Ceasefire To Hold, No Long-Term Resolution In Sight

BMI View: The ceasefire brokered between Israel and Palestinian delegates on August 4 will result in the end of Israel's military 'Operation Protective Edge' as both sides have little to gain from renewed warfare. However, a ceasefire will not result in a lasting resolution to the conflict, and further flare-ups will take place over the coming years.

We believe a 72-hour ceasefire brokered by Egypt in indirect negotiations between Israeli and Palestinian delegates on August 4 will result in the end of the Israeli military 'Operation Protective Edge' against Hamas - the militant group and political party that rules the Gaza Strip. The ceasefire came into effect at 08:00 local time on August 5, and has held as of the time of writing. At least five proposed truces fell apart during the conflict between Israel and Hamas that began on July 8. However, Israel withdrew all forces to positions outside Gaza on August 5, signalling that it intends to put an end to military operations.

Few Tactical Gains Left

Tensions To Remain Elevated
Palestinian Territories - Map

BMI View: The ceasefire brokered between Israel and Palestinian delegates on August 4 will result in the end of Israel's military 'Operation Protective Edge' as both sides have little to gain from renewed warfare. However, a ceasefire will not result in a lasting resolution to the conflict, and further flare-ups will take place over the coming years.

We believe a 72-hour ceasefire brokered by Egypt in indirect negotiations between Israeli and Palestinian delegates on August 4 will result in the end of the Israeli military 'Operation Protective Edge' against Hamas - the militant group and political party that rules the Gaza Strip. The ceasefire came into effect at 08:00 local time on August 5, and has held as of the time of writing. At least five proposed truces fell apart during the conflict between Israel and Hamas that began on July 8. However, Israel withdrew all forces to positions outside Gaza on August 5, signalling that it intends to put an end to military operations.

Tensions To Remain Elevated
Palestinian Territories - Map

Few Tactical Gains Left

We believe that there are few tactical gains to be achieved on both sides from a continuation of fighting. Israeli military spokesman Peter Lerner said the army had destroyed all of the 32 tunnels dug by Hamas inside the Gaza Strip for cross-border attacks, the main goal of the military operation. Lerner added that Israel had destroyed more than 3,000 rockets belonging to Hamas and the radical militant group Islamic Jihad. These groups had launched more than 3,300 rockets at Israel, and Israel suspects that they have approximately 3,000 rockets left.

With little military firepower remaining at its disposal, Hamas will be unable to inflict much more damage on Israel. Despite suffering significant military losses, the group has achieved enough tactical gains to buttress its credentials as an anti-Israeli resistance force. The group killed 64 Israeli soldiers, compared with 10 in the last major conflict in 2008-2009. Rocket strikes were in large part intercepted by Israel's Iron Dome missile defence system, and resulted in only three Israeli civilian deaths. But rockets hit most areas of Israel, forcing thousands into shelters, and resulted in the shutdown of Israel's international airport near Tel Aviv for two days. The conflict will have a significant, if temporary, impact on Israel's economy, and we expect real GDP growth to decelerate in Q314. More importantly perhaps, Israel has suffered a significant blow to its international standing, with the United Nations and several Western nations - including the US, Britain, France and Germany - condemning the high human cost of the war. Gaza's health ministry lists 1,867 deaths in the Gaza strip, with 485,000 people internally displaced.

Grim Future For Palestinian Territories
MENA - Political Risk Rating

No Permanent Resolution

Despite ongoing talks for a permanent ceasefire, we reaffirm our view that any agreement will fail to provide a long-term resolution to the conflict. Israel's main focus for a longer-term deal is on achieving a durable end to attacks from Gaza. However, Hamas will not give in to any demand to give up its arsenal. Increased security would also entail strong control over what comes in and out of the Gaza Strip. An end of the Israeli economic blockade of the Strip, the main Palestinian demand in negotiations, will not be met.

We believe that the current truce will be extended, and talks may result in a fragile ceasefire that only marginally fulfils Palestinian and Israeli demands. It could include the release of prisoners detained by Israel, the convening of a donor conference to rebuild Gaza's ruined infrastructure and a marginal easing of the blockade, in exchange for broad security assurances from Hamas. Alternatively, the Israeli and Palestinian delegations could fail to reach an agreement, but avoid a continuation of the military conflict.

In any case, no long-term resolution is in sight. Israel will not annex Gaza to its territory, as the Strip would prove ungovernable for Israel, while Hamas's military infrastructure will be rebuilt. The Strip will remain politically and economically isolated, which will only contribute to increased Palestinian bitterness and grievance against Israel. There is a significant risk that more radical groups in Gaza could gain popular support, with potential for a further flare-up in violence in the West Bank. Moreover, Israel will find itself diplomatically isolated in the face of broad international acceptance of the new unity cabinet, which will only increase Israel's perception of its own isolation and most likely result in increased public support for right-wing political parties in the country. We expect a further flare-up of violence to take place over the next few quarters and years.

Significant Risks Of A Continuation Of The Conflict

We flag significant risks that the current ceasefire will be broken, or that the failure to reach an agreement following extension of the ceasefire will result in a continuation of the conflict. Israeli Prime Minister Benjamin Netanyahu remains under pressure from the right of his government coalition and a significant portion of the electorate to further deteriorate Hamas's military infrastructure, and could decide to resume fighting. Hamas or other radical groups in the Gaza Strip could also launch further rocket attacks, which would trigger an Israeli military response. Israel has stated that armed force will be "redeployed in defensive positions outside the Gaza Strip", reflecting Israeli readiness to resume the fighting.

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