The Iran war will result in declines in GDP in the Gulf this year of at least 5-10%. The closure of the Strait of Hormuz has forced several Gulf economies have started to shut down oil wells which, alongside damage to energy infrastructure, means that even if the conflict is short-lived, it will take time for output to return to previous levels. Non-hydrocarbon activity will suffer too as tourists are deterred and safety concerns will hurt activity in those parts of the economy most reliant on footfall. Over a longer horizon, the conflict challenges diversification plans in the Gulf.
The rest of the region will endure softer growth and higher inflation. Egypt’s policy response, by allowing the pound to depreciate and raising local fuel prices, will aid the adjustment there. We are most concerned about Tunisia, where the risk of a disorderly balance of payments crisis and sovereign default is growing.