The economy of the Middle East is caught in the crossfire
A a month ago, on the eve of Hamas’ attack on Israel, there were reasons to be optimistic about the Middle East. Gulf states plowed billions of dollars of oil profits into flashy investments, building everything from sports teams and desert cities to entire manufacturing sectors. Perhaps, optimists thought, the prosperity would even trickle down to the poorest countries in the region.
What fueled such optimism was the longest period of calm since the Arab spring in 2011. Gnarly conflicts, such as civil wars in Libya and Yemen, as well as organized Palestinian resistance against Israel, appeared to be has frozen. Brutal fights, which some believed to be a precursor to them, were rare and disappeared entirely. The great rivals of the region were moving towards a warmer friendship. International investors flocked to the Gulf to get in on the action.
Hamas’ attack and Israel’s response suggest that the region will now be mired in bloody, destructive conflict for months to come, if not longer. Under pressure from their people, Arab leaders have blamed Israel for the situation, even if they have been careful in their language. Overnight, the focus has shifted from economic growth to containing and shortening the war. Countries across the region, including Egypt and Qatar, are pulling out all diplomatic stops to stop the spread of fighting.
Even if the conflict continues between just Hamas and Israel, there will be costs. Analysts had been optimistic about the prospects for economic integration. In 2020 the United Arab Emirates (uae) and Bahrain normalized relations with Israel, opening the door to deeper commercial ties. Although many other Arab countries refused to recognize Israel, many were increasingly willing to do business with it on the quiet. Even Saudi Arabian companies were suddenly trading and investing in their Israeli counterparts, whose workers are among the most productive in the region; the two countries were working on a treaty to formalize relations.
It remains to be seen how long such a compromise will last, but the more destruction there is in Gaza, the harder it will be for Arab leaders to keep up with Israel in the interim. future, with the numbers facing Palestine and pressure from neighbors. Although Thani al-Zeyoudi, the uaeand trade minister, has promised to keep business and politics separate, others are unsure what will be possible. A Turkish investment banker, who prepares deals for companies in the Gulf, reports that most of his clients who are considering Israel as an investment destination are waiting to see what will happen now.
For the poorest countries in the Middle East, the consequences will be worse – and nowhere more so than in Egypt. The country was already struggling, with annual inflation at 38% and the government living between payments on its mountain of dollar debt by borrowing investments from central Gulf banks. Now he has lost out on the gas that came out of Israel. On November 1, officials in Cairo allowed across the border a handful of wounded Gazans, as well as those with dual nationality. Some diplomats hope that larger inflows will continue, perhaps even on the scale that Jordan saw when it welcomed Palestinians in the 1940s and Syrians in the 2010s, if Egypt provided the right financial incentives. In 2016, looking after 650,000 Syrian refugees cost the Jordanian state $2.6bn, much more than the $1.3bn it received in foreign aid. Twice as many people are internally displaced in Gaza.
What if the conflict escalates? In the worst case, the region comes to war – possibly including a direct conflict between Iran and Israel – and economies turned upside down. Any such war is likely to see a sharp rise in oil prices. Arab oil producers could even limit supplies to the West, as they did during the Yom Kippur war in 1973, which the World Bank believes could push prices up 70%, to $157 per barrel. Even if the world economy is less energy intensive today, the Gulf oil producers would benefit. An outbreak of war, however, would hamper efforts to diversify their economies. Migrant workers would leave. Manufacturing businesses would struggle to get started without secure transportation. There would be a lack of tourists in malls and hotels in the future to fill them. And for the region’s energy importers, which include Egypt and Jordan, a rise in oil prices would be a disaster.
There is another escalation scenario that is more plausible. So far Iran has refused to turn threats and errant missiles into a direct attack. Israel’s ground offensive – smaller and slower than expected – is helping to keep things under control. Even so, conflict could still spill over Gaza’s borders. Imagine, say, fighting in the West Bank or more involvement from Hizbullah. In this situation, investing in the Middle East would seem much more risky. If fighting were to flare up in neighboring countries, leaders in the Gulf would find themselves working harder to convince investors that a return to calm and closer ties with Israel could happen soon. .
A parachute is required
In such a world, Egypt would not be the only open country. Lebanon’s economic free fall – now in its third year, as inflation soars above 100% – would be accelerated by the conflict between Israel and Hizbullah, which is based in the country. Fighting in the West Bank, where tensions are high, would cause trouble for Jordan, which is next door. Like Egypt, the country is almost broken. He took out a $1.2bn loan from the imf last year, and was recently told by the fund that the annual growth of 2.6% was not enough to correct its problems. Refugees could leave the state unable to repay debts. A dispute over its borders could hinder creditors.
If Egypt or Jordan ran out of money the results would be destabilizing for the region. Both countries are crossing Palestinian territory, feeding it with supplies and providing information to their friends. Both have the ear of the Palestinian Authority. And both have a young, disaffected crowd. The Arab spring showed how easily unrest in one Arab country can spread to another. Even Gulf officials, though they might be, would prefer to avoid such instability. ■
Read more from Free Exchange, our economics column:
Israel’s war economy is working – for now (October 26th)
Will Amazon and Google lock down competition? (October 19th)
To defeat populists, smart politicians need to up their game (October 12th)
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