Ref: AD-2988
Summary: the blockade of the Strait of Hormuz requires new and searching questions to be asked about the risk landscape for the economies of the GCC states once the war ends.
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Noting that Andrew Cunningham’s excellent summation of the IMF’s latest assessment of the GCC was published several days ago, the timing of its re-publication by ‘Arab Digest’ appears a little unfortunate as far as the Fund’s assessment of bond markets is concerned. As Katie Martin wrote in the FT this morning:
“For reasons that are not totally clear — there was no new news that we could see — global bond markets decided late last week that it was time to be properly worried about the inflation set off by the war in Iran. Yields are just stretching higher everywhere.”
This has coincided with growing broad concern in markets as the Strait of Hormuz remains largely closed and Donald Trump comes out with new ‘destruction of a civilisation’-type threats about where Brent could be headed. It appears that investors are finally waking up to the fact that the futures curve is not a crystal ball and that far greater attention needs to be paid to the price of physical oil at the point of delivery. Note too that the IEA reports that around 80 countries have already implemented emergency measures in the face of existing shortages and in anticipation of these likely getting worse in June as oil reserves (commercial and strategic) run out in the wake of an historically unprecedented ongoing drawdown. Sensible analysts are very wary now about predicting firmly where we might see Brent very shortly unless there is a major breakthrough between the US and Iran; but tentative talk of US$180pb cannot simply be dismissed and the inflation-related implications of anything around this mark and consequent impact on bond markets is not to be underestimated.
To give the IMF its due it does recognise that the GCC is not immune to the inflationary impact on their imports in particular; but I do wonder if it is underestimating the consequent impact on sovereign debt.
It would also do well to remember that markets have their own logic and that a shock in one Gulf economy could easily spill over into others even though the latter are more resilient substantively – the one in the former category which I have firmly in mind being Dubai which had to be bailed out by Abu Dhabi in the wake of the GFC and is, perhaps, no better placed today to ride out a real storm in sovereign debt markets.