Israel's next steps could either result in de-escalation by Q1 2024 or significant spillover across the MENA region

FrontierView’s update on the war in Gaza, noting key developments and changes to possible scenarios as well as implications for the region

The war in Gaza has now moved almost completely into FrontierView’s Widespread Invasion Scenario, whereby Israeli forces are mobilized in the northern half of Gaza and directly confronting Hamas fighters. In line with our scenario expectations, the exchange of fire between the Israeli forces and Hezbollah on Lebanon’s south border will moderately increase in frequency—but remain short of an all-out war between the two. Tensions in Iraq are creeping upward, and Houthi operations will widen moderately in the Red Sea, too. 

Qatari-US mediation with Hamas and Israeli forces appears to have made a breakthrough, with a truce deal appearing very close, if not already concluded. While the full details are not 100% confirmed, details have come out on the negotiations. Hamas spokespeople confirmed their willingness to deliver on their promises to Qatar and will release 50 civilian captives from Gaza in exchange for the release of women and children held in Israeli prisons. The truce will last up to five days and allow for the inflow of desperately needed humanitarian aid through the Rafah crossing, following a complete siege by the Israelis. 

The success of this truce could increase the chances of preventing further escalation in the war in Gaza, limiting it to a scenario where Israeli forces conclude their war by eliminating a significant number of Hamas leaders and successfully negotiating the release of civilian captives. Nonetheless, this scenario would last into Q1 2024, until full completion, with repeated episodes of truce until a comprehensive agreement is reached.

Should Israeli forces decide to escalate further and partially annex Gaza, the war will spill over more tensely into Lebanon, West Bank, Egypt, and Iraq. Alternatively, the Israelis could move to annex all of Gaza, triggering a widespread war where Egypt, Jordan, Iran (IRGC in addition to proxy groups), and Lebanon would be dragged in, spelling severe risks to MENA economies and international trade routes through the Strait Hormuz, Red Sea, and Suez Canal. US and European pressure and criticism of Israeli annexation ambitions are likely to keep the probabilities of both annexation scenarios low for now.

Key Developments around MENA:

  • Israel/Palestine: The number of disrupted employees reached over 430,000 as a consequence of Israeli conscription, suspension of nonessential business activities, and settlement evacuations in areas near the Lebanese and Gazan borders. Additionally, an estimated 150,000–200,000 workers from the West Bank have been frozen from employment as Israeli forces block crossings, and as radical-Israeli attacks on Palestinian civilians in the West Bank remain uncontrolled. FrontierView expects a severely weakened private sector business environment to stretch into Q1 2024, with a long-winded recovery timeline impacting procurement and purchasing powers. 
  • Lebanon: Tensions in south Lebanon rose significantly over the past week, with Hezbollah increasing its frequency in exchanging fire with Israeli forces south of the Lebanese border. Israeli forces struck Nabatiyeh for the first time since 2006, sparking a response from Hezbollah. Israeli attacks on south Lebanon will severely disrupt the winter tourism season, seeing a notable decrease in diaspora tourism. FrontierView expects a weakened private consumption outlook and some depreciation pressures for Q4 2023, lasting until the end of Q1 2024. 
  • Iranian proxy activities: The new phase, marked by the Widespread Invasion Scenario, sees a rise in Iranian proxy activities against Israeli and US assets. FrontierView expects more frequent targeting of US assets in Iraq by Iranian proxies and increased Houthi rocket launches from Yemen. Episodes of Houthi attacks on vessels in the Red Sea will likely occur repeatedly. Security risks in Iraq are climbing, but pose little to no disruption in the north for now. Multinationals operating in MENA could see further rising premiums on shipping and some delays. 
  • Jordan: MPs in Jordan are evaluating all Jordanian-Israeli agreements and making recommendations to the government. This comes as the foreign minister announced that Jordan will no longer be signing a water and energy deal with Israel. A suspension of some aspects of Jordanian-Israeli economic and trade ties is highly likely.
  • Egypt: Tourism disruption is worsening in Egypt, and cancellations for Q4 2024 reached as high as 50%, and as much as 12% for Q1 2024. International support for Egypt’s fiscal troubles amid the Israeli war on Gaza has been gathering pace, however. The IMF is strongly considering doubling the original US$ 3 billion program, and the EU is preparing a EUR 9 billion package for investments in Egypt’s digital, energy, agriculture, and transport sectors to commence by Q2 or Q3 2024. 
  • GCC: The sub-region remains largely stable and immune to any material disruptions. Nonetheless, the UAE saw a small number of tourist cancellations in Q4 2023, mostly from Israeli and American visitors. FrontierView expects no significant derailment in the growth projections for the UAE’s tourism sector.
  • Boycotts: FrontierView called out the real and significant risk of boycotting activities around MENA against some US and Israeli brands. Political positioning of such multinationals, their marketing campaigns, and their sensitivity approach will dictate how exposed they may be to boycotting from MENA consumers. Unlike previous Israeli wars on Gaza, the emotional toll from the 12,000 (as of November 21, 2023) is likely to drive a longer boycott timeline for MENA consumers. The combination of price sensitivity, increased appetite to substitute products, and sensitivity to anti-Palestinian commercial positioning poses a risk of structural loss in market share for some multinationals as consumers permanently switch to new alternatives.

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