A More Muted Geopolitical Environment and Bridging the “Two Middle East’s”

After a turbulent year with wars raging from Gaza to Lebanon, dangerous escalations between Iran and Israel, Houthi attacks on Red Sea shipping and the unraveling of Syria’s Ba’athist regime, the MENA region faces a more muted geopolitical outlook in 2025.

Geopolitical crises exacerbated already difficult economic situations in Lebanon, Yemen, Syria, Palestine, and Egypt, and slowed efforts at regional integration and hampered investment flows. They also served as a broader drag on regional economic integration efforts.

As Syria seeks stability and reconstruction support, Israel maintains tenuous cease-fires with Hamas and Hezbollah, Houthi rebels pause Red Sea strikes, and Iran continues its rapprochement with regional neighbors, the geopolitical environment is cooling - albeit still combustible.

This more muted environment heralds an opportunity to reinvigorate regional integration and investment efforts to support broader prosperity and future geopolitical stability and break the cycle of the “two Middle East’s” – one high performing and diversifying, and the other conflict-ridden and stagnant. The recent meeting of Syria’s new President Ahmed el-Sharaa with Saudi Arabia Crown Prince Mohammad bin Salman reflects this new moment. The Syrian president was quoted as saying that the meeting was “aimed at preserving peace and stability in the entire region and improving the economic reality for the Syrian people.”

Regional Economic Prospects: Six Themes to Watch

Oil Prices

While GCC states are actively diversifying their economies, oil sales still feature prominently in their revenues. Higher oil prices not only benefit exporters but also benefit the broader region. Benefits to non-oil producers include rises in remittances, trade, tourism, investment and foreign aid, and a general improvement in broader business sentiment.

For 2025, global crude oil demand is projected to grow moderately, increasing by approximately 1.3 million barrels per day (bpd), based on recent forecasts. Most forecasts anticipate Brent crude prices to average around $75 per barrel in 2025.  Though some exporters require higher prices to balance budgets, stable oil prices that remain in the $75-$80 will broadly benefit the region.

Global Economy

The MENA region is sensitive to slowdowns in the global economy, as it tends to hit key areas of revenue growth: hydrocarbons sales, tourism receipts, trade logistics and transport revenue, manufacturing, agriculture, real estate, construction, and financial services.

The global economic recovery is gathering pace as inflation tempers. The IMF projects 2025 global growth at 3.3% alongside a decline in global inflation to 4.2%. Advanced economies are projected to grow at 1.9% for the year, while emerging market and developing economies will see 4.2% growth. Growth bright spots include the United States, which saw an upward revision of its growth prospects, and some economies in emerging Asia, notably India.

Euro area growth remains subdued, while China’s 4.5% forecast signals a lower growth trajectory for a country still reeling from an overleveraged property sector, weak consumer demand, and industrial deceleration. As a major buyer of regional hydrocarbons, China’s demand - which will likely remain steady, if unspectacular, throughout the year – is vital to the region, and a steady global recovery provides a benign macro backdrop.

Saudi Arabia: The Economic Heavyweight

In much the same way that the global economy affects the broader region, so too does the Middle East’s economic heavyweight and major outward investor: Saudi Arabia. Growth in the Kingdom’s $1.2 trillion economy is set for a sharp upswing this year after a lackluster 2024. The IMF forecasts 3.3% growth in 2025, although the Saudi Ministry of Finance and the Economist Intelligence Unit (EIU) post higher forecasts at 4.6% and 4.8% respectively. The EIU has tagged Saudi Arabia as the fastest growing regional economy in 2025.

Non-oil growth is pegged at a robust 4.8% in 2025. Non-oil activities comprise roughly 52% of Saudi Arabia’s GDP. This is the highest level in history, Saudi Minister of Economy and Planning Faisal Ali Ibrahim recently noted, signaling that Vision 2030 diversification efforts are working.

Saudi Arabia’s Public Investment Fund (PIF), a key investor fueling the Kingdom’s ambitious Vision 2030 plan, has been one of the fastest growing sovereign wealth funds in the world over the past few years. The $925 billion fund recently announced that it would direct more of its investments toward local companies. This will have a multiplier effect on the national economy. A healthy and growing Saudi economy has historically benefited the broader region in terms of investments, remittances, and trade.

Egypt Recovery

Economic crisis gripped Egypt for much of the past year, marked by high inflation, a deteriorating currency, and a swelling debt load. The loss of Suez Canal receipts owing to repeated Houthi attacks on ships headed for Suez has also hit the country’s bottom line, with an estimated $7 billion in losses last year. Fresh IMF bail-out funds and a major investment pledge by an Abu Dhabi-based fund helped the North African economy limp toward recovery.

A reinvigorated privatization effort targets some $3.6 billion of state assets, including companies in banking, telecoms, plastics, aluminum and chemicals. This follows $2.2 billion of asset share sales in the 2023-4 fiscal year. Privatization initiatives are vital to the continued provision of IMF funds, which now totals $28 billion to Egypt over the past 8 years.

A key plank of the IMF’s funding plan included the liberalization of Egypt’s currency. Cairo agreed to this demand, and floated the pound, which led to a 50% devaluation. Lifting some subsidies and making a dent in its high debt loads are also key parts of the IMF plan. Recent offshore gas discoveries along the Mediterranean coast have also boosted Egypt’s prospects.

While Egypt’s challenges remain formidable, it enters the year on firmer footing.

Sovereign Wealth Funds and Regional Investments

The Gulf Arab states are home to some of the largest sovereign wealth funds (SWFs) in the world, accounting for roughly $4 trillion of assets. The most dynamic of these funds - Saudi Arabia’s PIF and the UAE’s Mubadala and ADQ – often make headline-grabbing investments. The region’s two largest funds – Abu Dhabi Investment Authority (ADIA) and Kuwait Investment Authority (KIA) - tend to invest in more traditional sectors from real estate to equities.

The decisions made by these SWFs about regional investments can have significant impacts in individual countries. ADQ’s $35 billion investment to develop Egypt’s Mediterranean coast bolstered the country’s finances and shored up its bond prices. Saudi Arabia has also pledged to invest some $15 billion in Egypt, with PIF leading the way. In 2022, the Saudi Egyptian Investment Company (SEIC) was established as a PIF subsidiary. In 2023, PIF also established the Saudi-Iraq Investment Company, capitalized at $3 billion. PIF has also partnered with Brookfield Asset Management to explore private equity opportunities across the region. Following the visit of Syrian President Ahmed el-Sharaa to Riyadh, Saudi Arabia will likely be a key player in reconstruction plans.

PIF as well as other leading SWFs, notably in Qatar and the UAE, have also become active investors in the region’s venture tech market - growing the startup scene and attracting top talent.

Regional Connectivity

The growth of transport, energy, and logistics networks across the region will support broader prosperity. The region is home to some of the world’s leading trade chokepoints from the Suez Canal to the Strait of Hormuz. Dubai still maintains a firm lead in global logistics, with Abu Dhabi, Saudi Arabia and Morocco also growing as major logistics and transport hubs. Fast-growing Saudi Arabia ranks in the top twenty in terms of total container shipping throughput, and it envisages a massive aviation expansion, fueled by public and private sector investment, of $100 billion, aiming to reach more than 300 million air passengers by 2030.

Beyond the Gulf states, new connectivity initiatives herald great promise for the region, notably the Iraq Development Road, a major infrastructure project aimed at transforming Iraq into a transit hub linking the Gulf to Turkey and Europe. The India-Middle East-Europe Economic Corridor (IMEC), announced at the G20 Summit in 2023, remains on hold due to the ongoing Gaza war, but Saudi Arabia and the UAE have pledged to support it. Meanwhile Gulf rail initiatives are growing fast, with the prospects of rail links across much of the GCC region within a decade.

Conclusion

Rising disparities between the GCC and the low-growth and conflict-ridden broader region fuels the “two Middle East’s” narrative. Gulf Cooperation Council (GCC) states continued building resilience by diversifying their economies and investing in industries of the future at home and abroad, with Saudi Arabia and the United Arab Emirates leading the way. To break the cycle of the “two Middle East’s,” more regional integration and investment are required, and the growth of heavyweight economies like Saudi Arabia will be broadly supportive. A more muted geopolitical environment will also support broader stability and prosperity.