Thursday, May 14, 2009

Potential outcomes in Pakistan's war with Taliban

Pakistan's military is pressing ahead with an offensive to try to crush the Taliban, following warnings from Washington that the militants pose an existential threat. Following are some scenarios of how events could unfold:

WEAK PAKISTANI GOVERNMENT STRUGGLES TO PUSH BACK TALIBAN

Even if Taliban fighters melt away from their strongholds in Swat in the face of the latest army offensive, they can regroup.

Militants could stealthily widen and consolidate their territorial grip as long as they were careful not to overreach and provoke another major army offensive.

"The Pakistan Taliban are effectively taking advantage of the lack of governance and development. Neither appeasement nor military assault is likely to prove effective for handling the long-term threat posed by these groups," said Maria Kuusisto, Pakistan analyst at Eurasia Group in London.

The outlook would be more of the same -- instability, a continued terrorist threat, and a divided Pakistani leadership.

But this relatively negative outlook is already priced in, analysts say, meaning local markets will largely ignore the poor security situation and focus on the brighter economic picture.

There would be room for gains by local stocks, and the rupee would stabilize, seeing an orderly depreciation over time due to exchange rate reforms. There would be little or no impact on global markets.

MILITARY OFFENSIVE DEALS SIGNIFICANT BLOW TO TALIBAN

The Pakistani government and army so far retain considerable public support for their offensive against the Taliban in Swat. If they can press home their advantage and deal a significant military blow to the Taliban, stocks could see strong gains.

"We reiterate that investors keep an eye on the bigger picture and any progress on the political and military front should be taken as a bullish signal," Credit Suisse said last week. Analysts said the stock market upside could be 25 percent.

The military has also shown success in dealing with militants in tribal areas earlier this year.

But crushing an insurgency is notoriously difficult.

"Pakistani military forces already are privately expressing their concerns that many of the Taliban have blended in with the refugees fleeing the district, likely making it a matter of time before Taliban forces are able to reconstitute themselves in the area," risk consultancy Stratfor said in an analysis.

Furthermore, a sustained campaign against the Taliban would worsen an already severe refugee crisis and send the civilian death toll sharply higher, undermining popular support.

"If the war against militants becomes a prolonged one, and with heavy civilian casualties (as can be expected), public resentments against the government may well serve to break up the unity, laying the groundwork for both social and political unrest," said Jan Zalewski, analyst at IHS Global Insight.


To read the rest of the report follow this link:

War

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