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Gaza and the occupied West Bank face an unprecedented economic crisis, a World Bank economist said, after the institution lowered its outlook for the Middle East and North Africa last week.
A year on from the beginning of the war, which has claimed more than 42,000 lives according to local authorities, Gaza's economy is left in ruins. It shrank 86 per cent in the second quarter this year, and a World Bank and UN assessment earlier this year estimated the cost of damage to critical infrastructure at about $18.5 billion.
The West Bank economy contracted 23 per cent, the World Bank said, due to restrictions on movement, a decline in consumption and a severe fiscal crisis. The Palestinian Authority currently has a financing gap of $1.86 billion this year, the World Bank said, citing sources.
“What we see in Gaza and the West Bank is the largest economic crisis to date,” Roberta Gatti, the World Bank's chief economist for the Middle East and North Africa, told The National in an interview following the lender's most recent regional outlook.
Ms Gatti said the findings of the report saddened her on the human side of the conflict.
“And as an economist, I was sobered by what we saw being the impact of conflict in economies over the long term, and how fundamental peace is for development,” she said.
The humanitarian crisis faces potential long-lasting consequences, the World Bank said in its most recent economic outlook for the Middle East and North Africa.
Food insecurity in Gaza has “massively escalated”, it said. Fifteen per cent of Gaza's two million population faces famine-like conditions. A separate report from the UN said the current level of food insecurity for 133,000 people is “catastrophic”.
Additionally, 90 per cent of children under two years and 95 per cent of pregnant women or women who are breastfeeding face extreme food poverty.
“We know that there is an important interaction between the physical development of children and their cognitive development, and this will also have repercussion, not only on them as human beings, but also on them as a productive workers in the future," Ms Gatti said.
Region clouded by uncertainty
The World Bank said conflict casts a “long shadow” over the region's economic outlook.
The institution last week lowered its 2024 outlook for the Middle East by half a percentage point on heightened uncertainties caused by escalating tensions in the Gaza war and Opec production cuts.
As a whole, the region's gross domestic product is forecast to expand 2.2 per cent this year, a modest increase from 2023. This growth is being driven by the GCC, whose GDP is forecast to rise to 1.9 per cent this year after a 0.5 per cent increase in 2023.
“We see a fragile growth amid uncertainty in the region,” Ms Gatti said.
Uncertainty in the Middle East is nearly twice that as of other emerging markets and developing economies, the World Bank said.
According to one analysis, conflict-afflicted countries in the regions' income-per-capita could have been 45 per cent higher on average without the conflict. The loss equates to 35 years' worth of progress.
“That's a big number,” Ms Gatti said.
“And we see that the current conflict has come at a time where fragility writ large and violence has has increased twofold since the early 1990s – and also the region has the highest share of casualty in globally.
“So there is an increase in fragility and conflict in the region, of which, this last one is a very tragic example.”
Underscoring this uncertainty is the situation in Lebanon, which has been bombarded by air strikes since Israel's ground incursion in September.
The World Bank, whose regional outlook went to print before the incursion began, had forecast Lebanon's GDP to shrink by 1 per cent this year, driven by tourism.
Lebanese authorities have said 1.2 million people in Lebanon have been displaced or directly affected by the crisis.
The World Bank said the conflict's future trajectory will determine the full economic impact.
While the full scale of the crisis's impact on Lebanon's economy is still to be determined, Ms Gatti does not anticipate it will have a significant impact on the broader region's growth prospects.
“But the reality of Lebanon can change dramatically, and for sure, that underscores the uncertainty that all of us who are producing forecasts and trying to understand the trajectories of economies face.”
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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