Pandora’s Box
January 17, 2007
By Serhan Cevik | London
The future of Iraq will likely shape the Middle East’s political and economic prospects. The war in Iraq – bringing the country to the verge of a full-scale civil conflict – has opened a Pandora’s Box in the Middle East. After decades of devastating dictatorship that left Iraq without a tradition of power-sharing and trust between sectarian groups, it is not surprising to see ‘pent-up’ rage and attempts to redistribute power. This is how politically impoverished people all around the world have historically reacted to the end of repression. However, the sectarian and ethnic nature of Iraq’s conflict has escalated the cycle of violence beyond comprehension, killing about 3,000 civilians every month and radicalizing even more people every day. The transition from autocracy to democracy may be destabilizing in the beginning, but Iraq’s deepening fragmentation along sectarian and ethnic lines looks more like a chaotic descent towards disintegration, in our view – not the emergence of a participatory political regime. With such a pattern of vengeance weakening the prospect for political compromise, Iraq is facing the risk of disintegration, which could spiral into sectarian conflicts throughout the Middle East.
Sectarian violence is destroying the atmosphere for any possible reconciliation. Iraq has always been divided, but the war has intensified sectarian and ethnic divisions. Sadly, despite all the well-intentioned efforts, developments after the war ended up legitimizing sectarian politics and failed to produce an agenda for national reconciliation. As a result, Iraq’s central government still lacks a popular mandate and the institutional capability to find a political solution that would help to bridge sectarian divisions and maintain the country’s territorial integrity. Instead, the widening vacuum of insecurity empowers militias and criminal gangs who believe that they can tip the balance of power in their favor by escalating the cycle of violence. Of course, the ensuing collapse of law and order has created a perfect setting for all kinds of insurgents and has set the stage for Iraq’s disintegration. So where do we go from here? Although some commentators use Bosnia or the Algerian civil war as an analogy to the chaos in Iraq, we think that a more appropriate example is Lebanon, where sectarian militias fought one another for 15 years, killing or injuring 5% of the population and displacing the other half. In other words, with its growing sense of insecurity and pessimism, Iraq is fast moving towards a tipping point, after which it may not be possible to restrain the forces of catastrophic change. Iraqhas experienced severe economic deterioration before and after the war. Violent forms of political discourse do not just lead to a humanitarian tragedy; they also create a vicious circle of social erosion and economic instability. Even though there are some arguable signs of economic recovery, we see the fundamental picture as still extremely challenging and indeed bleaker than ever. According to the UN, sectarian violence has already resulted in an exodus of around 1.8 million Iraqis from the country and displaced another two million within Iraq. This is the worst refugee crisis in history, almost three times the number of Palestinian exiles in 1948. No wonder oil production – the most important source of revenue – is still running at less than 20% of its pre-war level and unemployment remains at 30% or even more in some parts of the country. The root cause of all these problems is the lack of security that hampers reconstruction efforts and normalization. However, we should not overlook the role of administrative stalemate, institutional failures and pervasive corruption in depressing private investment and employment growth. Since Iraq’s challenge is multi-dimensional in every aspect, we believe that usual prescriptions are simply inadequate to bring normalcy and improve socio-economic conditions anytime soon. Iraqis becoming a failed state devastated by a sectarian civil war that could drag in its neighbors. As unrelenting violence overwhelms a divided society, widespread poverty and frustration create an environment conducive to the escalation of sectarian and ethnic clashes. The risk is not just to the future of Iraq, but also to the greater Middle East. Iraq has already become a breeding ground for terrorism, making sectarian and ethnic tensions a strategic threat in the region. Facing such fallout, especially from Iraq’s total disintegration, neighboring states may opt for unilateral intervention in order to minimize risks, as Israel reportedly did in Lebanon. Further, the shifting sectarian balance creates asymmetric threats and advantages, such as Iran’s increasing influence against Sunni-dominated countries, and thus increases the risk of a regional conflict. Almost everything – good or bad – is interconnected in the Middle East, and so addressing one conflict requires comprehensive measures to deal with all other burning conflicts at the same time. For example, the stabilization of Iraq partly depends on the resolution of the Israeli-Palestinian conflict, which has long radicalized public opinion across the Middle East. Even though there is no quick fix for all these problems accumulated over many decades, the international community cannot afford to wait and see what will eventually come out of the box.
Important Disclosure Information at the end of this Forum
December Exports Decelerates
January 17, 2007
By Chetan Ahya | Mumbai
Trade surplus narrowed in December: Exports declined by 4.0% YoY in December following an increase of 8.0% YoY last month while imports moderated to 7.6% YoY (versus 9.5% in November). Consequently, the trade balance stood at S$2.5 billion (versus S$5.4 billion in November) , the lowest since July 2003. On a quarterly basis, 4Q06 exports (+2.2% YoY) and imports (+4.5% YoY) also slowed markedly compared to 3Q06 (+12.3% YoY and 14.9% YoY respectively). NODX growth weakened sharply: Non-oil domestic exports contracted sharply to -14.2% YoY (versus 8.0% YoY in November) partly because of base effect (31.6% YoY in December 2005) and as the electronic deceleration continued to pan out. Electronics NODX growth contracted further to -19.3% YoY (versus -8.4% in November). Exports of PCs, the only category that witnessed growth in December, moderated slightly to 28.8% YoY (versus 31.8% in November). Other major products such as disk drives (-41.1% versus -33.4%), integrated circuits (-6.7% versus -3.5%) and telecom equipment (-29.0% versus +19.3%) registered further contraction in December. Non-electronic NODX also dipped to -9.7% YoY in December (versus +24.9% YoY in November). In particular, pharmaceuticals witnessed a sharp slowdown (-33.0% YoY in December versus 73.9% last month), while petrochemicals contracted to -1.1% YoY in December (versus 10.8% in November). For 4Q06, NODX declined -0.8% YoY (versus +6.4% YoY in 3Q06). NODX exports to EU, US and China decelerated but recovered in Japan: In terms of export markets, the weak NODX headline was underpinned by poor demand from markets such as the EU (-28.2% YoY versus +40.1%), the US (-5.1% YoY versus +3.6% YoY) and China (-5.6% YoY versus +2.7% YoY). However, NODX to Japan rebounded slightly to 0.4% YoY in December after recording a decline of 4.1% last month.
Important Disclosure Information at the end of this Forum
Disclosure Statement
The information and opinions in this report were prepared or are disseminated by Morgan Stanley & Co. Incorporated and/or Morgan Stanley & Co. International Limited and/or Morgan Stanley Japan Securities Co., Ltd. and/or Morgan Stanley Dean Witter Asia Limited and/or Morgan Stanley Dean Witter Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H) and/or Morgan Stanley & Co. International Limited, Taipei Branch and/or Morgan Stanley & Co International Limited, Seoul Branch, and/or Morgan Stanley Dean Witter Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services licence No. 233742, which accepts responsibility for its contents), and/or JM Morgan Stanley Securities Private Limited and their affiliates (collectively, "Morgan Stanley").
Global Research
Conflict Management Policy
This research observes our conflict management policy, available at www.morganstanley.com/institutional/research/management_policies.html
Important Disclosures
This report does not provide individually tailored investment advice. It has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages them to seek a financial adviser's advice. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. This report is not an offer to buy or sell any security or to participate in any trading strategy. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.
With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we do not represent that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a company. Facts and views in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.
To our readers in Taiwan: This publication is distributed by Morgan Stanley & Co. International Limited, Taipei Branch; it may not be distributed to or quoted or used by the public media without the express written consent of Morgan Stanley. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Dean Witter Asia Limited as part of its regulated activities in Hong Kong; if you have any queries concerning it, contact our Hong Kong sales representatives.
This publication is disseminated in Japan by Morgan Stanley Japan Securities Co., Ltd.; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., which accept responsibility for its contents. Morgan Stanley & Co. International Limited, authorized and regulated by Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International Limited representative about the investments concerned. In Australia, this report, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act.
Trademarks and service marks herein are their owners' property. Third-party data providers make no warranties or representations of the accuracy, completeness, or timeliness of their data and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley bases projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on public information. MSCI has not reviewed, approved or endorsed these projections, opinions, forecasts and trading strategies. Morgan Stanley has no influence on or control over MSCI's index compilation decisions. This report or portions of it may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities is available on request.
|
