An assessment of political risk worldwide is as important, yet no more predictable, than financial and economic forecasting precisely because of its idiosyncratic nature. Nonetheless, adjudging event (or political) risk is essential for measuring the trends in and temperament of the public policymaking climate in the capitals of developed, emerging and frontier national markets. The stability or instability of the political atmosphere of a country establishes the direction of official decision-making regarding the economy and financial markets. The following is our evaluation of what we deem to be the most significant event risks facing investors globally.
The post-election political climate will focus on keeping the economic recovery on course and, at the same time, meeting fiscal goals and campaign spending pledges. If spending exceeds official targets and the Conservative regime fails to meet its budget objectives, euro-skeptic Tory backbenchers might be emboldened to challenge, but not depose the government in Westminster.
Prime Minister David Cameron may advance the date of the promised referendum to decide whether or not the UK should remain in the EU from 2017 to 2016 to avoid conflict with German and French general elections. Even though Tory euro-skeptics may be on the defensive in the aftermath of the UK Independence party’s failure to win more than a single seat in the May 7th parliamentary elections, their increased representation in the Conservative Party backbenches could prove disruptive now and then to Premier Cameron's legislative agenda.
An exit by Greece from the currency bloc remains a distinct possibility despite its having ended some recent uncertainty by paying €750 million service a loan from the IMF. While investors are discounting the growing likelihood of Greece’s departure from the currency zone, brinkmanship and intense, eleventh-hour negotiations might produce a last minute deal.
Rumors abound of Athens holding a plebiscite on Greece’s membership in the euro. In spite of the fact Syriza (Greece’s dominant coalition partner) is adamant in its stance to reverse many key reforms (like streamlining pensions and the bureaucracy) that were adopted by the prior center-right regime, a referendum result favoring Greece remaining in the Eurozone may compel Athens to abide by them eventually.
President Francois Hollande’s popular support is still sinking; the French economy is exhibiting no sustainable signs of revival; and Prime Minister Manuel Valls’ and Economy Minister Emmanuel Macron’s labor and industrial reforms address only a fraction of the country’s sclerotic economic rigidities. Moreover, an acceleration of political fragmentation nationally is anticipated as an increasing number of voters align with Marine Le Pen’s far-right National Front as a result of poor public opinion ratings of the governing Socialist Party and renewed legal troubles of former President Nicholas Sarkozy, who heads the opposition (UMP).
The center-left government under Prime Minister Matteo Renzi has accomplished much on the political reform front by shepherding key legislation through both houses of parliament that should ensure future elected regimes of majorities in both chambers. Still, Premier Renzi’s efforts at comprehensive reform were dealt a setback by the country’s highest court that ruled unconstitutional a freeze on pensions that may put Rome at odds with EU budget requirements.
Lower house balloting this December in Spain should prove problematic, but not insurmountable to the re-election campaign of the incumbent Popular Party under Prime Minister Mariano Rajoy. However, political scandals have undermined the popularity of Rajoy’s government. Yet, a nascent economic recovery may help it win re-election in the face of strong opposition from the insurgent leftist Podemos Party that fashions itself after Greece’s Syriza Party.
Violations of Estonian, Latvian and Lithuanian air space by Russian military aircraft will likely persist as long as Moscow’s acute insecurities compel it to coerce its neighbors into breaking their economic and military ties with the West. If Russia’s air force were to engage inadvertently or deliberately NATO military aircraft in combat, it would escalate already tense relations between Western capitals and Moscow.
CENTRAL AND EASTERN EUROPE
Sejm, or lower house, parliamentary elections will decide whether or not Civic Platform, the longest presiding party in Poland’s twenty-five years of independence from Soviet rule, remains the dominant political force in the nation following the departure of Donald Tusk as prime minister earlier this year. Ewa Kopacz, who assumed the premiership from Tusk, is considered an able leader, but the inability of President Bronislaw Komorowski to secure a first-ballot victory in his bid for re-election last weekend exposed otherwise previously undetectable weaknesses in Civic Platform’s electability.
Since his election last year, President Recep Tayyip Erdogan continues to press parliament to grant him powers that prior occupants of his office never enjoyed. His quest for additional authority irritates his predecessor, ex-President Abdullah Gul, and the current Prime Minister Ahmet Davutoglu, who is resisting the president’s demands. If parliament were to fulfill all his requests, Erdogan’s presidency – which already exercises authoritarian tendencies – could put Turkish judicial independence and civil liberties at grave risk with fewer checks in place to curb any attempt by Erdogan to overstep his authority. The outcome of the June 7th National Assembly elections will likely decide the fate of Erdogan’s demands.
Russian Intervention in Eastern Ukraine
Moscow’s annexation of Crimea and continued subversion of Ukraine in the latter’s eastern provinces is destabilizing enough for the Central and Eastern European region bordering Russia. Needless to say, any further aggression by Moscow would attract further Western retaliation via stiffer financial sanctions and additional military support to Kiev.
NORTH (SAHARAN) AFRICA
Libya remains in a state of chaotic civil war in spite of international recognition of the current government and the support of Western allies in trying to contain the struggle and restore stability to the country’s key coastal cities (especially, Benghazi and Tripoli, the capital). Like Yemen, if any of the militant groups opposing the government were to overthrow it and take power, it could attempt to undermine its North African neighbors, drawing Algeria and Egypt into a broader conflict.
Now serving his second term of office, President Jacob Zuma remains hostage to militant labor unions that have organized protracted wildcat work stoppages of mining and other industries across the country, entailing enormous losses in corporate earnings, worker productivity and government revenues. Zuma’s ineffectiveness in curtailing union power, evident in the regime’s capitulating to public sector demands for excessive wage increases, should certainly work to the advantage of his opponents in the Democratic Alliance, who will seek to unseat him and the ruling African National Congress (ANC) in the next general elections four years hence.
The recent election of the reformist, anti-corruption and counter-terrorist presidential candidate, Muhammadu Buhari, speaks volumes to the frustration of Nigerians with the administration of justice and the economy as well as the ineffectual military campaign to defend them against attacks by Boko Haram. While Buhari is committed to re-establishing national security, annihilating terrorism and bringing corrupt public officials to justice, concerns persist that he will overreach his authority and contravene Nigerian civil liberties.
Prime Minister Benjamin Netanyahu assembled a last-minute coalition with a slender one-seat majority in the Knesset (Israel’s parliament) that includes a far-right, nationalist party that seeks to modify the authority of the nation’s highest court, the Supreme Court. A slim one-seat parliamentary majority inexorably augurs feebly for political stability as do menacing developments elsewhere in the Middle East and uneasy relations with the US, Israel’s single-biggest benefactor.
Delicate negotiations between the US and Iran could fall apart at any time in light of spreading violence and instability across the Middle Eastern region. Yet, Tehran’s desperate need for foreign currency, access to financial and commercial markets as well as an economic recovery make it somewhat likely that both the US and Iran can come to an agreement on international monitoring of the latter’s nuclear facilities in exchange for delisting Iran as a terrorist state and unfreezing its assets abroad.
Insurgencies in Syria, Iraq and Yemen
Islamic State of Iraq and Syria (ISIS)-inspired insurgencies in Syria and Iraq pose the greatest danger to political stability in the region. If either Syria, Iraq or both nations were to fall entirely under the control of ISIS, a powerful base would be established for ISIS to export its brutal brand of terrorism elsewhere in the area and beyond.
Yemen is in the grip of a major civil war involving Shia Houthis, who control the capital (Sana’a) and surrounding areas and are in armed combat with Al-Qaeda forces and Sunni supporters of besieged President Abdurabuh Mansur Hadi. Although Saudi Arabia, Senegal and the Persian Gulf emirates are allied in protecting the Sunnis, their offensive could draw Iran into the conflict in defense of the Houthis, thus widening the violent struggle and perhaps disrupting negotiations between Washington and Tehran as they try to reach an agreement on monitoring the latter’s nuclear program in exchange for restoring Iranian access to its overseas assets.
Land reclamation activities by the Chinese navy in the South China Sea will remain a persistent irritant in Beijing’s relations with Vietnam and the Philippines. Chinese revanchism naturally alarms Hanoi and Manila and to a lesser extent, Jakarta and Kuala Lumpur. Washington has promised a bigger naval profile there through the deployment of warships and fighter jets to keep Beijing in check. While no major face-off is foreseen between the US and Chinese navies, Beijing’s adventurousness in the area will remain a cause for concern for some time.
Premier Narendra Modi’s cautious, yet bold, attempts at reform were dealt a mild setback by the lower house of Inda’s parliament this week, when his Bharatiya Janata party failed to muster enough votes to achieve passage of long-pending legislation to overhaul India’s chaotic system of local and state taxes by creating a unified goods and services levy. Nevertheless, we believe Modi will regain the upper hand and overcome resistance from opposition parties favoring the status quo later this year, when parliament will enact both the land and tax reform measures.
Implementation of President Joko Widodo’s plans for economic reform will remain an arduous process in the face of stubborn opposition from statist forces in the national legislature and even in his own cabinet. The momentum behind Widodo’s program is losing steam and the president will have to compromise with both his allies and opponents to achieve legislative passage of at least some of his program.
Pyongyang seems to be undergoing an alleged “disloyalty purge” on the orders of North Korea’s unpredictable supreme leader, Kim Yong Un. The execution of Defense Minister Hyon Yong Chol with an anti-aircraft gun was particularly brutal as Kim proceeds to consolidate his grip on power. Kim’s latest purge appears a convenient diversion from his erratically aggressive behavior toward his neighbors in the Yellow Sea and Sea of Japan. However, investors should not be under any illusion that the latest lull on the foreign front means Kim has tempered his hostility vis-à-vis South Korea or is no longer a threat to any of North Korea’s neighbors. If anything, his consolidation of power should keep them alert to the likelihood of impending indiscriminate attempts by Pyongyang at intimidating them and endangering their national security.
Ongoing investigations of alleged corruption – a money laundering operation designated “Operation Carwash” – involving some officials of Petrobras, the state-owned oil company, will proceed to weigh negatively on public confidence in President Dilma Rousseff and her administration, diluting legislative consensus for contracting the expanding fiscal deficit that Bloomberg consensus projections see ballooning to 5.2 percent of nominal GDP this year. Moreover, a separate, though related, inquiry into the financial activities of Rousseff’s political party is concentrating on her highly respected predecessor, Ignacio Lula da Silva. Distractions arising from the corruption inquiries will only postpone resolute remedies to the country’s deteriorating economic maladies.
Colombia’s near-term outlook will remain very much dependent on the strenuous, yet excruciatingly drawn-out, efforts of the nation’s re-elected president, Juan Manuel Santos, to negotiate a lasting peace accord with the Revolutionary Armed Forces of Colombia (FARC) and end the longest-running guerrilla insurgency in Latin American history. Having staked his entire presidency on bringing the struggle to conclusion, Santos is facing numerous roadblocks to ultimate success including the plausibly insurmountable FARC demand for amnesty from extraditions to the US, which an American delegate is expected to assure FARC will not take place if it comes to terms with Bogota.
President Christina Fernandez cannot run for re-election, but Daniel Scioli – a purported acolyte of the president – has pulled ahead of his likely opponent, Sergio Massa, in public opinion polls that gauge popular support for both candidates. The former would probably follow the same approach as that adopted by President Fernandez in debt negotiations with holdouts. Progress in negotiating a resolution of the disagreement between bond holdouts and the government remains as elusive as ever. The October 25th general election is more than five months from now, which should give Massa enough time to close the gap with Scioli and present an alternative policy platform that could unlock billions in postponed investments if a deal can be attained with holdouts to the original agreement.
Venezuela’s slide toward authoritarianism renders it an expressly unattractive market for foreign investors because of the vulnerability of private sector firms and foreign investments to expropriation by the leftist regime of President Nicolas Maduro. Global Markets Intelligence (GMI) adjudges any investment in Venezuela a risk too high to take.
The pro-labor, leftist New Democratic party’s victory in provincial elections last week in Alberta not only ended the forty-plus year dynasty of the governing Progressive Conservative party, but it also spells additional trouble for Prime Minister Stephen Harper’s bid to win re-election nationwide and enter the pantheon of Canada’s longest serving leaders. Conservative party financial scandals and eroding political support in the West, a normally reliable electoral stronghold, will plague the ruling party ahead of the national House of Commons ballot scheduled for October 19th of this year.