Gaza conflict shakes Middle East economies

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War in Gaza is threatening the fragile and tourism-dependent economies of Egypt, Jordan and Lebanon and triggering concerns that the impact will spread across the Middle East.

In Jordan, where tourism accounts for 10 per cent of gross domestic product, one tour operator said the war had triggered a string of cancellations: “Just like that, months and months of bookings have disappeared,” he said.

In Egypt, where the government has already turned to the IMF to relieve its economic crisis, many tourism bookings in Sinai, which borders Gaza, have been cancelled.

“We’re already seeing reports of cancelled bookings in neighbouring countries like Egypt,” said Farouk Soussa, Goldman Sachs’s regional economist. “We think it could cost Egypt billions in lost tourism revenues this fiscal year alone . . . Egypt doesn’t have the foreign exchange buffers to absorb that sort of hit.”

Noura al-Kaabi, a United Arab Emirates minister of state for foreign affairs, on Friday said the Gulf state was working “relentlessly” for a full ceasefire and warned that the regional temperature was approaching a “boiling point”.

“The risk of regional spillover and further escalation is real,” she told a conference in Abu Dhabi.

The steep civilian death toll from Israel’s assault on Gaza following Hamas’s incursion into southern Israel has punctured hopes for an economic dividend from a new era of better relations between the Jewish state and its Arab neighbours.

“There’s a great deal of uncertainty regarding the potential impact of the war on the region’s economy,” said Soussa. “The risk of further escalation threatens to both deepen and broaden the economic fallout.”

The crisis has already spread, with shelling across the Israel-Lebanon border, and drone and missile attacks on the Israeli Red Sea town of Eilat by Yemen’s Houthi militia, which is supported by Iran.

Israel’s tourism-dependent neighbours Egypt, Jordan and Lebanon were struggling even before the conflict.

“Uncertainty is a killer for tourist inflows,” said Kristalina Georgieva, the IMF’s managing director, at Saudi Arabia’s Future Investment Initiative conference last week.  

Lebanon, already in profound crisis, relies on tourism for about 40 per cent of GDP and now faces a further economic deterioration, Walid Nassar, its tourism minister, told CNN Business Arabic.  

For the petrostates of the Gulf, on the other hand, higher oil prices could boost state revenues dented by Opec output cuts.

“But this will likely be offset by reduced foreign direct investment inflows and tourism income,” said James Reeve, chief economist at Jadwa Investment in Riyadh. “Given that the priority is economic diversification, this is the bigger loss.”

Bankers have been brutally reminded of the centrality of the Israel-Palestine conflict to the politics of the Middle East.

Despite the war, top financiers flocked to last week’s FII conference, the so-called “Davos in the Desert”, trying to tap Saudi Arabia’s sovereign wealth funds for investment in global assets or to look at domestic opportunities, such as electric-vehicle manufacturing.

But many attendees were just doomscrolling on their mobile phones, following the human tragedy in Israel and Palestine that officials fear could slow their grandiose development plans.

In the post-pandemic boom town of Dubai, economic strength has been driven by an influx of Russians fleeing war and the ultra-wealthy seeking additional homes.

Hoteliers say the Gaza war is responsible for some cancellations from Israeli and American tour groups, but few expect others to avoid the city because of a distant war on the shores of the Mediterranean.

But a broader conflagration could deflate soaring property valuations and mar the busy autumn period. Events starring actress Jada Pinkett Smith and singer Macklemore have been postponed.   

“Retailers are already worried about softer sales, especially in luxury,” said one consultant. “Some big launch events for new products are being cancelled — they are all scared of what comes next.”

King Charles is scheduled to attend the opening of the UN COP28 climate summit in Dubai, along with other world leaders, from November 30. The UK government this week raised the risk of terrorist attacks in the UAE to “very likely” from “likely”.