February 2024 Al-Monitor Trend Report 

2,430 words

A historic deal has Egypt’s battered economy nearing a potential turning point. On Feb. 23, Cairo unveiled a $35 billion investment from the UAE centered on developing a prime slice of the Mediterranean coastline. Touted as Egypt’s largest ever deal, the investment changes the outlook for a government grappling with a crippling financial crisis.

The move should help pave way for a new deal with the International Monetary Fund (IMF), with these Emirati inflows key to providing Cairo with a buffer to navigate another devaluation of the pound at a moment when Houthi attacks on Red Sea shipping are sapping badly needed Suez Canal revenues, exacerbating Egypt’s foreign currency shortages. 

In announcing the deal, the UAE touted potential to support Egypt’s economic growth and development, while projecting that the mega-project could attract investments surpassing $150 billion. Left unmentioned was how Egypt’s teetering economic health could impact the broader Middle East as the Gaza war continues threatening regional stability.

Notably, the UAE’s big bet on Egypt emerged two days after Emirati defense conglomerate EDGE and Italian shipbuilder Fincantieri created an Abu Dhabi-based joint venture to manufacture naval vessels, creating an enterprise with a commercial pipeline valued at about $32 billion. The move fits into a broader pattern in the Gulf, where governments are pouring money into new strategic industries amid ambitious economic diversification drives. Those plans hinge in part on restoring regional calm shattered by the Israel-Hamas war. Key to that will be stabilizing vulnerable economies. 

As the conflict nears the five-month mark, we can see more clearly how regional powers are adapting to a climate of uncertainty and forging ahead with efforts to future-proof economies. Alongside the UAE’s moves, Saudi Arabia turned heads on Jan. 30 by suspending crude oil production capacity increases, a surprise investment pivot signaling Riyadh’s shifting oil demand outlook. Two days later, its Public Investment Fund launched Alat, a technology firm planning to invest $100 billion by 2030 to help the kingdom become a global leader in artificial intelligence, industrials and manufacturing.

That parallels other strategic moves emanating from the Gulf, from Qatar announcing a $1 billion venture capital program on Feb. 26, to ongoing momentum for Oman’s privatization drive. Against that backdrop, Al-Monitor is tracking a range of factors impacting regional economies and businesses so far in 2024. Below, this monthly trend report explores essential storylines on our radar. 

Middle East-China trade prospects remain robust despite Red Sea crisis

• As outlined in a memo by Howard J. Shatz, the Red Sea crisis has notable implications for China’s global trade, with the Suez Canal its shortest path to Europe. China also uses the maritime route to reach the United States and to receive Russian oil imports. 

• Among China’s major regional trade partners, Red Sea disruptions are exposing Turkey, Egypt and Israel, which accounted for an annual average of 17% of all China-Middle East goods trade from 2018-2022. China has also made significant investments in the Suez Canal area. However, between 70% and 75% of China’s regional trade is with partners unaffected by current disruptions.

• Chinese goods exports to the Middle East rose from $140 billion in 2018 to $226 billion in 2022, and from $164 billion in the first nine months of 2022 to $179 billion in the first nine months of 2023. That growth is driven partially by high incomes in several regional countries, while the Gulf also serves as an entrepot for Chinese exports headed to Africa and elsewhere. 

• China usually runs a goods trade deficit with the Middle East, relying on the region more for imports than as an export market. However, imports from the region are driven by oil and therefore more volatile — China’s regional goods imports fluctuate with oil prices, falling to $131 billion in 2020 before jumping to $277 billion in 2022.

The takeaway: Red Sea shipping disruptions are likely to have modest effects on Chinese goods trade with most of the Middle East but could lead to significant costs for China’s global trade. 

Looking ahead: China is likely to face additional short-term costs from reduced use of Egyptian ports and other transit facilities. These impacts will likely be temporary, notes Shatz, with Red Sea shipping set to return once Houthi attacks cease. Over the medium term, the Middle East’s goods trade relationship with China is unlikely to change dramatically. 

Another factor to watch: The Red Sea crisis has battered Egypt’s manufacturing and textiles industries. Its consumer goods sector, representing approximately $19.5 billion in imports in 2022, also faces notable challenges.

Saudi Aramco pivots investment plans as deals beckon in key Asian growth markets 

• Saudi Aramco is fueling a flurry of headlines so far in 2024: on Jan. 31, Bloomberg reported that Riyadh is considering plans to revive another Aramco share sale, a deal that could raise about $20 billion.

• A new Aramco offering would deliver funds needed to advance the kingdom’s economic transformation plan. After posting a rare budget surplus in 2022, Saudi Arabia is running deficits again amid continued big spending and recently revealed some Vision 2030 projects would be delayed.

• Crucially, Aramco announced on Jan. 30 that the kingdom’s energy ministry had directed it to maintain production capacity at 12 million barrels per day (MMBD) and not continue increasing to 13 MMBD as planned. 

• The Saudi government didn’t indicate whether production capacity increases are permanently suspended, but the reversal should free up billions amid Aramco’s efforts to expand into natural gas, chemicals and renewables.

• Meanwhile, Aramco continues pursuing a bigger foothold in Asian markets. Among other recent deals, China’s Rongsheng Petrochemical and Aramco in January announced talks to take 50% stakes in each other's refineries. 

• On Jan. 25, the head of Aramco’s downstream unit told Bloomberg that the company seeks refining and chemicals deals in Asia as it looks to rapidly expand the business and secure long-term buyers. The company is looking at China and India for more acquisitions. 

The takeaway: The surprise decision to pump the brakes on Aramco’s oil production capacity expansion represents a major investment pivot, freeing up funds for diversification projects.

Looking ahead: Aramco will likely lower capital spending in 2024, with more funds funneled into state coffers. There appears to be real momentum around another Aramco share sale, but a delay wouldn’t be surprising. Regardless, the oil giant should still splash out many billions on capital expenditure in 2024. 

Another factor to watch: February saw both Qatar and Saudi Arabia reveal expanding gas potential. QatarEnergy announced it would boost gas output by nearly 85% after discovering more reserves, while Aramco announced new reserves in its Jafurah field. 

Will the value of the Iranian Rial collapse?

• As outlined in a memo by Bijan Khajehpour, the Iranian Rial has experienced a new low in its valuation against the US dollar. In early February, on the so-called free-market, one US dollar fetched IRR 580,000, up from IRR 500,000, which had remained a relatively stable rate for the previous 10 months.

• Although the rate is stabilizing around IRR 550,000, the currency has experienced more than 10% devaluation in the past few weeks. Some see the development as a consequence of current regional tensions and the possibility of further regional escalations. Others connect it to pre-election domestic tensions.

• However, one could foresee the eventual devaluation of the Rial due to an artificial maintenance of the value by Iran’s central bank, which had managed to sustain the rate despite heavy inflationary pressure.

• The general expectation of economists and experts is that the country will experience further inflationary impulses in the next economic cycle; a logical consequence will be further devaluation of the national currency. 

• A key problem for the Iranian economy over past decades has been the prevalence of a multi-tiered exchange rate system. Currently, there are a minimum of three exchange rates that economic players have to work with. Meanwhile, the government is talking about introducing a new exchange rate.

The takeaway: Iran’s national currency has been under pressure due to a multi-tiered exchange rate system that has failed its objective of reducing inflationary pressures on the lower income classes. 

Looking ahead: Khajehpour sees a gradual devaluation of the Rial as the most likely scenario — not at the pace of inflation, but at a pace of about 20% over the next 12 months. The government and central bank will continue to juggle between different exchange rates.

Another factor to watch: A year on from a diplomatic thaw between Iran and Saudi Arabia, there has been little to show beyond photo ops.

Gaza war brings sharp rise in Israeli defense procurements

• As outlined in a memo by David Rosenberg, Israel’s war with Hamas caused its defense spending to soar in the last three months of 2023. In January, the cabinet approved allocations for 2024 of about $32 billion, nearly double the pre-war level. 

• Israel’s arms exports have been growing in recent years, but domestic needs triggered by the Gaza war have forced Israeli defense contractors to delay fulfilling export contracts for now. Israeli defense companies have reportedly postponed delivery for over $1.5 billion in orders from global customers. 

• Pre-war, Israeli defense spending was declining, falling to just 4.5% of GDP in 2022, from roughly 11% in the early 1990s. The IDF is now asking for annual spending to grow to about 6% of GDP in coming years. 

• Concerned about its reliance on the United States and a world shortage of productive capacity, the Israeli Defense Ministry’s procurement division is now working with local companies to step up munitions production and begin manufacturing aerial bombs. 

The takeaway: The Gaza war has reversed a long-term decline in Israeli defense spending, with the Oct. 7 attack fundamentally altering Israel’s assessment of the national security risks it faces.

Looking ahead: The Gaza war is expected to wind down in coming weeks, notes Rosenberg, but Israel will be upgrading border defenses, while Hezbollah’s more sophisticated arsenal will continue posing a threat. Israeli defense procurement is expected to continue to remain high going forward, even though the government will need to prevent its budget deficit from widening excessively. 

Another factor to watch: Despite delays in weapons exports, news surfaced in late February that Israel’s military deliveries to its largest customer, India, have so far been unaffected. 

South Korea seeks Gulf business boom with new advantages over rivals China, Japan

• South Korea is becoming a more visible player in the Middle East. The East Asian country, which relies heavily on energy imports from the region, has fostered business ties in the Arab world for decades. That long centered on construction contracts, but more recently relations have expanded around trade, defense and more, particularly in the Gulf. 

• This trend only became more pronounced when current South Korean President Yoon Suk Yeol assumed office in 2022. For instance, Yoon’s state visit to the UAE in 2023 delivered an Emirati pledge to invest $30 billion into South Korea’s nuclear power, defense, hydrogen and solar energy industries.

• Gulf-South Korea trade rose to $78 billion from $50 billion between 2021 and 2022, or a 56% rise, according to think tank Asia House. That comes as trade between the GCC and Emerging Asia (comprising China, India and most ASEAN members) rose 34.7% between 2021 and 2022 to reach $516 billion.

• In December 2023, the GCC reached a free trade agreement (FTA) with South Korea — ahead of similar pacts the bloc has explored with China and Japan, among other nations. The UAE and South Korea also struck a bilateral trade deal in October 2023, which the countries plan to finalize in H1 2024.

• South Korea’s ties with Saudi Arabia are also deepening. The countries inked dozens of agreements worth billions when Yoon visited Saudi Arabia in October 2023. In February 2024, Saudi Arabia also placed a $3.2 billion order for a missile defense system from South Korean firm LIG Nex1. 

The takeaway: South Korea is cementing itself as a major economic and strategic partner with key Middle East states, with Seoul finding ample opportunities to capitalize on relationships with Gulf states pursuing economic diversification drives. 

Looking ahead: South Korea’s regional push should continue advancing in 2024 as Seoul presses newfound advantages. In particular, Gulf players could be poised to power South Korea’s ambitions to become a top arms supplier globally.

Another factor to watch: China’s electric vehicle industry continues making regional inroads. In February, Chinese electric vehicle makers Nio and Xpeng both announced separate agreements with Abu Dhabi-based firms. 

Algeria to miss 2024 food import reduction target amid worsening drought conditions

• As outlined in a memo by Francisco Serrano, Algeria is set to become the world’s fifth largest buyer of soft wheat in 2024, with imports projected to increase 11% over 2023. That development is primarily due to water scarcity, which has impacted Algeria’s cereal production following a prolonged period of drought.

• Under its 2020-2024 Agriculture Roadmap, Algeria set a goal of cutting up to $2.5 billion from total annual food imports of around $10 billion in recent years, with authorities aiming to increase domestic production of strategic food commodities. These plans, however, are being challenged by volatile rainfall patterns. 

• Over H1 2023, several regions again suffered from a lack of rain, but improved rainfall during the fall strengthened the likelihood that 2024 agricultural output will be relatively better.

• According to Algeria’s central bank, agriculture accounted for 11.6% of GDP in 2022. The sector employs about 2.5 million people, but remains heavily dependent on annual rainfall levels, leading to severe output variations. For instance, after falling by 1.9% in 2021 due to drought, agricultural production increased by 5.8% in 2022. 

The takeaway: Efforts to reduce food imports under Algeria’s 2020-2024 Agriculture Roadmap are being challenged by volatile rainfall patterns. Unless adequate precipitation continues through this winter, 2024 will likely turn into another difficult year for essential crops in Algeria.

Looking ahead: Serrano predicts Algeria’s food production capacity will improve gradually, but progress will be blunted by inconsistent rainfalls. The government’s goal of shaving $2.5 billion worth of food imports will likely be achieved, but not before 2030.

Another factor to watch: Germany is targeting Algerian gas imports and long-term renewables partnerships. In February, a German gas trader signed a contract with state-owned producer Sonatrach, marking the first time the European country has procured gas from Algeria.