Complex Made Simple

N Korea-US scare: How will GCC markets fare?

On August 29, 2017, North Korea launched a missile that traveled over Japan’s northern Hokkaido island, eventually landing in the sea, but not before sparking public alerts to take cover. According to North Korea’s state media, this was a prelude to more military operations directed at the American territory of Guam.

Some estimate that North Korea’s furthest reaching inter-ballistic missile could theoretically travel roughly 10,000km. If true, the world at large is then within range, which explains why the US and the UN Security Council are deeply fretful and the rest of the world equally fearful.

The tension seems only to be escalating, with missile tests continuing on the North Korean side, countered by joint US/South Korean military exercises.

While the drums of war might not have actually sounded, there are fears that a potential conflict will have negative consequences on global and local economies.

Anticipated were uncertainties in FX and capital markets, leading to lower investor confidence, deteriorating consumer spending power, and others.

However, as a recent interview with Jameel Ahmad, Vice President of Market Research for FXTM, reveals, for the GCC, this can’t be farther from the truth. A transcript copy of the interview is below:

AMEinfoIs the threat of a North Korea/US conflict a cause for concern for currencies (FX, US dollar drop and Yen rise?) and/or capital markets in the region (Bonds yield, equities dropping, etc.)?

FXTM: We have seen an increase in the activity of currency markets, including increased demand for Japanese Yen and gold. The threat of a market sell-off has not been as pervasive as it could have been, but we are also noticing further selling in USD. Of course, this has benefits to those currencies pegged to the Dollar, including the UAE Dirham and Saudi Riyal.

The most significant fluctuations are in the currency markets, therefore the risk to the capital markets in the GCC region is seen as limited. I would go as far as to say that the GCC region and its markets are isolated from the current geopolitical tensions.

The risk that GCC markets need to be cognizant of is that they are still considered emerging market assets. They may not be as sensitive to fluctuations as global stock markets or emerging market currencies (those not pegged to USD), but they can still encounter some selling pressure if there is a significant escalation in market uncertainty.

The unexpected shock from the historic EU referendum in June 2016 is the best example of this in recent memory.

AMEinfoWhat are the economic impacts on the Asia Pacific and Middle East regions in terms of investor confidence?

FXTM: Due to its close proximity to the Asian Pacific, the ongoing tensions with North Korea are likely to have a market impact on the region, but there is no economic impact on the Asian Pacific as it stands.

So far, all we are seeing are fluctuations in the financial markets and this will likely remain the case, unless tensions escalate to severe levels. Investor confidence in the Middle East region shouldn’t be something that is concerning to the GCC and the ongoing tensions with North Korea are not currently having a material impact on its markets.

AMEinfoCould tariffs/sanctions on an uncooperative China create inflationary trade markets in the region and undermine consumer purchasing power?

FXTM: There doesn’t appear to be any current risk of tariffs/sanctions on China, due to the North Korea risks, and this is not something that I would expect to happen.

When Donald Trump won the US election back in November 2016, there were severe concerns on what impact this could have on China given the nature of Trump’s comments about the country in the past. If anything, President Trump has, so far, tried to build diplomatic relations with China.

With regards to consumer purchasing power in the Middle East region, I see benefits for the economies that have currencies pegged to the dollar. Their currencies are weakening (AED, for example) and this could be a good time for this to happen, with many of the GCC economies still under pressure to diversify away from oil reliance.

There are other benefits to the economies on the ground, including potential for foreign investments (property), inbound tourism purchasing power and it could have a positive impact on the retail sector.