Syria Country Outlook

POLITICAL STABILITY: The EIU believes that the regime of Syria’s president, Bashar al-Assad, and his ruling Baath party will be unable to retain power in the face of ongoing protests through its current method of heavy-handed repression and superficial reforms. Within the forecast period, sustained domestic, economic and international pressure is expected to bring about a major overhaul of the current regime structure. This could be done by Mr Assad himself, if he enacted meaningful reforms to recast the regime in a more open style, satisfying a critical mass of Syrians and international critics, and eventually leading to the purging of unpopular security figures, notably his brother and regime enforcer, Maher al-Assad. However, Mr Assad appears weak in the face of the protests, and has shown no inclination to make such bold moves. Alternatively, sections of the army not from Mr Assad’s loyal Alawi sect, in conjunction with the merchant Sunni elite, which has been loyal until now, may decide that the president is too great a liability and stage a coup against the Assad family. A less likely possibility is that hardliners in the security forces, led by Maher al-Assad, will launch a coup against Mr Assad themselves.

ELECTION WATCH: As part of the regime’s official reform programme, proposals for new election and political parties laws were approved by the president in July. The new laws regulate elections through a new independent election commission and legalise the founding of new political parties other than those allied to the ruling Baath party. However, there is currently no parliament to approve these measures as the four-year term of Syria’s parliament, the Majlis al-Shaab, expired in May. Under the current constitution, if a new election is not called within 90 days (August 7th), the old parliament will be recalled. The old parliament will therefore return to pass these measures and fresh elections under the new laws will be held some time in the next six months. Every seven years parliament proposes a presidential candidate who is then put to a referendum. Mr Assad was confirmed for his second term in 2007. Even if he stays in power it is likely that the nature of the presidential electoral process (the unlimited number of terms, the lack of a contest) will come under scrutiny.

INTERNATIONAL RELATIONS: The EU has placed sanctions on 35 regime figures, including Mr Assad, while the US has expanded the existing economic sanctions on Syria to include additional regime members, including the president. Facing growing isolation, Syria will rely on non-Western global allies, such as Russia and China, to veto any resolution condemning Syria’s actions at the UN Security Council. The reaction of Syria’s Arab neighbours to the crackdown had been largely muted owing to their fears of post-Baathist instability, but the regime’s continued violence has prompted a shift. Turkey, which has been frustrated by an inability to influence events despite its recent closeness to Syria, has stepped up its demands for reform, while Saudi Arabia has withdrawn its ambassador and demanded an end to the bloodshed. There is an increased possibility of diplomatic, economic or even military intervention by the Arab League or Turkey, either working together or separately. In contrast Iran and Hizbullah, an Iranian-sponsored Lebanese Shia militia, depend on their alliance with Syria to continue their cold war with Israel, which occupies Syria’s Golan Heights, and will continue supporting Mr Assad. This will include financial assistance, possibly arranged through Iran’s allies in Iraq.

POLICY TRENDS: The recent policy of gradually liberalising Syria’s centrally planned economy has stalled in the wake of the political unrest; its main architect, the deputy prime minister for economic affairs, Abdullah al-Dardari, was excluded from the new government formed in April. Mr Dardari’s successor as economy and foreign trade minister, Nidal al-Shaar, has a record that suggests he is in favour of economic reforms. However, his initial priority has been to quell the unrest by implementing populist state-funded measures, although a complete dismantling of Mr Dardari’s reforms is unlikely.

ECONOMIC GROWTH: Provisional figures from the Central Bank of Syria show that real GDP growth was 3.2% in 2010. Although the economy was boosted by increased oil production, growth in exports to Iraq and an expanding services sector, notably tourism, the continued weakness of the agricultural sector and increased food imports limited growth. With the continuation of political unrest we forecast that growth will drop to 1.1% in 2011, with any growth driven primarily by increased government spending and oil exports. Assuming that disruption will continue into 2012, but that some resolution will emerge in that year, we expect growth to increase slightly to 2.3% in 2012. Foreign investment is expected to drop as a result of the unrest, and the tourism sector will be hit badly. Business activity will be curtailed by disruptions caused by the protests, and the political uncertainty will lower private consumption (despite public-sector pay rises). In addition, any prolonged instability may persuade the Iraqi refugees living in Syria (estimated at between 500,000 and 1m) to return home, depressing consumption further.

INFLATION: Inflation should rise to 7% in 2011, less than initially expected, as early signs show that the increase in global commodity prices and the increase in liquidity resulting from the hike in state employees’ salaries and tax cuts promised during March have not pushed prices as high as some feared. Average inflation will drop to 5.5% in 2012, as commodity prices stabilise and the number of Iraqi nationals in Syria declines, lowering demand.

EXCHANGE RATES: The Syrian pound has been loosely pegged to the IMF’s special drawing rights since October 2007 and is tightly managed by the Central Bank. The authorities are unlikely to let the pound float freely, as they value exchange-rate stability. Recent unrest reportedly led to a temporary 15% depreciation of the pound against the dollar on Syria’s black market. (The black-market pound:dollar rate is usually in line with the official rate.) Concerns about the euro in 2011 will lead to a slight depreciation of the pound against the dollar, and we forecastthat the official rate will average SP47.3:US$1 in 2011-12. Before the current crisis, the Central Bank had healthy foreign-exchange reserves (equivalent to about 12 months of import cover), leaving it relatively well placed to defend the currency.

EXTERNAL SECTOR: High oil prices pushed export earnings up to US$14bn in 2010, but we expect them to drop in 2011-12 to an average of US$12.5bn, despite even higher oil prices, as non-oil exports decline as a result of political unrest. Oil production, which is increasing at small fields but declining at the larger, mature fields, rose by 2.9% in 2010. Several major oil companies have reported that production has been unaffected by the unrest, although there are reports of increased insurance premiums on tankers transporting oil from Syria’s ports, and acts of sabotage against some pipelines, which might cause some delays in delivery. Output will pick up further in 2011-12, averaging 392,000 barrels/day. The impact of changes in oil prices on the trade balance is limited, because Syria’s imports of refined products are about equal in value to its exports of crude oil. Higher production in 2011, augmented by a rise in international oil prices to an average of US$101.5/barrel in 2011-12, will push up crude oil export revenue to an average of US$5.3bn in 2011-12, from US$4bn in 2010. We forecast that the trade deficit will narrow to an average of US$1.4bn, or 2.3% of GDP, in 2011-12, as imports are expected to drop owing to the continued political unrest.

SOURCE: Country Outlook