Updated: Apr 28
For every company considering market opportunities in the Middle East and North Africa (MENA), the region’s political and economic stability is of great concern.
A broad geographic expanse that is home to more than 350 million people, the region faces an increasing threat of violence and unrest from civil wars in Libya, Yemen, Iraq and Syria, and continuing clashes between Israelis and Palestinians. Add to this the rise of terrorist groups, an erupting migration crisis as millions of refugees have been displaced and declining oil prices that have resulted in tighter fiscal policies, and political tensions are high throughout the region.
In addition, many MENA nations face pervasive problems with corruption, payment obligations, currency risks and physical security threats. Companies must deal with bureaucratic minefields and an uncertain, ever-changing regulatory and tax climate. As a result, although not every MENA country presents the same challenges, companies looking to enter the region must conduct a careful risk analysis before expanding into this market.
But the rewards of doing business in MENA cannot be ignored. Organizations that pursue and adhere to strict principles of risk management can generate very profitable business growth. The most recent statistics released by the International Monetary Fund (IMF) through its World Economic Outlook Database put the export value of the Middle East at $1.13 trillion at the end of 2012, a figure that represents 6.2% of total global exports, and the combined GDP of all Middle Eastern nations was $3.96 trillion.
The report precedes the precipitous decline in oil prices, however, which has caused export earnings to fall by hundreds of billions of dollars in the Gulf Cooperation Council countries (Bahrain, Oman, Qatar, Kuwait, Saudi Arabia and the United Arab Emirates) alone. This has been difficult for major oil producers in the region, which have had to optimize expenditures, lay off employees and reduce employee benefits provisions.
Despite these challenges, however, overall economic growth in these oil-exporting countries has remained steady at 2.4%. The IMF predicts a substantial rise in the price of oil from less than $50 per barrel in 2015 to $74 per barrel by 2020, promising further aid to the regional economy.
Although the economies of some MENA countries have been devastated by wars and political unrest, many others are emerging markets that offer significant opportunities for a wide swath of foreign businesses. According to Nielson’s Internet Usage and World Population Statistics report, internet usage across the Middle East is up more than 2,500% in the past decade, Saudi Arabia is now the world’s largest consumer of videos on YouTube, and mobile phone ownership across the Middle East is 19% higher than the world average, demonstrating an increasingly engaged consumer base.
Furthermore, some countries are expected to see significant economic gains. Now that the U.S.-imposed economic sanctions against Iraq have been lifted, a recent report by BMI Research pegs the nation’s economic growth at 4% through the next few years, driven primarily by foreign investment and domestic exports. The report further projects that the economies of Iran and Egypt will grow significantly throughout the remainder of the decade, given their rising populations of young people, the presence of highly skilled workers and pent-up demand.
Understanding the Risks
For companies that project sufficient return on investment for expanding into the MENA region, the next step is identifying the threats to achieving this return. These can include strategic and operational risks (asset expropriation and regulatory and tax impositions); financial risks (currency exchange fluctuations, contract repudiation and non-payment of monies owed); cultural risks (failure to negotiate in the ways foreign business partners expect to negotiate); and reputational risks (revelations that the company paid a bribe, provided a kickback or followed questionable labor practices).
Although the primary risks have been and will remain geopolitical and macroeconomic, there are countless variables to doing business in MENA that can change quickly and influence potential risk. “It’s a fool’s errand to think you can apply a cookie-cutter approach to identifying risk across the region,” said Stefano De Angelis, CEO of De Angelis & Associates - International Consulting Group. “You need to laser-in on one country, do your homework, put your boots on the ground, get a feel for the culture, and partner with an outside firm to assist you along the way. In almost all ways, despite governments and regulators trying to do the right things, this is and will remain an evolving landscape.”
To outsiders, MENA is a region rife with civil and international conflicts, social unrest and the growing presence of extremists. Such pernicious dangers increase the risk of asset expropriation, currency manipulation and contract repudiation, and threats to personnel security.
“If you’re working for a government or on a public-private infrastructure-type project, the economic slowdown caused by low oil prices means that national coffers are depleting, pressuring governments to slash costs, causing potential civil unrest,” said Kim Perry, director of political risk at De Angelis & Associates. “This also can result in a slowdown of a project that is currently underway to spread out the costs. Or it could result in a call to revise the contract midway through.”
Economic problems can also affect the timing of anticipated payments for products or services already rendered. Since international investments are essential to a country’s economic development, multinational companies do have leverage to pressure payments on a timely basis. But this will not always be effective. “At the end of the day, it often boils down to a single risk: Will I be paid or not?” De Angelis said.
Fluctuations in foreign currency exchange rates can impact payments, increasing the risk of capital loss. Currency devaluation will make exports cheaper and imports more expensive, while currency appreciation will raise the price of exports at the expense of import costs. In addition, foreign companies that sell their products or services on credit could face a loss if the exchange rate changes between invoicing and payment.
Corruption and Compliance
Corrupt public officials are another risk of doing business in the Middle East.
It is not uncommon for government contracts to include “commissions” and “surcharges” that are effectively bribes and kickbacks. According to Transparency International’s 2016 Corruption Perceptions Index, more than half of the MENA nations were perceived to be more corrupt than the global average, with five nations ranking among the 10 most corrupt.
Other reports support this perception. A 2014 survey by Ernst & Young characterizes corruption as “widespread, tolerated and sophisticated” throughout the region. Indeed, more than one-fifth of survey respondents said it was not possible to conduct business competitively in the Middle East without committing fraud. Despite anti-bribery laws enacted in many MENA countries and the broad reach of the U.S. Foreign Corrupt Practices Act, one-third of the respondents believe the rules will make “no difference” to corporate business practices in the region.
“The vast majority of companies are not adhering to what is supposed to be a global regulatory framework,” Perry said. “Wink and nod aside, some aren’t even claiming to try. With respect to those that appear to be complying, everyone understands this is disingenuous.”
Even with several governments in the region stepping up their enforcement of anti-bribery laws, the situation remains murky. Nevertheless, foreign entities caught engaging in such crimes can suffer reputational damage affecting their business across the globe.
Companies also need to be aware of the social and cultural dynamics of doing business in the Middle East and endeavor to build authentic personal relationships with their business partners. “Take the time to study Middle Eastern cultures, particularly as this relates to business comportment and conduct,” said psychologist Jeanne M. Brett, DeWitt W. Buchanan, Jr. Professor of Dispute Resolution and Negotiations at Northwestern University’s Kellogg School of Management.
“People in the Middle East are part of what we call an ‘honor culture.’ In such cultures, a person’s worth is a function of their reputation, and their reputation is a function of what they do and what others think of what they do.” Consequently, it can take quite a bit of time for Middle Easterners to develop trust in the other party. “In the Middle East, business and personal relationships are the same thing,” Brett said. “Expect to develop a true bond.”
This process contributes to the protracted amount of time it generally takes to conduct negotiations and make business decisions. Westerners tend to work on “thought time,” acting upon their thoughts regardless of the time of day, whereas people in the Middle East work more on “event time,” she explained. “Ramadan moves around the Western calendar at different points of the year, and the call to prayer moves with the sunrise and the sunset, which is not the same every month,” Brett said. “This is ‘event time’ and it drives Americans crazy because we want to close the deal.”
It is critical to the long-term relationship to respect these cultural differences, however, and have patience throughout the negotiations. “Rushing the discussion will affect the quality of the relationship you must develop,” she said.
Risk Management Best Practices
As more multinational corporations and regional companies engage in business ventures in the MENA region, risk management and business operational intelligence professionals will play increasingly important strategic roles. In some cases, risk managers will be called upon to help determine the viability of doing business in the region based on in-depth analysis of risk and reward.
Because of the breadth of exposures in MENA, one best practice is to partner with a local company that understands the evolving political, cultural and economic dynamics—in fact, in some countries, partnering with a local company is mandatory. Keep in mind, however, that these partnerships also create risk if both parties’ roles and responsibilities are not clearly defined and delineated. In addition, given the concerns about corruption, it is important to vet the local partner for evidence of past criminal behavior. Experts recommend having any prospective partners submit to a background screening and provide their books of business for assessment.
Ongoing monitoring of risks is absolutely essential as the political and economic situation in MENA can change quickly. It is often necessary to have people on the ground to provide intelligence on the status of the evolving political climate, which the local partner can provide. Information on brewing political conflicts that may have an adverse market impact in the future can also be obtained from research and consulting firms that specialize in the region.
Stefano De Angelis, agreed such reports are useful in making educated decisions, but urged caution. “You’ll get a nice glossy report from an analyst saying everything is good politically in a country going forward, but you need to broaden your vision and take into account the outlier, non-consensus opinions as well,” he said.
Some threats to business caused by political factors can be insured. Political risk insurance is available from commercial insurance companies and governments, such as the Overseas Private Investment Corporation in the United States, to absorb business-related losses due to war, civil strife, terrorism, government asset expropriation or confiscation, government contract repudiation, restrictions on the conversion and transfer of local currency revenues, and other risks.
Political risk insurance is not a panacea, however. “If you are booted out of a country that has experienced a coup and your assets are left there, you can claim the losses on your policy, but it will take a long time to get your money,” Perry said.
Companies must be proactive about managing the political risks to a business venture and monitoring the environment on an ongoing basis to “see the red flags before they rise,” she added.
In order to address contract repudiation risks, many recommend structuring company payments to correspond to different phases of the business venture rather than providing lump sums in advance. A similar structure is advisable to assure more timely payments. “If you’re delivering a piece of machinery to a company, map out the revenue-and-cost curve for the buyer,” De Angelis said.
He explained that the buyer of the machinery will expect cash flow from this equipment over a period of time in which it will also be dealing with labor and other expenses. “It’s in the best interests of companies to help their MENA business partners be cash-flow positive, rather than putting them and you in a difficult financial situation."
Contracts need to be worded carefully to further address these risks. Consider inserting clauses requiring force majeure to remove liability for unavoidable catastrophes that restrict the contracted parties from fulfilling obligations. To reduce these risks further, companies can purchase business credit insurance from private insurers or governmental export credit agencies. The coverage protects international accounts receivable from losses due to non-payment. Currency risks can also be hedged to offset any currency-related gains or losses.
Proceed with Caution
Many experts advise outside companies to proceed slowly when doing business in the MENA region, starting with a small deal to discern if the transacting party is serious about the viability of the business relationship. Once a more meaningful relationship blossoms, this can be the green light to expand the business activity.
Overall, business opportunities in MENA countries must be weighed against the various risks. The same principles that apply to managing risk in other regions of the world apply in the Middle East. Given the volatility of the region, however, risk monitoring must be more stringent.
Therefore, it is important for both multinational corporations and regional companies doing business in MENA countries to have a human presence on their side. By dispatching their own personnel to the region or retaining a local partner that understands the risks of doing business in a particular country, companies can more closely monitor changes to their risk profile and take advantage of the region’s investment opportunities.
Credit: RMMagazine.net, Dubai Chamber of Commerce, Middle East Business Magazine
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