Gulf countries: Outlook should improve following US-Iran agreement, but uncertainty remains elevated

Event

On 17 June, after almost four months of conflict, the US and Iran signed a Memorandum of Understanding (MoU) that outlines an agreement between the US and Iran to halt hostilities, a timeline for restoring traffic through the Strait of Hormuz, and the conditions for negotiating a comprehensive agreement on Iran’s nuclear programme over the next 60 days, among other provisions.

Impact

The MoU constitutes a significant diplomatic breakthrough, as the alternative could have been a more severe regional confrontation with deeper regional and global economic repercussions. If upheld, the agreement is expected to help ease economic pressures on the Gulf countries in the near term, particularly for the countries the most reliant on the Strait of Hormuz, namely Bahrain, Kuwait and Qatar.

However, the situation remains very fluid at this stage. The operating environment remains challenging for maritime operators, as conflicting Iranian and US guidance on transit routes continues to create operational uncertainty for maritime operators in the region. In this context, the regional environment is likely to remain characterised by elevated uncertainty, with developments largely depending on the progress of the negotiations. As a result, periods of relative stability may alternate with renewed episodes of tension, as illustrated by last week’s events, keeping risks to maritime navigation through the Strait of Hormuz and broader regional security elevated. In the near term, this could slow the full normalisation of traffic through the Strait by weighing on shipping confidence and keeping insurance costs elevated while continuing to act as a drag on investor sentiment and economic activity across the Gulf.

Moreover, at this stage, the MoU faces significant challenges for three main reasons. First, its relatively vague wording, which leaves key provisions open to interpretation, combined with deep distrust between the parties, creates high risk of disputes over alleged ceasefire violations. Second, although the agreement provides for the immediate and permanent termination of military operations on all fronts, including in Lebanon, this could be undermined by Israel’s continued military presence in the country, as well as by electoral considerations ahead of the upcoming parliamentary elections this autumn. Third, the scale of domestic pressures that the US and Iran may face in relation to this deal remains uncertain. Nonetheless, the approaching US mid-term elections and the waiver allowing Iran to export oil may incentivise the parties to maintain the agreement in the near term, even if challenges arise.

Analyst: Andres Hernandez Cardona - A.HernandezCardona@credendo.com