Investment Primer for the Middle East

Middle East Facts You Should Know – Lots of Oil and Other Sources of Heat

by Elliott Morss, Morss Global Finance

Introduction

To say there is a lot to worry about in the Middle East is an understatement: Consequences of the Arab Spring, including unsettled conditions in Egypt, Bahrain, Syria and Yemen, the Israeli/Palestine conflict, unstable Iraq, and aggressive Iran are just a few of the ongoing issues of concern. What will happen? This paper will help answer that question. Data and analysis of the social, economic and military power of these countries are presented below.

Military Power

It is an oversimplification to look at the balance of power in the Middle East as being determined strictly by whether the dominant sect is Shiite (Shia) or Sunni. Nevertheless, this distinction has relevance. It is also an oversimplification to think military power can be expressed by a country’s military manpower. But again, such data are interesting. In Table 1, Middle East countries are categorized by sect along with their military manpower. Look at the subtotals[1]. Even though the Sunni population is almost twice the Shiite’s, the Shiite’s military manpower is greater than the Sunni’s. The differential is explained by the fact that military personnel population share is more than twice as high in Shiite countries (4.6%) as in Sunni countries (1.8%). This share is highest in Israel (10%). Ostensibly for defense, Israel has used its military to seize land in neighboring countries resulting in far more UN Security Council condemnations for aggressive acts than any other country.

Sources: Wikipedia and Pew Click on table to enlarge.

Look at the Iraq numbers. One million soldiers. These data illustrate just how destabilizing it was for the US to have removed Saddam Hussein as the Iraq ruler. Saddam was Sunni and he was a continuing threat to Iran. That is now lost inasmuch as the majority of Iraqis are Shiite.

Economic Power

One hopes that most issues in the Middle East will not be resolved by military power. In Table 2, GDP and per capita incomes of its countries are presented. Here, we see the opposite of military power: far greater economic power among the Sunni countries. Start with the GDP totals: $2.6 trillion for Sunni countries and only $683 billion for Shiite nations. The Shiite per capita income total (weighted by GDP) is $12,777 while the Sunnis have a $30,620 average. The only Sunni countries with low per capita incomes are Egypt, Syria and Jordan.

Source: IMF WEO Database

Oil

The source of the Sunni wealth is no mystery. It is oil. Table 3 provides data on oil reserves. Overall, the Middle East share of all proven reserves are is almost 50%: Shiite (17.8%) and Sunni (30.1%). The R/P Ratio is reserves divided by current annual production, in other words, the number of years reserves will last at current production levels. The oil wealth of Iran, Iraq, Saudi, Kuwait, and the U.A.E. will probably last far beyond the time we have developed a cost-effective fossil fuel substitute.

Source: Indexmundi

Investing in the Middle East?

Given Middle East uncertainties, one has to be a real risk taker to even consider investments there. But it is at least worth examining each country’s current macroeconomic situation. You can learn a lot by looking at a country’s growth and unemployment rates. Information on its government’s deficit and debt is also helpful, as is its current account balance with the rest of the world. All of these data are presented in Table 4. The GDP growth rate is the 2010-2012 average and the government balance/debt and current account are all presented as a percent of GDP.

So what do we see? The big oil exporters – nothing to worry about. In contrast, Egypt, Lebanon, and Jordan appear to be real train wrecks. But Lebanon and Jordan get regular help from their oil-rich friends. Turkey’s performance is impressive: high growth with government finances under reasonable control.

Source: IMF WEO Database Click on table to enlarge.

Sidebar on Egypt

How things have changed since Morsi won the election last summer. Back then, Western countries and the US in particular were falling over themselves to help out. I quote from a September New York Times article:

“In addition to the debt assistance, the administration has thrown its support behind a $4.8 billion loan being negotiated between Egypt and the International Monetary Fund. Last week, it dispatched the first of two delegations to work out details of the proposed debt assistance, as well as $375 million in financing and loan guarantees for American financiers who invest in Egypt and a $60 million investment fund for Egyptian businesses.“

And this on top of the usual $1.4 billion in military assistance the US gives to Egypt annually as part of the Camp David Accord (Israel gets $3 billion, Egypt gets half as much).

Well then, what have we had in Egypt since last summer? Maybe some “Arab Winter”? Morsi took “non-democratic actions” that displeased the West, and this, despite Egypt’s desperate financial straits. It really needed the IMF’s $4.8 billion. But last week, Egypt sent the IMF home without any agreement.

So what happened? The New York Times has reported that Egypt initially said that as part of its IMF agreement, it would reduce its government deficit – now running at 11% of GDP to 8.5% by June 2014. That pledge would constitute a reduction of aggregate demand of 2.5% of GDP. The unemployment rate is now almost 13% in Egypt. The “pledge” would undoubtedly cause a significant uptick in unemployment.

Morsi already has riots in the streets because of his heavy handed tactics and he does not want more. So the Fund was sent packing. The economic future in Egypt is bleak.

Conclusions

The military and socio/economic analysis of the Middle East is interesting. The Shiites have formidable military power, but the Sunnis dominate in the economic sphere.

Investments? Only for extremely high risk investors. Those interested might take a look at the following ETFs – GAF, GULF, and MEF. For Turkey, there is TUR and ITKY-LSE. But keep in mind the Turkish market has increased more than 50% in the last 12 months.

Personally, I prefer a 4-5% dividend plus significant capital gains potential by investing in US real estate.

[1] While Lebanon is mixed, Hezbollah is in the Shiite camp so it is included along with other Shiite countries.

[2] Military share sect averages are weighted by population.