The threat Islamic extremism and ISIS in particular poses to security and eventually to longer term business and investment conditions was underscored in November when parts of Paris were attacked by gunmen and suicide bombers. Some 129 people were murdered and hundreds wounded. The Paris incidents were preceded this year by numerous onslaughts.
This began with the attack on French newspaper Charlie Hebdo, to assaults on oilfields in Libya and military checkpoints in Egypt, to a suicide bombing at the entrance of a Shiite mosque in Saudi Arabia. Assuming ISIS is directly responsible for these incidents, the civilian death toll outside of Iraq and Syria is in the vicinity of 1,000 fatalities.
Much of the international community has begun to coalesce around a strategy to combat ISIS’ activities, with the UK most recently sending warplanes over Syria, thus joining U.S. and French forces. Germany is being courted, and France is trying to persuade Russia to focus its efforts on ISIS within Syria as opposed to ‘rebels’ fighting the Syrian government of President Bashar al-Assad.
As part of the offensive, France, the U.S. and to some extent Russia have also targeted ISIS’ oil assets. Last month French warplanes bombed the Omar field in the eastern Syrian province of Deir Ezzour, which supplies the bulk of oil revenue. The U.S. accused the Syrian government of buying oil from ISIS and froze the U.S. assets of the Syrian who was allegedly instrumental in fostering the transactions. About 40 percent of ISIS’ oil production — some 15,000 barrels per day before last month’s strikes — is being delivered to Syria, while the rest is being sold on the black market. It has been estimated that oil sales fund about half of ISIS’ activities.
Despite such efforts to squeeze the revenue line, ISIS has diversified its sources of cash flow into extortion and tariffs, and reportedly sells natural gas from Deir Ezzour to areas of the country held by the group in exchange for electricity. ISIS has also been effective in replacing the oil infrastructure that was destroyed.
Looking forward, much like the migration crisis that has spread across parts of Europe, the threat that ISIS poses is one of the most far reaching political risk events in some time.
Obviously, the general goal of the organization is to create a broader Islamic caliphate. But such efforts will likely be contained by resistance not only from Western powers but also from other rebel groups such as the al-Nusra Front in Syria. Moreover, most Sunnis would not accept ISIS rule, and it is rather clear that Iran and others would do what was necessary to reinforce the current regime in Syria should ISIS ever really pose a significant threat to overall government.
In any event, it is rather clear we have fully entered a world now where domestic security, international diplomacy and coalition building, and the public acceptance of outright military force will dominate political discourse for some time. Government resources and priorities will therefore shift, and questions about diversity and assimilation in the local content will become more pronounced. Public spending priorities will also likely shift, with more powerful governments — and indeed more lucrative private defense manufacturers — assuming an increasingly active presence in corporate and individual activities.
Turning to international currencies, as expected, the IMF has announced that the Chinese yuan is a reserve currency, joining a basket of currencies that comprise the Fund’s lending reserves, alongside the U.S. dollar, the euro, the British pound and the Japanese yen.
But the IMF’s decision now shifts the onus on Chinese authorities to enact meaningful reforms, which includes how the currency is managed and the central bank’s transparency. Notwithstanding these imperatives, the inclusion of the yuan in the basket is intended for emergency lending (as opposed to the creation of a tradable asset) and we expect some volatility in the markets during the short term, with pressure on the authorities to weaken the yuan given China’s economic slowdown. In any event, we do not expect significant capital flight, and the inclusion of the currency by the IMF is clearly a sign that the global economy is increasingly moving towards the Pacific from the Atlantic.
Concluding on the topic of central banks and monetary policy, we suspect there is very little chance the Federal Reserve will not hike rates this month, while the European Central Bank will continue on its rather public decision to announce further easing measures, with Switzerland’s central bank following the European lead. As such, the greenback should consolidate modestly; the euro will find some new lows; and longer term European equities should do well, notably exporters from Germany (the country’s firms rely more on exports than those from other parts of Europe).
Continuing on to our ratings in November, some improvements were seen in South Korea’s country risk profile, as consumer confidence levels rose again for the fourth straight month. Myanmar also improved its overall score following the impressive election result for Suun Kyi's party, the National League for Democracy, which secured a legislative majority. However, the battle now will turn to the presidential vote and overall constitutional reform. Tanzania’s score also got a lift in the wake of the recent presidential vote, with the ruling Chama Cha Mapinduzi now holding a firm grip on power.
On the downside, riskier profiles were seen in Austria, as the jobless rate hit 8.6 percent, and is expected to worsen with higher levels of immigration. Finland’s score also fell as the unemployment rate nears 10 percent and the collapse of the government seems likely. And Mali’s overall score deteriorated as an upsurge in violence occurred in the northern sections of the country, which will do little to bolster economic growth.
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