This article first appeared in Forum, The Edge Malaysia Weekly on October 16, 2023 - October 22, 2023

The conflict instigated by the shocking assault on southern Israel by Palestinian Hamas militants will almost certainly intensify. The hundreds of fatalities among Israeli civilians will prompt Israel to act decisively. Israel has amassed 300,000 troops for a ground offensive into Gaza, which is sure to inflict huge civilian casualties among Palestinians there. That will inflame passions in the region to the point where a much broader and potentially bloodier conflict may ensue. For all of us in Southeast Asia, the likely loss of life is deeply saddening. We also know that even though the conflict seems far away from us, we cannot assume that the region will escape some fallout.

This impact will depend on how the conflict in the Middle East unfolds. The most likely scenario is likely to be a bloody one. Whatever the scenario that materialises, there will be several channels through which Asia will be affected. First, we must be ready for political ramifications: These could include the possible weakening of America’s security commitment to the Indo-Pacific region and the chances that inflamed religious passions in our region might complicate domestic politics or perhaps even spur terrorism. Second, there will also be economic consequences whose magnitude will depend on how much oil prices rise and whether a wider regional conflagration in the Middle East undermines global business confidence to the point that demand for Asia’s exports weakens.

All things considered, our take is that our region cannot avoid some increase in political and economic risks but that the heightened risks are probably manageable.

How Asia will be impacted will depend on how the crisis in the Middle East unfolds, so we need to set this out before we can assess what it all means for Asia.

Hamas’ ability to penetrate Israel’s sophisticated defences and inflict massive casualties in towns and villages across southern Israel has shaken Israelis to their very core. It is likely that most of the political and security establishments in Israel are now determined to do whatever it takes and at almost whatever cost to demolish Hamas and so ensure that Gaza is never again a secure base for any militant group to threaten Israel. That can only be achieved through a ground offensive into a region where 2.3 million Palestinians are squeezed into 365 sq km — so densely that it will be impossible for an invading force to distinguish between civilian and military areas. Moreover, Hamas has prepared well for an Israeli attack with tunnels and obstacles that will make any Israeli offensive a hellish one.

The resulting loss of life among Palestinian civilians as well as soldiers on both sides will probably be so large that there will be severe consequences.

•     The West Bank, where roughly three million Palestinians live, could well explode into violence as well. This region is already boiling with anger and violence had already surged this year because of provocations by right-wing Israeli settlers in the West Bank. Hamas’ rival, the Palestinian Liberation Organization (PLO), rules the area but has lost much support and faces competition from more radical elements such as the Lion’s Den forces, who have been stepping up attacks on Israeli forces in the area. There is a high chance, therefore, of an explosion of violence in the West Bank.

•     It is also likely that the well-armed Hezbollah militant group in Lebanon will step up military pressure on Israel if a ground offensive is launched against Gaza. While Hezbollah probably would prefer to avoid a full-scale conflict with Israel, it also is likely to feel the need to demonstrate its support for Palestinians. Hezbollah has fired rockets into northern Israel and a number of its fighters have been killed attempting to infiltrate into Israel since the Hamas assault on Gaza. In addition, another militant group, Palestinian Islamic Jihad (PIJ), has also conducted military operations against Israel. An all-out war in Lebanon such as the one in 2006 is unlikely as neither Hezbollah nor the Israelis have the stomach for one. More likely is that Hezbollah and PIJ mount small-scale operations to tie down Israeli military resources in order to help Hamas.

•     There is a possibility of instability in some countries in the Middle East. Widespread anti-Israeli and anti-American protests are likely across the region. Egypt, with its floundering economy and forthcoming elections, is at risk: thousands of Palestinians will probably flee from Gaza into Egypt and may stay there for an extended period, creating an immense strain on Egypt and an uncertain impact on domestic politics.

In short, we are likely to see a widening conflict that will go beyond Gaza to encompass the West Bank and southern Lebanon. This will severely stretch Israel’s military, causing it to call on the US for funding and military equipment. The scale of casualties in Gaza will very likely arouse anger across the Muslim world, including South and Southeast Asia.

For Asia, the primary consideration will be how America’s security commitment to East and Southeast Asia might change as a result.

Since the Obama presidency, the US has been trying to “pivot” away from Europe and the Middle East towards the Indo-Pacific region, where it believes its priorities lie because of a rising and more assertive China. This has had important effects in our region. Smaller nations in this region have gone along with this pivot, knowing that it gives them greater leverage to balance between the US and China. The strengthened American commitment also probably played a role in persuading the Philippines to shift away from courting China to returning to the US military embrace. South Korea and Vietnam also probably feel able to stand up to Chinese pressure because of such American commitment.

The problem is that war in Ukraine has already tested this pivot to Asia. A broader Middle East conflict could further test America’s resolve to prioritise East Asia because of the special relationship it has with Israel. Some segments within the Republican party are already reluctant to fund Ukraine’s massive needs. If a militarily-stretched Israel requires more US funding and supplies of munitions that Ukraine is also competing for, the US will be placed in a difficult position. With its fiscal position constrained, the US might have to make hard decisions on which ally to favour, something which none of its allies will like. In particular, if the US downgrades assistance to Ukraine in favour of Israel, America’s allies in the Indo-Pacific will question how reliable the US is as a security guarantor against, or counterweight to, China. And, that could favour China in its contest with the US.

Another risk is that America’s rivals in Asia could judge that a US distracted by Ukraine and the Middle East is taking its eye off the Indo-Pacific, allowing them to push their own agendas more aggressively. The risk is not so much China taking advantage of current events to harm Taiwan. There are growing hopes in Beijing that an anti-independence candidate will win the Taiwanese presidency in January’s elections. That means that China is unlikely to provoke Taiwanese voters into rallying around an anti-China candidate for now. Instead, we would watch out for a North Korean provocation. The latter, already emboldened by its strengthened nuclear and missile capacity and recently reinforced alliance with Russia, seems to be itching for action. We would not be surprised if there were some provocation by North Korea in the coming weeks.

Yet another consideration is whether religious passions in South Asia, Indonesia and Malaysia might be inflamed leading to two potential risks:

•      Massive loss of lives in Gaza as a result of an Israeli offensive there would tend to arouse anger in Islamic communities in South and Southeast Asia. With a presidential election campaign starting in Indonesia, this could give an opening to a candidate to resort to inflammatory religious rhetoric in order to gain support. In the gubernatorial election in Jakarta in 2017, Anies Baswedan came from behind to win the governorship after radical elements attacked his opponent for committing blasphemy. Anies is now running for the presidency, backed by religiously-minded parties, one or more of which may want to capitalise on religious anger. In Malaysia, the moderate reformist government of Prime Minister Datuk Seri Anwar Ibrahim is already having to fend off accusations of not being Islamic enough. His opponents may well exploit any inflamed passions to step up their efforts to undermine him.

•      Next, while domestic terrorists may want to take advantage of aroused religious sentiments to mobilise support, we believe that the region’s security forces have succeeded in reducing the terrorist threat. Indonesia, in particular, has been quite effective in eliminating highly-skilled terrorists and disrupted their networks of support. However, there could well be more lone-wolf terrorist offences similar to the incident in Egypt on Oct 8 when a policeman killed two Israeli tourists. These would be nasty but can be dealt with by the region’s security forces.

The key channel of economic impact will be through energy prices. Oil prices initially spiked up after last weekend’s events but are now giving up some of those gains. We see a very low likelihood that the production or transport of oil might be disrupted in the scenario we described above. The major Arab oil producers are not inclined to use oil as a weapon as they did in 1973 — the United Arab Emirates has made this explicitly clear. Neither are major oil transport routes likely to be affected by wider Israeli-Palestinian fighting.

What could change this for the worse is if Iran, which supports both Hamas and Hezbollah, is drawn into the conflict. Not only is Iran an oil producer, it also has the ability to interdict oil being shipped through the Straits of Hormuz, which accounts for between 20% and 30% of total oil consumption. However, Iran is playing its cards carefully, providing arms, training and money to Israel’s enemies but avoiding further provocations.

A second source of economic impact will be if a wider conflict triggers unexpected disturbances that impair business confidence in major economies. Asian exporters would be particularly hard hit if reduced confidence leads to cutbacks in capital spending, for example. So far, the behaviour of equity markets seems to indicate otherwise — equity markets have bounced back after their initial falls. For now, this risk remains low.

The war between Israel and the Palestinian Hamas forces is likely to be a critical turning point for the Middle East. But, for Asian nations, the economic damage is unlikely to be anything close to the scale during the 1973 Arab-Israeli war, to which the current fighting has been compared, so long as oil prices remain well behaved.

The greater danger is political. If America’s credibility as a security guarantor is diminished because it has to downgrade its commitments in East and Southeast Asia in favour of Israel, then countries in this region will have less leeway to manoeuvre their way around an assertive China. There is also a risk of provocations by the rivals of the US in the region, such as North Korea.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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