Global Economy Heading to Breakdown

This piece provides an understanding of the interplay between geopolitics and economics, and of the impact on the dynamic global economy.

The tests ahead are interconnected and have vast potential economic impacts.

The trajectory of the Russia-Ukraine conflict and the Israel war with Hamas heightens concerns about the global economy.

These shocks have created uncertainty in the global political economy and weakened the world’s ability to recover from Covid-19.

This has generated new geopolitical tensions, exposed the fragility of the international relations system and pushed the world economy into breakdown.

As war rages on between Russia and Ukraine, and Israel and Palestine, there is a burgeoning geopolitical crisis simmering in the background that has major implications for the future of the international world trade.

It has become increasingly clear that China is observing the world’s response to Russia’s invasion of Ukraine and setting up a potential blueprint for an invasion of Taiwan.

It is also becoming increasingly clear that the international community is nowhere near prepared to adequately deal with an invasion.

Therefore, the challenge for all these increasingly nervous lesser powers is not just whether they can retain a degree of policy independence, but whether they can reconcile potentially incompatible geopolitical and geo-economic goals.

What global tension means for Namibia’s economy?
The war between Israel and Hamas might disrupt Namibia’s trade relations with Israel and affect global economic sentiment, resulting in reduced foreign direct investment and possible depreciation of the Namibia dollar.

According to the United Nations Comtrade database on international trade, Namibian exports to Israel were US$59,82 million during 2022, while imports from Israel amounted to US$3,8 million.

Namibian exports to Palestine were US$334 during 2022, while imports from Palestine were US$17,35 for the period under review.

It should be noted that in 2004 we had companies from Israel which had heavily invested in Namibia’s diamond industry.

LLD Diamonds was given 36 concessions worth US$180 million by the Namibian government in order to invest in Namibia’s diamond industry.

As of 2005, LLD Diamonds operated the largest diamond cutting centre in Africa.

Based in Windhoek, former Namibian president Hifikepunye Pohamba called the

factory a success story in Namibia’s drive to attract foreign direct investment.

Therefore, war should be avoided at all costs due to the loss of life, destruction of infrastructure, economic impact, escalation of violence, social and psychological consequences, environmental impact, and threats to global stability and security.

What Russia-Ukraine and Israel-Hamas war mean for global’s economy
Various reports indicate that the violence could bring tightened sanctions against Iran, derail a possible Israel-Saudi thaw, and expand conflict across the Middle East, which could threaten to send fuel prices soaring.

We should understand that this unrest will derail economic recovery.

Global petroleum supplies have already been roiled by Russia’s war on Ukraine and the resulting Western sanctions against Moscow’s oil exports. Many analysts are bracing for a spike in the short to medium term.

The Middle East is a major hub for oil production and trade, contributing around 33% of global crude oil production.

Any prolonged conflict in the region can lead to volatility in global oil prices due to concerns over supply disruptions, even if Israel and the Palestinian territories are not major oil producers themselves.

Some of the reports indicate crude oil prices surged by 4% on Sunday, with likely indicators pointing to an ever-higher price.

Furthermore, the exchange rate is a very important price that affects the desirability of our exports and the cost of imports. I

t is important to understand that a country’s foreign exchange reserves are directly linked to its currency’s strength.

A depletion of these reserves can result in the depreciation of the local currency, for example the Namibia dollar, against major currencies like the US dollar.

Geopolitical uncertainties can influence investor sentiment and if global investors perceive heightened risks due to potential spillover effects, there could be a decline in capital importation in Namibia. The reduction in capital importation can put pressure on currency, leading to potential depreciation.

Furthermore, companies that rely on imports or exports between Russia-Ukraine and Israel-Hamas may experience delays, added costs, or reduced business.

This war is likely to affect businesses that rely on trade partnerships, especially if prolonged or escalated, can affect global economic sentiment, investor confidence and risk perceptions.

Hence, for policy makers, countries with a high dependence on export trade will pay more attention to political peace and stability to encourage the introduction of foreign capital or formulate corresponding policies to provide security for transnational investors.

Moreover, from the scale of global relations, maintaining world peace and social stability and building good national relations are the most effective ways to defuse the negative impact of geopolitical risks on economic activities.

Hence, a stable political and economic environment is essential to attract foreign investment, encourage the development of foreign trade and thus promote their own economic growth.

We should strengthen political and economic cooperation, deepen friendly exchanges, jointly build a community of a shared future for humankind and promote the common development of the global economy.

We should effectively defuse geopolitical risks through proactive diplomatic strategies, promote the signing of bilateral investment agreements, improve relevant laws and regulations and provide a sound economic and political environment.

Hence, no single country can be fully equipped to deal with the growing social, economic and environmental risks facing the world.

In this geopolitical context, major powers need to take a leadership role to enhance global resilience through innovative cooperation.

Thus, reducing the possibility of political and economic instability and violent conflicts leads to the well-being of the citizens.

Therefore, international relations play an important part in this, provided that the international community fosters peace, given each country’s support for either the Russia, Ukraine, Israel, or Palestinian side.

We need vigorous diplomatic efforts to meet these challenges. To silence the guns, we must raise the voices for peace.

In conclusion, we need to do everything possible to find peace and unity.

An intensification of geopolitical tensions could potentially trigger significant de-globalisation of trade and the economic system.

Therefore, the international community, particularly the powerful countries, should find a way to eliminate geopolitical frictions through international cooperation, and the impact of regional economic and trade organisations on geopolitical risks.

*Josef Sheehama has more than 21 years’ banking experience, serving as credit manager, branch manager, and now centralised credit head office at a local commercial bank.

In an age of information overload, Sunrise is The Namibian’s morning briefing, delivered at 6h00 from Monday to Friday. It offers a curated rundown of the most important stories from the past 24 hours – occasionally with a light, witty touch. It’s an essential way to stay informed. Subscribe and join our newsletter community.