Political risks back on the radar

Political developments have re-emerged as a key risk to the region’s economic outlook in recent weeks. The economic fallout for Saudi Arabia from the Khashoggi scandal should be limited, at least in the near-term. The threat of sanctions has weighed on Saudi financial markets but the country’s strong balance sheet means that the dollar peg will remain intact and we still expect GDP growth to accelerate over the coming quarters. Saudi Arabia is not the only country where political risks are brewing though. Political infighting in Lebanon and Tunisia will delay efforts to shore up their fragile balance of payments positions. An IMF deal should enable the Tunisian authorities to muddle through until next year’s elections. In Lebanon, however, even if Prime Minister Saad Hariri manages to form a new government in the next few days, the risk of a devaluation and default there is on the rise. At the very least, we expect economic growth in both countries to be extremely sluggish in 2019-20.