The Week Ahead

The Week Ahead
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UK votes on Brexit. Nigeria shifts exchange rates. The US Federal Reserve Chair speaks to Congress. Egyptian courts rule on island transfers. The Brexit vote comes down to the wire. The AIIB holds its first annual meeting. All in The Week Ahead.

Brexit vote comes down to the wire as Britons make major decision

On Thursday, the UK will vote on a referendum deciding whether to leave or remain in the European Union. Polls are slated to be open from 7:00am to 7:00pm GMT, with initial results expected at around midnight. What had previously been a steady and commanding lead for the Remain campaign has slipped away to the two sides being neck-in-neck, with Leave appearing to pull slightly ahead.

A British vote in favor of leave would have an immediate and negative consequence both politically and financially. Financially, stock markets would fall significantly, and the British pound would lose significant value against other currencies, particularly considering the fact that markets have largely expected the UK to vote in favor of remaining in the EU, making this a surprise. Finance leaders would begin scrambling to figure out what exactly would happen next: what would Britain’s trade relationships look like? France has already signaled that it would not be kind to the UK in determining a new UK-EU trade relationship. How will this affect the pound in the short/medium/long term?

Politically, the impact could be just as swift and just as negative; leaders in both parties have indicated that in the event of a vote in favor of Leave, Prime Minister David Cameron would likely resign, setting up a scramble for who would replace him permanently as prime minister. What actions is the new government in the UK likely to take without an EU regulatory regime exerting power over it? How quickly will Scotland call for another independence referendum and when will the new government grant it one (since it is almost certain that no matter how England votes on Brexit, Scotland will almost certainly vote to remain in the EU)? And how will this affect other movements and parties within other EU member states to secede from the EU?

In the event the UK votes to Remain, none of these events of course will happen, though the referendum itself could still place pressure on other countries to hold their own referenda on EU membership, similar to the pressure regional separatist movements, particularly in Spain, called for in their own independence referenda following Scotland’s unsuccessful vote.

 

Nigeria shifts exchange rate to float, likely to lead to significant correction for the naira

On Monday, the Central Bank of Nigeria is slated to shift the naira from a steady exchange rate of around 197-199 to the US dollar to a floating regime, which could lift the rate from between 250 to as much as 350 to the dollar. The move, which surprised Nigeria analysts because it will go further than many anticipated — many had expected either a managed float or a wider exchange rate band — will involve the selection by the central bank of 10 major currency dealers through which the currency will be traded. Unlike a few other countries struggling with currency devaluations, the central bank will maintain only one official exchange rate and has maintained that it would be willing to intervene in the currency market should the need arise.

Other major OPEC producers, including Angola, have devalued their own currencies as they feel the pinch of falling oil revenues. So long as the currency does not go into a deep, long-term spiral — which appears unlikely given the underlying strengths of the Nigerian economy — this may encourage investment by lifting the capital controls that always make investors nervous. Inflation, however, could become an issue. Already hovering around 15%, and with a weakened economy, inflation of the naira is likely to rise at least initially, and will probably be the chief source of concern for the Central Bank. This is one of the main reasons President Buhari was so resistant to lifting the naira peg, though the Central Bank determined that what was essentially a death by a thousand cuts needed to be staunched. The Central Bank’s care in parsing out the temporary noise with the kinds of events that require prompt government intervention will be vital in stabilizing Nigeria’s currency as well as its economy.

 

Federal Reserve Chair speaks to Congress after Fed holds off on rate increase in June

On Tuesday and Wednesday, Federal Reserve Chair Janet Yellen will deliver testimony to both the Senate and House of Representatives to explain the Fed’s likely moves in the year ahead. The Fed has moved off more bullish expectations that the Central Bank would lift interest rates 3 or 4 times this year, and both the uncertainty of the results of the Brexit vote — which led directly to the weakening of the pound relative to virtually all major currencies — as well as weak job numbers for May likely contributed mightily to the Fed’s decision not to raise rates in June, as some had thought, and likely not in July, as many had thought.

Although Fed Chair Yellen has been fairly optimistic that interest rate hikes would be in the offing as the US economy improves, global economic jitters could cause her to reconsider her original proposition and adopt a more cautionary tone. This could rankle conservatives in both houses of Congress, who have long criticized the Federal Reserve for keeping interest rates too low. Any indications she makes to the contrary will likely draw the ire of liberals in Congress who have argued that wage growth has been persistently low and inflation has been tepid.

 

Egyptian courts to determine legality of island transfer to Saudi Arabia

On Tuesday, Egyptian courts are slated to issue their ruling regarding the legality of the Sisi government’s decision to cede two islands in the Red Sea to Saudi Arabia. The islands transfer deal set off a firestorm of criticism from across the Egyptian political spectrum as an unnecessary cession of territory to a wealthy neighbor. The lands had been transferred from the Saudi to Egyptian government in 1950 due to concerns from the former that they would be seized by the Israeli government. The islands are located in a strategically important point in the Red Sea; Tiran and Sanafir are right at the mouth of the Gulf of Aqaba’s exit point to the Red Sea, a gulf which is surrounded by Egypt’s Sinai Peninsula, Saudi Arabia, Israel and Jordan. Concerns that transfer of the lands would lead to the blockage of Israeli ships out of the Gulf of Aqaba were reduced when the Egyptian government assured the Israeli government that Saudi ownership would not limit the free movement of Israeli goods — which itself led to anti-Semitic criticism that the transfer of islands was part of a Zionist plot.

A ruling in the government’s favor would not be surprising, considering the Egyptian government’s argument that the land have always belonged to Saudi Arabia and therefore Egypt would technically not be ceding any of its own land. The court’s ruling, regardless of which side the islands end up on, it will likely continue to be a flashpoint of criticism for the Sisi government.

 

AIIB holds first annual meeting as China and others work to craft ADB alternative

On Friday, the Asian Infrastructure Investment Bank will hold its first annual meeting in Beijing to begin negotiations and operations of the AIIB. The meeting, which will include Russian President Vladimir Putin, takes place as the organization sets to figure out exactly how it  will function, what its priorities will be, and to what extent China — which will likely contribute the lion’s share of funding — will cede power to other countries.

The AIIB has been portrayed as an alternative to the Japan and US-led Asian Development Bank, headquartered in Manila. Despite technically beginning operations in late December of last year, whether the bank really gets off the ground has been a question ever since China announced the AIIB initiative — particularly considering the reticence of the US, Japan and Canada, among others, to join. However, much of that concern was put to rest after not just several major Asian countries, including South Korea, Indonesia and India, but also several European countries, including France, Germany, and the UK, joined.

One of the areas of highest importance to many of the developed countries in the organization is likely to be the level of environmental standards with the loans it gives out. The World Bank and US government have both indicated their preference that the loans offered by the AIIB maintain strict environmental standards, which may go against the preferences of the Chinese government and some of the less developed nations in the Asia-Pacific. How this issue is hammered out will go a long way in determining the level of buy-in the developed nations of the Asia-Pacific, Europe and North America will have using the AIIB as a development tool in the region.

 

The Week Ahead provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, The Week Ahead presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.

The Week Ahead was written by GRI analyst Brian Daigle.

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