Conflict between US and Iran to hit Gulf economies

A prolonged armed conflict between the US and Iran will have disastrous consequences for the Arab economies in the medium to long term, but a limited surprise attack is likely to have only short term consequences for regional economies, according to a strategic note issued by Damac Capital International.

According to the report, the US-Iran conflict arises from a situation that is similar to that which led the United States to attack Afghanistan and Iraq. The Bush administration wants to prevent regimes that sponsor terror from threatening the US and its allies with weapons of mass destruction. The Bush administration considers Afghanistan, Iraq, Iran and North Korea to represent the most important threats.

"In the first scenario, we lay out the steps that the US will need to take if it is to encourage a peaceful change of regimes in Iran. We believe that the central strategy in this scenario will consist of a reinvigorated 'hearts and minds' programme aimed primarily at young Iranians who might - as per US view - be alienated from the current regime. The likelihood of this approach is increased by [a] international pressure on the US to place greater emphasis on diplomatic rather than military engagement with Iran, (b) the strain on the US military caused by the occupation of Iraq and Afghanis-tan, and (c) the vulnerability of US interests in the region [particularly US military bases in Israel and other Arab countries] to an Iranian counter-attack,'' the report said.

In the second scenario, the Bush administration uses limited force against Iran. Specific targets in Iran, including nuclear facilities and military bases, will simultaneously come under surprise attack from air and naval forces.

According to the report, the impact on the UAE economy, in particular, and on the GCC economies, in general, will depend greatly on which scenario unfolds. Oil prices clearly will be the first to be affected. If the US does not pursue the use of force in Iran, oil prices will hover around the current level of $90 per barrel and might exceed $100 per barrel.

Limited military strikes on Iran by the US will cause a rapid increase in oil prices, even if Arab countries remain disengaged. Oil prices will begin to fall partly because the military conflict will end more quickly than expected. If the US-Iran conflict evolves into a large-scale and protracted war, Iran will block the Strait of Hormuz. The global supply of oil will be reduced by an amount equal to the combined production of the GCC. Oil prices will sky-rocket and remain high.

"As for the stock markets and the economies as a whole, we believe that the outcome could be positive, if the war is limited and does not spill over to neighbouring countries. Markets will have a short-term decline as investors exit the market following a military strike. However, once valuations have discounted the effects of military action, investors will return to their positions. This will probably be followed by a strong rally as attractive multiples and robust fundamentals will hit the marketplace," the report said.

Analysts see an increase in oil prices will add ample liquidity to the already strong economic picture. The new liquidity will find its way into new mega-infrastructure projects implemented by local companies which in turn will show up in corporate earnings. GCC states will most likely increase their international exposure. The UAE will benefit the most from Iranian merchants and businessmen who will transfer their funds and businesses into the Emirates seeking a politically stable business environment.

"If Arab countries are unwillingly drawn into the war, we believe that the region's economies will suffer. Projects will be put on hold until the conflict is resolved and markets will remain depressed for a protracted period," the report said.

If Arab countries are unwillingly drawn into the war, we believe that the region's economies will suffer. Projects will be put on hold and markets will remain depressed for a protracted period." ( Gulf )

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