Barclays Research: The ISIS threat – a new era of MENA risk

Barclays Research: The ISIS threat – a new era of MENA risk


Geneva – The emergence of the militant group ISIS in Syria and Iraq, and recent increased efforts to fight it, has ushered in a new era of geopolitical risk in MENA. The particular nature of the ISIS organisation, the role of Syria in attracting jihadist groups globally, and ISIS’s ability to amplify and feed off the other existing tensions in the region, make swift solutions unlikely.

From Barclays Research

Instead, the stage seems set for a prolonged period of heightened regional uncertainty, with risks potentially spilling over into global oil markets and also to other economies and financial markets in the region (eg, Turkey, Lebanon, Jordan and GCC). While recognising that the complexities of the issue make any predictions extremely difficult, this note is an attempt at a systematic analysis of the implications of this new ISIS threat.

  • Oil markets: The damage to Iraq’s energy infrastructure is likely to leave a permanent scar on the survivability, resilience, and operation of the country’s fragile energy sector, including by reducing expenditures on new storage and pumping needed to build production capacity and exports from the south. Our forecast for oil prices to remain above $100 in 2015 is due largely to our expectation that the threat of ISIS will keep the geopolitical risk premium elevated for 2014 and 2015.
  • Sovereign credit: The ISIS threat adds to our concerns about the outlook for sovereign risk in the region, including Turkey’s sovereign outlook and the resilience of Lebanese spreads. In Iraq, the recent formation of a government and the start of military operations by the recently formed international coalition against ISIS may continue to support Iraq ‘28s. We expect the GCC sovereigns to maintain their regional ‘safe haven’ status and continue to benefit from local liquidity, unless direct security threats emerge in a tail risk scenario.
  • Corporate credit: Credit risks in relation to Iraqi operations are generally limited within US IG and HY energy and European Integrated Oil and Gas. In EM corporates, QTELQD and CCOLAT are the most exposed from an operating and financial standpoint, although Iraq/ISIS- related risks seem offset by other, positive factors.
  • Large cap IOCs equities: The nature of the technical service contracts in Iraq means there is relatively little value at risk for any of the large cap IOCs, with the range between 0 and 1. Perhaps the biggest risk could be posed by a slower development in Kurdistan. While Iraqi oil sales and service revenues for foreign oil companies are a small share of their total revenue, ISIS’ incursion worsens the perception of investing in Iraq for many years, with implications for global oil supply.

A lasting challenge to the MENA region
With the emergence of ISIS, and the fight against it, the MENA region appears to have entered a prolonged period of heightened security and geopolitical risk. The potential implications for regional economies, global oil market prospects and ultimately financial markets are serious, in our view. This note is an attempt to systematically address the various key questions that this new phase of heightened regional uncertainty raises for investors. The emergence of the “Islamic State of Iraq and Al-Sham” (ISIS) militant group has moved existing geopolitical risks in the MENA region to a new level.

Defeating the global threat of ISIS
It has not only further radicalised ongoing conflicts in Syria and Iraq, but also seems to be drawing the West back into a more active role in the region. Four years into the Syria conflict and three months after the fall of Iraq’s second-largest city Mosul into the hands of ISIS, President Obama outlined on 10 September, a four-point strategy for “defeating” ISIS in Iraq and Syria. It involves military airstrikes in Iraq and Syria and support to Iraqi and Kurdish forces, as well as to moderate Syrian opposition groups. The efforts of the Obama administration to secure military and financial backing from Arab leaders, European allies and the US Congress for the strategy culminated in a 15 September conference in Paris on “Peace and Stability in Iraq”. This led to pledges from more than 30 countries (including at least 10 Arab countries) to use “whatever means necessary” to defeat the global threat of ISIS. Click on the link below to continue reading the extensive report including graphics:

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