Shoppers at Kuwait’s Avenues Mall. The Saudi-Iranian tensions could not only impact economies in the region, but have a negative impact on tourism as getting visas for Iranians will get tougher. Image Credit: Reuters

Dubai: The Saudi-Iranian tensions could impact not just the economy of Iran, but also that of the wider Middle East and Africa (MEA) region, analysts have said. It could also affect investors’ appetite for risk, “spell increased volatility” in the financial markets and create pressure on oil prices.

“[The] impact of the conflict on key sectors such as oil, tourism and trade but also on the overall economy could be felt not only by Iran but also by the already fragile MEA region,” said Kinda Chebib, senior research analyst at Euromonitor International, in her analysis sent to Gulf News.

Chebib noted that the two countries have import-export ties, with the trade exchange between them exceeding $266 million (Dh977 million) in 2014. By the end of 2014, the volume of Saudi exports to Iran reached about $102 million, while Saudi imports from Iran hit $181 million.

“The situation can have a repercussion on the economy, as trade has also been halted between the two. An area that could potentially suffer if there is acceleration in tensions is oil.”


The tourism industry is another area that can feel some impact. Soon after Saudi Arabia severed ties with Iran, 150 flights between the two countries were reportedly stopped. “This can be detrimental for the tourism industry in the region, as tens of thousands of Iranians travel to [Saudi] each year to complete Hajj and Umrah pilgrimages. This is in addition to the fact that [obtaining] visas is likely to become more difficult for Iranians in general,” Chebib said.

“Intensified crisis between the two countries could trouble investors, since most Saudi oil production comes from its Eastern Province, dominated by Shiites.”

January saw a dramatic start to the New Year. The equity markets crashed on poor manufacturing data in China and Saudi Arabia severed diplomatic ties with Iran.

Members of the Gulf Cooperation Council (GCC) region responded to Saudi’s move, with Bahrain announcing afterwards that it had cut diplomatic ties with Tehran. The UAE also downgraded its relations, while Kuwait recalled its ambassador, and Qatar and Oman criticised Iran’s meddling.

The tensions added to investor anxiety, with the S&P dropping more than 2 per cent and the Euro Stoxx more than 3 per cent. The US and German 10-year government bond yields also fell.

“The collapse in China’s equity market, combined with geo-political tensions and weak global manufacturing data proved to be a powerful cocktail undermining investor risk appetite,” said ABN Amro in its January 5 analysis.

Broader ramifications

Another bank said a flare-up in the row between Saudi and Iran, along with other “geopolitical risks”, could upset global financial markets and have broader economic and political ramifications.

“Tensions between Saudi Arabia and Iran are likely to be a major source of risk in the Middle East. The Iranian nuclear deal completed in July has elevated Saudi Arabia’s security concerns. This could lead to proxy conflicts between the two countries in other parts of the region,” according to Merrill Lynch.

Other analysts, however, argued that the soured bilateral relations between the two countries will not have much wider economic implications. This is partly because the Chinese economy, as well as the Asian stock markets, is also showing some weakness.

“The oil price, since the escalation of tensions have been volatile. A significant spike in prices were expected but failed to materialise, mainly because geopolitical risks are dominated by weak manufacturing data by China and sharp declines in Asian stock markets. Weak demand from Asia is an early indicator that oil supply will not be matched,” Alp Eke, senior economist at the National Bank of Abu Dhabi (NBAD) pointed out.

“In my opinion, the analysts and investors are aware of the friction between Iran and Saudi Arabia since the Arab Spring and such factors are now undervalued or under-appreciated by investors,” Eke told Gulf News.

“The recent escalation of events [including the 2015 Hajj incident and January 2016 executions] will not impact the oil price as much. Iran and Saudi Arabia have severed ties before [in 1987 to 1991]. Of course, [that’s] assuming the most recent event doesn’t lead to direct hostilities.”

Impact on oil

Eke said the impact will instead be felt in other areas. Given that Saudi and Iran are considered the world’s most powerful members of the Organisation of the Petroleum Exporting Countries (Opec), it may now be difficult to reach a solution that can curb the production of oil.

“At the moment, a unified policy by Opec will be almost impossible to achieve. In the recent past, Iran and Venezuela have been asking other members of Opec to reduce production, but Saudi Arabia, with its vast FX reserves, have been in favour of keeping the same production levels.”

“Iran suffered greatly from the sanctions, mismanagement of limited revenues and populist government policies which contributed to the decline of the Iran economy. With the implementation of Joint Plan of Action and lifting of sanctions, Iran will be able to increase production levels significantly within a year. “

“Iran currently produces 2.9 million barrels a day and can add up to half million barrels within a short time to the already over-supplied global market. Saudi Arabia government has been a very vocal opponent on the lifting of sanctions and Iran’s gradual integration into the world economy. In my opinion, if the most recent events lead to prolonged period of heightened tension, this could cause delays in sanction removal which could create upward pressure on oil prices," Eke added.