It’s not even been 24 hours, but Israeli and US strikes on Iran have irreversibly changed the region. Just before 10am in Tehran yesterday, reports began streaming out of the country of airstrikes targeting the capital, which soon spread to targets across the entirety of the country.

Where do things stand this morning? Here’s what we know:

• Supreme Leader Ali Khamenei is dead, Iranian state media said early this morning.
• His death seems unlikely to end the US-Israeli attack: Washington is targeting regime change, the elimination of both Iran’s nuclear program and its navy;
• Iran has struck targets in Saudi Arabia as well as the UAE, Kuwait, Qatar, Jordan, and Israel, launching both missiles and drones. There have been few reports of casualties;
• Ships are avoiding the Strait of Hormuz to steer clear of the conflict. Iranian media claimed the waterway is “effectively closed”;
• Dozens of Iranians are believed to have killed, including scores of school children reportedly killed by a US or Israeli strike;
• Schools in the UAE are closed through Wednesday.

It soon became clear that regime change was the goal, with Trump telling the Iranian people in a televised address that, “When we are finished, take over your government. It will be yours to take” (watch, runtime; 8:06). Trump further pledged to destroy the country’s nuclear project, missile capabilities, and its navy, while threatening that members of the Islamic Revolutionary Guard Corps, army, and police would “face certain death” if they don’t put down their arms.

Iran responded with drone and missile attacks on not just Israel, but US bases and other targets in neighboring Arab nations, including in the UAE, Saudi Arabia, Qatar, Kuwait, Iraq, Jordan, and Bahrain. Despite the intention to target US military sites, the Fairmont in Dubai’s Palm Jumeirah was hit by a missile and a residential high-rise in Bahrain was struck by what is believed to have been an Iranian drone, sparking sharp condemnation from the region.

The conflict shows no sign of easing even after the death of Iranian Supreme Leader Ali Khamenei, with Netanyahu saying Israel will “will hit thousands more targets of the terror regime” in the next few days and Trump writing that the bombing campaign will continue “uninterrupted throughout the week.”

Egypt has so far avoided being directly pulled into the conflict, but our “position at the heart of the global trade and energy network makes it quickly susceptible to any broad regional disturbance,” economist Hany Abou El Fotouh tells us. The “impact will not arrive all at once — rather, it will seep through multiple channels like energy, transport, financial flows, and subsequently, investment behavior,” he explained.

What to watch: FX and outflows

The EGP is likely to come under pressure in the coming days — and that’s healthy. A freely floating currency should come under pressure as risk-averse investors pull out of the regions and those staying the course weigh the likely impact on our economy of the storm Washington and Tel Aviv have unleashed.

Look for the EGP to hit 49 against the greenback in the coming days if the conflict continues, three banking sources told EnterpriseAM. We will see the pressures build as banks open their doors this morning and fulfill exit requests from the weekend, we were told. “The EGP has been weakening recently and there may be a bit more pressure in a risk-off environment. At the margin, that may make central banks less inclined to lower interest rates,” Capital Economics Chief Emerging Markets Economist William Jackson tells us.

Already, some USD 1.7 bn in hot money had exited through the secondary system, we were told yesterday, with the amount expected to have increased further. This is on top of an estimated USD 2-3 bn of inflows that never materialized due to investors staying clear of the market over heightened rhetoric from the US in the run up to the strikes, we were told.

“The magnitude of these outflows and the temporary depreciation of the EGP will depend on the length of this war,” HC Securities Head of Research Nemat Choucri tells us, mirroring what others told us about energy prices, Suez Canal receipts, and tourism inflows (see below).

But Egypt is in a good position to manage outflows and soon welcome them back, one of the banking sources told us, pointing to the country’s much-improved stock of foreign currency reserves. Government officials have also previously told us how confidence in the exchange rate regime and ability to exit when needed has persuaded investors to return to the market as optimism returns, while Choucri highlighted how outflows turned into inflows by the end of the 12-day war in June.

FX reserves are a safety net that the government is keen to maintain, with pressure building on the Finance Ministry to proceed with new international issuances before the end of the fiscal year at competitive rates to reduce the bleed on our reserves. Egypt repaid some USD 2.3 bn worth of international bond and sukuk issuances last month, with more to come in the months ahead, one of the banking sources told us.

“Egypt’s strong foreign exchange reserves will be the first line of defense, but they will not hold out for long if the conflict is protracted and the bill for reform doubles,” Abou El Fotouh said. Abou El Fotouh explained that the problem isn’t primarily the rise in prices as “short-term shocks can be absorbed, but how long they will remain high and if the country has “enough flexibility to rearrange spending priorities without massive economic disruption.”

Demand for local debt is expected to remain strong, albeit at higher yields than recent weeks, another senior banker tells us. This comes at a time when the Finance Ministry is looking to borrow EGP 1.1 tn this month, up from EGP 843 bn the month before, according to a document from the ministry seen by EnterpriseAM.

But the same can’t be said for the EGX, with the market set to “be affected in the short term by waves of selling due to fears, as liquidity exits and moves toward safe havens,” EGX board member Rania Yacoub tells us. Osool Brokerage Managing Director Ehab Saeed sees the EGX30 falling from 49.2k points to approach 47.5k-48k, warning the market opening today “will certainly not be pleasant because it was already undergoing a correction phase” and will accelerate further.

Investors are already flocking to safe haven assets: A surge in gold trading resulted in a temporary suspension of all gold pricing within the local market until Monday, Al Mal reports, citing Hani Milad, the head of Federation of Egyptian Chambers of Commerce’s gold and jewelry division. The precious metal jumped over EGP 450 per gram in a matter of hours, with people using it as a hedge during this time of uncertainty, Milad said, strongly advising citizens to stop buying until a measure of sanity returns to the market.

What to watch: Tourism

This is the big one, folks: Tourism to Egypt has been booming — and seemed poised to get yet another boost from the opening late last year of the Grand Egyptian Museum. What some had claimed was just pent-up demand post-covid was, in fact, structural interest in Egypt as a destination.

Red Sea demand is typically the most-sensitive to geopolitical nastiness. Past incidents have seen cancellations hit there first, and a small number of tourists are already leaving Hurghada and Sharm El Sheikh on the advice of their embassies, an official from the Chamber of Tourism Companies tells us.

Could we see a repeat of what happened during the 12-day war against Iran in June?

Some hotel operators suffered sharp cancellations, the source added. Chamber of Tourism Companies member Magdy Sadeq called for caution, warning that the sector is keeping an eye on developments after having made a substantial recovery during the winter season. The risk, Sadeq says, is in the duration of the Israeli-American strikes. The problem is that “a tourist makes their decision based on the image of the region as a whole, not just the borders of a single state,” according to Abou El Fotouh.

The aviation industry was quick to cancel flights. EgyptAir joined its regional and global peers, suspending flights to Kuwait, Doha, Bahrain, Abu Dhabi, Sharjah, Qassim, Dammam, Erbil, Baghdad, Amman, Beirut, and Muscat.

Flights to Egypt from outside the GCC are so far unaffected, with the country considered sufficiently distant from the conflict in terms of distance and lack of both Iranian proxies and US military bases on its territory. Flight tracking website Flightradar24 shows traffic avoiding the affected areas and converging on surrounding airports, including Cairo.

What to watch: Suez Canal

Shipping lines had already been diverting away from the Suez Canal as tensions and rhetoric rose over the weekend — even before the strikes began. That included Maersk rerouting its ME11 and MECL services around the Cape of Good Hope, the maritime giant said in a statement Friday.

French shipping outfit CMA CGM is rerouting its vessels via the Cape of Good Hope, after suspending transit through the Suez Canal until further notice.

The Madbouly government’s hope of luring traffic back to the canal will be pushed back, with shipping lines often looking for 1-3 months of stable and safe conditions following the end of any hostilities before sending back their larger vessels, a senior government official tells us. Despite progress being made in bringing back vessels through the canal in recent months, the canal’s target of bringing in USD 8-9.2 bn is now solidly out of reach.

Shipping lines could be spooked further if the Houthis follow through on their threat to “resume missile and drone attacks, making the Red Sea a standing variable in Tehran’s escalation toolkit,” former head of supply chain and transport industries at the World Economic Forum Wolfgang Lehmacher tells EnterpriseAM.

What to watch: The price of oil

“There is no impact that you can quantify, nor can you speak about it or determine its scale, until you know the duration of the war,” Thndr analyst Esraa Ahmed told us.

If the conflict remains just a “limited set of strikes” — which we’ve likely already surpassed — Jackson sees oil reaching USD 80 a barrel, up from the USD 73 that Brent crude was selling at before markets closed for the weekend, according to a note. But with rhetoric from both sides of the conflict becoming increasingly aggressive and the pace of attacks continuing, we are likely looking at a “longer conflict that causes disruptions to supply could send prices much higher – with a material effect on global inflation.”

Are we looking at USD 100 a barrel? Despite the build up of American forces in the region having led to “political risk premium baked into the oil price” disruptions to oil flows out of the region via the closure of the Strait of Hormuz or Iranian supply disruptions could see prices pass the USD 100 a barrel for the first time since 2022, according to Jackson.

The Strait of Hormuz remains the most sensitive point in the equation, warned Abou El Fotouh. Even if movement is only temporarily disrupted in the waterway, which carries some 20% of the world's oil and gas flows, “markets will respond quickly, as they build their expectations on risks, not just facts,” he said.

We’re already seeing tankers avoid the strait, with Iran’s Tasnim News Agency claiming it’s practically closed, although no formal announcement has been made by Tehran. Ships reported receiving a radio broadcast — reportedly from the Iranian navy — instructing them to leave the waterway as passage is banned.

Higher oil prices will put pressure on the Madbouly government’s budget. We came into the crisis with oil hovering below the USD 77 per barrel that the Finance Ministry had pencilled in. Our reliance on imported oil would put pressure on the balance of payments, Abou El Fotoh told us.

The war has now upended many of the state’s assumptions it made in the draft budget ahead of presenting it to the House this March. This could mean that the Finance Ministry will resort to hedging against oil price volatility once again if energy prices rise and uncertainty remains, another government official tells EnterpriseAM

But “it is too early to assess the impact of rising oil prices on the new budget, as it remains unclear how long the crisis will last,” the official told us. While public finances remain stable with decent revenues, the outbreak of the war risks driving up food and energy prices and the impact of exchange rate fluctuations on debt service obligations could shift the budget's trajectory should tensions escalate, the official added.

Also worth keeping an eye on: How fast is the government able to pass the rising price of oil on to consumers and businesses at the fuel pumps, factories, and other installations.

The bottom line: “We have made significant strides in the economic reform program, but global and regional risks inevitably impact official targets,” the official said.

What to watch: Inflation and rates

Look for global inflation to rise 0.6-0.7 percentage points, which would have an oversized impact on monetary easing in emerging markets, according to Jackson. “The repercussions of the war are not limited to the general budget, but extend to citizens’ wallets,” EG Bank board member Mohamed Abdel Aal tells EnterpriseAM. While gold and silver will be seen as a way to store value ahead of potential decline of emerging currencies, a return to the greenback as the primary safe haven currency will increase both import costs and the cost of servicing external debt, he added.

In the event that the “crisis is contained, the [central bank’s] monetary policy committee may settle for leaving interest rates unchanged at its next meeting to absorb the shock,” Abdel Aal said.

The risk is to the longer-term outlook: If the conflict gets worse, we could see an “‘imported’ wave of inflation due to jumps in shipping and fuel prices, and that could prompt the central bank to keep interest rates higher for longer than planned,” Abdel Aal added.

Few will be envious of the hard decisions that the central bank will have to make, having to balance between tackling inflationary pressures stemming from energy market disruptions and the “need to maintain the attractiveness of the currency and prevent sharp fluctuations in the exchange market,” Abou El Fotouh said.

We’ve got a month to see how things shake out: The central bank is next set to review its interest rate policy on 2 April, according to its public calendar.

What to watch: Energy

We could face tighter energy supplies after Israel shut off Egypt-bound exports after the attack started yesterday morning, a senior government official in the oil sector tells EnterpriseAM. Flows to industry have so far been unaffected by the cutoff of some 1.1 bcf per day of gas sent by Israel, officials tell us.

The Oil Ministry wants us all to chill out: “We have diversified sources of gas supplies and readily available alternative capacities … to meet electricity and industrial needs,” it said in a statement. Reserves of petroleum products remain at “safe” levels, Cabinet also said yesterday.

Bridging the gap are docked floating storage regasification units that are working at full capacity, a government official told us. Looking at the longer term, the official also pointed to contracting 24 LNG shipments from Qatar and the renewal of numerous supply arrangements as helping to mitigate supply concerns until the war and uncertainty comes to an end — assuming that is that the Strait of Hormuz remains open.

To ensure reserves don’t dip the Madbouly government is looking to accelerate imports of some LNG cargoes, including those contracted last summer, Bloomberg reports, citing people it says are in the know.

What’s happening on the diplomacy front?

Foreign Ministry is advocating for dialogue: The Foreign Ministry released a statement shortly after the attacks started reiterating that the “only path to ensuring security and stability lies in a commitment to the choice of diplomacy and dialogue.” President Abdel Fattah El Sisi and Foreign Minister Badr Abdelatty highlighted the importance of a diplomatic solution during calls with their regional counterparts.

The bottom line

“The Egyptian economy today does not stand on fragile ground as it did in previous [regional crises], but it is also not isolated from the storm,” according to Abou El Fotouh. “The strength of current indicators gives us time and space to move, nothing more … If pressure on Suez Canal revenues coincides with a slowdown in tourism and the exit of short-term investments, liquidity management becomes more complex,” he said.