Obama delivers last SOTU. Paris hosts monetary policy conference. Economic development explored in Latin America. EU commission begins investigation. Former comedian becomes president. All in the Weekly Risk Outlook.
President Barack Obama Delivers Last SOTU of His Presidency
On Tuesday, U.S. President Obama will deliver his eighth and final State of the Union (SOTU) address to both houses of Congress.
Although the SOTU has lost some of its luster relative to previous administrations, the president’s “bully pulpit” can still be used to guide discussion, if not outright policy.
The president is likely to discuss recent military measures by the US and its allies to counter the rise of ISIS, and may touch on the Iran nuclear deal and the opening of relations to Cuba.
Additionally, President Obama will almost certainly discuss his recent executive actions on gun control, which have already received condemnation from Republican presidential candidates and congressional leaders.
One point that will receive more support from Republican members of Congress than Democrats, the President will also push for as quick a ratification of the 12-member Trans-Pacific Partnership as possible.
A February 4th signing ceremony in New Zealand may be the President’s opening salvo for the timetable for Congressional consideration of the trade pact.
Finally, the President will likely speak to the economic concerns facing the American people, though the significance of such comments in an increasingly polarized electorate will probably be fairly muted.
Also worth noting will be South Carolina Governor Nikki Haley’s Republican response to the State of the Union address.
Governor Haley has been touted as a possible vice presidential nominee, and previous Republican respondents (Senator Marco Rubio or Speaker of the House Paul Ryan) subsequently gained prominence, though for others it may have done more harm than good, as it did for Governor Bobby Jindal.
Monetary Policy Conference Brings Major Players to Paris
On Tuesday, the Bank of France will hold a monetary policy conference slated to include representatives of the world’s most powerful government banking institutions.
Attending the conference will be the governors of the Bank of England, the Bank of Japan, and the Bank of Mexico, Vice Chairman of the Federal Reserve Stanley Fischer, several ECB executive board members, and IMF Director Christine Lagarde.
With the Federal Reserve’s recent 25 base point increase of U.S. interest rates, there has been growing concern that the division between the ECB and Bank of Japan on the one hand and the Federal Reserve on the other could produce unintended international macroeconomic consequences. This may help explain why the IMF strongly encouraged the Federal Reserve not to raise interest rates in December.
Major and minor developed economies have either kept interest rates low, or lowered them all the way to negative territory. China has also lowered interest rates over the course of 2015.
In contrast, a number of developing countries have either maintained high interest rates or have raised them, including Brazil, Argentina, South Africa, Nigeria, and Russia, suggesting a divergence between the two given conflicting macroeconomic pressures.
The rise of U.S. interest rates, likely the prime topic of discussion at the Paris conference, could lead to a withdrawal of capital both from developing and developed countries in favor of a more stable and increasingly valuable U.S. investment, making life difficult for central bankers from Ottawa to Tokyo, Cape Town to Moscow.
This will also make it more difficult for countries and companies around the world to service debts in U.S. dollars, as the U.S. dollar strengthens in value relative to other currencies. Speculation on a possible debt crisis due to this divergence is already rattling markets.
CEO-Conference in Cancun Explores Poor Outlook for Latin America
On Tuesday, Santander bank will host its 20th annual Latin American Conference. CEOs from across the Americas, as well as Europe and Asia, will gather in Cancun, Mexico to discuss economic developments in the Americas.
This three-day conference will feature speakers from across the Americas, including Katia Abreu, the current market-friendly minister of agriculture for Brazil, as well as Robert Gates, the former U.S. secretary of defense.
Economic growth in the region has soured considerably with the collapse of commodities. Several major countries in the region with strong ties to the oil industry, including Brazil, Venezuela, and Ecuador are expected to contract significantly in 2016, while other major countries like Argentina are expected to maintain anemic growth.
Other countries in the region that have pursued more traditional macroeconomic policies, including Chile, Peru, and Mexico, are likely to have more stable growth, though at greatly reduced rates relative to the commodity boom years.
Elections and new administrations could change this calculation in some countries. In Venezuela, the opposition Democratic Unity Roundtable (MUD) has vowed to move on pursuing economic reforms, though this may be hindered by internal divisions.
In Guatemala, the soon-to-be-inaugurated president Jimmy Morales has promised to crack down on corruption in Central America’s largest economy. As for Argentina, President Macri is likely to pursue as quick a resolution to the holdout creditor situation as possible to reopen Argentina to international investment.
Political developments in the region are likely to be a chief source of discussion at the conference as this area will probably be the most important endogenous source of change for the region.
European Commission Begins Investigation of Poland’s New Government
Starting on Wednesday, the European Commission will examine whether Poland’s new government, under the right-wing Law and Justice Party, are in violation of European democratic standards.
The Commission is most concerned with recent changes in the governance of the Polish Constitutional Tribunal. The lower house of Poland’s parliament, controlled by the Law and Justice party, voted in December to impose a 2/3 majority for the court (rather than the previous majority rule) as well as to extend the delay before the tribunal can rule on the constitutionality of a case from two weeks to three to six months.
Concerns have grown with these developments at both the national court systems as well as the media that the new government is working to consolidate political power and hamper checks and balances in Poland.
Additionally, coming changes to the Polish Monetary Policy Council could also reduce political independence in the way the country addresses monetary policy. Senior Law and Justice officials have indicated a desire for the Central Bank to cut interest rates to spur growth as well as initiate some form of loan program to ease worker concerns.
All of these developments have the potential to disrupt what had previously been a robust growth rate for Poland, serving as the bulwark for economic development in Eastern Europe. Poland was the only major European country to never enter recession, and growth from 2014 to 2015 had been a healthy 3.2-3.5%.
Increasing control over the independent political, media, and economic institutions of Poland could have the twin impacts of initiating economically short-termed policies as well as bolstering instability in a country formerly renowned for its stable environment.
Promising Reform, Former Comedian Becomes President of Guatemala
On Thursday, Jimmy Morales will take office as Guatemala’s President. The former TV comedian has run his campaign on an almost entirely anti-corruption platform, although his policy positions also embrace a center-right perspective.
He was elected following the resignation and imprisonment of President Otto Molina, Vice President Roxana Baldetti, as well as the chiefs of the national tax collection agency and the Central Bank of Guatemala which, in turn, followed a UN-led investigation into charges of corruption in the country.
Given his lack of political experience, it is very difficult to project what economic or foreign policy initiatives President-elect Morales will advance, a potentially troubling political risk development for Central America’s largest economy.
Aside from foreign policy, it remains to be seen how he will interact with a very fractured Guatamalan Congress. His party, the right-wing National Convergence Front, only has 11 seats in the 158-seat legislature, even fewer than the scandal-tainted party of former President Molina, the Patriotic Party.
This untested president will need not only to quickly learn the deft skills of being his nation’s top diplomat, but also the complex negotiations between the much larger parties on the left and right that could spell doom for his anti-corruption initiatives.
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 written by GRI analyst Brian Daigle.