Current Global Crisis on Middle East Countries Assignment Sample

• Subject Name : International business (international markets)

International Business

Introduction to International Business

The oil-dependent economies are coupled to the oil prices as it accounts for the preponderance of the national GDP. The Middle East countries and the African countries are highly reliant on the oil demand on a global scale (Maliszewska, Mattoo & Van Der Mensbrugghe, 2020). Even the countries that are oil-rich such as Canada also look up to these countries for the oil provisions. The Middle East accounts for around 65 per cent of the oil reserves, Saudi Arabia accounts for 42 per cent of the oil production in the Middle East countries. In the past decade, the economic growth in these countries has ballooned with 55 per cent in Saudi Arabia, 35 per cent in UAE, 27 per cent in Turkey and 20 per cent in Iran. The heightened revenues and prices of oil have efficaciously benefitted the Middle East and African countries. However, with the outbreak of the pandemic, these countries are sustaining intricacies in terms of maintaining the current global position. They have been hard hit by the downfall in the prices of oil which has also led to Saudi Arabia opening the tap for crushing the high-cost producers (Maliszewska, Mattoo & Van Der Mensbrugghe, 2020).

The global crisis has impacted the businesses in the countries as they are highly reliant on oil exports. It has caused economic pain for them. As a result of the crashing prices and the lowering demand, the government budgets are also getting hindered. This assessment is an extensive analysis of the impact of Covid-19 crisis on the countries’ GDP and economic and financial status (Lone & Ahmad, 2020). The assessment maintains a key refrain of influence of the global crisis in disturbing the exports of oil and hence, pushing it into a pitiable financial liability. As L4 consulting firm, this assessment will perform a comprehensive evaluation considering the adverse impacts of relying on a single economic resource, the negative influence of Covid-19 in terms of financial setbacks and political instability. The key objective of this assessment is to provide a valid set of recommendations to the government of the Middle East and the African countries for dealing with this financial impede. All-encompassing scrutiny of the countries is done by employing SWOT analysis, VRIO framework, strategy implementation and force field analysis.

Historical Narratives and Economic Development

In Nigeria, the oil exports account for around 90 per cent of the total exports and two-third of the overall government revenue (Akpoveta, Joy & Joy, 2020). The finance minister of the country has called for the review process on the basis of the oil price of $57 a barrel (Maliszewska, Mattoo & Van Der Mensbrugghe, 2020). However, there will be difficulty in terms of the economy because it is not keeping pace with the growth in population. Around 65 per cent of the revenue of the government is employed for servicing the existing debt (Lone & Ahmad, 2020). In the Middle East countries and their African countries, selling oil is an easy method of money for the government for revenue rather than taxing the citizens. They are used as a tactic for buying votes and for overrunning the rivals and funding a comfortable retirement across the globe. When the prices fell by about 30 per cent in the initial week of March, the prices diminished to about $32 a barrel, it resulted in many politicians becoming aghast. Since Covid-19 resulted in the cutting of the global demands, it caused Saudi Arabia to further indulge in competing with the high-cost producers (Middle East & Africa, 2020). In the parts of the Middle East, surprise wars resulted in messing up the finances. Even with the oil at $58 a barrel, Oman had predicted depreciation of about 8 per cent in GDP in the year 2020.

Key Issues of International Business

Long Term Impact of Reliance on A Single Economic Source

Relying on a single economic source can be detrimental for countries also because of the volatility and the fluctuation in the prices in the national market upon exports for the economy. However, due to the market uncertainty, it may be the case that the country suffered from an economic crisis due to the low demands in the single economy source (Van Staden, 2020). The Middle East countries and African countries are highly dependent on oil exports; it may cause the countries to witness high volatility. The Middle East will incur long-term consequences which will involve the amalgamation of the contraction of its gross domestic products as well as the depreciation in the oil markets; it may present the countries with challenges for many years to come. Around one-third of the economic fallout in these countries is the gravest as compared to the 1929 Great Depression (Middle East & Africa, 2020). The international stay-at-home orders have resulted in a collapse in the global demand resulting in emptying streets, shutting of the factories and exports. It will take time for the outbreak to be accurately assessed and hence, then the global economy will be barricaded.

A negative consequence of relying on a single economic source is the fact that the national security, as well as the economic prosperity, will be slewed. The Middle East and African countries are riddled with political tensions and corruption as a result of the outbreak and in the future also, the high reliance on hydrocarbons can result in lack of investment, disputes and elevated uncertainty regarding the political stability of the energy resources. In the key produces like Iraq, Saudi Arabia and Iran, the problem may be further intensified if the demand for the oil is further elevated (Maliszewska, Mattoo & Van Der Mensbrugghe, 2020). During the global crisis such as the price wars between the different oil-producing countries can worsen the condition henceforth, it is integral that the countries also must have alternative income sources.

Influence of Rented Funds from International Partners

Covid-19 has deflated the opportunities of boosting the international supply chains as it has interrupted in the organization as well as the overall performance of different countries. It has provided insights about the risk management which can be incurred in supply chains as a result of outbreaks. The funding from international partners can be a possible step incorporated by the Middle East countries and African countries for managing their poor economy at the present scenario because the financial impact of Covid-19 has resulted in poor access points for the recipients and business closures hence; international donor community is also at the verge (International monetary fund, 2020). Tanzania's president, John Magufuli, withheld a loan of around $300 million in the year 2018 which was for funding secondary education.

It was basically a curriculum for teaching the young mothers (Calmon, 2020) $500 million of the fund was lent to the president. However, he was less empathetic when considering the matter while treating the responsibility of the women's to fulfil their accountability effectively. It is already incurred the loans and less has been implemented. In the Covid-19 case, it can be inferred from the previous scenarios that the sustained fall of price can be negative for all the states in the Middle East and Africa and hence is cardinal for them to diversify. Considering the pandemic and its destructive effect in terms of sweeping across all the African and Middle East countries and questioning their prosperity in terms of funding, the regional military ventures have made them return towards funding from the international establishments. With more than ten thousands of infected people and many lives at cost, it is evident that the pandemic has heated tensions between the Islamists and secularists and has accelerated the governance failures. At this stage, the funding of health services will be helpful for the Middle Eastern and African countries to swift and improve the health infrastructure and combat the shortage of financial resources and medical supplies (Middle East & Africa, 2020).

Impact of Covid-19 and Economic Setback

The direct and indirect effect of Covid-19

The direct impact of Covid-19 on the oil-producing countries can be inferred from the fact that low prices are more painful in Iran because it relies on the black stuff for 90 per cent of the revenue of the government. The country is witnessing political paralysis with the months of protest against the government starting from October. The public spending has been raised up to 45 per cent and the deficit has been doubled, still, the state cannot make its payroll despite the spending on the public sector wages (Maliszewska, Mattoo & Van Der Mensbrugghe, 2020). The long-term impact of Covid-19 is that it is making a downfall in the price of oil which is undesirable not only for Iran but all the Middle East and African countries because oil makes of the huge proportion of exports and the revenue in most of the countries like Nigeria and Angola.

The price war among the oil-exporting global powers

Oil prices in China have begun to slide. Furthermore, in Western Europe and the United States, the price of the global Brent crude oil benchmark has also collapsed. According to the head of International energy agency Mr Fatih Birol, the oil world is witnessing the greatest degree of shock due to the pandemic (Verleger Jr, 2020). The price war between Saudi Arabia and Russia is directly impacting the United States and trying to hydro-fracture the targets, not only the profit margins are ended with an aggressive rate but the unconventional protection methods with higher production costs are also becoming more uneconomical as there are continuously lowering prices which are pushing the countries into debt (Akpoveta, Joy & Joy, 2020).

Significance of Addressing the Issues

Not only the Covid-19 pandemic but the recent attacks on Saudi Arabia's oil facilities have also influenced the world's largest oil exporter in the Middle East to look for alternative sources of the economy apart from the oil and energy. For the Middle East and African countries, it is vital to address the issue of the single economic and financial source so that the future economic collapse is prevented. The persistent risk of volatility in oil prices may hinder the countries' performances (Verleger Jr, 2020). If it is not addressed, the private sectors' role in the economy may get diminished and the small-medium enterprises can be discouraged for investing in education, innovation and creating new job opportunities.

The Long-Term Impact of Lower than Expected Revenue

The lower prices may abandon the economic growth of the countries and the delay in recovery of the oil prices can also pose an impact on its currency peg. The need to create non-oil jobs is cardinal so that the financial sectors can be amended and the domestic banking sector can be further inflated. If the issue of diversification is not addressed then it will result in poorly capitalised firms as the oil revenues will directly force and advocate influence on the national oil companies, governments and the banking system (Akpoveta, Joy & Joy, 2020).

Evaluation of Strategies for Addressing the Issues

Robustly Competing with The Rivals

The GCC is an alliance of the six Middle East countries. The key objective of GCC is to accomplish unity among its members. It makes sure that the relations are strengthened among the members of the council. It also ensures that political stability is attained. Coordination in terms of security and economic aspect is highlighted. In comparison with the counterpart Iran, GCC intends to ensure that the integrative agreements are made for safeguarding the government, infrastructure and economic coordination. The competition of GCC with its counterpart can be assessed from the fact that leadership is the Middle East sees Iran adept foreign policy actor. Opportunism is prevalent among the relationship between the competitors. For balancing the pressure from Riyadh, Saudi Arabia has also partnered with Tehran as a part of the hedging strategy (Zhuang et al. 2020). In the context of the present scenario, The Iranian and Saudi Arabia competition is intensified in the oil and gas industry and has fumed the price war as a result of the pandemic. This fierce competition has led to the corporations indulging in upgrading the infrastructure. For combating the present pandemic, Saudi Arabia has more access to resources; the GCC can overcome the financial crisis by severely competing with Iran. Since the economic projections for Iran are more dramatic, GCC may end up getting hands on the competition with Iran (Zhuang et al. 2020).

Economic Diversification: Force Field Analysis

With the increasing consensus about corporate social responsibility, customers are inclining towards the energy sources that are sustainable and environmentally virtuous. This attitude and further deflating oil levels are forcing the Middle East and African countries to switch to alternative fuel sources. Furthermore, the UN agency on industrial development, UNIDO's increasing intervention and the CSR policies are pressurizing the oil industries to look for alternative fuel resources (Shojaei & Masoumi, 2020).

The National Renewable Energy Strategy adopted by Egypt in the year 2008 was intended to safeguard that the share of renewable energy is elevated about 20 per cent. In terms of capacity, its solar radiations are capable of generating energy of about 8.52 GW. However, the capacity and the share of alternative resources need to be further elevated. However, the forces that are barricading this change are the fact that the costs associated with the implementation of renewable energy structure are quite high. The total subsidy share of the fossil fuel in Egypt in the year 2012 was reported at about 10.2 per cent. These subsidies have motivated economic development but they often ignore the environmental facet. The large subsidies of fossil fuel are known to bestow competitive advantage (Smith, Machalaba, Seifman, Feferholtz & Karesh, 2019).

Strengths and Challenges: SWOT Analysis

Table 2: SWOT analysis

Resource Capability: VRIO Framework

Table 3: VRIO framework

Strategy Implementation

Financial Recovery and Time Frame

Foreign direct investment in the digital economy can be helpful for these countries to make sure that the recovery is boosted; it can help bring know-how, growth, jobs and Technology in countries. The governments need to comprehend the fact that the digital economy requires different regulations and policies because of the variation in the model from traditional businesses (Middle East & Africa, 2020). It is highly reliant on technology and data and hence, it requires a platform for leveraging non-traditional assets. Since travelling is a budding sector in some of the Middle East countries like Saudi Arabia and Egypt, they can ensure investment in digital technology in this sector such as delivery firms and ride-sharing.

The economic crisis sparked by the pandemic which may become more dramatic and sharper with time, henceforth, there is a need for the Middle East and African countries to indulge in the sustainable and alternative fuels and lay prominence on the strengthening of the different power plants in the country to prepare for the ground recovery. The IMF can make that the unprecedented demand for emergency assistance is provided in terms of financing. There is a need for several regional teleconferences in the Middle East so that they can engage with the authority on the rapidly evolving shocks and coordinate with the international fund providers for strengthening the different sectors of the countries can be a beneficial step. Relief packages can be made for the reconstruction of the construction sector, manufacturing sector and travelling in the tourism sector. There is a need that the budget is prepared according to the decline in the economy in the countries, in Saudi Arabia, there is a need to double the VAT so that the cost of living charges are suspended. The government can ensure that the $26.6 billion budget is incorporated to deal with the crisis. The capital spending needs to be made on the non-oil sector activity to boost the recovery. This plan may consume around two years to effectively recover from the fallout.

Government Support

Considering the present scenario, there is a need that the government in these countries alerts their focus on the positioning of the onshore businesses. The UAE's Federal government is indulging in incentivizing tax to moderate the potential enforcement actions which will be necessary for considering the small-medium enterprises for borrowers especially (Whitecase, 2020). For ensuring that the businesses do not sustain extra taxation, it is also making sure that corporate tax is not imposed on the businesses which are registered onshore; however, the businesses registered in the free zones are exempted from the tax for a particular duration. The government has introduced the target economy support scheme which was launched on 15^th March this year. The key objective of the scheme is to ensure that the temporary relief from the payments of interest and principal and outstanding loans is provided for all the sectors especially private ones affected by the pandemic (Raoofi et al. 2020).

Considering the above assessment and the reliance of Middle Eastern African countries on oil exports, the economy has been affected to a vast degree. For combating this, it is essential that the countries lay prominence on elevating liquidity issues faced by different businesses and organisations in these countries to be corrected with guarantee scheme especially by the investment officers so that the financing by the local banks is stimulated for ensuring that the small-medium enterprises are able to navigate the current marketing environment (Abubakar, 2020). Since the most fragile economies of the Middle East are highly vulnerable to get influenced through Covid-19, the Middle East is facing mounting pressure on its number of foreign investment projects especially in Egypt's tourism (International monetary fund, 2020).

Since the pandemic has had impacted tourism in Egypt resulting in border closure forecasted to about $1bn a month. It accounted for around 11.9 per cent of the total GDP in the year 2018 (Woertz, 2020). The government can combat the issues of foreign direct investment by ensuring that the political turbulence is reduced by managing the conflict in different regions. The government can ensure supporting the foreign investments by setting up the stimulus packages for small businesses in countries like Egypt, Iraq, Saudi Arabia and other African countries (International monetary fund, 2020).

Conclusion on International Business

This assessment has effectually highlighted the adversative consequences that the Middle East and African oil-producing countries are witnessing as a result of the outbreak of the pandemic. It is contingent from the assessment that the high reliance on the single economic resource has cost the countries an economic fallout and financial crisis. As a result of the deafening prices and the lowering demand for oil and gas in the global market, the government budgets are also getting hindered in these countries. It is evident from the assessment that around 65 per cent of the revenue of the government is employed for servicing the existing debt. In these countries, selling oil is an effortless method of money for the government for revenue rather than demanding taxation on the citizens.

It is clear from the assessment that the negative upshot of relying on a single economic source is the fact that the national security, as well as the economic opulence, is hindered. The Middle East and African countries are perplexed with political tensions and corruption as a result of the outburst of the virus and in the future also, the high reliance on hydrocarbons can result in lack of speculation, elevated disputes and high vagueness regarding the political solidity of the energy resources. The long-term impact of Covid-19 is that it is resulting in demise in the price of oil which is unwelcomed not only by all the Middle East and African countries because oil makes of the huge percentage of exports and the revenue in most of the countries. The analyses bring forward a clearer picture of the countries’ need to diversify, invest in alternative sources of fuel and invest in countries and partner with different firms to support investment.

References for International Business

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