US Fed to raise rates. WTO meets in Kenya. Mexico announces auction winners. Summit on terrorism financing. Spanish elections’ outcome politically dangerous. All in the Weekly Risk Outlook.
Federal Reserve Likely to Raise Interest Rates for the First Time in 9 Years
On Tuesday, the Federal Open Market Committee will begin its two-day December policy discussion to decide whether to raise the federal funds rate from zero for the first time since 2006.
After years of holding off on moving interest rates, the Fed now appears very likely to marginally raise interest rates to by 25 to 50 basis points.
Although some analysts and economists have suggested holding off on rates until inflation figures get closer to 2% and household income numbers improve, the Fed is likely to make the hike based on better-than-expected data over the past couple of months as a signal of the growing strength of the U.S. economy.
Most signs from Federal Reserve Chair Janet Yellen indicate that the Fed will then move with extreme caution on any further interest rate decisions. Yellen has also emphasized that the Fed may again reduce interest rates if economic conditions deteriorate. In her own words, any future decision will still be “data-driven.”
The Fed’s decision stands in stark contrast to a number of major economies in both the developed and developing worlds as both struggle with sagging employment and weakening growth.
The European Central Bank has kept interest rates low, and Chair Mario Draghi has indicated the ECB will expand its QE program.
Japan is also likely to continue its own QE program with weak inflation. Key developing economies like Brazil, Nigeria, and South Africa have continued to maintain high interest rates to tamp down inflationary concerns and weakening economic fundamentals.
It appears, though, that the U.S. may be the sole major market economy to be changing its interest rates as a show of a strengthening economy, rather than to move rates as a reaction to a weakening one. The financial gap across the Atlantic will widen in 2016.
Spanish Elections May Lead to Hung Parliament
On Sunday, Spanish citizens will head to the polls to select the 350 members of the Spanish Chamber of Deputies as well as 208 of the 266 Senators.
For the first time since the transition to democracy, it appears likely that neither the Socialist Workers’ Party (PSOE) nor the People’s Party (PP) will be able to secure sufficient support in parliament given the rise of two outside political groups: Podemos and Ciudadanos.
Podemos has risen as a leftist, anti-austerity alternative to the two major parties, and in recent municipal elections was able to win the mayoralty of Barcelona and could take away significant firepower from the Socialists.
Ciudadanos, on the other hand, has risen in the polls fairly recently; the party established itself as an anti-secessionist, reformist party in Catalonia, though its moves following strong gains in Catalonia to shift to a national approach as a centrist and anti-corruption party will likely siphon support from Rajoy’s PP.
Previous suggestions of a grand coalition between the PSOE and PP appear increasingly unlikely, and it now looks as though Ciudadanos could emerge as a kingmaker for control of parliament.
The party is largely viewed as more closely tied to the PP, but the specter of corruption over the PP will make it very difficult for Ciudadanos to align itself with the party without major concessions.
Some have suggested one of those concessions may be the resignation of Prime Minister Rajoy in order for the PP to maintain its position. However, if the PSOE gains the upper hand, or if the combined tally of the PP and Ciudadanos is not enough to forge a majority, it is highly likely that a lot of political jockeying will occur before a final resolution is reached.
Recent elections and campaigns in the UK, France, Argentina, Venezuela, Canada, and the United States suggest that citizens are increasingly willing to consider previously unthinkable (or at least unlikely) alternatives if they believe their votes are likely to upend the status quo.
It would be unsurprising if Ciudadanos were to emerge as the essential player following Sunday’s elections.
World Trade Organization Meets for 10th Ministerial in Kenya
On Tuesday, WTO members will meet for a ministerial session in Nairobi. The meeting is likely to include discussion of a few key items that may or may not be ratified during the 4-day session:
- The Environmental Goods Agreement (EGA), slated to remove tariffs on environmental goods and services like wind turbines and solar water heaters;
- The expansion of the Information Technology Agreement (ITA), which will further eliminate tariffs for information technology and consumer electronic goods;
- Possibly a discussion over the future direction of the Doha Round.
All three agreements have hit stumbling blocks, and the Nairobi ministerial will serve as a key opportunity to resolve some of the thorniest issues.
In terms of the EGA, countries have yet to completely agree on which items will be excluded from the list of environmental goods. For the ITA expansion, although the list of items has already been agreed to by the ITA member states, the timeline for the elimination of tariffs by member states remains a sticking point.
Some countries, like Japan and Australia, have pushed for accelerated tariff elimination timelines, while China has called for as long a staging process as possible.
Finally, the Doha Round remains mired in deadlock between developed and developing countries. A number of developed countries have publicly called for the Doha Round to either be narrowly tailored or scrapped, while developing countries have argued that negotiations should continue.
Despite the complicated negotiations, pressure to present some form of formalized agreement in this ministerial will be very high, as the WTO has been called into question as an effective negotiating body amid countries shifting their trade liberalization efforts to bilateral free trade agreements and so-called mega-regionals (like the TPP and TTIP).
This may be enough to get either the EGA or ITA expansion through some form of breakthrough.
Mexico Announces Onshore Oil Auction Winners
On Tuesday, the Mexican government will announce its winners of 25 onshore oil fields it is auctioning off to private investment. 79 companies are scheduled to compete for the 25 fields.
Despite Mexico’s wide plaudits for liberalizing its energy sector – which was viewed as the last sector it actually would liberalize –by the Nieto administration, the timing for the auctions could not be much worse.
With oil prices roughly 70% lower than they were a little over a year ago, getting energy companies to invest in new fields is particularly difficult as many companies are either shutting down operations in less profitable areas or halting expansion efforts into riskier fields.
In the past, the Mexican government has moved to modify the bidding terms of auctions to make their fields more investor-friendly as previous auctions have disappointed.
The long-term consequences of the oil price fall on the auctions could prove to be significant for revenue.
Although the Mexican government oil field concession system has moved very deliberately (and been heralded as a model for future privatization efforts), the pressure to sell oil fields in a depressed market may lead the government to accept lower tax and revenue sharing figures in exchange for bids.
The result of Tuesday’s 25 oil field bids could prove emblematic of this tug-of-war between extracting as much fiscal revenue as possible without driving away outside investors in a very weak market.
U.S. Treasury Secretary Chairs Summit on Countering Terrorism Financing
On Thursday, U.S. Secretary of the Treasury Jack Lew will meet with his UN Security Council counterparts to discuss forging a coordinated effort to halt terrorism financing.
This meeting will mark the first effort by the UNSC’s finance ministers to coordinate a counter-terrorism initiative.
With the recent attacks in Paris, the likely ISIL-inspired shootings in California, and the downing of a Russian plane over Egypt, the permanent members of the UN Security Council have placed a heightened attention on countering the rise of ISIL (particularly its efforts to use oil revenues to finance its terrorist attacks).
This effort by the finance ministers is likely to dovetail with an emerging strategy by the governments countering ISIL to attack the oil fields frequently used by the group to secure its cash.
It is uncertain at this point what approach the Treasury Secretary and other finance ministers will take to contribute to this endeavor; the opacity of ISIL’s revenue streams can make an effort to clamp down on resources difficult.
However, the U.S. Treasury Department will likely look for the intermediary players that work to legitimize both ISIL’s cash as well as its oil.
Additionally, with recent indications that the Assad government may be securing oil from ISIL as well as providing significant revenue to ISIL, this could scramble the diplomatic position of countries like Russia that are looking to both boost the Assad regime as well as degrade the ISIL machine.
For the United States and other coalition partners that are looking for both the end of the Assad regime as well as ISIL, this may mean sanctioning (further) Syrian banks and intermediaries of Syrian banks.
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 was produced by GRI analyst Brian Daigle.