Geopolitical risk: The Arab Spring

15 Oct 2013

The significance of the Arab Spring should not be underestimated. While disruption in Syria itself may not be hugely impactful on markets (it is not a major oil producer), its effects are being felt well beyond the Arab world. The threat of a much broader conflict remains real and would have a very significant impact on global oil supply and prices. Not only would that further dampen the fragile global recovery, it would increase upward pressure on food prices, thereby fuelling civil unrest on a much greater scale globally.

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Egypt and Syria are two cases in point. According to Matt Strong, partner, credit political and security risks at JLT Specialty: “There is no end in sight for the conflict in Egypt, which will likely muddle along over the medium term with on-going escalations and outbreaks of violence. Syria will be much the same. There is no solution in sight even if the opposition were to gain power.”

Libya is perhaps more concerning as oil supply there has been massively disrupted. Oil supply initially recovered well after its bloody conflict, but rebel activity has since caused a near total shut-down in supply. OPEC supply consequently decreased by 260kb/d in August, despite near-record Saudi output according to the IEA.

This supply/demand imbalance is very negative for global growth. The International Monetary Fund calculated a $10-a-barrel increase in the price of oil reduces US GDP growth by 0.5 percentage points.

MGIM’s Owen says: “A year ago the global economy was in recession and the oil price should have been lower, but the Arab Spring pushed it higher and now it has gone up again. The Syrian problem alone has pushed oil up around $10-15.”

A rise in oil price is also, effectively, a tax on consumers as so much of what is consumed globally contains some element of energy prices. As currencies in key emerging markets have fallen, the cost of food, for example, has significantly increased.

This threat goes far beyond Arab nations. Brazil, Turkey and China, among other countries, have seen civil uprisings in the last two years.

Lee Robinson, founder of Altana Wealth, estimates: “Two billion people in Brazil, Turkey, India and Indonesia have seen their currencies fall 10-20% this year. Over the last two years, the two most populated countries, India and China, have seen a swing of 50% in their relative currencies.”

The Arab Spring has already shown it does not take much of a spark to light a fire in the post-crisis world. The contagion of unrest has already begun to spread and as long as oil supply remains under threat from the Arab Spring, so does global growth and stability in many of the developing nations. Both scenarios if allowed to develop would have severely negative consequences for investors.