Rising tension between Iran and the West has the potential to disrupt the fragile economic recovery across the developed world, deepen a European recession and slow down growth in the Middle East and emerging market economies, Jean-Michel Six, Standard & Poor’s chief economist for Europe, told Gulf News yesterday.
In response to tougher sanctions, including that on Iranian oil exports by the European Union (EU), Iran has threatened retaliation, notably in the form of a blockade of the Strait of Hormuz, a conduit for the flow of oil and gas out of the Gulf. So far, these threats have been verbal, but analysts are not ruling out the possibility that the current exchanges of rhetoric could spark disruptions to trade flowing through the strait, or even in an extreme scenario, a military confrontation.
The likelihood of severe disruption of oil supplies through the strait, through which 20 percent of the world’s oil flows, is very low,’ though if one did occur, it might boost oil to $150 a barrel, according to S&P analysts, Analysts said high oil prices could derail the economic recovery across the world. “A spike in oil prices would fuel inflation and upset a fragile economic recovery in both developed and emerging markets,” said Jean-Michel Six.
For oil-producing countries in the Gulf, higher oil prices would actually be beneficial. “As oil exporters, they would receive more foreign earnings that they could either use to stimulate demand or improve their government’s balance sheets,” said Standard & Poor’s credit analyst Elliot Hentov.
In contrast, an oil price hike could adversely impact the oil importers from the Middle East. The fiscal and external balances of oil importers in the Middle East — especially Jordan, Egypt, and Lebanon — are already stretched. As such, they are ill-prepared for a further rise in oil prices, S&P analysts said. Furthermore, countries in need of attracting investor appetite in 2012 such as Egypt could suffer from an elevated risk premium in their debt financing. Other non-oil trade could also be affected because of higher transaction and logistics costs for shipping imports into the Gulf states through the Strait of Hormuz.
The impact of recessionary conditions in Europe is limited on the Gulf economies, according to S&P’s Six. However, he said the financial sector deleveraging happening in Europe is likely to reduce funding availability for companies seeking longer term funding for new projects or refinancing their maturing liabilities.
“Gulf economies have been remarkably resilient to turbulence in Europe. We do not expect any direct impact on Gulf economies as a result of the restructurings in Europe. Although funding through European banks could emerge a problem, we see the possibility of increased fund flows into the region through international debt capital markets making up for the liquidity shortage caused by deleveraging in Europe,” Six said.
The growing risk appetite of international investors and the significant yield gap that exists between debt issues from the developed world and the Gulf are expected to attract more capital here.
Jean-Michel Six, Chief economist, S&P