Spotlight on: how risk managers can tackle threats emerging from Israel

As tensions only intensify between Israel and Hamas, the economic and human toll is mounting, prompting deep concerns and complex challenges.

Zoe Ciaccio, an intelligence analyst specialising in the Middle East at geopolitical and security intelligence business Dragonfly, says one of the biggest economic impacts for Israel has been the effect the conflict has had on the country’s tourism industry.

“Israel’s economy is currently stagnant because the country is at war,” she says. “The largest impact has been on tourism, but private spending has also dropped, including people’s spending on events, particularly outside of big cities.

“That’s because there is a general sense of fear about travelling both within and to Israel, and that hasn’t been helped by the fact that many foreign airlines have stopped travelling to Israel.”

“That tells you just how quickly people’s confidence in the security of a country can fail”

Ciaccio adds that while some flights have now resumed, the Iranian attack on 13 and 14 April demonstrates just how quick airlines are to respond and suspend flights in the face of heightening tensions.

“That tells you just how quickly people’s confidence in the security of a country can fail, and how quickly people will regard a country as a no-go,” she says.

Despite the challenges, Ciaccio says that Israel has managed to “remain fairly operational” during the conflict, with many businesses operating as usual.

COSTLY BUSINESS

Businesses have, however, had to contend with labour shortages as a result of the calling up of reservists to the military – around 360,000 have so far been mobilised, the largest mobilisation since 1973.

In addition, many Palestinians no longer have the permits required to travel from either Gaza or the West Bank to work.

And this has made the war very expensive for the Israeli government, with government spending rising by around 80% between October 2023 and January 2024. Ciaccio says this has been fuelled not only by the direct costs of the war, but also the indirect costs that have risen dramatically over this period.

“Many economists have said the impact of the war on Israel has been much worse than expected.”

“The Israeli government has had to compensate businesses and households for the reservists they’ve had to call up, and there are also tens of thousands of displaced people that the government has had to put up in temporary accommodation or hotels,” Ciaccio says.

“Many economists have said the impact of the war on Israel has been much worse than expected.”

IMPACTS FAR AND WIDE

The conflict is also having an impact on the broader region. Ciaccio cites the example of the Houthi attacks on shipping in the Red Sea and Gulf – which are aimed at pressuring Israel to end the conflict – as just one example of how the it has spilled over into neighbouring countries.

“The attacks have led many ships to reroute around the Cape of Good Hope. The Suez Canal is a major source of revenue and, more importantly, a major source of foreign currency for Egypt, which is now lacking,” she says.

“I don’t see the Houthi attacks ceasing within the next six months, and that means Egypt is looking at further losses from Suez Canal passages.”

Ciaccio is also concerned that continued attacks may start to impact the oil markets, a sector that has been relatively unaff ected to date.

“The Suez Canal is a major source of revenue and, more importantly, a major source of foreign currency for Egypt, which is now lacking,”

“Saudi Arabia has a lot of projects on the Red Sea, and that requires vessels to move freely in order to get the materials to carry out these projects,” she says. “Security is also vital for investor confidence, and Saudi Arabia is in a situation now where it needs a significant amount of foreign investment.”

While the impact of the conflict on the global economy has been limited to date, Jake Hernandez, CEO of Gallagher Specialty’s risk consulting service, says that any worsening of the situation – including the potential for regional escalations – could have a significant global impact.

“Global markets would be heavily affected. This is particularly true if the Strait of Hormuz is closed to traffic and this starts to affect the oil price or even oil futures,” he says.

“Any routes in the equity markets could drag some economies back into recession, particularly those that are only just coming out of one, like the UK.”

“In Europe, the heavy use of natural gas for homes and electricity generation requires liquefied natural gas from Qatar on long-term supply agreements, which would also be disrupted as this cannot be transported over land.”

“Energy prices may spike again, as we saw last year,” he adds.

And Hernandez says that such an escalation could also drag several countries back into recession. “Equity markets hate conflicts in the Middle East. It’s unclear if an escalation has already been ‘priced in’ to stocks and shares in Europe, the US and Asia,” he says.

“Any routes in the equity markets could drag some economies back into recession, particularly those that are only just coming out of one, like the UK.”

PLAN FOR CONTINUED CRISIS

Ultimately the future remains unknown, says Ciaccio, but people must still try to “prepare for the unexpected”.

“Our most likely scenario is that the tit-for-tat attacks we’ve seen will persist over the coming years. But they are not going to significantly worsen for now,” she says.

“There is, however, the more unlikely scenario that there is a major military escalation in the region, which could come to involve countries like Jordan, Saudi Arabia or other Gulf countries with US bases in them.

“This means that crisis planning is essential for the region, even for the countries that are perceived to be much safer and have been operating with a high degree of confidence. We’re at a point now where crisis planning has to be a key priority for regional risk and security managers.”