-oil private sector activity — has generally softened for Saudi Arabia, Egypt and the UAE in the first three months of 2018, growth forecasts remain relatively positive. 

But, Mr. CEO, before you brag to the board that the incipient recovery, albeit torpid, is finally showing signs of stirring, I want to share some thoughts:

While PMI — a gauge of non-oil private sector activity — has generally softened for Saudi Arabia, Egypt and the UAE in the first three months of 2018, growth forecasts remain relatively positive. 

Trevor McFarlane

Be wary of letting the memory of double-digit growth cloud your judgment about the region. One need only look as far as next month to understand why we would do well to build potential downside scenarios for our Middle East action plans.

May 6 — Lebanese parliamentary elections: You need to monitor results, as the country’s old guard faces a new, alternative political wave. Despite a new electoral law, Lebanon’s political structure will continue to be dominated by a sect-driven, patron-client relationship between political figures and respective communities. Lebanon is a small market in our MENA portfolio, but because of external proxy influence within the country, elections can potentially heighten the general perception of tensions across the broader region, which in turn, could dampen investor sentiment and weaken demand. 

May 12 — Iraq’s parliamentary elections: It’s a similar story from Baghdad. We do not have a presence in the market but these elections are coming at a pivotal time. Since the retreat of Daesh in December 2017, millions of displaced people have returned to their homes, potentially creating opportunities for our company. But the outcomes of upcoming elections will determine the degree to which Iran will influence the country’s future, which in turn, could have business-impacting, geopolitical implications. Monitor closely. 

May 12 — Joint Comprehensive Plan of Action (JCPAO): It looks increasingly likely that the JCPOA will fragment should the US president refuse to sign the sanction waiver on May 12. Should that happen, and the US reinstitutes international trade sanctions, it would increase geopolitical risk, bolster oil prices while dampening investor sentiment across MENA. 

May 14-15 — Palestine-Israel: To make matters worse, Nakba Day (Israel’s Declaration of independence) will be complicated by the move of the American embassy to Jerusalem. While the likelihood of the move taking place on May 14-15 is reduced, given Washington’s inability to secure funds to build a wall around the new premises, expect rhetoric and announcements to intensify, especially if Hezbollah’s Hassan Nasrallah is feeling emboldened by a recent electoral result in Lebanon. 

And, Mr. CEO, that’s only the first couple of weeks of May, and says nothing about US President Trump’s potential trade war, OPEC’s efforts at managing the oil market (which the American president recently didn’t seem too happy about), the IMF’s next expected $2 billion payment to Egypt and a snap election in Turkey. 

Be that said, as a company we need to be able to capitalize on a better growth outlook in the face of these rather fluid regional issues. So how do we move forward? If I may, Mr. CEO, I advise that we look at the short-term risks that are intensifying in nature, create contingency plans in case they impact operational activities or market demand. We need to monitor developments in a structured way, ready to adapt to evolving situations. Flexibility is critical. Our local teams on the ground must be adaptable and empowered to change strategy, including on pricing and to reduce exposure to credit risks. Revise assumptions on market prioritization on a quarterly basis while our commercial team should update their segmentation process to reflect rapidly shifting customer behaviors. 

If you do this, we can crack the opportunities that clearly exist across the Middle East portfolio. But we need to be creative in terms of how we go after that growth. Put simply, what won us market share in the past, won’t win us market share in the future. Most importantly, though, keep smiling; it’s good for team morale. 

Sincerely,  Head of Research & Strategy