Regional impacts and scenarios for the Iranian-Israeli conflict in the wake of Israel’s attack on Iran’s embassy and the subsequent retaliation

On the evening of April 13, 2024, Iran launched a retaliatory attack on Israel Ramon military base, which it states was the launch pad for the Israeli attack on its consulate in Damascus that killed seven Iranian diplomats and other civilians. Most of the 300 projectiles were intercepted before hitting the Ramon military base, with support from the UK and US. The immediate risk of a wider regional conflict subsided after the Iranian retaliation, as Iran stated its response was calculated and limited, and the US advised the Israeli government to not escalate further. 

Updated Scenarios:

FrontierView’s base case (55%) expects that the recent cycle of escalatory violence and tensions will subside. Israel is likely to succumb to international pressure and instead respond to Iran’s retaliation in a calibrated manner that prevents an Iranian response. Initially, Israel will focus on striking Iranian-supported groups in Lebanon, Syria, Yemen, or Iraq (in order of probability). This would pose an aversion away from a regional war, but raise the tension level and security challenges in the aforementioned markets—a worsening situation than our previous base case.

  • Israel could also decide to announce a pre-emptive attack on the launch sites of Iran’s retaliatory military operation, giving enough time for the Iranians to intercept any incoming projectiles inside its borders (similar to the Iranian attack). Alternatively, the Israeli attack could come in cyber form. The key driver here would be that Iran is able to reduce the potential damage inflicted, prompting a lesser need for a response once again, a political win-win to the Iranian and Israeli regimes and avoiding further escalations.

It is important to remember, however, that the Israeli attack on Iran’s embassy and the subsequent response from Iran has pushed the region into a state of higher tension, with a higher ceiling for escalation and shorter warning timelines. This heightened risk of regional war requires executives to start planning for a downside scenario in which the broader MENA region and its economy are impacted.

In the downside scenario (35%) Israel’s strike is escalatory and targets key areas inside Iran—but falls short of an attack on civilian infrastructure and Tehran. In this case, Iran is forced to retaliate once again, and the region is dragged into a situation where direct confrontation between Iran and Israel becomes a cadence. Regardless of a calculated or small-scale approach, the exchange would be sufficient to cause mass uncertainty in terms of security risk in the region and would result in economic disruptions to currencies, trade, foreign investments, tourism, private consumption, and confidence as well as a reprioritization of government spending plans. 

  • This level of tension could spike once more if either Iran or Israel mount a significant strike on nuclear facilities or Israeli strikes target civilian infrastructure. In the extreme downside scenario (10%), a regional war erupts, forcing US intervention and critically destabilizing the region for a lengthy period.

Business implications:

Oil prices: Iran’s response still offers room to avoid a further escalation, which helped partially reverse some of the oil price climb seen in the past week. FrontierView expects prices to stabilize and marginally ease further. Should the Israeli attack cause a significant escalation and drive Iran to retaliate once more, potentially through disruptions to the supply route in the Strait of Hormuz, prices are likely to climb fast toward USD 100/bbl. and even surpass it. 

Shipping: Nonetheless, even in our base-case scenarios, an Israeli response to Iranian proxies could reach the Houthis, resulting in a resurgence of more volatile maritime disruptions in the Red Sea. Thus, we expect to see the risk of disruptions and cost implications to worsen in Q2/Q3. 

Economic Outlook for the Region: Regionally, the tense environment between Iran and Israel and its implications to the wider MENA region have drastically changed since Israel’s attack on Iran’s embassy, rendering the confrontation more direct rather than limited to proxies. The key consequence to MENA is that future escalations will have less warning time and a higher ceiling for escalation. In the immediate term, we see the following implications:

  • Travel and tourism to the region are likely to see some disruptions for the remainder of Q2. The line of fire means that Egypt-, Jordan-, UAE-, Oman-, and Saudi Arabia-bound flights would see a higher risk if the Israeli response is escalatory. 
  • Foreign investments that have been trickling into Iraq and Jordan are likely to be paused for the coming three months until investors assess the bigger-picture risk. In our base case, investments into Iraq resume from mid-Q3 onward. The impact on Egypt-bound investments remains unaffected within the base case. 
  • Most currencies remained largely stable and unaffected by the Iranian retaliatory operation. FrontierView placed the Iraqi dinar on a risk watch, as an Israeli attack on Iranian proxies inside Iraq could cause some fluctuations (up to 27% depreciation) on black-market rates. The Lebanese lira is seeing some increased pressure. Should the Hezbollah-Israeli confrontation escalate into Q2/Q3 and disrupt the summer-tourism season, reduced dollar inflows could see the lira slip a further 15% on the black-market rate and beyond if a full-scale war erupts. The reduced immediate uncertainty improved confidence in the shekel. The Iranian rial saw the largest damage, slipping to more than IIR 705,000/USD.
  • The biggest impact on the Israeli market is a further setback to private confidence recovery and increased fiscal pressure. Defending against the 300 projectiles cost more than USD 1.1 billion, likely to accelerate some of the austerity and tax hike plans.

Actions to Consider: FrontierView recommends businesses prepare a more comprehensive mitigation plan for future downside scenarios. The Iranian-Israeli confrontation has evolved permanently in MENA, becoming more direct. This leaves the downside scenarios more damaging and with less warning. Multinationals should have clear and comprehensive plans against travel and tourism disruptions in late 2024, even for markets such as UAE and Saudi Arabia. A risk of bigger confrontation would likely keep tourists away from the entire MENA region (excluding Morocco and Turkiye). Risks to supply chain disruptions are increasingly likely in both the base-case and downside scenarios. Multinationals should plan on a cost buffer and stockpiling solutions in case of severe shipping disruptions. Executives must also build scenarios for damaging inflationary spikes under a scenario in which oil prices reach or surpass USD 100/bbl. Currency scenarios are also recommended for the Turkish and Lebanese liras, the Jordanian and Iraqi dinar, and the shekel in the downside scenarios.

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