The Middle East back in focus in 2024
Robert Besseling, CEO at PANGEA-RISK, assesses some of the regional implications of the Red Sea maritime crisis, but foresees a broadly more optimistic outlook for the Middle East in 2024.
Fears over a broader outbreak of regional war in the Middle East and disruption to Red Sea shipping are clouding longer term projections for the region. Even while maritime insecurity will pose serious commercial threats, the wider Gulf region is capitalising on surging demand for its energy assets, while pursuing ambitious economic diversification strategies. Trade and investment opportunities in key markets such as Saudi Arabia and Iraq offer a more balanced forecast for the region. Nevertheless, a slowing economic outlook will increase fiscal vulnerabilities in markets such as Egypt, which may narrowly avert defaulting on its massive sovereign debt obligations in 2024.
The resumption of war in the Middle East in October 2023 has put a new spotlight on the fissile region at a time of global interest in its key markets. The Central Bank of Israel estimates over $55.9 billion in direct and indirect costs for Israel alone. Moreover, the Israeli maritime, aviation, and property sectors are exposed as insurers withdraw cover under the current insecurity conditions, fearing an outbreak of wider war in the Middle East. Commercial disruptions, particularly in port operations, further underscore the economic vulnerabilities, with potential implications for imports and exports. Disruption to shipping in the Red Sea and Suez Canal drive the highest threat of regional contagion and conflict escalation.
A feared regional war has so far not materialised, yet, Israel, along with its principal ally the US, finds itself increasingly engaged in confrontations on several fronts. Israel's security concerns extend beyond the West Bank and Hezbollah in southern Lebanon. The country faces increased attacks from Iran's ‘Axis of Resistance’ proxies in Syria and Iraq, targeting US forces. In the Red Sea, the Houthi rebels pose a threat to commercial shipping. However, diplomatic interventions by Egypt, Jordan, and Gulf countries, coupled with the strategic interests shared with certain Arab states, may mitigate the risk of a broader regional conflict.
Red Sea maritime crisis
Since January, the US and its allies have executed airstrikes to curb drone and missile attacks on shipping from Yemen, signifying a notable tactical shift in the Red Sea region. Despite these measures, the impact of the US-led naval coalition in effectively deterring Houthi aggressions is expected to be limited. In the forthcoming months, it is anticipated that Houthi attacks on vessels will persist, albeit potentially at a reduced rate and intensity, as the group reorganises and formulates its forthcoming strategies. Given their near two-decade-long engagement in conflict and survival through almost a decade of airstrikes from Saudi Arabia and the United Arab Emirates (UAE), the group's resolve appears unshaken.
In the wake of intensifying Houthi attacks on commercial vessels traversing the Red Sea, numerous major shipping companies have opted to reroute their journeys via longer and more costly, but comparatively safer, paths around the African continent, avoiding the conflict zone. The detour around Africa, involving longer routes through the Horn of Africa and the South Atlantic, leads to increased fuel consumption and extended transit times, contributing to inflation and higher emissions. Another risk associated with alternative routes around Africa is the escalating threat of piracy, particularly in the Gulf of Guinea and along the southwest African coast.
As the Israel-Hamas conflict continues, insecurity and operational threats to vessels in transit will continue to characterise the maritime security environment in the Red Sea, Gulf of Aden, as well as in the Persian Gulf, with a particularly elevated threat in the Bab El-Mandeb area.
Moving beyond ‘Big Oil’
The Middle East’s primary objective in 2024 will be to pursue economic diversification plans, which are spearheaded by regional giant Saudi Arabia. The kingdom’s economic diversification efforts under the Vision 2030 initiative are showing promising signs. Over the next 12 months, Saudi Arabia is anticipated to witness sustained growth, with non-oil GDP expected to remain robust. This will be driven by accelerated project implementation stimulating demand, underpinned by the kingdom’s Vision 2030 initiative and the recent launch of Special Economic Zones (SEZs), designed to attract investment and diversify the economy away from oil. The SEZs, coupled with $1.25 trillion worth of projects since Vision 2030’s inception, are pivotal for economic diversification. Furthermore, legal and regulatory enhancements, including a new Investment Law enacted in July 2023, are fortifying the business environment, promoting transparency, and strengthening investor rights.
However, Saudi Arabia’s economic strategy remains susceptible to sudden international changes, with its business environment conditioned by bilateral relations and exposure to global financing practices. Saudi-Israeli normalisation, which appeared imminent before the 7 October Hamas attack on Israel, will be delayed. Yet on the wider international relations front, Saudi Arabia made steps towards normalising relationships with peers and playing a broader role in the region, which contributed to easing trade and investment conditions. In 2023, the kingdom reached a historic accord with Iran negotiated by China. Relations between Saudi Arabia and Türkiye have also improved after years of hostility. Competition with the UAE for business and investment opportunities should make each country more appealing to global investors. Despite external uncertainties, the economic outlook for Saudi Arabia remains robust, with non-oil sectors expected to drive growth.
Relative regional stability
Despite the new war between Israel and Hamas in 2023, other parts of the Middle East are showing relative stability and progress, most notably in Iraq. Iraq has recently embarked on a major shift in its energy sector investment approach, securing a $27 billion oil deal with France's TotalEnergies. This initiative is geared towards boosting oil production and financing substantial projects, seeking to rejuvenate foreign investment in Iraq's energy sector. This development takes place against a backdrop of dwindling foreign investment over the past decade, with oil conglomerates such as Exxon Mobil, Shell, and BP reducing their operations in Iraq. The new deal introduces an innovative revenue-sharing model designed to lure investors. It covers an array of projects, including a solar power plant, a gas processing facility, a seawater supply project, and an oil field.
After months of political conflict, Iraq has managed to pass its historic three-year national budget for 2023-25, the largest in the country's history at $153 billion per annum. Yet, economic planning deficiencies persist, with expenditure consistently outstripping income and heavy reliance on oil revenues. A severe drop in oil prices could force Iraq to borrow more or tap into its $97 billion monetary reserves, potentially destabilising the dinar and driving inflation.
Sovereign default risk in 2024
Despite President Abdel Fattah Al Sisi's smooth re-election late last year, Egypt is poised to face balance-of-payment challenges in 2024. The looming risk of a foreign payments crisis will likely steer the country's policy towards a more orthodox approach. Additionally, Egypt is expected to leverage its geopolitical position in the region to draw multilateral finance and potentially secure guarantees for international debt issues.
Plans to devalue the Egyptian pound are intended to balance external payments and enhance the global demand for its exports. However, high inflation and tight credit conditions, coupled with a shift towards austerity, are expected to limit economic growth in 2024-25. Growth rates should pick up post-adjustment phase.
On the foreign policy front, Egypt will maintain a steadfast stance on Nile water rights, with military action an unlikely response to negotiation impasses. Concurrently, Al Sisi’s administration is set to uphold pragmatic relations with Israel, carefully balancing between domestic concerns and strategic external interests.
