Sunday, February 27, 2011

Will Economic Fallout of Middle East Turmoil Impact India and Pakistan?

Much is being written about the potential for the spread of political upheaval that started in Tunisia and recently led to the end of the 30 years rule of the Egyptian dictator Hosni Mubarak. Most of the commentary and punditry has so far been focused on potential political instability forced by possibly massive street protests.

Political fall-out from the events in Tunisia and Egypt has already engulfed the Middle Eastern nations of Bahrain, Libya and Yemen. However, little attention has so far been paid to the more immediate impact of spreading trouble in the oil-rich Middle East on developing nations in South Asia and elsewhere.

Crude oil prices have been rising for some time but the fears of the spread of the political unrest have accelerated the rate of increase. The price of crude has already crossed the crucial $100 a barrel mark with the Libyan crisis in full bloom. South Asian economies are keeping a close eye on the situation in Africa and Middle East but still remain unaffected in receiving their oil supplies through this region. Any further spread of the unrest into GCC countries, particularly Saudi Arabia, could have a huge impact on the health of South Asian economies.

According to the World Bank's Immigration and Remittances Factbook 2011, the top remittance sending countries in 2009 were the United States, Saudi Arabia, Switzerland, Russia and Germany. Worldwide, the top recipient countries in 2010 were India, China, Mexico, Philippines and France, according to Dawn News. In South Asia, the top five remittance receiving nations in 2010 were: India ($55.0 billion), Bangladesh ($11.1 billion), Pakistan ($9.4 billion), Sri Lanka ($3.6 billion), and Nepal ($3.5 billion).

Pakistan's exports to the Middle East add up to several billion dollars a year. The United Arab Emirates alone imported $1.7 billion worth of Pakistani products last year, according to Arabian Business.

Relatively stable energy prices and rising exports and surging remittances have helped South Asian nations in 2009-2010. But this could all unravel with rising oil import bill combined with the fall of inflows from worker remittances and decline in exports to the Middle East region. India and Pakistan are already running significant current account deficits, and experiencing high rates of inflation exacerbated by rising food and energy prices since late 2010. The economic hardship, particularly high food prices and unemployment, could become a catalyst for serious political turmoil in South Asia in 2011 and beyond.

Related Links:

Haq's Musings

Pakistan's Economy 2008-2010

Pakistan's Rising Exports and Remittances

Indian Economy: Hard or Soft Landing in 2011?

China's Trade and Investment in South Asia

India's Twin Deficits

Inflation Hits India

Goldman Sachs India Warning on Twin Deficits

India's Nov 2010 Imports, Exports

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6 Comments:

Blogger Riaz Haq said...

KSE-100 is so far flat this year but BSE is in sharp decline as foreign buyers are fleeing.

Whatever happened to the Indian equity market? asks the BBC:

Back in November, the Sensex squeezed past 21,000 for a day before starting a three month, 16% fall.

In the same time, the world's main indices, the FTSE Dow and Nikkei have all gained up to 7%, two of the remaining BRIC countries have fallen no more than 7%, and Russia's RTS Index has gained 26%.

Unsurprisingly foreign funds have been fleeing Indian equities in the last three months.

India is in a pickle and two reasons spring to mind - the stock market was heavily overvalued and the Central Bank has been raising interest rates.

At the end of the year the price of the average share on the Sensex was 23 times its earning power (ie its p/e ratio was 23 x). The Shanghai Index was 18 x, Brazil's Bovespa 14 x and Russia's just 9 x (the Dow's p/e was 13 x). That kind of valuation may be fine if future growth seems assured, but there are signs it may be falling off.
'Leg down'

GDP in real terms expanded at an annual rate of 8.2% in the last quarter - slowing from the 8.9% rate recorded in April to June. Now, this isn't a serious problem and no one is suggesting that the Indian growth story is in serious trouble, but it may be more than just a blip.

Maya Bhandari, senior economist at Lombard Street Research, says that, on a seasonally adjusted basis, growth was pretty much flat. She adds: "I would expect another leg down in the market in the coming few months."

Food inflation has been entrenched for some time, which means the Reserve Bank started putting up interest rates a year ago and has since hiked them seven times.

"In the last 25 months or so, we have had negative real interest rates and the central bank is going to have its work cut out to bring down inflation. And while it may be raising rates, the bank is holding more auctions and lowering the statutory liquidity levels for banks - all of which has inflationary consequences," says Ms Bhandari.

On top of domestic inflation pressures, the Middle East and North Africa crisis sent oil prices belting up above $100 a barrel, adding to the central bank's imperative to keep the upward pressure on rates.
Rate rises?

India is the world's the fourth largest oil importer and imports over 70% of its oil requirements. Oil prices, which will stay high for as long as the Arab crisis lasts, will damage India's economy more than most of its main rivals. At the moment, most economists are pencilling in another half to one percentage point rise in rates.

Oil is also going to hurt government finances. In his March budget, Finance Minister Pranab Mukherjee estimated that the deficit would fall from an estimated 5.1% of GDP in the year ending March 31, to 4.6% next fiscal year.

But if oil prices keep on going up, the government will have to decide whether to keep on paying out fuel subsidies or deregulate diesel prices.

Keeping the deficit under control would suggest the latter.

Five state elections in the next few months would suggest the former.

London-based India investment consultancy director Deepak Lalwani points out that foreign confidence in India has also not been helped by a slew of scandals, the biggest being allegations that the 2008 sale of second-generation, or 2G, cellular licenses resulted in losses of nearly $36bn in potential revenue for the government.

http://www.bbc.co.uk/news/business-12650610

March 6, 2011 at 10:51 PM  
Blogger Riaz Haq said...

Here's a Business Recorder report on threats from inflation and capital inflows in Asia:

ISLAMABAD: Inflation has become or continues to be an important risk to macroeconomic and social stability in a number of countries in Asia Pacific, including Vietnam, Sri Lanka, India, Indonesia, Mongolia, Cambodia, Cook Islands, Fiji, Pakistan, and Bangladesh.

This was revealed in a report titled "Asia-Pacific Sovereigns In 2011: Generally Stable Credit Quality; Inflation, Capital Flows Make Policy Environment Tricky.

Issued by the Standard & Poor's Ratings Services, the report said the challenges of strong capital inflows and rising inflationary pressures bring in important credit risks. Domestic politics and increasing geopolitical risks further complicate policy decisions, it said.

The ability of Asia-Pacific governments to navigate external and domestic challenges adroitly while pushing ahead with economic reforms will determine the pace of ascent in their credit ratings.

"In our base-case scenario, strong growth will support credit quality in Asia-Pacific," said Standard & Poor's credit analyst Elena Okorotchenko Asia continues to outperform other regions in terms of growth and sovereign credit trends.

The report said, despite generally stable credit quality, various factors have combined to make the policy environment tricky for sovereigns in the region, said in a report available here Monday.

Economic growth will enable the public sector of high-income economies to reduce fiscal deficits and resume fiscal consolidation and allow emerging market governments to speed up structural reforms.

But the downside risks to this scenario are growing beyond just a slower U.S. economy or the eurozone debt woes.

Food and energy price increases, the familiar bugbears, are providing a strong inflationary impetus across the board, and present low-income sovereigns in particular with difficult political and fiscal choices.

In addition to inflation, a number of sovereigns, such as Indonesia, Thailand, and Korea, could be facing problems with capital flows, either as a result of large inflows/outflows complicating exchange rate management or because of potential policy mistakes in trying to control such flows.

Recent developments in several Middle Eastern countries have raised questions about contagion effects.

Such popular uprisings are highly unpredictable, although the risks appear to be more pronounced where high unemployment among the young, inflation, poverty or wide income gaps are combined with growing political disillusionment in an autocratic and often corrupt regime.

In Asia, there are countries with ongoing political/social tensions and risks independent of recent events in the Middle East: Fiji, Pakistan, Bangladesh, and Thailand.

"We have factored these risks into current ratings on these sovereigns," said Ms. Okorotchenko.

In a number of other countries, the risk of social unrest is present but mitigating factors are currently strong. These are China, Vietnam, Sri Lanka, Malaysia, and Cambodia.

"The risks in these countries are mitigated by some combination of strong growth, low unemployment, and a degree of popular support for the government," she added.

Of the 22 sovereigns that Standard & Poor's rates in the region, 17 have stable outlooks on their ratings. Indonesia and Fiji have a positive outlook, and only three sovereign ratings are on negative outlooks: New Zealand, Vietnam, and the Cook Islands.

March 21, 2011 at 8:57 AM  
Blogger Riaz Haq said...

Here's a Op Ed by Miranda Husain published in Newsweek Pakistan about Saudis and Bahrainis seeking Pak help in quelling Shia protests:

Less than three weeks after Gulf Cooperation Council (GCC) forces, led by Saudi Arabia, entered Bahrain to aid the anti-democracy crackdown there, dignitaries from both oil-rich kingdoms did their separate rounds in Pakistan. The royal houses of Saudi Arabia and Bahrain are nervous, and they need Pakistan’s mercenaries, and—if necessary—military muscle to shore them up.

This is a remarkable turn of events for Asif Ali Zardari, who had been trying since he was elected president in 2008 to secure Saudi oil on sweetheart terms. He had been unsuccessful in his efforts because the Sunni Saudis view his leadership with some degree of skepticism. It also doesn’t help that Zardari, a Shia, is big on improving relations with Shia Tehran. Riyadh now appears inclined to export oil on terms that better suit cash-strapped Islamabad. Manama, too, wants to play ball. It wants increased defense cooperation and has pledged to prioritize Pakistan’s hopes for a free-trade agreement with the GCC in return. But Zardari and his Army chief, Gen. Ashfaq Kayani, should fight the urge to get mired in the Middle East.

Pakistan already has a presence in Bahrain: a battalion of the Azad Kashmir Regiment was deployed there over a year ago to train local troops, and retired officers from our Navy and Army are part of their security forces. Media estimates put the number of Pakistanis serving in Bahrain’s security establishment at about 10,000. Their removal has been a key demand of protesters in the kingdom. Last month in Islamabad, Prime Minister Yousaf Raza Gilani reportedly assured Bahrain’s foreign minister, Sheikh Khaled bin Ahmed al-Khalifa, that Pakistan would offer more retired manpower to help quell the uprising against Bahrain’s Sunni rulers by its Shia majority. Gilani’s spokesman was unable to confirm the pledge.

Islamabad’s support to the tottering regime in Manama is not ideal. “It’s like our version of Blackwater,” says Talat Masood, a former Pakistan Army general, referring to Bahrain’s recruitment drive in Pakistan. “We’re doing [in Bahrain] exactly what we have been opposing here,” he says. Pakistan, he maintains, has no business in trying to suppress a democratic, people’s movement in another country. Short-term economic gains cannot be the only prism through which Pakistan views its national interests, he says.

Pakistan has a long history of military involvement and training in the Arab world. Its pilots flew warplanes in the 1967 Arab-Israeli conflict, and volunteered for the 1973 Yom Kippur War. Involvement in Bahrain’s current strife would not be the first time that Pakistan has used its military might to thwart an Arab uprising against an Arab regime. In 1970, future military dictator Gen. Zia-ul-Haq, then head of the Pakistani military training mission in Jordan, led his soldiers to intervene on the side of Amman to quash a Palestinian challenge to its rule.
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“The U.S. has counted on Pakistan to help control the Arab world and safeguard Arab rulers from their own populations,” says Chomsky. “Pakistan was one of the ‘cops on the beat’ that the Nixon administration had in mind when outlining their doctrine for controlling the Arab world,” he says. Pakistan has such “severe internal problems” that it may not be able to play this role even if asked to. But the real reason that Pakistan should avoid this role is so that it can stand on the right side of history, alongside those who are fighting for democracy.

April 10, 2011 at 5:45 PM  
Blogger Riaz Haq said...

Here's an excerpt from an Indian analyst Rohit Bangani's comments:

As we know that is India is world 2nd largest populous country with over 1.2 billion people, just behind China. India’s economy is relatively small in terms of U.S. dollar compared to China which is 4 times larger and U.S. which is 10 times larger than India. India’s GDP is around $1.2 trillion which is less than asset under management of big fund like BlackRock having $3.6 trillion under its belt. India is having current account deficit of 3.5% which makes the country more susceptible to volatility in foreign capital flows than its Asian neighbors, as well as in commodity prices, because the country imports much of its raw material requirements.

May 26, 2011 at 11:05 PM  
Blogger Riaz Haq said...

Here's a VOA report on Bahraini govt recruiting Pakistan Army and Police veterans to put down the Shia rebellion:

Former CIA officer Bruce Riedel, who has extensive experience in South Asia, says Bahrain has been recruiting Pakistani veterans for decades. But he says the eruption of the pro-democracy demonstrations in the Gulf state in March has sparked a sharp increase in the recruiting.

"This winter, when the very serious demonstrations began and it looked like the regime might even be toppled at a certain point, their hiring of mercenaries went up substantially," said Riedel. "And they began sending out basically want ads in major Pakistani newspapers advertising well-paying jobs in the Bahraini police and the Bahraini National Guard for any experienced soldier or policeman in Pakistan."

The ads placed in Pakistani newspapers call for ex-riot police and riot control instructors, military police, non-commissioned officers, and other military and security specialists - as well as cooks and mess hall waiters - for the Bahrain National Guard. The ads were placed by the Fauji Foundation, an organization set up to help veterans and their families. Calls to the foundation seeking comment were not returned.

A senior Pakistani source says President Zardari and King Hamad discussed the issue of recruitment during the Pakistani leader’s visit to Bahrain Wednesday. But asked to comment on the matter, a Pakistani embassy spokesman said the recruitment of veterans is done through private channels and has nothing to do with the Pakistani government.

Riedel says hundreds, if not thousands, of unemployed Pakistani military and police veterans were hired. Most have come from the province of Baluchistan in southwest Pakistan.
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Bruce Riedel, now a senior fellow at the Brookings Institution’s Saban Center for Middle East Policy, says the Bahraini policy has aggravated the Shia-Sunni sectarian divide.

"The fact that the [ruling] Khalifa family is importing Sunni Pakistani mercenaries to repress the Shia majority only underscores the perception of the Shia majority that the regime is not interested in genuine reforms, not interested in building a constitutional monarchy, but interested in repressing the majority simply because they are Shias," he said.

Repeated calls and e-mails to the Bahrain Embassy in Washington seeking comment got no response.

Riedel adds that for Bahrain's rulers, there is a side agenda to the recruitment.

"Many of these Sunni Pakistani troops, if they’ve served well and served long enough, will also be offered Bahraini citizenship at the end of their career - an offer that is intended to try to increase the demographic size of the Sunni minority on the island. And that only intensifies Shia frustration with the way things are governed in Bahrain," he said.

The issue also has diplomatic repercussions. Iran, a Shi’ite nation, has voiced concern about the Bahraini government’s response to the demonstrations. In March, a 1,600-man Gulf Cooperation Council force, led by another Sunni monarchy, Saudi Arabia, went into Bahrain. In April, Iran summoned the Pakistani ambassador to hear official concern about Bahrain's recruitment of Pakistani mercenaries to help put down the protests. According to Iranian press reports, Iranian officials warned of “serious ramifications” for Pakistani-Iranian relations if the recruitment continued.

August 18, 2011 at 4:51 PM  
Blogger Riaz Haq said...

Here's a Japan Times story on Saudi quest for military help from Pakistan:

The Saudi rulers view Pakistan as one of three regional powers, along with Iran and Turkey, capable of having a decisive impact on the Middle East. An alliance with Shiite Iran — the kingdom’s supreme ideological enemy, and one with regional hegemonic ambitions — is out of the question. Turkey, for its part, is regarded as a competitor for the mantle of Sunni Muslim leadership — a position long held by the Ottoman Empire.

The frequent description of Turkish Prime Minister Recep Tayyip Erdogan as harboring “neo-Ottoman” ambitions for his country clearly implicates this rivalry. It was the Ottomans who brought down two historical Saudi/Wahhabi states. The first such state (1745-1818) was destroyed by Egypt’s Mehmet Ali with Ottoman support; the second (1824-1891) was also defeated by the Ottomans.

By contrast, the kingdom has no problematic history with Pakistan. On the contrary, the Saudis have bankrolled the Pakistani state, and proved a generous host to its current prime minister, Mian Nawaz Sharif, during his long exile following the military coup that toppled his government in 1999.

Indeed, Saudi Arabia has invested heavily in Pakistan since the early years of its independence. Given that Pakistan was founded in 1947 on a religious basis, it is not surprising that its leaders sought support from the source of Islam, Mecca, then under Saudi rule. The kingdom, in turn, exported its Wahhabi teachings to the “Land of the Pure,” ultimately fueling the Islamic extremism and sectarian violence of the Taliban and others.
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Part of the Saudi plan today is to use Pakistanis as the backbone for a new Gulf Cooperation Council (GCC) joint military force. Pakistani forces under Saudi command were used in operations to quell Shiite uprisings in Bahrain in 2011, and the Saudis now want a standby force ready to put down Islamist and Shiite provocations whenever and wherever they may appear in the gulf. In the event of an existential threat in the region, in particular a confrontation with Iran, Pakistan would offer the kingdom a form of deadly protection denied it by the West.

So to what extent can Pakistan really enhance Saudi Arabia’s security, particularly in a war against Iran? Pakistan is badly fractured, with domestic terrorism running rampant. Its military lacks the capacity to intervene in Saudi Arabia’s defense while maintaining not only domestic security, but also readiness for war against India (an obsession of Pakistani generals).

Moreover, Pakistan’s substantial Shiite population might join the ranks of the violently disaffected if the military backed the Saudis in a sectarian war. And the Pakistan People’s Party, now in opposition but still a powerful domestic force, shares interests with Iran.

So, although the strategic value of closer military ties with Pakistan seems highly questionable, Saudi Arabia has little choice. The GCC is in fact disintegrating, following Qatar’s ouster for supporting the Muslim Brotherhood and Oman’s voluntary departure from the group. That, together with the kingdom’s deepening distrust of the U.S., is fueling a growing sense of isolation. Pakistan may not be anyone’s idea of an ally when facing an existential threat; for Saudi Arabia, however, it is an idea whose time has come.


http://www.japantimes.co.jp/opinion/2014/03/28/commentary/saudi-arabias-diplomatic-pilgrimage-to-pakistan/

March 29, 2014 at 8:49 AM  

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