Iran-US conflict threatens to derail global economy

By Ranjit Singh

THE recent retaliation by Iran towards the US has clearly sent signals that the global economy is under threat.

Iran launched more than a dozen missiles at two Iraqi bases that hold US troops in what appears to be retaliation to the American airstrike which killed an top Iranian general last week. The recent escalation in the tension between Iran and the US may present US President Donald Trump with his greatest challenge to date.

CNN reported there seems to be no reports of US casualties so far. A preliminary report from an Iraqi security source indicated there were Iraqi casualties, but Iraqi security officials later told CNN there were no casualties among Iraqi security forces.

The problems in the Middle East have sent global oil prices upwards. Since the assassination of the Iranian general last week, global Brent crude futures have spiked 4% to above US$70 per barrel.

Some 20% of the world’s crude oil is transported through the Straits of Hormuz on the coast of Iran and any supply interruptions would result in a spike in global oil prices.

Dr Yeah Kim Leng, Professor at Sunway University and a member of Bank Negara Malaysia’s Monetary Policy Committee (MPC) tells FocusM that any escalation of the US-Iran conflict following the assassination of the general is likely to elicit an abrupt risk-off reaction among investors globally.

“It could reverse the positive sentiments and stock market gains following the Phase 1 trade deal reached between the US and China. While the spike in oil prices is beneficial to Malaysia as a net oil and gas exporter, the key concern is a dampened recovery of the global economy in 2020 if the conflict escalates,” he says.

Yeah adds the tension between the two countries could have far-reaching implications for global trade it the situation worsens.

“Given Malaysia’s relatively small exposure to trade and investment with Iran, a limited conflict and retaliations between the US and Iran will not affect the Malaysian economy but if the tit-for-tat actions culminate in an open armed conflict between the two nations, then a global downturn and its deleterious effects on the Malaysian economy will be the likely case,” he says.

The Bangkok Post reported that the conflict between Iran and the US will lead to fluctuations in currency and stock markets and an immediate rise in the prices of oil and gold.

Gold prices have soared beyond US$1,600 per troy ounce as investors found refuge in the precious metal as a safe haven as a result of the US-Iran imbroglio.

As tensions rise in the Middle East, Moody’s warned on Jan 6 that any sustained clashes could have global economic repercussions.

“A lasting conflict would have wide-ranging implications through broad economic and financial shocks that significantly worsen operating and financing conditions,” Moody’s senior analyst Alexander Perjessy wrote in a note to clients.

“A protracted conflict would potentially have global repercussions, in particular through its effect on oil prices,” he added.

Perjessy said the effects of ongoing tensions would hit the broader economy – not just the oil and banking sectors – as things like tourism in the Middle East, for instance, would be impacted. He also noted that “increased risk aversion” would be negative for issuers, particularly those with “large external financing needs” and “relatively smaller or insufficient reserves”.

Lee Heng Guie, executive director of Socio Economic Research Centre (SERC) tells FocusM that it was too early to make an assessment of the economic impact from the  US-Iran conflict.

“If the crisis worsens, global oil prices would spike further,” he says. – Jan 8, 2020


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