Oil Risks For Emerging Markets; + US To Proceed On Syria Without UK

The likelihood of an eventual US air strike on Syria (even without the support of the UK, and pending approval from the US Congress) has pushed up global oil prices of late. If this risk premium persists, higher oil prices will place additional pressure on crude importers, particularly emerging market countries that have also experienced significant currency depreciation in the past few months.

This dynamic is exacerbating the difficulties that policymakers are already facing, and could result in a sharp pick-up in imported inflation in the coming months, particularly in countries such as South Africa, Argentina, Indonesia, Brazil and Turkey. In these countries, Brent crude oil prices have risen by more than 15% y-o-y in local currency terms, and in Argentina, Turkey, India, and Brazil, oil prices are now substantially higher than at the peak (in US dollar terms) in July 2008.

The threat of inflation and the persistence of large current account deficits may pressure central banks to raise interest rates at a time when their economies are slowing, and government fiscal accounts are becoming stretched as energy subsidies become increasingly expensive to finance. In addition, governments could face a significant political backlash if they try to raise taxes or reduce subsidies, as was the case in Indonesia in June.

UK To Refrain From Syria Action

Last Thursday, August 29, saw British Prime Minister David Cameron fail to win backing from parliament for military action against Syria. Over the weekend, US President Barack Obama announced that he will consult Congress about the mission. Overall, we believe that the US will proceed with airstrikes in the near future, possibly with French participation, and logistical support from regional allies, if necessary.

The main reason for Cameron’s failure to secure support from the British parliament or public would appear to be the legacy of the Iraq War, after which many politicians and voters felt that they were misled by false or flimsy evidence into supporting the invasion of Iraq in 2003. There is also a general war fatigue after Britain’s long involvement in Iraq, and ongoing troop deployments in Afghanistan, both of which have incurred significant casualties.

The likelihood that the US will proceed without the UK, and the possibility that France rather than Britain may be Washington’s main partner in the anticipated airstrikes on Syria, have led some opinion makers in London to fret that the UK is fading as a global power, and is even becoming isolationist.

We believe that this is misleading. A country’s status as a world power should not be judged by its response to one particular conflict. (For that matter, there are other variables for measuring global influence, such as economic weight, diplomatic clout, ‘soft’ power, etc.) The UK’s reluctance to go to ‘war’ (even in a limited fashion) is understandable after Iraq and Afghanistan, but this war weariness will not last forever. France can afford to feel more confident, given that it excluded itself from the Iraq War and scored a success in Mali earlier this year.

Furthermore, the sad truth is that Syria’s civil war is unlikely to be the last such conflict in the Middle East, let alone the rest of the world. Thus, despite the UK’s exclusion from a strike on Syria, it is quite possible that Britain will become embroiled in another foreign conflict later this decade.

This Week’s Trivia Question

Last week’s question was about elderly leaders, in view of Zimbabwean President Robert Mugabe’s inauguration for a further five-year term at the age of 89. Our question was, which European head of state was earlier this year re-elected to a second term, which, if completed, would take him to the same age as Mugabe would be in 2018? And which other southern African leader ruled his country until he was in his mid-90s, in the 1990s? The answers are Italian President Giorgio Napolitano, now aged 88, and former Malawian President Hastings Kamuzu Banda, who stepped down in May 1994 aged almost 96.

This week’s question is as follows: In light of the anticipated US attack on Syria, when did Syria actually participate in a war on the same side as the US?