Middle East and North Africa: Country Risk Grows
The war between Israel and Hamas in Gaza comes with a terrible human cost on both sides in October 2023, but is also likely to change the wider picture in the Middle East. The war will likely drag into 2024 and cause political tensions in the Middle East.
It is also feasible that Hezbollah in South Lebanon could be drawn into the conflict depending on how the situation in Gaza and Israel develops. Israel is also likely to retaliate against Iran at a later date, due to intense political pressures in Israel. This is most probably to involve attacks on Iran military advisors in Syria. These have been occurring since 2011, but the risk is that these are scaled up dramatically. The magnitude and the duration of Israel’s ground offensive in Gaza strip can also be decisive on how Middle Eastern countries will react to the ongoing tension.
All of this will likely ensure that Middle East tensions remain elevated or deteriorate further for the remainder of 2023 and into 2024. A normalization deal between Saudi Arabia and Israel (sponsored by the Biden administration) is now unlikely in the near-term due to domestic and regional politics. Saudi Arabia had already considered waiting to see if a friendlier U.S. Republican president is elected in November 2024. Secondly, a more active U.S. involvement in Middle East politics is likely until at least the U.S. presidential election, which replaces the growing sense previously that the U.S. was more focused on China and Ukraine. This encourages a focus to enhance relations by the U.S. with Gulf countries, but at the cost of early improvement in relations between Middle East countries (e.g. Saudi Arabia and Iran could deteriorate). Meanwhile, on the economic front, Gulf countries will likely still remain focused on long-term projects to diversify economies away from fossil fuels helped by the rebound in oil revenues. Economic momentum will also remain good, it just that the regional political situation will be fraught. Thirdly, Iran’s government will likely use the war as a pretext to control mass protests that have seen against the repressive regime and the cost of living crisis. However, public outrage now runs deep in Iran and further domestic protests on cost of living issues could well be evident. Fourthly, the India-Middle East-Israel corridor agreed by select G20 countries will likely go on the backburner – it had faced major logistical difficulties in Jordan and Saudi Arabia saw it as being symbolic to enhance trade with India rather than a real priority. Finally, the Palestine question is once again back in focus, which can rally popular support across a cross section of MENA countries and be an influence or point of tension on bi-lateral relations between countries. We expect the war will not only affect MENA dynamics, but also may reshape Russia’s, Iran’s and Turkiye’s role in the region.
Egypt will likely have to navigate these cross currents by calling for calm; mediating to resolve the conflict, as well as dealing with the humanitarian crisis and trying to advance long-term solution to the Palestine question. The U.S. will likely also seek help from Egypt on the conflict, alongside Qatar. The U.S. will also want to ensure better influence with Egypt after its surprise inclusion in BRICS from January 2024. But this could take a little time, as the Biden administration will presumably seek to deemphasize the alleged bribery by Egypt of Senator Menendez (ex chair of the U.S. Senate Foreign Relations Committee). On the economic front, Egypt continues to confront economic problems, as it appears the country will have to devalue after the December election when president Sisi is widely expected to be reelected and risks an economic crisis in 2024.Egypt has avoided devaluation since March, despite a projected 23.5% inflation rate for 2023 (IMF) and needs to relieve financial pressures. The ongoing 46 month $3bln IMF package is providing support and driving some reforms and asset sales, but Egypt may require more money from the IMF to help manage external debt in the coming years. Egypt will likely ask the U.S. for support on this front in exchange for mediation on Israel and Gaza.
The focus on Israel and Gaza also risks shifting the regional focus away from solving other problems. Yemen ceasefire is largely holding, but Saudi Arabia and UAE remain divergent on what a future Yemen looks like and how much support to provide. Syria conflict is less intense but still precarious, as intermittent fighting remains and the admission to the Arab League is unlikely to be followed by momentum to resolve the civil war. Meanwhile, Libya focuses on dealing with the devastating Derna floods does not take away from the gulf between the Tripoli and Benghazi rival governments on new elections. The shift of Egypt focus will also probably mean less outside pressure and the situation in Libya remains fragile. Finally, Iraq government friendly ties to Iran will likely also raise concerns about foreign direct investment and momentum for the non-oil sector (crucial to reduce youth unemployment and reducing future tensions). Security risks in all of these countries are projected to remain very high.