How the escalation around Gaza will affect the economies of the Middle East

The Hamas attack on Israel and its retaliatory military operation are affecting the Middle East and North Africa (MENA), a key region for the global economy. About 600 million people live there, 60% of the world’s oil reserves and 45% of gas reserves are concentrated. Global transport routes pass through the region, up to 80% of the world’s maritime cargo traffic; new corridors were planned and existing ones were being expanded, such as the international North-South transport corridor with Russian and Iranian participation, as well as the Chinese “One Belt, One Road”. The World Bank (WB), in a forecast published two days before the escalation, calculated that in 2023 the GDP growth rate of MENA countries would slow down three times – from 6% in 2022 to 1.9%.

At a minimum, the Israeli authorities and world oil prices responded to the conflict with Hamas in the economic sphere. Tel Aviv ordered Chevron to stop gas production at the Tamar platform in the Mediterranean from October 9. Brent oil, which was trading on October 6, on the eve of the Hamas attack, was below $84/barrel on the ICE exchange, at the opening of October 9 it cost $87.5/barrel, and by October 20 it exceeded $93/barrel, having cooled only on October 23 to $90/bbl. The Central Bank of Israel is selling $30 billion worth of currencies to maintain the exchange rate of the shekel against the dollar. The flagship Israeli stock index TA-35 fell 6.7% on October 9 to a low of 1,705.07 points and has continued to fall throughout the weeks of the conflict. On October 23, it stood at 1,614.96 points.

Vedomosti interviewed experts about the possible consequences of the conflict for the economic growth of the region.

Stock market expert “BKS World of Investments” Evgeniy Mironyuk:

“At the end of the year, 1.9% of total growth for the region in the current conditions will be a good indicator; it may worsen as tensions increase. The slowdown in growth rates in the World Bank’s pre-conflict forecast was due to a higher calculation base, when the previous growth was restorative (after the coronavirus pandemic. – Vedomosti).”

Associate Professor at the Department of Global Financial Markets and Fintech, Russian Economic University. G. V. Plekhanova Ilyas Zaripov:

“It is too early to revise the overall forecast of the World Bank towards a further slowdown. The most realistic scenario is that most countries in the region will not be involved in the conflict. Combined with rising world prices for raw materials, this will lead to GDP growth in the countries of the region in 2023-2024. by 3.2–3.6%. The main thing is not to allow the conflict to enter a protracted stage, which could lead to an outflow of conservative investors from the region.

Lebanon is likely to be the hardest hit in the region from the ongoing fighting in Gaza or in its south, which could face another decline in GDP if Israel launches a military operation there. Beirut will need international help to rebuild. Another player neighboring the conflict zone, Egypt, is a more developed country; a military conflict will affect it less severely, but the growth [в 2023 г.] will be zero or about 1–1.5%.

Israel’s economy is also likely to suffer from high military spending and requires US foreign assistance. Israel’s GDP growth may turn out to be zero as a result of the conflict, since the conflict worsens relations with the surrounding Islamic world.”

Senior Lecturer at the School of Oriental Studies at the National Research University Higher School of Economics Andrey Zeltyn:

“The mobilization of more than 300,000 male reservists, or 4% of all 9.5 million citizens, is painful for the Israeli economy, coupled with benefits for those mobilized and the shutdown of the Tamar field. Fitch and Moody’s notice this. Although they left an extremely high A+ rating for the country, they placed Israel on the list of countries with a “negative” rating and even allowed a revision, which has never happened before in history. The $14.3 billion announced in the draft financial assistance for Israelis introduced into the US Congress on October 20 by President Joe Biden could be used to close the potential budget hole. However, the Israeli economy is now much more resilient compared to the events of the Yom Kippur War 50 years ago, in October 1973, when mass mobilization was also carried out on a comparable scale.

In addition to the direct impact on the economy, the war delays the launch of the project for the new India-Middle East-Europe Transport Corridor (IMEC), which is important for Israel, through Israeli territory. The project was announced by Biden on September 9 at the G20 summit. An exodus of investors from Israel, which is dependent on foreign investment, is now likely. Technology transfer from it went to Saudi Arabia, where Crown Prince Muhammad bin Salman is implementing the Vision 2030 modernization program. Hopes for strengthening the transfer were associated with the normalization of relations between Riyadh and Tel Aviv, with the IMEC corridor. Israel’s possible economic problems will also have a painful impact on Bahrain and the UAE, which had hoped for Israeli investment and technology.”

Analyst at Finam Financial Group Oksana Lukicheva:

“Key oil producers are still neutral: OPEC+, represented by Saudi Arabia and Russia, promised to support the market if supplies begin to fall sharply: this could be about 3-4 million barrels per day. The market will most likely withstand a complete shutdown of Iran and even some other producers, although it will be under severe stress.

The conflict rather threatens the regional gas market: the Israelis closed Tamar, from where they received 10 billion cubic meters. m, or 50-60% of your needs. They are trying to replace them with LNG and supplies from another large Israeli field – Leviathan. Damage will depend on the duration of the closure. So far there are no serious problems with exports, supplies are bypassed through the Arab gas pipeline to Egypt, but there may not be enough gas for everyone: prices are already rising.”

Dean of the School of Political Studies ION RANEPA Sergei Demidenko:

“The impact of the conflict on the Israeli economy will be very situational, local and short-term. There will be a so-called “geopolitical premium”, a negative stock exchange reaction, but not something fatal for the Israeli and even less so for the regional economy, because it is unlikely that a blow will be dealt to markets, supply chains, and supply routes.”