The revolution that toppled the regime of former Tunisian President Ben Ali after 23 years in power has led to unprecedented ripple effects across the Middle East and North Africa (MENA) region. The departure of former Egyptian President Mubarak less than one month after these events amplified these movements, giving new momentum to popular protests across the region. Risks to geo-political stability in the MENA region have raised concerns about potential re-pricing of risk and the impact on international oil and gas markets; the region accounts for more than 27% of total world oil supply. Although Gulf Co-operation Council (GCC) countries (ex. Bahrain) are not likely to experience domestic unrest, protests have intensified particularly in Bahrain, Iran, Libya, and Yemen.

A revolution, not “bread protests”

The popular unrest that has affected the MENA region is widely perceived as the by-product of higher commodity prices (food accounts for a significant share of the CPI basket, see figures 1 and 2) and the impact of the global financial crisis on unemployment. However, recent events in Tunisia and Egypt highlight that social discontent was rather a catalyst, while widespread corruption and lack of political representation were the major drivers of these movements (see figure 3). The fast spillover effects to the rest of the region also highlight the political nature of these protests as wealth distribution varies considerably across the region. After the departure of Ben Ali and Mubarak, protests intensified in Algeria, Bahrain, Iran, Libya, and Yemen, and large protests are expected in Morocco. Even Iraq was affected by popular protests demanding political reform and a reduction of corruption. Lebanon and GCC countries (ex. Bahrain) appear to be the only countries that have not been affected so far.

Figure 1: Higher Commodity Prices Contributed to Social Tensions

Figure 2: Poorer MENA Countries Are More Vulnerable to Food Prices

The rapid and wide spread nature of the protests highlights the role played by information technology during recent weeks. Social media played a notable part in mobilizing the youth, but pan-Arabic satellite broadcasters were also pivotal in this contagion. Internet penetration rates are actually relatively low in most countries, and the internet was switched off in Egypt during the peak of protests.

Ripple effects to differ across the region

We believe the ripple effects from Tunisia and Egypt will accelerate popular protests across the region, adding significant uncertainty to this year’s outlook. However, contagion will differ due to specific factors to each country (see figure 5, next page). In our view, these ripple effects will accelerate countries’ reform agendas rather than creating a wide Tunisian-style revolution across the rest of the region. Monarchies in the Middle East, as well as in Morocco, should benefit from the relative legitimacy of their rulers while countries with higher GDP per capita should remain more resilient.

Figure 3: Factors Favouring Popular Unrest

Figure 4: Costs of Insuring Sovereign Debt

An exception is Bahrain, where popular protests have intensified most following Mubarak’s departure on February 11. Clashes with the police resulted in five people being killed while the opposition and protesters demanded a government reshuffle and increased political representation. Despite its small size, Bahrain could affect the rest of the GCC as it represents a major financial hub for petrodollar recycling. In addition, political upheaval could fuel tensions between Sunni and Shiite factions of the population that could spread to the eastern province in Saudi Arabia where the Kingdom’s Shiaa minority is concentrated. The region is also a military hub for Western allies. Popular unrest in the rest of the region is likely to intensify in Algeria, Iran, Libya, and Yemen, while in Jordan the government reshuffling appears to have answered some of protesters’ demands despite some ongoing demonstrations.

Spread to GCC countries to remain limited

We believe GCC countries (ex. Bahrain) are not likely to face similar domestic social unrest due to their higher wealth levels and standards of living as well as a lower level of perceived corruption. Saudi Arabia in particular has embarked on impressive economic and social reforms whereby education accounts for an increasing share of public finances (7% of GDP in 2010). In addition, the political regime is supported by the distribution of key posts to members of tribes, which ensures some political representation in the Kingdom.

GCC countries are more vulnerable to regional instability than to potential domestic unrest. Geo-political instability could adversely affect crude oil transport and result in a repricing of risk across the region. The latter could increase borrowing costs and affect Dubai’s ability to refinance its debt in 2011-12 (see figure 4). More importantly, Sunni-Shiaa tensions in Bahrain could spread to the Saudi Arabia’s eastern province close to the oil fields. This could have immediate and substantial effects on oil prices due to the Kingdom’s key role in global oil markets. In addition, potential instability in Yemen as well as Djibouti (where new protests are demanding the President’s resignation) could affect activity in the Red Sea and impact oil markets as well as world trade. Although higher oil prices will benefit GCC countries, increased regional geo-political instability could also increase tensions between GCC nationals and foreign labor from the rest of the region.

Figure 5: MENA: Comparative Political Analysis (2010)

We believe GCC countries will step up efforts to contain the political crisis in Bahrain due to its potential impact on the region. Protests could be protracted, but a similar outcome to Tunisia/Egypt is not likely, in our view. The authorities will increase subsidies and social transfers while announcing new development projects and more job creation. However, political reform will be limited in our view, and protesters’ demands to reduce powers of the upper chamber are not likely to be met. The intensification and wide spread of popular protest across the region will negatively impact confidence and could delay economic recovery despite higher oil prices.