November 2023 Al-Monitor Trend Report
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As billion-dollar deals took flight during the Dubai Airshow in November 2023, a noticeable absence hovered over proceedings: exhibition stands for Israeli weapons makers Israel Aerospace Industries and Rafael stood empty and unstaffed at the start of the weeklong expo, Reuters reported Nov. 13.
Both companies have made significant UAE inroads since the emergence of the Abraham Accords, with their high-profile no-shows at the airshow underlining how the Gaza war has unsettled Arab-Israeli normalization and fledgling economic integration. Yet, dealmaking at the Dubai Airshow also offers a glimpse of how regional business and investment is soldiering on despite the threat of a wider war.
Prior to the Oct. 7 attack, regional economies faced plenty of challenges, but there were also many reasons for optimism as years of turmoil gave way to an era of reconciliation and ambitious national development — headlined by Gulf states pouring billions into flashy economic diversification drives. Resurgent violence has upended that narrative, while an escalating conflict would wreak economic devastation regionally (alongside producing an oil price spike). Still, this comes as the Economist Intelligence Unit forecast on Nov 15. that the Israel-Hamas conflict will remain a contained confrontation, and that Middle Eastern economic growth will rise roughly 3% in 2024, compared to 1.8% in 2023.
Against that backdrop, Al-Monitor is tracking how this conflict could deliver a range of outcomes for key sectors and economies in the Middle East. Below, we dig into essential storylines that are already emerging in this moment of uncertainty.
Israel-Hamas war delivers a pivotal moment for the Abraham Accords
So far, the Abraham Accords are holding, but the war has increased pressure on the UAE, Bahrain and Morocco to downplay political and economic ties with Israel. That saw Bahrain reveal on Nov. 2 that its ambassador to Tel Aviv had returned home.
Only weeks removed from anticipation that Saudi Arabia could also soon normalize ties with Israel, the proponents of the historic peace pact have rallied to condemn Israel’s invasion as casualties mount in Gaza. The UAE has been out front in such diplomacy.
The US-brokered Abraham Accords, hailed as the “dawn of a new Middle East” in 2020, brought covert ties into daylight, delivering new security, trade, investment and tourism links. Still, the Arab Opinion Index 2022 found 84% of respondents across 14 Arab countries disapproved of their countries establishing diplomatic relations with Israel.
Arab signatories won key benefits from normalization, such as the United States and Israel recognized Moroccan sovereignty over Western Sahara. However, it’s the UAE that has most proactively capitalized on normalization, with about 1,000 Israeli businesses now operating in the country,
Israel-UAE bilateral goods trade reached roughly $2.5 billion in 2022, up 115% over 2021, while April 2023 saw a free trade agreement between the countries enter force intended to increase non-oil bilateral trade to $10 billion by 2030. Meanwhile, Israel’s goods trade with Bahrain and Morocco in 2022 only amounted to $13 million and $56 million, respectively.
Crucially, normalization boosted Israel’s defense industry. Out of Israel’s record $12.5 billion defense exports in 2022, around $3 billion went to Abraham Accords signatories.
The takeaway: Although there are some who believe the Accords could be a casualty of the war, unwinding them isn’t so simple — particularly for the UAE, which has most proactively sought to capitalize on the economic and investment opportunities facilitated by Arab-Israeli normalization.
Looking ahead: Long-term strategic relationships underpinning the Abraham Accords should survive but they likely won’t remain unscathed, with this crisis poised to undermine economic integration and Gulf-Israel investment flows in the short-term. That would noticeably impact the UAE, which could face a potential exodus of Israeli businesses amid security concerns, dealing a blow to its defense and tech sectors.
Another factor to watch: In a key sign that UAE-Israeli ties are positioned to endure, Bloomberg reported on Nov. 29 that Israel’s President Isaac Herzog is planning a quick visit to Dubai for COP28, which would mark his first trip abroad since the Gaza war started.
Can the East Med gas hub remain with Israel at its center?
As outlined in a memo by Dr. Karen E. Young, the Israel-Hamas war is affecting regional energy production and cooperation, even as oil markets have proven optimistic that the conflict will not spread to the rest of the Middle East and natural gas prices don’t seem to be immediately impacted.
The effects are most visible in the temporary stoppage at the start of the war of Israeli pipeline gas from the Tamar offshore field to Egypt, which has traditionally been used as a portion of Egyptian export of LNG and as a stock for local electricity generation. After suspending operations in Tamar on Oct. 7, Chevron said it resumed supplying customers in Israel and the region from the gas field on Nov. 13.
Israel also surprised markets by awarding 12 gas exploration licenses to six firms on Oct. 29, just weeks after the war began. Italy’s ENI, Dana Petroleum and Israeli Ratio Energies will have license to explore west of the Leviathan field, the most important current source of Israeli gas exports.
A key strategic goal for Israel’s energy security and for the East Med as a regional energy hub has been attracting major operators and international investors, including Arab and Muslim-majority states.
Still, a possible deal for BP and Abu Dhabi National Oil Company (ADNOC) to jointly purchase Israeli gas operator New Med may be at risk. The BP/ADNOC joint venture agreed earlier in 2023 to buy a 50% stake in the firm.
The takeaway: Although short-term signals see continuity in work, there is growing risk that East Mediterranean gas production overall will suffer from the conflict and the growing lack of cooperation and economic and political coordination between Israel and neighbors.
Looking ahead: Israel’s exports to Jordan and to Egypt should continue despite tensions, but cooperation between neighbors is set to become more difficult. Israel’s ability to attract new investors will be limited, and some deals in process stall or fail. This is bad news for regional energy security and the overall investment environment.
Another factor to watch: Alongside the potential for a wider war to impact energy prices, this moment of geopolitical uncertainty could see oil resources become a target: as outlined in a memo by Kate Dourian, the Houthis may be limbering up to make a move on Marib oil fields as the Gaza war diverts attention from Yemen.
Israel's economic rebound hinges on a limited conflict
As outlined in a memo by David Rosenberg, the outbreak of the Gaza war brought Israeli economic activity to a halt in much of the country’s south and massive reserve call-ups have created labor shortages and disrupted supply chains. Israel has called up around 360,000 reservists, or roughly 8% of the workforce, to assist with the military operation.
Over the past two decades, the Israeli economy has weathered a series of short wars with Hezbollah and Hamas, with lost economic activity recovered once hostilities ended. In an Oct. 17 rating action commentary, FitchRatings attributed this resilience to Israel’s “preparedness for military confrontations, solid fiscal and external metrics and cash buffers.”
The economy was performing relatively well on the eve of the conflict, with GDP at a 3.1% annual rate in Q2. However, the pace of growth was expected to decelerate further due to rising interest rates and concerns about the impact of the government’s controversial judicial reforms. One key barometer of concerns had been a 9.7% depreciation of the shekel against the dollar this year before Oct. 7. After initially weakening after the attack, the shekel has since rallied thanks to support from Israel’s central bank.
Still, the larger blow to the Israeli economy is coming into focus as fighting nears the three-month mark and threatens to severely hamper its finances. On Nov. 9, Israel’s central bank governor said that the war is a “major shock” to the economy and more expensive than initially estimated.
The war will cost Israel about $54 billion between 2023-2025, with most of that coming from defense expenditures, according to central bank forecasts published Nov. 27, which projected the war will erase about 3% of GDP by the end of 2024, while the debt-to-GDP ratio is expected to increase to 66% by then.
The takeaway: Although the Israeli economy has strong fundamentals and is no stranger to weathering conflict, the stakes are growing higher as the costs of war mount. Even if a wider conflict is avoided, a long war with Hamas followed by a reoccupation of Gaza would send Israel into recession and have long-term effects on foreign investment, the government’s fiscal position and consumer and business confidence.
Looking ahead: Q4 is likely to see a sharp decline in Israeli GDP. Assuming the war is contained, and a long-term occupation of Gaza avoided, economic activity could begin recovering over the course of Q1 2024. Still, Israeli officials expect the deficit will grow significantly compared to pre-war expectations, with the long-term impact hinging on how long the conflict lasts.
Another factor to watch: As the war causes widespread staff shortages, the impact is especially acute for Israel’s vaunted tech sector, which was already weathering a deep slump. The sector has been disproportionately affected by reserve call-ups and a survey of Israeli tech companies issued Oct. 23 found that 70% were delaying projects due to staff absences.
Israel-Hamas war poised to inflame Middle East arms race, pressure security partnerships
The Middle East is already home to some of the world’s most prolific arms importers and it already seemed likely regional defense spending would remain robust as Gulf states rode budget surpluses into 2023.
For instance, Saudi Arabia earmarked $69 billion for its military heading into this year and Turkey is already boosting spending: On Oct. 17, Ankara revealed its 2024 military budget would reach $40 billion, up 150% over 2023.
More broadly, a potential direct Israel-Iran confrontation, combined with mounting popular unrest, provides plenty of impetus to increase expenditure. Consider: In 2009, the year before the Arab Spring ignited, regional military spending leveled off at an estimated $103 billion before surging to $150 billion by 2013.
Iran’s asymmetric warfare capabilities and formidable missile and drone arsenal already loomed over regional military spending. There’s also the specter of nuclear proliferation, with Saudi Crown Prince Mohammed Bin Salman warning in September that if Iran obtained a nuclear weapon, "we have to get one.”
This moment of rising instability projects to have significant implications for the United States and its future as the primary regional security guarantor and top local arms supplier at a moment when Middle Eastern countries are increasingly diversifying procurement relationships.
That’s seeing Russia and China gunning for more regional business, while Gulf states are demonstrating an open willingness to buck the United States over its preconditions around arms transfers. That saw the UAE walk away from acquiring F-35s in 2021.
Yet, Gulf states remain focused on US support despite tensions. That was on display at the Al-Monitor/Semafor Middle East Global Summit in September 2023, when the UAE president’s diplomatic adviser Anwar Gargash called for an “ironclad” defense arrangement with the United States.
The takeaway: As the Middle East descends into a new phase of conflict and confrontation, regional states look poised to boost military spending and procurement as the threat landscape grows more complicated and mounting popular unrest heightens unease among ruling regimes. That should generate more business for US defense players, but global rivals are also positioned to capitalize.
Looking ahead: Alongside boosting expenditure, rising regional instability could compel Saudi Arabia and the UAE to push harder for binding mutual defense partnerships with the United States. Such partnerships may struggle to receive congressional approval, but lesser arrangements akin to a September 2023 defense agreement with Bahrain that wouldn’t require congressional approval.
Another factor to watch: On Nov. 20, Saudi Crown Prince Mohammed bin Salman called on the international community to cease weapons exports to Israel, a statement reflecting increased pressure from Riyadh to de-escalate the Gaza war and complicating Washington's efforts to get Saudi Arabia and Israel to normalize ties.
Israel-Hamas war set to impact Jordan’s water and energy security
With the Gaza war overwhelming already strained ties with Israel, Jordan’s Foreign Minister Ayman Safadi told Al Jazeera on Nov. 16 that the kingdom won’t sign a landmark energy-for-water deal with Israel. Dubbed Project Prosperity, the trilateral deal (which includes UAE backing) could boost Jordan’s water supply by roughly 20%, helping alleviate pressure on one of the world’s most water-scarce nations.
The deal had marked a new era in water cooperation between the countries, after their 1994 peace treaty hinged in part on resolving long-standing water disputes. Brokered by US Special Presidential Envoy for Climate John Kerry, Project Prosperity has been hailed as a “win-win” byproduct of the Abraham Accords, but it has progressed slowly since it was first announced in 2021. COP28 was expected to produce a binding agreement towards the execution stage.
Jordan’s water security aspirations now largely hinge on developing its own Red Sea desalination plant at Aqaba, a project known as the National Water Carrier, which the government announced intent to implement in 2021.
Expected to cost about $3 billion, it has been described as Jordan’s largest infrastructure project ever. The kingdom hoped to begin work by 2023 and pump water by 2028, but the project has faced funding and feasibility questions.
The takeaway: Alongside taking its toll on needed regional climate cooperation, the war is only underlining Jordan’s ongoing dependence on Israel to meet its water needs. Putting Project Prosperity on ice was a natural move for Amman, but it can’t deflect from the kingdom’s worsening water crisis.
Looking ahead: Project Prosperity looks out of reach for now, but Jordan’s water woes are dire enough that some version of the trilateral deal may eventually take shape, even if in modified form. Regardless, water relations could feature prominently in the post-war peacebuilding process.
Another factor to watch: This crisis may also renew scrutiny on Jordan’s controversial gas deal with Israel. In 2016, Jordan agreed to pay Israel $10 billion over 15 years to import gas. Alongside generating significant public backlash, the deal was also criticized for undercutting Jordan’s transition to renewables.
Middle East travel boom delivering economic boost as Israel-Hamas war threatens recovery
As outlined in Al-Monitor's October Trend Report, the Gaza war has quickly disrupted regional tourism. Israel has suffered the worst, with flight bookings plummeting by 155 percentage points in the three-week period following the Oct. 7 attack, reports travel analytics firm ForwardKeys. That was followed by Saudi Arabia, down 67 percentage points, Jordan (-54), Lebanon (-45) and Egypt (-35).
That’s threatening the world’s strongest tourism recovery. Global tourism isn’t expected to fully recover from COVID-19 until 2024, but Q1 2023 saw the Middle East become the world’s first region where tourism arrivals fully reached pre-pandemic levels, exceeding 2019 numbers by 15%, according to the United Nations World Tourism Organization (UNWTO). The Middle East has since reported the world’s best results between January-July 2023, with arrivals 20% above 2019.
Most Middle Eastern countries have a lot riding on this rebound, a statement particularly true for fragile, tourism-dependent economies directly adjacent to Israel: the sector accounts for over 10% of GDP in Lebanon, Jordan and Egypt. More broadly, tourism features prominently in future economic and political plans across the region, headlined by Gulf players pursuing economic diversification.
Nowhere is that more evident than in Saudi Arabia, which has earmarked $1 trillion to develop its tourism sector as part of an ambitious effort to rebrand the kingdom’s image globally. That plan now aligns neatly with plans to host the 2034 World Cup.
The takeaway: At a pivotal moment for the recovery (and evolution) of the Middle East’s travel and hospitality sector, the Israel-Hamas war has delivered a big dose of uncertainty. This could have devastating consequences for tourism-dependent economies, while undercutting plans in the Gulf to use the sector as a conduit for non-oil growth.
Looking ahead: An escalating war would bring regional tourism to a standstill, but even a contained conflict will still have long-term impacts. This resurgent violence and instability could influence traveler decisions and perceptions of the region for years. Still, this won’t diminish the importance of tourism, with Middle Eastern governments set to increasingly bank on the sector to boost their economies and national ambitions going forward.
Another factor to watch: After years of financial losses stemming from the pandemic, Middle East airlines have been posting robust results in 2023 and inked big orders at the Dubai Airshow in November. Most recently, the Emirates Group reported $2.7 billion in profit during H1 of its 2023-24 fiscal year, representing its highest-ever six-month financial result.
