Middle East North Africa: Key themes to watch in 2025

Here is how we see our key themes for 2025 shaping the Middle East North Africa (MENA) region’s operational and investment environment.

Economic angst

Sovereign debt stress will continue to impact highly indebted MENA oil-importing countries, including Lebanon and Tunisia. Egypt will continue to implement monetary, fiscal and economic adjustment measures in line with International Monetary Fund (IMF) requirements through 2025 to help reduce macroeconomic imbalances and public debt. The government is seeking to renegotiate some of the terms of the enlarged US$8 billion IMF financing program due to the heavy impact on the cost of living. 

A weak oil price outlook will worsen financial risks for oil-producing countries in MENA and increases the likelihood of delays or cancellations to major infrastructure and construction projects. Financially weaker and less stable oil producing countries like Iraq could be forced to curtail spending, which would raise conflict risks and threaten political stability. Affluent countries, especially Saudi Arabia, would be more likely to defer investment spending on their transition path to a lower oil dependency.

The non-oil economy of Gulf Cooperation Council (GCC) countries will likely be confronted with higher-than-expected interest rates and a weaker growth outlook. GCC central banks with a peg rate to the US dollar could be forced to maintain a relatively high policy rate level following the US Fed if inflation in the US accelerates in response to the introduction of tariffs on goods imports to the US. This would increase capital costs for Gulf countries with a pegged exchange rate to the US dollar, including Saudi Arabia, the United Arab Emirates (UAE), Qatar, Oman, and Bahrain, potentially slowing their transition to less oil-dependent economies.

Others might seek faster climate transition to reduce hydrocarbon dependency. The UAE would be likely to respond with greater commitment to building a regional trade network that spans south-east Asia, the Gulf region, and Africa and extends to Latin America and Europe. The key risk to this policy is a disruption of trade and supply links, especially shipping lanes, in the Red Sea and, though unlikely, in the Strait of Hormuz.

Domestic discontent

We expect Lebanon’s economy to contract sharply following the Israel-Hezbollah escalation in September-November 2024. Physical damage from the war was estimated to be around US$3.4 billion by the World Bank on Nov. 14, 2024, about 13% of Lebanon’s GDP in 2024. Lebanese government efforts to reform the economy and reconstruct the banking system had stalled given the country’s lack of stable government, and political instability and economic stresses are likely to worsen in 2025 with little if any prospect of emerging from sovereign default.

The Syrian opposition takeover of government in Syria is likely to impact on Syrian agriculture through a potentially increasingly volatile security situation in the one-year outlook. Access to food imports will likely be contingent on the make-up of the transition government. Besides renewed security risks affecting irrigation infrastructure and agricultural land, areas across northwestern Syria face extreme obstacles to access due to severe risk of renewed civil war. Food and fuel shipments face a high risk of hijacking. We assess that Islamic State operations are likely to further increase in frequency in 2025. Food supply shortages will likely aggravate the economic situation, raise inflation risks and the potential for renewed conflict.

Israel’s financial ability to conduct war operations is unlikely to be diminished in 2025, although financial constraints will likely weigh more heavily on the government. Significant risk of higher military spending remains, which would increase the need for future fiscal consolidation and widen the potential for rifts in the governing coalition.

Elusive alliances

The risk of regional conflict will remain severe, particularly if Iran carries out further large-scale military retaliation against Israel, which we assess is increasingly unlikely given the weakening of Iran and its regional allies and proxies. The incoming US administration is likely to seek to prevent wider escalation involving Iran and the Arab Gulf states.

President-elect Donald Trump is likely to prioritize Israel’s security by seeking a ceasefire in the Israel-Hamas war and finalizing the Israel-Hezbollah ceasefire that came into force on Nov. 27. A ceasefire reached in both conflicts would facilitate normalization between Saudi Arabia and Israel and wider cooperation between Israel and other countries in the region such as the UAE.

Guaranteeing Israel’s security and overall freedom of navigation, particularly for key maritime chokepoints and trade routes in the region, around the Strait of Hormuz, Red Sea and Suez Canal — permitting unimpeded global trade, particularly of hydrocarbons — are likely to remain core priorities for US foreign policy in the region. The Trump administration is also likely to seek to maintain a significant US military presence across the region, particularly the Gulf, although this is likely to be reduced during Trump’s term in office.

Diplomatic relations between Israel and its neighbors are likely to continue to be strained through 2025 without a negotiated settlement for Gaza. 

Trade troubles

Houthi targeting of commercial and military naval vessels in the Gulf of Aden, Bab al-Mandab Strait and the Red Sea and US-led coalition and Israeli strikes on Houthi-controlled territory in Yemen are likely to continue into 2025. This would maintain a severe risk for all vessels and crew attempting to transit the Bab al-Mandab Strait and the Red Sea, regardless of affiliation.

Russia’s share of wheat imports for Morocco, Egypt, Tunisia, and Algeria will likely increase in 2025, particularly if drought conditions continue in the 2025/2026 season and below-average harvests in France, due to heavy rainfall there, continue to affect the region’s traditional wheat supplier. Russia is likely to maintain stable diplomatic relations with all North African countries.

Saudi Arabia and the UAE have outlined economic development targets to expand their technology sectors via investments in semiconductor and AI capability. Under the Biden administration, existing restrictions that were applied to mainland China in 2022 were extended to include other markets, including the UAE and Saudi Arabia, and in October 2023 to cover AI-accelerator chips and related servers and semiconductor manufacturing technologies and supply chains. Trump is likely to continue with these policies and increase the restrictions around the use of China-sourced hardware. 

Click here for our global report on 2025 themes