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August 10, 2022
EDITORIALOP-EDOPINIONPOINTS OF VIEW

Afghanistan could have a significant impact on the global economy

 Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

 

The world is witnessing yet another major crisis – images of the Taliban entering Kabul, civilians fighting desperately to board planes leaving the airport, clinging onto their landing gear. Human suffering has been plastered all over the TV news.

In a globalized world, a crisis like the Afghanistan situation will be felt wider. While Afghanistan’s GDP of $19 billion makes up an insignificant 0.02% of the world economy, this remote, mountainous country has proven time and again (let’s remember it contributed to the collapse of the Soviet Union) that it has an outsized impact on the world.

The first direct economic impact is related to all major airlines forced to divert their euro-asian flights passing through Afghanistan, with extra fuel costs and prolonged flight times, because the airspace was “released to the military”.

On a larger scale, the US retreat showed the American isolationist instinct, with the US withdrawing from a role of “world policeman” that it’s often been uncomfortable taking. If the US starts to look inward instead of spreading the values of democracy and free markets, its absence from the world is leaving a vacuum that will be filled by other, less benevolent actors.

Also, the Afghan retreat may have a big impact on US politics and the Biden administration’s ability to get things done. After last week an unusually bipartisan Senate vote passed the over $1 Trillion infrastructure bill, Republicans and some Democrats started to distance themselves from Biden and his policies, jeopardising the administration’s agenda. Biden’s popularity dropped to a 7-month low and, if it falls more, we could be headed for a Republican-controlled Congress after next year’s elections, which would likely freeze any political cooperation – from passing budgets to enacting any new legislation.

With U.S. prestige taking a hit, a darkening cloud could also grow over the U.S. Treasury bonds as a safe-haven asset and the dollar as the world’s reserve currency,” said Christopher Smart, chief global strategist and head of the Barings Investment Institute.

Other potential impacts of the Afghan crisis could include a hardening of Iran’s stance in its nuclear negotiations with the United States. In turn, the Americans could impose more sanctions, potentially making Iranian oil more difficult to export.

 

Afghanistan also has the potential to destabilize neighboring countries and even Europe if fears regarding the mass migration of refugees and even insurgents materialize. A potential sign that the refugee situation is expected to worsen is that Turkey is already building a wall on its border with Iran to prevent the entrance of Afghan refugees on their way to Europe. Pakistan also claimed that their borders were sealed to Afghan refugees. The European Union and the United Kingdom are bracing for impact, hoping for more cooperation in managing migration than a few years ago when masses of refugees from Syria made their way across the continent.

Lastly, there could also be new, major economic developments inside Afghanistan. A recent report showed the estimated value of rare minerals deposits in Afghanistan of between $1 and 3 trillion. While the extraction of these minerals could be many years away, since the infrastructure for mining is almost completely absent, if Afghanistan has peace and a stable government, investment could flow in from other countries, like China, which need these resources.

So far though, while the situation in Afghanistan is evolving each day and causing uncertainty, the markets for now seem more concerned about Fed tapering, inflation numbers and the impact of the Delta variant on economies.

Much is unknown at this point about the future evolution of Afghanistan, but one thing is clear – this mountainous country of just 34 million inhabitants is likely to retain a very relevant place in world affairs, with an outsized impact far from its borders.

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Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

 

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