Gaza war to hit MENA economies, says S&P

Arabian Post Staff

Beyond the catastrophic loss of life and costly damage to infrastructure, the war between Israel and Hamas will have repercussions for other economies in the Middle East and North Africa (MENA), Standard & Poor’s said in a report.

Focusing on the tourism sector, S&P says Lebanon, Egypt, and Jordan could suffer the most, hampering real GDP growth and weakening their external positions, although this could be somewhat mitigated by potential support from international donors.

For the Gulf Cooperation Council (GCC), Turkey, and Iraq, the impact on tourism flows is unlikely to be material in the agency’s  current base case.

Much will depend on how long the conflict lasts and whether it will spill over into the broader region.

An escalation could open up additional fronts in the region. When looking solely at the impact on tourism, S&P Global Ratings believes Lebanon, Egypt, and Jordan are most exposed, due to their geographic proximity and the potential for some aspects of the conflict to expand across their borders.

The view stems from the results of S&P’s scenario analysis, in which the financial impact of a 10%, 30%, or 70% loss in tourism receipts was tested for each country. Last year, tourism contributed 26% of Lebanon’s current account receipts. For Jordan and Egypt, the figure was 21% and 12%, and for Israel, 3%.

Likely impacts of the war include physical destruction, an outflow of portfolio and non-resident deposits, and a reduction in foreign direct investment. Increased protests across MENA could also exacerbate social instability and political risks. What’s more, further deepening of the humanitarian crisis in Gaza or a serious escalation in the West Bank could lead to a new wave of refugee flows that would burden economies in the region. A prolonged conflict may lead to a significant loss of GDP and foreign exchange receipts across MENA.

The tourism sector is a big employer and an important source of foreign currency in many MENA countries. Tourism sectors globally have been recovering robustly in 2023, particularly in the Middle East. According to the U.N. World Tourism Organization, the region received 20% more tourists in the first seven months of this year than in the same period in 2019. This makes MENA the only region, where tourism has returned to and exceeded pre-pandemic levels, supporting economic growth and the economies’ current account positions. The consequences of war put this progress at risk.

S&P has considered three scenarios relating to the loss of tourism receipts–of 10%, 30% and 70%–and the resulting impact on rated MENA economies in U.S. dollars, share of GDP, and the proportion of foreign exchange reserves.

The three tourism loss percentages in its scenarios were calibrated based on the following historical observations:

During the 2006 Lebanon-Israel conflict, which took place over 34 days, tourist arrivals in Lebanon fell by almost 40% in July-August, and by 6% on average for the full year compared to 2005.

During the “Arab Spring” in 2011, tourist arrivals dropped by 33% in Egypt and by 20% in Jordan.

During the COVID-19 pandemic, tourist arrivals fell worldwide by 70% on average in 2020.

Also published on Medium.