Since we first sent out our Quick Update on the ongoing military conflict in the Middle East, the situation has continued to be quite volatile. Most events since then have been in the direction of escalation, but with enough events that also point towards a quicker resolution being possible. Probably the most alarming of these have been how much oil prices have risen - over USD 100 per barrel on Monday open. The overall situation is simply volatile and it might be near a moment of maximum uncertainty about how this can play out.
With varied reports continuously suggesting increased escalation in the Gulf, how can this moment of uncertainty resolve?
In our previous update, we put forth three broad scenarios.
In our first scenario, the conflict lasts for a few weeks at a heightened level but then resolves quickly - before the month is over.
In our second scenario, the conflict escalates into a protracted war that lasts for a few months between the primary belligerents - US, Israel, Iran - with others drawn in occasionally.
In our third scenario, we had a full-blown regional war that lasts for many months.
In the first few weeks, all three scenarios will look very similar - rapid escalation including strikes outside the main belligerents. Only after this does this clarify towards a resolution, a protracted conflict, or a full-blown regional war.
The way we understand this right now, in any case, these conflicts do remain for an extended period. For Sri Lanka, macroeconomically, this would mean there is a definite ‘shock scenario,’ but given the underlying strength the country has achieved through fiscal and external buffers, it could be an “interruption” to the broader Sri Lankan economic story that has been building up — and the larger the shock, the greater the interruption. Over the next few days, we expect to be conducting far more detailed work on this, particularly given the potential for even a temporary rise in oil prices to have knock-on effects across global financial markets. Should the more adverse scenario of a wider and more protracted war materialise, we will continue to expand our work over the coming weeks in this direction, with the aim of helping clients understand, plan, and navigate what is likely to be an extremely uncertain and challenging operational environment.