This is a short update to our long report, Afghanistan's abyss in 10 charts: China's power reduces risk for Pakistan, 11 August 2021.
In Afghanistan, the Taliban have gone from rebel to ruler in the last couple of days after government forces effectively surrendered control of Kabul, completing the group's territorial takeover, and President Ghani fled the country. The speed of the Taliban's territorial takeover over recent weeks means the fall of Kabul without a shot fired was not a surprise.
While US politics is temporarily side-tracked by a game of whom to blame for the failure to permanently defeat the Taliban or build a robust state in its place over the last two decades, and mainstream media focuses on the threat to civil liberties under Taliban rule, investors are forced to consider the repercussions for regional security – particularly for China, India, Pakistan, Russia, and the central Asian republics of Tajikistan, Turkmenistan, and Uzbekistan.
Pakistan, Tajikistan, and Uzbekistan all have traded US$ sovereign debt and Pakistan has an equity market of significance for small emerging and frontier investors. Pakistan US$ bonds indicated about half a point lower at opening today with the yield on the '27s rising about 12bps to 6.3%, as investors worry about spillover risks.
We remain positive on Pakistan equities because they are cheap versus history and because its reform story should continue, with an inclusion of the Taliban in the Afghan government is less risky for Pakistan's security than its exclusion.
We list the following factors to look out for which should inform this assessment of risk in this rapidly changing arena.
Which foreign powers leave their diplomatic staff in place, attempt to mediate between the Taliban and other local powers, or go as far as recognising the new de facto government –particularly, the largest regional military powers following the US withdrawal, China, Iran, India, and Russia? Clearly, the rhetoric in recent weeks and months suggests that the US and India will not recognise a Taliban government but that China, Pakistan, and Russia are more likely to.
How does the Taliban deal with members of the former government, eg Abdullah Abdullah or Hamid Karzai – does it inflict revenge or seek some sort of reconciliation?
How foreign nationals attempting to exit are treated by the Taliban – ie are border exits like Kabul airport secured and do they remain functional?
It may be the dominant territorial force but how complete is Taliban control of security and are there any signs of activity from the local versions of Al Qaeda and Islamic State (IS Khorasan Province)?
Once the dust settles in Afghanistan, or, at least attention is diverted to the next geopolitical hotspot, investors might also reconsider the the long-term credibility of US security cover for those far away countries dependent on it – eg Philippines and Taiwan. In the way that unilateral withdrawal from the the Iran Nuclear Deal under the Trump administration brought into question the durability of US signatures on international treaties, the rapid withdrawal from Afghanistan under the Biden administration, which caught US allies off guard, may bring into question how much this is a withdrawal from one country or one instance of a more sweeping global withdrawal.