Coming up roses?

Published: Feb 2015

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With global leaders finding it increasingly tough to keep up with the pace of change, it can be difficult to predict how geopolitics will influence the economic outlook for 2015. Nevertheless there are some key themes that treasurers should keep a keen eye on over the coming months, says ECR.

Although 2014 turned out to be, in the main, a year of crises, it was interspersed with encouraging economic news as well. The US economy is now largely on the right track (even though some data remains a little suspect) and the British economy is also growing steadily. In addition, the markets are demonstrating confidence in the economic aspirations of new rulers in Indonesia and India, and China’s growth seems to be on schedule.

The global outlook is far from rosy, though. Many analysts fear, for example, that China has created unsustainable bubbles that will see current growth rates falter. On top of this, the Eurozone is in turmoil; there are question marks about the will (and ability) of Japanese Prime Minister Shinzo Abe to get the country’s economy back on track; and analysts worry – to a greater or lesser extent – about three of the five BRICS, namely Brazil, South Africa and Russia.

These days a would-be grandmaster, staring at the global chessboard, is liable to find that the pawns have started moving around on their own.

Gideon Rachman, Financial Times

As ever, politics will be a very important factor in the economic developments in – and ultimately the prospects for – these countries. Indeed, many of the major crises that broke out in 2014 were connected to (geo)politics. And it is no coincidence that most experts regard poor governance as the biggest threat to global security.

Moreover, leaders find it increasingly difficult to get a grip on national and international politics and economics in what the FT’s Gideon Rachman, describes as the ‘democratic age’. The world seems more complex and obtrusive than ever before. Borders – and not just physical ones – are porous. People, capital flows, criminality, information, weapons, ideas, pollution, and epidemics move around the world at speed. As Rachman writes, “These days a would-be grandmaster, staring at the global chessboard, is liable to find that the pawns have started moving around on their own.”

Gazing into the crystal ball

Although this makes it harder to predict future events, it is still important to understand what the key geostrategic and (geo)economic issues impacting the financial markets will be over the next 12 months. And amidst all the uncertainty, one thing is clear – global instability and unrest will continue into 2015.

First of all, in the Middle East and North Africa (MENA) region, arrangements that were set up in the first half of the 20th century continue to come under internal and external pressure. And, there is no reason to think that the reshuffle of borders and power relations will come to an end any time soon.

Elsewhere, since the eruption of the financial crisis in 2007/2008, liberal democracy has been creaking on its foundations in many areas. History professor Mark Mazower wrote that, “by discrediting the more mythical idealisations of the market, it has encouraged the restoration of state power as a goal in itself. This programme is easily harnessed by authoritarian leaders in the name of national sovereignty and democracy.” In some cases, we are seeing transitions from ‘authoritarianism light’ to a totalitarian regime. Conditions have hardened in countries like China, Hungary, and Turkey, but most of all in Russia. Tensions between these areas and the West could become exacerbated (unless strong leaders actively strive to reassure the markets by creating more stability – which may pose a moral conundrum).

Over in Africa, some 20 countries are “failed states” or are heading in this direction. As a result, they are exposed to the dissemination of diseases, extremism and violence. The past shows that instability can easily spread from one African country to another, and with resource-rich areas such as Nigeria, Angola, South Africa, and South Sudan so relevant to the financial markets, this is a concern. Meanwhile, in Asia, the restructuring of national security and economic order continues. This affects the relations between the US and China. Add to this the maritime tensions between China and other Asian countries, such as Japan, and the picture becomes quite cloudy. Nevertheless, Asia continues to benefit from the shift of political and economic power from West to East and from North to South. In a relative sense, the Americans are losing power and this is all the more true of Europe too.

Market hurdles in 2015

Over the past year, the markets have not been overly bothered by geopolitical crises or politico-economic setbacks. However, market sentiment is fickle and it is likely to change as the Fed tightens its belt. In combination with waning confidence in the omnipotence of central banks, the slowdown in Chinese growth, political instability, and growing risk-aversion, this could result in a ‘risk-off’ climate going forward.

In Europe, 2014 was a relatively quiet year, but 2015 could be very different, considering the lack of adequate reform in France and Italy, which is being compounded by the fact that the core Eurozone countries are not doing very well either. Various electoral fireworks are scheduled for 2015 as well. The main question treasurers should be considering is: will Europe opt for a fiscal union (and write down Greek debts) or is a ‘Grexit’ on the cards? If the other euro countries want to hang on to Greece, write-downs are unavoidable.

By discrediting the more mythical idealisations of the market, it has encouraged the restoration of state power as a goal in itself. This programme is easily harnessed by authoritarian leaders in the name of national sovereignty and democracy.

Mark Mazower, Professor of History

In recent months, the oil price has been another area for treasurers to watch closely, losing over 40-50%. According to Jessica Tuchman Mathews, the outgoing President of the Carnegie Endowment for International Peace, a foreign policy think tank in Washington, “If, as now seems quite possible, oil prices settle at around $60 per barrel…that will be a global game changer. Virtually no economy and few economic relationships will be unaffected.”

Whereas the global economy will benefit if oil prices continue to stay low – unless the pullback triggers geopolitical crises – a number of specific countries will be hard hit. The most vulnerable states are: Venezuela, Nigeria, Russia and Iran. Other countries that should be monitored if the oil price slump continues are Brazil, Iraq, Libya, and the Gulf States.

Nevertheless, the oil price pullback will help China as it continues its advance. Treasurers would do well to consider three questions here:

  • Is leader Xi Jinping a true reformer who really intends to tackle corruption and turn China from a mega-exporter into an economy driven by domestic consumption?
  • Is prosperity the primary aim of China’s global infrastructure plans and projects or does it have a hidden geostrategic agenda as it continues to construct (rail) roads and ports on a massive scale?
  • Finally, will China’s slowdown in growth lead to more conflicts with neighbouring countries?

The full picture

There are many more themes that will be relevant to the markets in 2015. For example, Japanese Prime Minister Abe should not invest too much political capital, time and effort in his nationalist agenda (as he has done in the past). Instead, he would do well to focus wholeheartedly on the Japanese economy. He may have no choice. Especially since the power base of his ally, Bank of Japan (BoJ) Governor Kuroda, is crumbling within the central bank, which continues to strive to boost the economy.

Other important leaders to follow are Prime Minister Modi in India and President Jokowi in Indonesia. Both leaders are viewed as benevolent reformers who are willing (and able) to get rid of bureaucracy, corruption, and other major obstacles to growth. Both have made a decent start. However, it remains to be seen whether they will continue along the same lines once the low-hanging reform fruits have been picked.

In summary, we foresee numerous geopolitical and politico-economic risks for 2015. Despite this, steady growth in the US and the UK, the continuous emergence of countries like China, India, and Indonesia, together with low oil prices could add some sunshine to the grey skies. Yet, all in all, we do not expect much better economic weather.

The global economy is bound to grow at a slower pace than in recent decades and the unsettled climate will destabilise many countries. International and national political problems are hampering economic growth. Is an umbrella to protect against the economic drizzle and political downpour really too much of a luxury?

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