COVID-19 Effects on EU Investment in the Middle East

Introduction

The European Union (EU) is an economic and political partnership representing several sovereign countries that have come together to form a unique cooperative framework. It resulted from an integration process that began after World War II, with six initial member states from Western Europe, to promote interdependence and prevent the possibility of another war on the continent (OECD, 2018). The EU now has 27 member states, with the majority located in Eastern and Central Europe. It promotes stability, peace, and economic prosperity across the European continent. Traditionally, EU trade, foreign, and development aid policies focus on ten Southern and Eastern Mediterranean countries (SEMC) that constitute its immediate neighbors. The SEMC countries include Tunisia, Morocco, Jordan, Egypt, Algeria, Israel, Libya, Lebanon, the Palestinian Authority, and Syria.

In recent decades, the EU has been a major provider of development aid to the Middle East region. About €84 billion was invested in the region between 2007 and 2019, with the largest contributors being the European Commission (€22 billion), Germany (€21 billion), and France (€15 billion). The European Investment Bank (EIB) has also actively invested in the Middle East, funding regional projects worth €21 billion from 2007 to 2020; approximately €6 billion of this was categorized as aid during the same period (OECD, 2020).

Generally, the EU is a cornerstone of prosperity and stability in Europe. However, it currently faces various internal and external challenges. EU leaders have had to focus significant attention on managing the COVID-19 pandemic and its economic effects (WTO, 2011). Other issues the EU faces include the backsliding of democracy in member states such as Hungary and Poland, managing relations with the United Kingdom following Brexit in 2020, the presence of populist and, to some extent, anti-EU political parties across the bloc, challenges posed by China and Russia, and ongoing societal and political pressure related to migration. Most of these challenges may have implications for the future character and shape of the EU.

More cases of COVID-19 infections were confirmed worldwide even as the number of vaccine doses administered continued to increase. The crisis extended beyond health to impact education, jobs, the environment, food security, and more. The pandemic began as a health crisis but rapidly spread to become an economic crisis for many countries and unions worldwide (WTO, 2011). Development banks, governments, philanthropic organizations, multilateral and bilateral donors, and the private sector have continued to contribute equipment, money, and expertise to combat the crisis. This paper focuses on how the coronavirus has affected and will continue to affect EU investment in the Middle East.

Background of Trade Flows and Investment in the Middle East

Hydrocarbon exports have driven trade flows in the Middle East region for many years, as it is home to the largest natural gas and oil reserves in the world. Since the global financial crisis (GFC), the fuel export share has decreased (The Economist, 2020). Although non-fuel exports in 2007 were below 25% of total exports, the figure rose by 2015. Even so, fuel exports still contributed a large share of total exports in 2019. Oil price fluctuations affect the weight of fuel exports in the Middle East most acutely, with the 2014 oil price collapse producing the biggest single-year fall. The COVID-19 pandemic caused oil prices to decline further, compounding the effect on exports. Fuel exports make up more than two-thirds of exports from oil-exporting countries in the region.

Non-fuel exports have also grown substantially, from $38 billion in 2007 to $316 billion in 2019. In 2019, 35% of all regional trade was with other countries within the Middle East, representing an increase from 30% in 2008. Greater economic integration within the region is a positive development given existing trade barriers and numerous ongoing conflicts (The Economist, 2020). Intra-regional trade has a better chance of growing if trade barriers are removed and conflicts are addressed. The EU is the Middle East's second-largest trading partner, despite a drop in its share of exports from the region after the GFC. Most trade between the Middle East and the EU is conducted with Spain and France. Meanwhile, China increased its share of Middle East exports from 2% to 6%.

The EU remains a major trading partner of the Middle East region, receiving more than 15% of non-fuel exports. The Middle East also trades extensively among its member countries and with North Africa, making intra-MENA trade the greatest single source of regional development. From an investment perspective, however, the picture differs (The Economist, 2020). Investment from other MENA countries into the Middle East is modest and declined in the 2010s in both absolute value and total market share. Nevertheless, the EU remains the largest investor in the Middle East. Foreign direct investment (FDI) from the EU to the region increased between 2009 and 2017 before gradually falling, partly as a result of the COVID-19 effect.

The Impact of COVID-19 on the Middle East Region

The pandemic delivered an additional negative shock to an already fragile and stagnated macroeconomic environment in the Middle East and North Africa (MENA) zone. Effects include the consequences of lockdown measures and the health crisis itself, dramatic declines in tourism revenues, temporary supply chain interruptions, lower oil prices, and reduced labor remittances (The Economist, 2020). According to the IMF's October 2020 forecast, GDP was expected to drop in all Middle Eastern countries except Egypt. Additionally, oil producers experienced a collapse in oil prices in 2020 due to the fall in global demand and the breakdown of supplier coordination. Reduced government revenues, deep recession, and increased public expenditure further worsened debt-to-GDP levels and fiscal balances, potentially increasing the risk of sovereign defaults.

Capital flight struck the Middle East region significantly between February and March 2020. The IMF estimated capital outflows in the range of $6 billion to $8 billion or more (IMF, 2020a, 2020b). However, this shock was smaller than that experienced in other emerging markets such as former Soviet Union countries and Latin America (Dabrowski and Dominguez-Jimenez, 2020a, 2020b). Although the virus and its effects intensified during the first wave of the crisis, market confidence subsequently recovered to near pre-COVID levels (The Economist, 2020). This improvement in market sentiment is attributed to significant fiscal and monetary policy responses in developed economies, which eased financing conditions globally. Both oil-producing countries with high credit ratings and those with lower ratings, such as Egypt, maintained market access through local-currency and dollar-denominated bonds.

Currencies in MENA countries experienced modest depreciation, with the exception of the Lebanese pound. Most currencies recovered after the initial drop in March–April 2020, though not all MENA currencies are fully convertible, and many are pegged to the US dollar (The Economist, 2020). The IMF offered emergency aid to many Middle Eastern countries to help address the economic and social consequences of COVID-19. Jordan, Egypt, and Tunisia received assistance through the Rapid Financing Instrument, while Mauritania and Djibouti received the Rapid Credit Facility under concessional servicing terms. Both instruments lack ex-post conditionality, meaning they are less likely to trigger the structural reforms typically associated with standard IMF programs. Jordan's existing IMF program was modified, Morocco drew from its precautionary credit line, and a new Stand-By arrangement with Egypt was approved (IMF, 2020b).

Conclusion

The COVID-19 pandemic continues to disrupt life and economic activity worldwide. World trade was forecast to drop by about 13% to 32% in 2020. The unprecedented nature of the health crisis and the resulting uncertainty around its economic impact have been central drivers of this decline. The expected slump is likely to exceed the contraction registered during the 2008–09 global financial crisis. The forecast of recovery in 2021 remained uncertain, with outcomes dependent on the duration of the pandemic and the effectiveness of policy responses. Governments took various measures to protect citizens from the health emergency, yet declines in trade and output have consequentially harmed businesses and households despite the immense human suffering caused by COVID-19 itself. The pandemic has had immediate, short-term, medium-term, and long-term impacts on EU investment in the Middle East region.

The immediate recovery goal is to contain the pandemic and address the economic damage suffered by people, businesses, and countries. Policymakers must simultaneously begin planning for the post-COVID period. A rapid and vigorous recovery is possible despite the dramatic drop in EU FDI in the Middle East. The decisions made today will determine the shape of future recovery and long-term international growth prospects. A strong, sustainable, and socially inclusive recovery is needed to address the pandemic's lasting effects on EU investment in the Middle East.

Fiscal and monetary policy and open trade will be central to the recovery process. Promoting a favorable business environment and keeping markets predictable and accessible will support renewed EU investment in the region. Countries working together will accelerate recovery. However, persistent COVID-19 outbreaks, extended movement restrictions, or prolonged disruptions to economic activity could deepen the recession further. Businesses in the Middle East may consequently face increasing borrowing costs, difficulties servicing existing debt, and rising loan defaults and bankruptcies — outcomes that are closely linked to the trajectory of EU investment in the region.