Recent threats in the Red Sea: Economic impact on the region and on the EU

Briefing 27-03-2024

Since mid-November 2023, the Iran-backed Houthi militia, which controls large parts of Yemen, has attacked numerous Western commercial ships near the Bab el-Mandeb Strait in the Red Sea. In response, major shipping companies have temporarily suspended Suez transits and diverted their trade. This diversion coincides with decreasing freight in another maritime chokepoint, the Panama Canal, provoked by lowered water levels. Rounding South Africa via the Cape of Good Hope is the shortest alternative route for travel by ship between Asia and Europe, a route that increases shipping time by 10 to 14 days. Shipping prices had already been on the rise recently, owing to increased fuel and insurance costs. The diversion has caused delays that have disrupted global supply chains, with certain companies choosing to halt production in their factories. If the situation persists or worsens, it could further affect energy supplies and prices, all this potentially contributing to higher inflation. This could, in turn, hamper the efforts of central banks to achieve a 'soft landing'. If, in addition, United States (US) and European Union (EU) central banks decide to keep interest rates high, developing countries will have to pay premium prices for international debt, raising repayment risks for many countries in Africa that have maturity deadlines this year. The attacks have reduced income from maritime fees and could affect commodity exports for some countries in the region, worsening an already precarious economic situation. If the situation persists or worsens, it could also impact trade for other countries in east Africa and aggravate food security challenges, generating social unrest in countries in the region. In addition to the attacks on ships, there are suspicions that the Houthis have been involved in damage to submarine communications cables. This damage – to what is categorised as critical infrastructure – could represent a significant cost to the EU and other economies. Following calls by the European Parliament and Council, the European Commission has recently adopted a recommendation on the security and resilience of submarine cable infrastructures.