The Week Ahead

The Week Ahead

The U.K. and France go to the polls again. A corruption scandal hits South Africa. Pakistan and India join the SCO. All in The Week Ahead.

Following a topsy-turvy campaign British voters will vote in snap election

This Thursday, British voters will finally cast their ballots in what has been a short and chaotic campaign, capped by Saturday night’s terror attack in London. While the snap election had earlier been forecast as the likely collapse of the Labour Party, the position of Labour has begun to recuperate as the Conservatives have made several missteps.

Probably the most important mistake made by Conservatives was the release of its manifesto including what was subsequently referred to by critics as the “dementia tax.”  The tax proposal, amended a few days after its proposal under a firestorm of criticism, would require British citizens to fund a portion of their state-funded care at home if their assets are in excess of £100,000. This would likely hit many British homeowners, as the current situation mandates that the liquidation of assets would not have to occur until after the individual has died. The proposal was attacked by Conservatives for its effect on homeowners, while Labour and the Liberal Democrats seized on the issue due to the fact it would likely skyrocket costs for individuals who require long-term palliative care, like dementia, Alzheimer’s, or Multiple Sclerosis patients. Coupled with NHS cuts, healthcare has risen up substantially in an election that many assumed would be more focused on Brexit. Complicating matters further is Saturday night’s terror attack in central London, which could shift voters’ priorities in the final days.

Heading in to the home stretch, Labour has recovered from its 20+ point deficit and, depending on the pollster, is now behind somewhere in the single digits. The position of the other parties is more difficult to gauge, which makes final seat estimates more difficult. Although talk of a leftwing alliance between the Greens, SNP and Labour had been discussed earlier in the campaign, none of the parties have made major moves in that direction, like withdrawing from constituencies to consolidate votes around one of the three parties.  It appears that the SNP will lose at least a seat or two in Scotland, given that it currently controls 56 of the 59 Scottish seats, and the Lib Dems may make gains. Fundamentally, the likeliest scenario now is a Conservative majority with a lower margin than originally anticipated — although markets are beginning to become concerned about the possibility of a hung parliament.


First round of Assembly elections will be first major political test for President Macron

On Sunday, French voters will cast their vote for the first round of the National Assembly elections. This upcoming Assembly will undoubtedly look very different from the one that preceded it: first, the previously ruling Socialist Party is likely to drop to possibly its poorest showing ever, with current projections forecasting a bleak 50-60 seat final vote share for the Socialists in the 577-seat chamber. The other major development will be the rise of previously low represented or non-existent political parties. On the far right, Marine Le Pen’s National Front is likely to perform strongly, with current estimates that it will receive the 3rd highest vote share in the first round. On the left, the newly formed France Insoumise, led by leftist former presidential candidate Jean-Luc Melenchon, is likely to receive a higher vote share in this election than the Socialists. Finally, and most importantly, President Macron’s centrist Republique en Marche (REM) is currently projected to receive the highest vote share of any party.

The bigger test for the party and President Macron, however, is what will happen following the first vote; while there is a degree of winnowing following the first vote — only candidates receiving more than 12.5% of the first round vote can proceed to the second round — it is still possible that more than 2 candidates will emerge in several Assembly districts. Fears that the FN could end up splitting the difference and gain a substantial number of seats in the Assembly has led both the Republicains and REM to agree to withdraw candidates from certain Assembly districts to prevent the FN from winning due to splits between the center and right. It is at the moment uncertain if the Socialists and France Insoumise will come to a similar arrangement, and the Socialists are remaining tight-lipped about it. At the moment, the two biggest things to look for in the first round is the strength of REM’s showing relative to the Republicains and FN which will guide President Macron’s ability to get much done, and the degree of decline of the Socialists. If the Socialists decline to a virtual non-existence, France Insoumise could emerge as the more forceful, populist and uncompromising voice of the national French left, even if the Socialists maintain substantial power at the provincial and local levels.


African National Congress faces deeper divisions as new Zuma allegations emerge

Tensions within South Africa’s largest political party are likely to deepen this week following allegations last week that ANC leader and South African President Jacob Zuma may have engaged in illegal influence peddling. These allegations emerged after a trove of documents were leaked to South African media outlets, particularly AmaBhungane. The media organizations allege that based on the leaked documents, President Zuma had improperly used government contracts to advance his relationship with the powerful Gupta family, which owns several major businesses throughout South Africa.

President Zuma and ANC leaders have offered polar opposite reactions to the leaks, with Zuma saying the allegations were unfounded and simple constituted “hearsay,” while other ANC leaders have stressed the potential significance of this ahead of leadership elections in December and have urged an investigation. Although President Zuma can remain president through to 2019, this December the ANC will hold leadership elections that will determine who becomes president if the ANC emerges with a majority or workable coalition in 2019 elections. President Zuma and his core ANC supporters are likely to support Zuma’s ex-wife, Nkosazana Diamini-Zuma while a growing group of anti-Zuma ANC members are coalescing around current deputy president Cyril Ramaphosa.

The near-constant political fighting and scandals swirling around President Zuma and his administration have created a substantial drag on South Africa’s economy, with credit agencies moving South African bonds to junk. The shuffling out of competent ministers in favor of replacing them with what are viewed to be inexperienced Zuma cronies has contributed to economic instability, with cabinet shuffles strongly tied to movements of the South African rand. Further divisions within the ANC could spell trouble for South Africa’s economy ahead: with a divided ANC, the rise of other parties, notably the Democracy Alliance, can make forging national consensus more difficult. As it currently stands, today’s fraught political environment has the ANC with a commanding 49 seat majority in the 400-seat National Assembly, and over 150 more seats than the next highest party.


Formal admission of India and Pakistan to SCO at Kazakhstan meeting could help thaw testy relations

This Monday, both India and Pakistan will formally join the Shanghai Cooperation Organization (SCO), a group that spans from a vast swathe of Asia and is anchored by China and Russia (Iran’s potential membership will also be discussed). The admission of the two countries will make the SCO, which focuses on defense, security, and cultural cooperation, one of the largest on Earth by population and will likely alter its operations. Although the process for admitting the two countries has been ongoing since 2015, the formal admission this week will provide a unique opportunity for India and Pakistan to attempt to thaw the chilly relations that have worsened over the past several months: the recent trial in Pakistan of an Indian accused of spying has caused a substantial diplomatic rift, tensions in Kashmir are growing, and India has threatened to withhold water from Pakistan.

While there is some speculation that Indian Prime Minister Modi and Pakistani Prime Minister Sharif could meet at the SCO meeting in Astana informally or on the sidelines — the two are reportedly personal friends — it appears that such a meeting is now unlikely. Pressure from Russia, China, and other SCO partners could begin to build on the two countries particularly if further incidents between the two nuclear powers threaten to destabilize the region. Even without a meeting, formal membership of the two countries to the SCO will provide another forum for collaboration between India and Pakistan.

 

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.

This edition of The Week Ahead was written by GRI Analyst Brian Daigle.

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