Yesterday it was reported that Israel’s much-anticipated offensive on southern Gaza has now begun. On Thursday afternoon, Israeli forces stormed the main hospital in the south of the Gaza strip in an operation the Israeli Defence Forces (IDF) said was a limited operation to recover hostages seized by Hamas during its attack on Israel in October.
The move comes days after Egypt, whose Sinai Peninsula borders Gaza, warned Israel not to overreach in its “Rafah Offensive” and threatened to void the peace treaty that has been in place between the two countries for four decades. While diplomats have since played down the suggestion, the declaration is undoubtedly a reflection of Cairo’s deep-seated fears about the political implications of volatility on the Gaza-Egypt border.
The government in Cairo has to be seen as taking a hard line on Israel because of public opinion within Egypt, which is overwhelmingly sympathetic to the plight of the Palestinians. Indeed, the current military government came to power following a coup against the Islamist government led by the Muslim Brotherhood, which won elections following the Arab Spring in 2011.
The incumbent Sisi administration fears that, should the IDF press ahead with its planned operation on Rafah, this could lead to a high number of civilian deaths and an influx of Palestinian refugees into Egypt. In turn, this could bolster Islamist sentiment within Egypt and potentially even lead to high amounts of political pressure on the government in Cairo itself. For reasons of self-preservation if nothing else, Sisi could be forced to scrap the peace treaty with Israel, and thereby completely change the geopolitical outlook in the Middle East.
Should Egypt feel compelled to become more closely involved in the war, this could significantly alter the outlook for Israel. Egypt has a serious military that has benefited from decades of US aid and possesses some of the most sophisticated weaponry and technology currently available. With 310,000 active personnel, and 375,000 in reserve, Egypt also a significantly larger army than Israel. Jerusalem needs to be careful not to provoke Cairo into a military response because this could complicate their efforts to secure a victory in Gaza.
This would also cause problems for investors with an exposure to Middle Eastern markets, particularly Israeli or Egyptian assets. For one, while the Israeli shekel has performed relatively solidly since the outbreak of war, thanks largely to the actions of the Bank of Israel, the opening of a new front in the south of the country, or even sabre-rattling between Jerusalem and Cairo, would be almost certain to cause depreciations.
The same goes for the Egyptian pound, which is already at record lows against the dollar as the government seeks to implement liberalising reforms in the hope of unlocking further funds from the IMF. The financial risks to Israel were emphasised recently by the global credit ratings agency Moody’s, which downgraded Israel from A1 to A2:
Foreign investors with an exposure to Israel and the wider Middle East should be thinking carefully about how this war is going to play out. The United States, Europe, and others are all urging Israel not to continue with its proposed assault on Rafah, but so far at least, to no avail. It is not inconceivable that the ongoing war in Gaza will change the geopolitical outlook – and investment considerations – for years to come.
Author: Harry Clynch
#Israel #Egypt #ForeignInvestment #MiddleEast #Geopolitics
