By Eddie Tam
Nobel Prize-winning economist Robert Shiller, based on his work on “Narrative Economics”, which studied the effects that narratives and stories can have on the global economy, picks Donald Trump’s election victory in the US and the emerge of Artificial intelligence (AI) as the two ‘narratives’ supporting the market rally that began more than a year ago.
If you ask me, I would add two more stories: China’s rise as a superpower, and the fall of Islamic extremism. For now, let me elaborate more on the second factor.
For years, numerous incidents of violence and attack, which were linked to Islamic extremists, have plagued the globe, particularly the Western countries. Among the various terror groups, the richest and most powerful, in recent years, had been the Islamic State (IS).
The jihadist group burst on to the international scene in 2014 when it declared the establishment of a “caliphate” – a state governed in accordance with Islamic law – in a large territory in Syria and Iraq, which was once more than twice the size of Jordan and home to millions of people.
Behind the rise of the IS, if we trace back to the origin of these Islamic extremist movements, it lies in Iran’s 1979 revolution that shook the Islamic world.
In 1979, Iran’s Pahlavi dynasty under Mohammad Reza Shah Pahlavi, who was supported by the United States, was overthrown and replaced by the Islamic Republic under Ruhollah Khomeini, the leader of the revolution.
Following the revolution, Khomeini assumed control as Supreme Leader of Iran, which became the first Islamic theocratic regime in the modern Middle East.
In that year, a group of Iranian students, who supported the revolution, took over the US Embassy in Tehran, taking more than 60 American hostages for 444 days. The crisis is considered a significant event in the history of Iran-US relations, and a major factor in Jimmy Carter’s loss in the 1980 US presidential election.
Also in the same year, the Grand Mosque seizure occurred when hundreds of Sunni jihadi fundamentalists took over the Great Mosque in Mecca, Saudi Arabia, with 100,000 pilgrims taken hostage. The crisis resulted in serious casualties.
Following the attack, the Saudi authorities implemented a stricter enforcement of Islamic law. Religious conservatives seized more power in the country over the next decades, and religious police became more assertive in the country.
Cinemas closed and music stopped, and women’s rights had been brutally suppressed. Religious police patrolling on the streets also enforced Islamic codes of conduct in public, such as requiring women to be swathed in long, black cloaks known as abayas, or even preventing women from going out in public alone.
The situation further escalated as the export of the fundamentalist strain of Islam known as Wahhabism fueled global extremism and terrorism, contributing to the horrific terrorist attack of 9/11, which became a watershed moment that put crushing Islamist terrorism as the focus on the foreign policy of the US and Western countries.
The tragic 9/11 incident prompted airport security levels to be taken to new highs, yet that did not stop more terror attacks, which became much more common and deadly.
The constant risk of terror attacks, with the massive influx of Islamic refugees and migrants, contributed to the rise of populism in Europe and the US, and more importantly, the Brexit surprise and Trump’s victory in the US presidential election.
But I believe the time of Islamic extremism has gone. After three years of US-backed militia’s strikes, IS has been almost completely defeated in Syria and Iraq. Raqqa, the capital of IS’s self-proclaimed caliphate and its last major stronghold in Syria, was recaptured in October 2017. And the IS caliphate was reported to have been reduced to a handful of villages in the Syrian Desert. By depriving the IS of its economic resources, the jihadist group is believed to be seriously weakened.
The pendulum has swung to the side of safety, with the US Pentagon putting competition from China and Russia as the main focus in regard to potential threats, rather than terrorism, according to the 2018 National Defense Strategy released last week.
In the first year of Trump’s presidency, he assigned his son-in-law Jared Kushner as his emissary to the Middle East, brokering a ‘Middle East peace deal’ with Saudi Crown Prince Mohammed bin Salman (MBS).
The 32-year-old future king of Saudi Arabia needs the US support to allow him to consolidate his power and wealth in order to push forward his vision to transform his country.
The crown prince is launching the initial public offering of the national oil giant Saudi Aramco, expected to raise billions of dollars, as he plans to set up the world’s biggest sovereign wealth fund and reduce the economy’s reliance on oil, which is the heart of the country’s economic reform program.
In return for its support, the US demands Saudi Arabia to stop the backing of IS and other terrorist groups, and to roll out modernizing and secularizing reforms in the country, which the young prince welcomes.
A range of secularizing reforms has already been introduced, such as allowing women to drive, granting women access to sporting events in stadiums, and also lifting a decades-old ban on cinemas with the first movie theaters expected to open this year.
MBS has removed powers from religious police in the country, with an aim to return the country to ‘moderate Islam that is open to all religions’. Its success, if possible, would upend the Sunni Islamic world.
For investors, the crown prince’s vision could potentially have a much larger impact on oil prices.
Saudi Arabia needs oil prices to stay high to boost the valuation of the Aramco IPO. Meanwhile, Western developed countries, as well as China, also want oil prices to be elevated to stave off the risk of deflation. Also, it is in the US interests to keep the oil prices supported, when the country is set to become the world’s leading oil-producing nation for its booming shale oil production.
Thus, there is some sort of consensus now among the major players in the global economy to support the oil prices.
Some market watchers believe Wall Street banks are also interested in helping boost oil prices, as everyone wants a slice of the huge financial pie from Saudi Aramco IPO.
Morgan Stanley, which Aramco hired to help manage the listing, recently raised forecasts for oil prices in 2018 to US$75 a barrel, up from US$63 a barrel, suggesting that strong capital flows into the oil market will push up prices. Goldman Sachs also said there is a growing risk that it will have to push up its targets as well.
I won’t be bearish on the crude oil market in short term. Yet, if Saudi Aramco launches its IPO this year as planned, it will be hard to say whether the oil price rally can continue once the oil giant is listed.
Hong Kong joined New York and London on the shortlist of international stock exchanges to compete for the titanic IPO deal. Personally, I sincerely wish Aramco doesn’t pick Hong Kong as the listing venue, as I have dark memories of what happened after another oil giant listed here in the past. I am referring to the listing of China’s oil behemoth, PetroChina, in the year 2000 and the stock market crash that came after that.
This article appeared in the Hong Kong Economic Journal on Jan 23