January 2024 Al-Monitor Trend Report 

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Heading into 2023, Middle East economies were riding high after the region posted a 5.6% growth rate over the prior year, making it a global bright spot in a generally gloomy environment clouded by recession fears. A year later, the Middle East again stands out as an outlier but for the opposite reason, as the escalating Israel-Hamas war teeters on the brink of producing widespread economic pain.

This comes as the International Monetary Fund (IMF) said on Jan. 30 that the global economy is approaching a soft landing while upgrading its 2024 growth forecast to 3.1%, up 0.2 percentage points from its October projections. Simultaneously, the IMF pared its Middle East and North Africa (MENA) forecast 0.5 percentage points to 2.9%, a revision mainly attributable to Saudi Arabia and reflecting lower oil production in 2024.

This comes as 2023’s tumultuous end has given way to an increasingly turbulent start to 2024 in the Middle East, with hostilities infecting the Red Sea and the threat of a direct US-Iran confrontation growing after a deadly drone attack on American troops in Jordan on Jan. 28. That’s giving real shape to the feared threats posed by a broader conflagration. The outlook for MENA is currently highly uncertain, notes the IMF, as a spreading conflict and intensifying Red Sea disruptions could have a severe impact, including on trade and tourism. Despite a staggering human toll and geopolitical uncertainty, the Gaza war’s economic fallout has largely been contained to directly adjacent countries, but that’s little comfort to Jordan, Egypt and Lebanon: Across three months, this war has likely cost these vulnerable economies $10.3 billion, or 2.3% of their GPD, while 230,000 people in these countries are now expected to fall into poverty, according to a United Nations Development Programme assessment.

Despite sunnier global forecasts, this war poses major threats to a world still shaking off successive shocks dating back to the pandemic, with the IMF singling out ongoing Houthi attacks on Red Sea shipping as a major downside risk imperiling this broader recovery, among others. Against that backdrop, Middle East turbulence continues to preoccupy decision-makers. That was on full display in January at Davos, where all roads led to the Middle East, as Al-Monitor was on hand to document. Closer to home, we continue tracking essential regional storylines emerging at this moment, outlined below. 

Middle East economies navigate treacherous straits as Gaza war infects Red Sea

• The Red Sea has become a new front in the Israel-Hamas war as Iran-backed Houthi militants continue attacks against shipping despite US-led efforts to secure safe passage in the strategic waterway, through which roughly 11% of global trade flows. 

• The Houthis have attacked more than two dozen ships traversing the area since mid-November, compelling global shipping giants and energy majors to pause Red Sea transits. As of Jan. 24, about 562 carrier vessels had diverted or were diverting from the Suez Canal, according to Flexport. 

• This rerouting has sparked fears this crisis could drive up the cost of goods and energy prices worldwide, conjuring new inflation worries. Still, the World Economic Forum’s MENA head Maroun Kairouz told Al-Monitor in January that global trade was resilient and would be able to cope in the short term amid weak global demand. 

• Meanwhile, energy markets largely brushed this turmoil aside. Brent crude stood slightly below $82 as of Jan. 30, only slightly reversing a monthlong price decline. That is largely thanks to record US fossil fuel production helping offset Middle East disruptions.

• Seeking to deter attacks, the United States announced a maritime security initiative dubbed Operation Prosperity Guardian in December 2023. Over 20 nations signed on, but few have contributed warships. Among Arab nations, only Bahrain has announced its participation. 

• Regardless, naval escorts have done little to deter escalating Houthi attacks — provoking a more forceful response in January when US and UK forces began launching strikes aimed at reducing the group’s capabilities. 

• Iran raised the stakes by dispatching warships to the Red Sea in early January. The Pentagon also said a drone launched from Iran struck a tanker in the Indian Ocean on Dec. 23, 2023, raising the specter it could attempt to block the Strait of Hormuz, the world's most important oil chokepoint. 

• Alongside global trade impacts, a prolonged crisis is exposing regional economic risks. Egypt is especially vulnerable, as the Suez Canal last year generated $9.4 billion in badly needed state revenues (accounting for 1.2% of GDP in fiscal revenues, notes the IMF). Meanwhile, Qatar, one of the world’s largest LNG exporters, confirmed on Jan. 24 that it had paused gas shipments through the Red Sea to Europe.

The takeaway: This volatile situation already poses a significant threat to the global economy, while underlining the complex web of threats facing the Middle East as this war grinds on and exposes pressure points and economic vulnerabilities. 

Looking ahead: Global trade should remain in limbo well into Q1 2024, with fallout gradually feeding into the world’s economy. Within the region, Egypt will feel the heat as Suez Canal revenues dry up, and these disruptions could potentially erode Europe’s recent dependence on Middle East energy shipments. In the long term, this may impact the Red Sea’s attractiveness, influencing regional investments into overland routes and pipelines bypassing the Suez Canal.

Another factor to watch: Despite this turmoil, Abu Dhabi-based AD Ports on Jan. 5 announced a 15-year agreement with Egypt’s Red Sea Port Authority to operate and manage three cruise terminals along the Red Sea.

Saudi Arabia bolsters expat incentives as war complicates Vision 2030 

• News surfaced on Jan. 24 that Saudi Arabia is planning to open its first liquor store for non-Muslim diplomats in Riyadh in the coming weeks, marking a major shift for the conservative kingdom after years of rumors around such a move. The move is aligned with Crown Prince Mohammed bin Salman's vision to transform Saudi Arabia into a tourism, business and entertainment hub.

• That news came after Saudi Arabia expanded its Premium Residency Program to include five new categories aimed at elite expats on Jan. 10. These permits allow select foreigners to live, work, and own businesses and property in the kingdom without requiring a local sponsor, among other benefits. Residency durations vary but generally allow holders to stay five years. 

• Originally launched in 2019, the Premium Residency program shifted Saudi Arabia’s historically restrictive visa policies and initially included a one-year residency visa with an annual fee of about $26,000 and a permanent residency option costing roughly $213,000. Newly introduced options break out more specific categories of eligibility (like executives, investors, etc.) and require a one-time fee of $1,066, according to the program’s website. 

• The moves directly follow the Jan. 1 deadline for multinationals to locate regional headquarters in Saudi Arabia if they want to access government contracts going forward, an ultimatum widely seen as a play to lure business and investment away from the United Arab Emirates. 

• It’s currently unclear how many Premium Residency permits Saudi Arabia has awarded since 2019, but Henley & Partners estimates the country saw net outflows of 100 high net worth individuals (HNWIs) in 2023 compared with 600 in net outflows in 2022. Meanwhile, the Emirates was forecast to have enjoyed a net inflow of approximately 4,500 HNWIs in 2023. 

• Despite reforms, Saudi Arabia’s minority Western expat population still usually lives in isolated compounds, as the kingdom largely lacks overall lifestyle amenities and infrastructure available to foreigners in the UAE. One issue cited for expats relocating is the availability of international schools, while other concerns linger around a difficult workplace culture that has driven away many foreign executives powering its mega-projects. 

The takeaway: Saudi Arabia is dangling new incentives in 2024 to attract talented foreigners to settle in the kingdom amid its growing economic rivalry with the UAE. Yet the kingdom still faces ongoing roadblocks to convincing foreign professionals and investors to relocate — not least of which is the unsettling specter of regional war. 

Looking ahead: Saudi Arabia is poised to continue boosting incentives and implementing new policies in 2024 as it seeks to make up ground on Gulf neighbors as a destination for foreign talent and wealth. That should see continued emphasis on lifestyle amenities, expat housing and international schools. 

Another factor to watch: The UAE continues shoring up its own competitive advantage as a global destination. For instance, Abu Dhabi is about to welcome the country’s first brewery in February.

Viral boycotts serve up challenges for global brands in Middle East 

• The Middle East is cooking up trouble for global brands, particularly American ones. McDonald’s, Starbucks, KFC, Domino’s, Coca-Cola and beyond are facing a social media-fueled boycott campaign in the Arab world, with these brands becoming a target for public anger over US support for Israel’s military operation in Gaza.

• On Jan. 30, Starbucks cut its annual sales forecast as the Israel-Hamas war dealt a blow to its Middle East business, which comes after the CEO of McDonald’s admitted on Jan. 4 that several markets in the Middle East were experiencing “a meaningful business impact” amid boycotts in the Arab world. This backlash has been particularly evident in Egypt and Jordan, Reuters reported on Nov. 22, 2023, but signs also point to the campaign expanding. 

• This campaign has directed attention to companies perceived to have taken pro-Israeli stances or those alleged to have financial or investment ties to Israel, prompting shoppers to shift to local alternatives, according to Reuters. In the case of McDonald’s, outrage erupted after the burger chain's Israeli franchise began giving thousands of free meals to Israel’s military. 

• That underlines a key regional vulnerability for global brands, which often rely on local franchise operators or partners to run their businesses or distribute products — from restaurants to apparel brands. For instance, Starbucks has over 2,000 stores across 13 MENA markets operated through a licensing agreement with Kuwait’s Alshaya Group. 

• These boycotts are largely a grassroots effort, but Turkey is producing official calls to action. Turkish state-run rail company TCDD announced a boycott of Starbucks products in October 2023, while the country’s parliament reportedly removed Coca-Cola and Nestle products from its restaurants in early November. 

The takeaway: Western companies have endured backlash in the Arab world before, but these viral, largely grassroots boycotts are delivering real challenges that may not be easily overcome for popular American consumer brands. Although the ultimate impact on their global revenues may remain limited, local firms operating these brands may feel the heat. 

Looking ahead: With this highly destructive Gaza war poised to sustain rage and influence long-term purchasing decisions, brands caught in the crossfire may no longer have the same pull in the Middle East going forward and could see their prospects dim as US soft power erodes — opening the door for rivals to capitalize.

Another factor to watch: News surfaced on Jan. 18 that regional Starbucks operator Alshaya Group is closing 60 stores across Egypt, citing the country’s ongoing economic situation. Closures impact Claire's, Debenhams, Mothercare, The Body Shop and Pinkberry, but not its 80 Starbucks outlets in the country — for now.

Palestine faces economic devastation 

• As outlined in a memo by David Rosenberg, prospects are dimming for a post-war Palestinian economic recovery. The World Bank estimates that GDP for the West Bank and Gaza contracted by 3.7% in 2023, compared with the pre-war projection of 3.2% growth. In 2024, the economy may shrink another 5%. 

• Although recurrent wars with Israel have resulted in considerable damage to Gaza’s housing and infrastructure, the current destruction is unprecedented. The World Bank estimated that by H2 of November, 60% of Gaza’s ICT, health and education infrastructure had been destroyed, as was 70% of commerce-related infrastructure.

• The UN says that close to 80% of Gaza’s 2.4 million people have been displaced, and the unemployment rate in the strip has soared to 85%. The World Bank reports that 56,000 businesses have closed, resulting in the loss of 147,000 jobs in the formal sector. 

• In the West Bank, Israel has stepped up raids and arrests and has erected more internal barriers to contain potential unrest. The Palestine Central Bureau of Statistics estimates that in October alone, productive capacity in the West Bank dropped 37%. The Palestine Economic Policy Research Institute estimates that 67,000 Palestinians (out of a total labor force of 871,000) cannot reach jobs inside the West Bank due to increased barriers to movement.

• A particularly severe blow came from Israel’s decision after the war broke out to ban Palestinians from working in Israel due to security concerns. The International Labor Organization puts those job losses at about 150,000 (although some 10,000 others have continued to work in West Bank settlements and industrial zones). 

The takeaway: The war has taken a severe toll on the Palestinian economy, principally in Gaza but also in the West Bank where Israeli measures have brought economic activity to a standstill. 

Looking ahead: The medium-term outlook for the Palestinian economy hinges on a reconstruction plan for Gaza and an Israeli decision to restore pre-war economic ties with the Palestinians, wrote Rosenberg. Neither development appears promising.

Another factor to watch: Israel's sovereign credit rating could be cut if the war with Hamas expands to other fronts, according to comments from an S&P Global Ratings director published by Reuters on Jan. 29. In October 2023, S&P affirmed Israel's AA- rating but revised its outlook to "negative" from "stable.”

Middle East tourism under pressure 

• As outlined in a memo by Rosenberg, the Gaza war is interrupting a regional tourism recovery for Israel and neighboring countries. Before fighting erupted, the Middle East was leading a post-COVID global travel rebound, with arrivals at regional destinations 20% higher during the first nine months of 2023 than in the same period in 2019, according to the UN World Travel Organization.

• That recovery has been producing records: Egyptian tourism receipts and the number of holidaymakers visiting reached record highs in 2023, with sector revenues reaching $15 billion and inbound tourism hitting 14.9 million last year. Israel was an exception, where arrivals were still 13% below pre-COVID levels.

• Israeli and Palestinian tourism has been the most affected, with foreign travelers visiting Israel falling to back pandemic levels. Egypt’s tourism numbers fell about 10% during the first two months of the Gaza conflict. Jordanian hotel occupancy rates and reservations fell between 50-75% in the two months following the war’s outbreak, reports the World Bank.

• Tourism is a lifeline in many MENA economies, accounting for between 2 to 20% of GDP, notes the IMF. S&P Global warned in November 2023 that Lebanon, Egypt and Jordan would be the hardest hit economically by a regional travel downturn, with the impact on Gulf countries “unlikely to be material.” For example, a 10% drop in tourism receipts would deprive Lebanon of $500 million in income and 3.3% of GDP. 

• Governments are leaving tourism players to fend for themselves. One exception is Egypt, where Tourism Minister Ahmed Issa said in November that the government was offering each flight landing at the Sinai’s Sharm El Sheikh International Airport an extra $500 to be added to the $1,300 to $3,500 Egypt was already offering to charter carriers if they meet certain occupancy levels. 

The takeaway: The war has taken a toll on MENA’s tourism industry in concentric circles centered on the Gaza war zone. Israel, Palestine, Lebanon, Egypt and Jordan have all been impacted, but the fallout hasn’t spread beyond — for now.

Looking ahead: The downturn for Israel and immediate neighbors is likely to continue into H1 2024, notes Rosenberg. Travel tends to take longer to recover from the impact of war and terrorism than it does from natural disasters. 

Another factor to watch: Red Sea turmoil is also impacting global cruise ship lines. In January, Carnival warned that 2024 earnings would take a hit after rerouting from the Red Sea, while Royal Caribbean and MSC Cruises have also canceled regional voyages.