The Middle East in 2011: Time for some positive signs?

By Eurasia Group's Middle East practice

Predictions of coming market booms in the Middle East have a long history of proving overly optimistic, but there are reasons to believe that this year will be different. Clear positive signs are emerging in several countries and in multiple sectors. At the macro level, the region will benefit from upward pressures on energy prices and from the broader phenomenon of large-scale capital inflows into emerging markets.

Many countries in the Middle East -- including the United Arab Emirates, Iraq, Saudi Arabia, and Egypt -- are positioned to take advantage of these trends. Despite Dubai's drawn-out and still incomplete recovery, the UAE will remain the region's most dynamic economy. Investment in energy, petrochemicals, infrastructure, real estate, and education will drive its growth. Politically, Abu Dhabi has strengthened its influence and economic coordination between the emirates is now the norm. Dubai's financial troubles may not be completely over, but the economic and political situation in the UAE will continue to improve in 2011, in part because Abu Dhabi remains in a strong fiscal position.

Iraq will see massive new investment in its oil sector and infrastructure building. The country's myriad challenges cannot be underestimated, and the risk of sliding back toward violence remains, but Iraq now has a viable path forward. Its new government, led by Prime Minister Nouri al Maliki, has representation from all of Iraq's ethnic, sectarian, and political groups; and project work on the country's massive southern oil fields is set to ramp up quickly.

Infrastructure and energy investment will drive growth in Saudi Arabia, which is poised for a strong 2011. Saudi officials are justifiably confident about the direction of their economy. Riyadh is attempting to manage global oil prices unilaterally and does not want prices to rise to unsustainable levels; it would not want to be blamed for contributing to a double-dip recession if the global economy slows again.

Egypt, despite political uncertainty ahead of its September 2011 presidential election, will build on years of strong growth -- buoyed by investment in the energy sector, tourism, remittances, and increased traffic through the Suez Canal. Unemployment, however, will remain one of the top socioeconomic concerns, and something that opposition parties will try to seize on in order to gain popularity.  

One of the most interesting political developments in the region will be Turkey's continuing emergence as a significant economic and diplomatic regional player. Long aligned with Israel, and more politically oriented toward Europe than the Middle East, Ankara is in the midst of a significant rebalancing. The effects of a more active Turkey in the Middle East will become clearer during 2011. Economically, Turkish businesses will look to invest and work in countries and regions that Western firms view as too risky, such as Iraqi Kurdistan. Politically, Turkey could emerge as an intermediary between the West and Iran, as well as a regional counterweight to the Islamic Republic.

This post was written by analysts in Eurasia Group's Middle East practice.