The human tragedy unfolding in Gaza and Israel could have widespread implications for the MENA region (see "Credit Conditions: War In The Middle East Compounds Global Geopolitical Risks," published Oct. 18, 2023). Our current base case is that the war will largely be contained to Israel and Gaza and last no more than three to six months (see "Israel Outlook Revised To Negative On Geopolitical Risks; 'AA-' Ratings Affirmed," published Oct. 24, 2023).

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. Our view stems from the results of our scenario analysis, in which we tested the financial impact of a 10%, 30%, or 70% loss in tourism receipts on 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%.

Tourism Is Just One Sector Facing Risks

Likely impacts of the war include physical destruction, an outflow of portfolio and nonresident 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. As we saw in Jordan (and Lebanon following the Syrian refugee crisis), this could undermine fiscal and credit metrics. 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.

Three Scenarios Point To Potential Financial Implications

We have 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 our 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.

To generate the results:  We first applied the assumed loss percentage to total tourism receipts in 2022. Then, to put the loss of tourism receipts into context, we show the data as a share of the respective country's economic output and international foreign currency reserves. These figures are annualized, and the two larger loss estimates would probably not materialize assuming the war ends before the first half of next year. Note that there would also be a follow-on impact on government revenue, but that is harder to quantify with available data.

The Results: Impact Of Lost Tourism For Neighboring Countries

Table 1

Israel

Given current security conditions, we expect a halt to foreign tourism. However, the direct economic impact from the reduction in tourism receipts is likely to be minimal because the sector comprises less than 3% of current account receipts. As a result, even if tourism income were to drop by 70% (scenario three), the loss would be equivalent to about 2% of Israel's official foreign exchange reserves.

The economy will however likely face more severe consequences from logistical disruptions, business interruption, a reduced labor force, suspension of gas production at the Tamar gas field, and lower investment. We forecast that real GDP will drop by 5% year on year in fourth-quarter 2023, bringing down growth for the full year to 1.5%. We forecast growth at 0.5% for 2024.

Egypt, Jordan, and Lebanon

These countries, immediate neighbors of Israel and Gaza, are more vulnerable to a slowdown in tourism, given concerns about security risks and social unrest amid high external vulnerabilities. Also, the tourism sector contributes 12%-26% of their current account receipts, generating foreign exchange income as well as employment.

During the first half of 2023, tourism receipts were up more than 50% in Jordan and 30% in Egypt and were at record high levels over the 12 months to June 30 in both countries. In Lebanon, arrivals rose 33% in January-August. Tourism provides jobs for about 20% of the population in Jordan and Lebanon and is an important sector, given unemployment rates of almost 30% in Lebanon and 19% in Jordan. In Egypt, the sector directly employs close to 10% of the population.

Since the war between Israel and Hamas, several tour agencies in Egypt have reported cancellations of around half of the bookings for November and December, particularly from European travelers. Airlines such as Lufthansa, Eurowings, and Swiss Air suspended flights to Lebanon in mid-October. We think similar trends could emerge in Jordan's tourism sector.

Lebanon has the highest reliance on the tourism sector among the four countries, where it accounts for 26% of current account receipts.   This exposes the country to weaker economic growth and external balances due to a fall in tourist arrivals. The impact of our stress scenarios is worse on Egypt in absolute U.S. dollar terms and as a percentage of reserves.

For Lebanon, our data suggests that if tourism receipts were to fall by 10%-30%, the direct loss to economic output could be up to 10% of GDP. While the impact appears more muted as a percentage of foreign reserves, this is because gross foreign exchange reserves are higher in Lebanon but comprise a large portion of gold and required reserves on banks' foreign currency deposits, which are not accessible to the Banque du Liban. In the context of ongoing foreign currency shortages, currency depreciation of more than 95% since 2020, hyperinflation, and a political vacuum, Lebanon can ill afford to forego critical foreign currency inflows from tourism.

We see Egypt as being in a more vulnerable situation than Jordan despite a lower economic concentration in tourism.   This is because revenue shortfalls would weigh more on its external position amid large external debt repayments coming due. Loss of tourism revenue of 10%-30% could cost the country 4%-11% of foreign exchange reserves if the central bank of Egypt (CBE) were to intervene in the foreign exchange market. That said, we expect multi- and bi-lateral donors will continue to support Egypt and Jordan, since instability in these countries could spill over to the rest of the region. For instance, after Russian troops entered Ukraine in February 2022, some GCC states deposited $13 billion (2.7% of GDP) at the CBE.

It is important to emphasize the quite large share of visitors from the region and diaspora in total tourism arrivals, which should help shield the sector from a larger sector shock.   Such visitors are likely to have somewhat more inelastic demand to regional geopolitical considerations, in our view. In Lebanon, almost 80% of total arrivals for the first seven months of 2023 were Lebanese non-residents and other Arabs. For Jordan, this category constituted 73% of tourism income in the 12 months to June 30. On the other hand, the Egyptian market's reliance on arrivals from Western Europe, including the U.K., is higher, and sunshine-seeking visitors--including those on package holidays--may have no preference for specific destinations.

Perception Of The Broader Region Remains Key

Within the broader MENA region, higher perceived security risks could dampen the inflow of tourists. In particular, Turkiye and the United Arab Emirates (UAE), for example, have large, diversified tourism industries that could be affected by cancelled hotel bookings and events to some extent. But we do not currently expect the decline to be significant, for now, for several reasons. We have applied our scenarios across the region for illustrative purposes only (see table 2).

We think the impact for Turkey would likely be minimal because it is geographically farther away from the conflict than the other countries. For the UAE, there is some buffer because tourist inflows already exceed pre-pandemic levels. Dubai saw 11.1 million visitors over January-August, compared to 10.85 million during the same period in 2019. We might even see some tourists divert their travel to these two countries from other parts of the region. In the other GCC countries, most visitors come from within the Gulf region. For Saudi Arabia and Iraq, a large part of tourism is for religious purposes and would be less susceptible to cancellations.

Table 2

Related Research

• Israel Outlook Revised To Negative On Geopolitical Risks; 'AA-' Ratings Affirmed, Oct. 24, 2023
• Egypt Downgraded To 'B-' On Mounting Funding Pressures; Outlook Stable, Oct. 20, 2023
• Credit Conditions: War In The Middle East Compounds Global Geopolitical Risks, Oct. 18, 2023
• Jordan 'B+/B' Ratings Affirmed; Outlook Remains Stable, Sept. 8, 2023
• Lebanon FC Ratings Affirmed At 'SD/SD' And LC Ratings At 'CC/C'; Outlook On Long-Term LC Rating Remains Negative, Aug. 18, 2023