African nations require financial prudence to offset severe economic impacts of Israel-Hamas conflict 

Amid the devastating loss of life, African policymakers and investors are grappling with the economic and political implications of the Israel-Hamas war on their domestic economies. The fallout could significantly disrupt economies still reeling from Covid-19 and the Russia-Ukraine conflict.

This could cause ruptures in the fragile geopolitical patchwork and birth new security challenges. Most African sovereigns have limited buffers to absorb further external shocks and will need to manage any contagion carefully.

As with any geopolitical strife, global risk aversion rose when the war began. The flight to safety by investors saw the dollar strengthen and gold prices spike in line with traditional behaviours, which initially drove up risk premia. 

However, in recent weeks, fears of regional and global contagion have tapered. Instead, investor attention has turned to whether the US economy might finally be slowing and whether a Fed pivot is imminent. By implication, the weaker dollar has boosted global risk appetite, with a less bearish outlook for emerging markets. This has signalled a slight reprieve for African policymakers, blindsided by the food and fuel inflationary pressures that followed the Ukraine war.

However, a significant escalation or involvement of other players, such as Iran and Lebanon, could change the outlook. For starters, currencies, bonds and stock markets would be hard hit as risk aversion again sees capital revert to safe havens and away from emerging markets.

Given the boom-bust nature of many African economies, which rely heavily on commodities, any wild swings in these prices would have a pronounced effect on the balance of payment and fiscal positions. Global energy flows, particularly developments relating to the Strait of Hormuz, will be of concern, given its centrality to global energy supply and its emergence as a strategic target.

In this context, the World Bank warned on 30 October that the Israel-Hamas conflict could trigger a global economic ‘shock’ — including oil prices rising to $150 a barrel and millions going hungry.

“Policymakers will need to be vigilant,” says World Bank chief economist Indermit Gill. “If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades — not just from the war in Ukraine but also the Middle East.”

Higher-for-longer energy prices would also raise global inflationary pressures, leading to tighter monetary policy and a more pessimistic financial market reaction.

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