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Taking a punt on the future

INTERNATIONAL wealth is down, surplus capacity and risk perception is up, balance sheets are under strain and currency misalignments persist. Throw in Iraq, North Korea, terrorism threats and the risk of financial accidents in emerging markets and industrial country financial systems and it’s a problematic outlook for international trade in 2003, according to the Commonwealth Government Export Finance and Insurance Corporation.

EFIC has identified 10 possible setbacks that could hamper the recovery of international markets.

The EFIC believes there is a 20 per cent probability that the US dollar will tumble over the next year as a result of a ballooning current account deficit, which is currently close to 5 per cent of GDP.

EFIC also does not give much credence to US claims that war with Iraq is not inevitable. It believes the probability of war is around 90 per cent, while the risk of a messy, prolonged conflict is around 20 per cent. Quick regime change in Iraq, however, would remove a major source of uncertainty, revive business and consumer sentiment and lead to falling oil prices. But the alternative is also likely if the oil facilities are sabotaged or there is a backlash against governments in neighbouring countries.

The uncertainly surrounding the future vitality of the Japanese economy would also have a dramatic effect on international trade. Japan is the world’s second largest economy and Australia’s number one trading partner.

Emerging markets such as Brazil, Turkey, Venezuela and the Philippines will also be facing a testing time in 2003, with at least one expected to succumb to political and economic crisis. 

While EFIC feels there is a less than 10 per cent chance of war on the Korean Peninsula, if conflict did occur it would destabilise the region and “at the very least would send risk premiums soaring and currencies plunging across much of East Asia”. Another war that could unsettle world trade is one between India and Pakistan.

Other possibilities include: counter-revolution in Iran; Germany and America going through a deflationary stagnant period; the World Trade Organisation Doha trade round faltering; and another financial accident in the post-bubble world of damaged balance sheets, according to EFIC.

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