As we enter the second quarter of 2024, one of the most significant geopolitical crises in recent memory is unfolding in the Middle East. Businesses face serious consequences and preparing for these risks is a challenge that requires careful planning and a strategic outlook.
History has revealed two key indicators for risk and uncertainty stemming from the conflict in the Middle East – the spot price of gold and of oil. Costs of these commodities have increased substantially over the past three to four months – a barrel of oil has increased from $82 to $92, while gold has increased from approximately $2000 to $2300.00 an ounce. This correlates with the period of escalating conflict in Gaza, with the increasing cost of oil being the first domino to fall in an unfolding global economic downturn.
This year, many economists and central banks hoped to reduce interest rates based on an expectation of reducing primary input costs. This seems unlikely as increasing oil prices are key drivers of inflation – meaning that the relief that many economies need to support growth in the form of lower interest rates is unlikely to happen in 2024.
An increase in inflation is not the only outcome organisations have to worry about, as the issue of shipping and transport logistics comes into play. About 40% of the world’s traffic between Asia and Europe flowed through the Suez Canal. The threats around the Arabian Gulf have forced many shipping lines to avoid the area and to use significantly longer routes. Climate-related factors are compounding the issue, as severe droughts have affected the capacity of the Panama Canal – another key trade route. Consequences of these logistical issues include delayed shipments, increased landing costs and slower delivery schedules, further increasing business risks and reducing the attractiveness of trading in lower-margin commodities and products.
Uncertainty will only worsen, as the possibility of sanctions being applied to Iran following themissile attacks against Israel . Instability in the area could also lead to surprising decisions by various political leaders. For example, the leaders of Israel and Turkey are under pressure to act, as evidenced by recent election results. Their decisions on regional conflicts and local economic policy may substantially impact trade relations and the value of the respective currencies. It is generally understood that a war reduces the economic output of a country by about 30% and increases the inflation rate by about 15%.
The war in Ukraine is an additional complication as larger European economies are under pressure after long periods of low growth and the recent spike in inflation. Economic growth initiatives may not receive the necessary support because of a lack of available funding, since funding may be diverted to Ukraine and aid for the Middle East.
Geopolitical risks breed a type of uncertainty that many organisations feel ill-equipped to deal with. The scale of these risks can seem daunting, but with the right tools, businesses can take action to mitigate them.
In periods of global uncertainty, it’s more important than ever for risk professionals to use scenario planning to its full potential. Models like Clem Sunter’s “flags” – the process of identifying, defining, and monitoring risks and adapting and reviewing strategies to tackle them – can make all the difference. With supply chain issues set to worsen, businesses also need to escalate supply chain analysis to ensure that moderate dependencies do not become unwelcome surprises.
2024 has been an unprecedented year for global conflict, and uncertainty will only worsen with escalation. In this volatile environment, effective preparation is difficult, but not impossible. Risk professionals have a tough job ahead of them, but with constant monitoring, a level head, and dedication to resilience, we can navigate these turbulent times and ensure the safety and stability of our organisations.
Risk managers need to reassess their strategies and preparedness measures. The current environment necessitates a robust framework for monitoring these economic indicators and making informed decisions to safeguard their businesses against the cascading effects of this unrest. Strategic scenario planning should be leveraged to anticipate and mitigate risks associated with the volatility in commodity prices and potential economic downturns. It is imperative for risk managers to not only keep abreast of these changes but also to effectively communicate potential impacts and necessary adjustments to their organizations’ risk mitigation plans.
By Volker Von Widdern
Leader of the Strategic Risk Practice at Riskonet Africa
