What a Biden presidency means for the Middle East's economies, markets and oil prices

As most of the GCC economies' currencies are pegged to the greenback, a weaker dollar can increase the cost of imported goods in the Gulf countries that rely on imports

  
U.S. Democratic presidential nominee and former Vice President Joe Biden is seen on a TV screen as the German share price index DAX reacts to the 2020 U.S. presidential election at the stock exchange in Frankfurt, Germany, November 4, 2020.

U.S. Democratic presidential nominee and former Vice President Joe Biden is seen on a TV screen as the German share price index DAX reacts to the 2020 U.S. presidential election at the stock exchange in Frankfurt, Germany, November 4, 2020.

Reuters/Kai Pfaffenbach

Global markets welcomed a renewed leadership in the United States under President-elect Joe Biden: the MSCI Global Index rose 7.7 percent in the election week; the S&P Index ,7.3 percent; the NASDAQ Index, 9.4 percent; the Stoxx Europe 600, 7 percent; and the MSCI Asia Pacific Index, 6.3 percent.

Although Biden’s victory was confirmed, Congress will likely be split, with Republicans in control of the Senate, but this outcome has buoyed markets. Investors responded positively to the apparent lack of the so called “blue wave,” which would have meant a resounding victory for Democrats both in White House as well as Congress.

As it stands, Republicans have secured at least 50 seats in the 100-member Senate, with run-off elections for two seats in the state of Georgia scheduled for January 2021.

While the exact nature of Biden administration’s policies remains to be seen, what does this mean for the Middle East’s economies and markets? Would a divided Biden administration largely be good news for markets globally, the Middle East included? Analysts and business leaders believe so.

“The Middle East should benefit in terms of a revival of trading relationships and re-joining of international treaties aimed at enhancing business and peace within the region,” Mehvish Ayub, Senior Portfolio Strategist, State Street Global Advisors, told Zawya. 

Muhammad Chbib, CEO, Tradeling, observed, “Biden is a very experienced politician. While multilateral agreements may not be his first priority as he focuses on domestic policy, he understands the importance of strong relationships and how they can positively impact business, trade and the overall economy.”

IMPACT ON THE DOLLAR

Though not directly related to Biden’s victory, many analysts believe that, until the foreseeable near future, the US dollar will continue weakening in the near to medium term in line with the liquidity measures that the US Fed is expected to announce.

As most of the GCC economies’ currencies are pegged to the greenback, a weaker dollar can increase the cost of imported goods in the Gulf countries that rely on imports. However, the silver lining is that the weaker dollar could give a boost to non-oil sectors such as tourism.

“The US dollar is expected to continue its gradual decline in the coming years [as] part of a natural US dollar weakening cycle. This matters for the Gulf given the currency pegs to the US dollar and reserve assets [are] dollar-denominated. This will act as a small stimulus for Gulf economies but is offset by continued weakness in the oil market,” said Elliot Hentov, Head of Policy Research (Global Macro), State Street Global Advisors.

OIL PRICES AND IRAN INVESTMENTs

With Biden’s victory, analysts anticipate a normalization of the United States’ relationship with Iran. This means the eventual return of Iranian crude oil to the market, adding to its oversupply, Sherif El-Haddad, Head of Asset Management at Al Mal Capital, told Zawya.

However, a major positive for Brent crude prices is Biden’s environmental policies, El-Haddad added. “Biden will return the US to the Paris agreement and provide significant motivation to companies to lower their carbon emissions. […] If the Democrats are able to gain a majority, we could see reduced activity from the US sector, specifically fracking. This will be positive for Brent crude prices in the short term but will accelerate a transition to renewable energy.”

From the perspective of the UAE, the net effect will be positive, he added. “Once Iran opens up for business, we believe a significant amount of investment will be directed to the UAE along with an increase in the number of tourists, and increase trade will stimulate the economy more than a higher oil price would.”

However, analysts believe Iran’s full return to world oil markets will be short term and will take time, so it is not an immediate concern for oil prices.

Clay Lowery, Executive Vice President of Policy and Research of the Washington-based Institute of International Finance (IIF), also told Zawya that a Biden administration would try to accelerate US action on climate change policies and potentially lift sanctions on Iran. “We think this could have a short-term bearish effect on oil prices as supply increases and a medium-term increase if some of these policies slow down US production.” 

Elliot Hentov, Head of Global Research, State Street Global Advisors concurred: “We are sceptical that Iranian oil exports will ramp up quickly and consider it a medium-term development. More relevant will be what regulatory changes a Biden administration can find to constrain US oil production growth.”

“Taken together with the global recovery in oil demand, we see a small upside to oil prices coming into 2021, but not enough to lessen pressure on government balance sheets in the Gulf,” he continued.

UPTICK IN E.M. ASSETS

Aside the weaker dollar and oil prices, Biden’s victory bodes well for the overall emerging market (EM) assets.

BlackRock, the world’s largest asset manager, said last week that EM assets should perform on improved trade sentiment, especially in Asia ex-Japan, following Joe Biden’s victory.

“Biden’s victory signifies a return to a near-term market environment dominated by low rates [and] a hunt for yield and growth stocks,” BlackRock said, adding that a divided government would constrain the Biden administration’s ability to implement plans for large-scale fiscal stimulus and public investment, tax, healthcare and climate legislation.

All told, the new President-elect of the US will have very different priorities to those of his predecessor, President Donald Trump, and in many ways, Biden’s foreign policies could be ideologically opposed to his. However, what Biden can implement will largely depend on the final composition of the Senate, which will not be decided until run-off elections in January 2021. A major area to consider for the Middle East will be the overall US economic policy in terms of fiscal stimulus and other measures that may have an impact on markets and the value of the dollar.

(Reporting by Sunil Kumar Singh; editing by Seban Scaria)

(seban.scaria@refinitiv.com)

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© ZAWYA 2020

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