Talk of War Dominates Annual Gathering of Global Finance Chiefs

War in the Middle East has swollen the list of geopolitical risks for global finance chiefs already confronting fallout from conflict in Ukraine and bracing for a year of pivotal elections.

(Bloomberg) — War in the Middle East has swollen the list of geopolitical risks for global finance chiefs already confronting fallout from conflict in Ukraine and bracing for a year of pivotal elections.

The Hamas attack on Israel and potential for further economic disruption have taken center stage among the fiscal and central banking elite gathered at the International Monetary Fund’s annual meetings being held in the Moroccan city of Marrakech.

“Geopolitical risks are the most significant risk for the world economy now,” French Finance Minister Bruno Le Maire told reporters before discussing the matter with Group of Seven counterparts. “Geopolitical risk has become the most significant risk for growth, for development — and for common prosperity.”

Meanwhile, Thursday’s US data showing a brisk pace of consumer-price increases serves as a reminder that financial risks remain elevated too — with persistently higher borrowing costs set to further squeeze public finances.

Beyond shock at the human impact — the G-7 condemned Hamas for its attack and pledged solidarity with Israel in a joint statement — officials attending the meetings are struggling to assess the scope of economic fallout from that conflict and the consequences for oil supply.

IMF Managing Director Kristalina Georgieva told reporters: “In terms of economic impact, we are very closely monitoring how the situation evolves, how it is affecting especially oil markets.” 

Read more: Oil Pares Gains as US Stockpile Increase Undercuts War Premium

On Wednesday, veteran crisis fighter Janet Yellen downplayed concerns over the conflict’s potential to upend the world’s economic outlook.

“We’re monitoring potential economic impacts from the crisis, but I’m not really thinking of that as a major likely driver of the global economic outlook,” the Treasury secretary said in a press briefing.

War Fallout

Veteran economist Nouriel Roubini — a harbinger of doom during the 2008 financial crisis — told Francine Lacqua on Bloomberg Television Thursday that markets are assuming the war will be contained. He sees a “two-third probability” of that, while a worse scenario would see Iran and Lebanon involved in a bigger conflict.

“If that were to be the case, of course the supply of oil from the Gulf gets disrupted and you get a spike in oil prices,” he said. “The economic impact would be huge.” 

Such an outcome would compound the challenges already faced by finance ministries and central banks around the world. 

They were counting on slowing inflation to allow stabilization in the global monetary environment, albeit with elevated borrowing costs that may strain public finances.

At least the “higher-for-longer” prospects for interest rates espoused by the US Federal Reserve — now reinforced by data showing a 0.3% increase in the so-called core consumer price index in September — could be taken as a fair assumption by governments making tough budget choices. 

Political Risks

But the effects of another protracted conflict, beyond the one raging in Ukraine, is far less quantifiable and adds to a long list of political touch points on their horizon next year. 

The US election is perhaps the most significant of those, with the possibility that Donald Trump might return to office with a renewed assault on the prevailing global economic order. 

Votes in the European Union and in the UK are further items on a packed calendar. Elections in Taiwan — closely watched by China — will be a focus, while Algeria, Egypt, India, Indonesia, Mexico, South Africa, and South Korea also hold polls.

Fallout from the war in Ukraine, meanwhile, continues to weigh heavily, even on relatively far-flung economies. 

In South Africa for example, the currency suffered a significant blow from US allegations that the country supplied weapons to Russia — an outcome addressed on Wednesday by Rashad Cassim, a deputy governor of its central bank. 

The nation “bore the brunt of geopolitical risk in a very serious way,” he said. “The relationship between geopolitical risks and the exchange rate for an emerging market became extremely complex. All I can say is that the challenges of monetary policy are going to be much harder.”

Where the fallout from wars in Ukraine and the Middle East converge is in the possible impact on oil, a market that is already subject to the whims of producer governments that have cut supply to reap the benefits to their coffers.

“We had seen some of that already — even before the events of this weekend,” IMF Chief Economist Pierre-Olivier Gourinchas told an event on Thursday afternoon. 

His boss, Georgieva, warned that governments and policymakers need to get used to the prevailing truth that geopolitical risk isn’t going away. 

“We are in a shock-prone world,” she told reporters. “I do not know when the next shock is going to be. I just know it will come.”

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