Weekly Risk Outlook

Weekly Risk Outlook
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Washington and Havana mend ties with reopening of embassies. TPP meeting in Hawaii could be final stage after eight years of negotiation. President Obama meets with Nigerian and Kenyan leaders to strengthen security and economic growth. Home sales likely to show growing strength of U.S. economy. Conferences in San Salvador and Cartagena explore Latin American growth. All in the Weekly Risk Outlook.

Washington and Havana Reopen Embassies

Also on Monday, the United States and Cuba will formally restart diplomatic relations with one another with the formal shift of the Special Interests Section offices in Havana and Washington, DC into embassies.

Despite Cuba’s small economic stature in the region (in PPP terms, Cuba’s GDP represents 2.2% of the LAC region’s economic output), the formalization of relations between Cuba and the United States could have important economic, as well as political, consequences.

Although Cuba’s exports are heavily concentrated, with 82% of all exports falling under 7 product categories (including alcohol, sugar, tobacco and pharmaceutical products), its imports are significantly more diversified and have attracted attention from key U.S. constituencies.

Removing a diplomatic point of contention for the United States in Latin America, a coalition of farming groups see significant potential for Cuba as an agricultural imports market (particularly in grains). This has scrambled conventional left-right politics in the U.S. House and Senate, which will ultimately be needed to lift the embargo against Cuba.

Despite the reopening of embassies, a number of key hurdles remain, and will likely not be overcome during President Obama’s final term in office; Senators Cruz and Rubio (who are also 2016 presidential contenders) have threatened to block any ambassadorial appointment to Havana, and, regardless of some Republican support for lifting the congressionally mandated elements of the U.S. embargo, it will likely have to wait for the next Congress and President to move forward on this matter.

TPP Meeting in Hawaii Could Be Final Stage

On Friday, the chief negotiators of the 12-nation Trans-Pacific Partnership (TPP) will meet in Maui, Hawaii to discuss a number of issues still unresolved by the member states. A meeting will follow on Tuesday July 28 between trade ministers (presumably to wrap up the thorniest issues).

Most significantly and a first for the TPP, Japan’s Economy Minister Akira Amari suggested that the TPP could be concluded without all 12 members, and noted that the TPP negotiations could end at the Hawaii ministerial.

Intellectual property remains a sticking point in many fields, including access to biological medicine as well as content protection and oversight.

U.S. negotiators are increasingly frustrated with the position of the Canadian government in regard to market access for dairy and poultry products, with the U.S. government claiming that the Canadian government indicated that market access for agricultural products would be on the table as a condition for Canada joining the TPP negotiations in 2012.

The Canadian negotiators refute this claim.

U.S. lawmakers, including the House Chairs of the Ways and Means and Agriculture committees, have indicated that a lack of meaningful dairy market access from Canada would make it difficult for the United States to sign the TPP.

Canada so far has not introduced any proposals to provide dairy market access to the TPP states. New Zealand is also reported to be dragging its feet in the negotiations. The Japanese minister’s wish looks unlikely to be fulfilled.

President Obama Meets With Kenyan and Nigerian leaders

On Monday, President Obama will host recently inaugurated Nigerian President Muhammadu Buhari at the White House. Major subjects of discussion are likely to include ongoing developments in the Nigerian government’s fight against Boko Haram as well as efforts to promote political and economic reform in light of lower oil prices.

Last week, the United States announced it would boost military aid to Nigeria to combat Boko Haram, though changing Nigeria’s economic climate may prove to be almost as difficult as combating Boko Haram.

Nigeria is notorious for oil theft (most of which goes to waste), and the decline in oil prices has revealed significant holes in investment for Nigeria’s remaining billions of proven reserves, as well as an economy hugely reliant on oil revenues, which account for 2/3 of government earnings and 95% of foreign earnings.

On the political front, President Obama will visit Kenya to attend the Global Entrepreneurship Summit July 24-26 to meet with Kenyan President Uhuru Kenyatta.

Kenya has experienced significant security concerns with the rise of al-Shabaab in the country, which has claimed responsibility for the attacks at Garissa University that led to over 140 deaths. The U.S. State department has issued a travel warning for U.S. citizens in Kenya during Mr. Obama’s visit.

Home Sales Likely to Show Growing Strength of U.S. Economy

On Wednesday, the National Association of Realtors will issue its monthly report on sales of previously owned homes in the United States.

Economists project that sales have increased to their highest level since 2009, a rise due in part to the improved employment situation.

Last month, sales of new U.S. homes reached their highest level since 2008 (though Friday’s upcoming monthly report from the Department of Commerce is not likely to have exceeded last month’s levels), prompting a better outlook both for the general economic environment as well as the construction sector.

Increased confidence by U.S. consumers, particularly as it relates to their willingness to make both major and minor purchases, will weigh on the Federal Reserve’s decision to raise interest rates this year.

In Congressional testimony last week, Yellen cited the improved economic environment in the United States, particularly in unemployment, as a leading indicator for the Fed’s decision to raise the Federal funds rate.

When questioned directly by Congresswoman Maloney (D-NY) what impact the stock market developments in China and bailout in Greece will have on the Federal Reserve’s interest rate decision, Yellen made it clear that her focus and that of the Federal Reserve in determining whether to raise interest rates will remain almost exclusively on domestic economic developments.

Conferences in San Salvador and Cartagena Explore Latin American Growth

On Thursday, the Latin American Reserve Fund (FLAR) will host the International Conference of Economic Studies in Cartagena, Colombia.

The central bank presidents of Chile, Colombia, and Peru will be in attendance to explore inflation on a panel currently titled “Financial Stability and Inflation Targeting in Latin America.”

On the same day in San Salvador, El Salvador, the IMF will host a conference on the economic outlook of Central America and the Dominican Republic.

The Mexican central bank president, Agustin Carstens, is expected to discuss the impact of a rise in U.S. interest rates on the region. A rise in U.S. interest rates has many countries concerned, as dollar-denominated debts will be more expensive to repay, access to credit will be more expensive, and  currencies will depreciate against the stronger dollar (although this can have benefits or drawbacks depending on the industry).

In Brazil, these factors could have a particularly significant influence as the country grapples with the multibillion-dollar Petrobras scandal and President Rousseff tries to move through a package of macroeconomic reforms in an increasingly rebellious Congress.

While Brazil could face benefits with increased export competitiveness from a further depreciated real, the increased expense of accessing credit will likely draw the ire of Brazilian citizens already deeply skeptical of the government’s reform efforts.

Other countries in the region, Mexico in particular, could face capital flight back to the United States, which has the potential to constrain budgets and growth forecasts.

 

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 affect economic outcomes. 

The Weekly Risk Outlook is written by GRI analyst Brian Daigle.

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