The MENA region has long been at the juncture of geopolitical and economic strategies because of events going on in US politics. This is an interconnectedness of the regions because of decades of diplomatic engagements, energy dependencies, and trade relationships.
The market reactions in the MENA region to US political shifts are multilayered, ranging from the movements in oil prices to capital and investor sentiments. These reactions could only be understood if one considers the processes of policy changes in the United States and the aftershocks these created within the region.
The Role Of Energy Dynamics
Probably the most vital channel through which American political developments affect the markets in the MENA region is through energy policy. The MENA region holds a large portion of the world’s oil and gas reserves, making it particularly sensitive to Washington’s actions that affect global energy markets.
For instance, sanction decisions against oil-exporting countries like Iran or Venezuela usually affect the price of crude oil. A high price of oil is normally a blessing for the economies of GCC countries like Saudi Arabia, the United Arab Emirates, and Qatar since their revenues increase and investor confidence improves.
Conversely, US policies to enhance domestic shale oil production or shift toward renewable energy sources serve to depress world oil prices, which, in turn, compels the oil-dependent MENA economies to reassess fiscal policies and investment decisions. For example, countries reliant on the export of oil may incur budgetary deficits, which, in turn, affect the performance of their stock markets and currency values.
Geopolitical Uncertainty And Market Volatility
In turn, most geopolitical events related to American foreign policy affect the financial markets in MENA. For example, Presidential elections in the United States, changes in the administration, and shifts of accents in foreign policy create their impact on the regional economy. A more military and sanctions-leaning administration would increase tensions in the region and, therefore, heighten volatility across the market.
Consequently, investors may retreat for fear of instability. On the other side, diplomatic breakthroughs like a US-brokered peace deal or a removal of sanctions might influence regional stability for the better and foreign direct investment; thus, increasing market confidence. Last but not least, consider this example: in 2020, at an event facilitated by the United States, the signing of what is known as the Abraham Accords between the State of Israel and various Arab states happened, further development of new pathways toward trade and investment reflected by positive reactions in the regional markets.
The monetary policy of the US Federal Reserve represents another important factor impacting the shape of MENA markets and financial behaviour. A good number of MENA currencies have been linked to the value of the US dollar and thereby follow the changes in dollar interest rates.
Higher rates by the Federal Reserve might imply tighter liquidity in the MENA markets, with higher borrowing costs for sectors like real estate and infrastructure that require significant financing.
The stronger dollar, moreover, can lead to the outflow of capital from emerging markets, including those within the MENA region, to seek safer returns in United States-based assets. This often leads to depreciation in local currencies and heightened inflationary pressures. On the other hand, accommodative or dovish Federal Reserve policy, characterised by lower interest rates, can spur capital inflows to the MENA markets and push up equities and other asset classes.
Trade Relationships And Economic Dependencies
The other leading determinant of the economic outlook for the MENA region, specifically countries that have close integration with the US in trade matters, is Washington’s trade policy. Such countries like Morocco and Egypt do benefit from a preferential trade agreement and tend to be sensitive concerning changes in US trade policy priorities.
Protectionist policies and increased tariffs impede exports and reduce revenues, hence affecting the performance of the stock market.
More generally, US political developments with the potential to affect world trade, such as those concerning tariffs against China or the European Union, would indirectly have impacts on the MENA markets.
This is so because, as global trade routes continue to shift, MENA countries positioned as logistical hubs will face changes in the tides of trade volumes affecting their economic fortunes and, in turn, market sentiment.
Influence Of US-Iran Relations
One of the most watched aspects of US foreign policy in the MENA region pertains to its approach towards Iran. Changes in United States-Iran relations, especially on nuclear negotiations and sanctions-always have an immediate and significant consequence on regional markets. Poor relations and high tension drive up risk premiums, inflation in oil prices, and thereby equity markets within the GCC.
Conversely, improvements in negotiation or the removal of sanctions decrease geopolitical risk and thus stabilise the markets. For example, the Iran nuclear deal 2015-which gained the formal name Joint Comprehensive Plan of Action, JCPOA-led to a brief period of relaxed tensions between the parties to the agreement and opened up trade opportunities to the region that had previously been shrouded by the grey cloud of sanctions, thereby boosting the MENA markets. But then this year, under the administration of Donald Trump, many of the American positions taken in the deal have been reversed, and a lot of that ground has given way to renewed uncertainty.
Investor Sentiment And Global Capital Flows
Broader US political stability and policy directions have a major impact on investor sentiment worldwide, thus influencing the MENA markets. With instances of political uncertainty, such as during hung or disputed elections, or even in cases of government shutdowns, investors tend to adopt risk-averse behaviour.
This may find expression in capital outflows from emerging markets-including those in the MENA region-to seek refuge in US Treasury bonds or other safe-haven assets.
Also, periods of political stability and clarity in policy direction within the United States have fired up risk appetite and driven capital towards higher-yielding emerging markets. These are general trends that often benefit the diverse MENA markets, offering a raft of investment opportunities in areas such as energy, real estate, and technology.
Over the last couple of years, the economies of the MENA region have been focused on diversification away from oil dependency, largely into technology, tourism, and renewable energy. US political moves that foster global sustainability goals, such as rejoining the Paris Agreement, can fall in place with these efforts for better collaboration and investment.
An example could be that US interest in the Clean Energy Transition policy has awakened interests in specific regional projects, such as NEOM in Saudi Arabia or Masdar City within the UAE. These thus start to attract international investors interested in growth opportunity profiles, which themselves look good on regional capital markets.
Conversely, any relaxation from US leadership, or other major emitters, in terms of focusing action toward meeting or beating the threshold value concerning climate change, serves as speed bump material for these currently initiated projects.
While the markets in the MENA region continue to build resilience and diversify their economic bases, the influence of US policy through energy dynamics, monetary policy, or geopolitical strategy remains high. It is such a linkage that is extremely important both for investors and policymakers. The close monitoring of political developments in the United States will enable stakeholders in the MENA region to better anticipate market movements, mitigate risks, and seize opportunities. As the global economic landscape continues to shift, the interaction of these two regions will continue to shape not only local markets but also broader global trends.