Weekly Risk Outlook

Weekly Risk Outlook
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 ASEAN pushes for ‘code of conduct’ in South China Sea dispute. The United States Federal Reserve to maintain its current monetary policy stance while members of the African Union and other international actors attempt to broker a power sharing agreement in South Sudan. All this in GRI’s Weekly Outlook. 

ASEAN summit: easing tensions with China

On Wednesday, January 28th, the foreign ministers of the Association of Southeast Asian Nations (ASEAN) will finalize their first meeting of the year in Kota Kinabalu, Malaysia. Near the top of the agenda is the need to address ongoing South China Sea disputes, as ASEAN officials seek to advance a “code of conduct” to ease tensions with an increasingly assertive China.

With some ASEAN members accusing Beijing of violating the terms of their 2002 agreement, the Philippines Foreign Secretary – Albert del Rosario – has been very vocal in criticizing China’s “massive reclamation” in the South China Sea, labeling it as a blatant violation of the Declaration on the Conduct of Parties in the South China Sea (DOC) and the United Nations Convention on the Law of the Sea (UNCLOS).

Having already filed an arbitration case  against Beijing to declare that its infamous 9-dash line is inconsistent with the UNCLOS, del Rosario has framed the issue as a threat to the entire region and has expressed his willingness to raise the issue during the ASEAN summit.

Malaysia, the hosting nation, is one of the claimant ASEAN members of the South China Sea – along with Brunei, the Philippines and Vietnam. In the wake of China’s conduction of a military exercise near the Malaysian James Shoal reef – which raised alarm bells back in March 2014 – recent media reports pointed to a Chinese naval flotilla that had been found patrolling off the same reef this month.

In spite of China’s actions, Kuala Lumpur has continued to exert a hedging policy vis-à-vis Beijing to ensure the normalization of ties with its largest trading partner. As a result, questions have been raised regarding the extent to which ASEAN calls for China to retract on its assertive actions will be unanimous.

With this in mind, the balancing of national versus regional interests is going to be a challenging one as we expect members like Vietnam and the Philippines to adopt a confrontational approach. Malaysia, however, is likely to be more cautious and simply advocate in favour of proposing an approved code of conduct for all interested parties, as it fears that an aggressive stance on China would harm the nature of its relations with the Asian giant.

US: FOMC to reiterate patience
The Federal Reserve’s Open Market Committee (FOMC) will meet on Wednesday, January 28th, to discuss monetary policy and announce its latest interest rate decision. With inflation still hovering below 2% and economic activity expanding at a “moderate pace”, the FOMC is expected to reiterate its current stance of remaining data dependent and caution in favor of “patience” viz. the eventual rate lift-off.

Having already signaled that the first rate hike could come as early as mid-year (consensus points to June 2015) and despite positive improvements in the labor market (unemployment down to 5.6% amid rapid growth in non-agricultural payrolls), disappointing December retail sales and average hourly earnings data have come as a downside surprise.

Compounded with recent market developments and central bank cuts abroad, do not expect the FOMC to be making any significant changes to its forward guidance.

As a result, we expect the FOMC to communicate a continuation of its current policy stance, with no signaling of policy shifts for at least the next two FOMC meetings. If anything, the FOMC may intend to begin normalizing rates once there is significant evidence of improvements in the labor market, with a potential rate hike come June 2015.

South Sudan: IGAD pressured to broker power-sharing deal
On January 30th, the Intergovernmental Authority for Development (IGAD) will be hosting a summit in the Ethiopian capital of Addis Ababa – with the hopes of brokering a power-sharing deal between the warring parties of South Sudan. Following the inconclusive round of talks last December, pressure is arising for both the mediating regional body and the factions of the Sudan People’s Liberation Movement (SPLM) to reach an agreement.

For IGAD and its international partners, the lack of a unified strategy to build consensus around an ill-defined power-sharing proposal (and the need to iron out the details of much needed security arrangements) is likely to jeopardize the prospects of sealing a conclusive deal. For the representatives of the SPLM factions, both Salva Kiir and Riek Machar have yet to reconcile their positions vis-à-vis the proposed power-sharing arrangement and their readiness to firmly commit to ending armed violence.

Indeed, in spite of the January 2014 cessation of hostilities agreement, there has been an uptick in military skirmishes during the past year, with warring parties generating hostile rhetoric on impending offensives, amid mutual accusations in the wake of recent clashes in Upper Nile state.

These derailments aside, hopeful prospects have emanated from the January 22nd Agreement on the Reunification of the SPLM, signed in Arusha (Tanzania) by both President Kiir and former Vice-President Machar – now leader of the splinter SPLM-in-opposition (SPLMIO).

The deal stipulates a restructuring of the party organs and its leadership as well as the revoking of the dismissed party leaders – a move that triggered the splintering of the SPLM and subsequent eruption of a violent crisis in December 2013.

As negotiators head to Addis Ababa on the sidelines of the African Union summit, the Arusha agreement will undoubtedly be welcomed as a positive stepping stone but much is yet to be done regarding the mutual acceptance of a power-sharing arrangement. In this regard, the US and China are expected to use their strong leverage on the regional mediators (namely Uganda, Kenya and Sudan) to ensure that the need to broker a deal gains enough traction.

For South Sudan, this will be fundamental in putting an end to a protracted crisis that has been aggravated by the shortfall in revenues emanating from falling oil prices.

The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions impact economic outcomes.

The WRO is put together by GRI analyst Jose Luengo-Cabrera.

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