A lot of ink has been spilt on the lamentable Afghanistan fall into Taliban hands on August 14, after a war that lasted almost 20 years. Yet only a few drops for its impact on the financial markets.
What does the new Islamist government mean for the rest of the world? This is the question we will try to answer in this article.
The context
The fall of Kabul and, along with it, the collapse of the former Afghan administration was hastened by the unsettling doubt shrouding the talks in Qatar over a year and a half ago, negotiating a ceasefire in Afghanistan.
US and Taliban officials shook hands in February 2020, agreeing on a complete withdrawal of American forces and a narrow majority of their allies within 14 months.
Greeted with dismay by both US and Afghan military officials, the agreement sealed the Afghan defeat. “They saw that document as the end”, said an Afghan special forces officer, referring to the morale of the armed forces.
“The day the deal was signed we saw the change. Everyone was just looking out for himself. It was like [the United States] left us to fail”, he told the media.
According to US President Joe Biden, the US administration has pumped more than $1 trillion into weathering animosity in the Middle Eastern country, and it has done so successfully.
The Taliban quickly picked up on the troops’ drawdown message and immediately regrouped and overran the Afghan army. In less than a week, they seized the capital city of Kabul, taking control of the country.
The US-Afghan allies’ lack of a robust defense and the Afghan President Ashraf Ghani fleeing the country and other government members threw the country into a hurling political crisis.
It’s more to it…
Leaving analysts and governments wondering what to do next, the blitzing Taliban victory echoes of economic uncertainty are mostly felt in Afghanistan’s neighbouring countries (i.e., Iran, Iraq, Tajikistan, Tajikistan, Turkmenistan, Uzbekistan, and Pakistan).
Stretching to the east of Afghanistan, Pakistan is on financiers’ radar for its considerable equity market and its reliance on IMF’s hefty $6 billion support programme.
The odds of a looming conflict and the affluence of refugees cascading at its borders for protection pose a real challenge to the country’s recovery efforts.
A UNHCR estimate suggests that 400,000 Afghans have abandoned their homes so far this year. Of these, only a few hundred are known to have escaped the Taliban grip. The UNHCR forecasts revolve around 2.6 million Afghan refugees dissipated worldwide, 1.4 million fled to Pakistan, while 1 million found shelter in Iran.
Additionally, 10,000 Pakistani civilians fell victim to the terrorist attacks of 2010-2015, the South Asia Terrorism Portal shows. This figure has dropped, but concerns that it will mount again are rising.
“Another influx of refugees and the spillover of violent groups motivated to destabilise urban areas and infrastructure, particularly, on the western side of Pakistan... could set Pakistan’s recovery and reform story back,” Hasnain Malik, analyst at Tellimer, said in a statement.
He also implied that the risk might be lower if Taliban militants were included in Afghanistan’s government.
Zooming out: The Afghan crisis and its butterfly effect
Sensitive to the news, Pakistan’s benchmark index KSE 100 sank 0.98% in the hottest week of the conflict (August 11-16).
Slightly recovering since most of the NATO member states have started pulling out their military and non-military personnel deployed in Afghanistan and their local collaborators, the KSE 100 rose 0.77%.
But, now, with the Taliban celebrating their victory, it’s hard to tell what the future holds for Pakistan’s economy.
The country is surviving on debt, and investors are concerned about the country’s economy now more than ever. With bond prices sinking almost 8% in 2021, Pakistan needs IMF money to rebuild the economy. Financial analysts believe this is due to delays in the country accessing the last IMF tranche.
Lest we forget, Pakistani economists and policymakers have been trying to master a national debt accounting for 90% of the country’s GDP for over a decade. Therefore, a Taliban attack within its borders would be fatal to the nation.
From Pakistan to China
Hours after the Taliban seized power, China extended its friendship to the new Afghan Islamist government. According to a Chinese spokeswoman, Beijing is ready “for friendly cooperation with Afghanistan”.
Beijing’s stance is no surprise, knowing China’s interest in rare metals such as lithium, aluminium, neodymium, and other earth minerals it uses to produce magnets and batteries.
According to a report by The Diplomat news magazine, Afghanistan holds on average $3 trillion worth of rare earth minerals in its mines.
So, the Chinese readiness to launch a collaboration with the Taliban government and even the generous offer of potential economic aid to set Afghanistan back on track may have a hefty price tag attached.
Meanwhile, in the financial markets
If there’s anything that can send the financial markets to new heights or tumbling to fresh lows, it’s sentiment. The unrest in Afghanistan and former President Ghani’s relinquishing power to the Taliban militants spurred fear among investors.
At the same time, the risk of an all-time low remains high across the world’s leading financial markets.
Global indices were the first affected by the incidents. The FTSE 100 plummeted as much as 0.90%, while the Dow Jones Industrial Average (DIJA) lost 0.065%, and the S&P 500 was 0.23% down on August 16.
The NASDAQ Composite index also tanked 0.74% on the day.
However, while most of the global benchmarks retreated to the negative territories, the beginning of September saw the Footsie, at least, ‘rise and shine’ as the industrials’ rally gave investors a shot in the arm. In the early hours of September 2, the UK 100 index was up 53 points.
The Dow Jones Industrial Average and the S&P 500 also benefited from an improvement in investor sentiment.
At the time of writing, DJIA is 1.17% up from its August 18 close; the S&P 500 gained 3.27% in three weeks, while the NASDAQ Composite shot up 5.51%.
Overall the trend remains positive, as the markets have already priced in US President Biden’s war-end comments. The next few weeks and months will be decisive for the markets. China’s actions will be closely eyed.
This article was submitted by 1MARKET.
