GRI Weekly Risk Outlook

GRI Weekly Risk Outlook

Putin visits India to reach out on energy, defense. Crude oil reaches new lows as economies thrive on cheap energy. US likely to avoid a repeat of 2013 shutdown. Eurozone ministers meet to discuss possible non-compliance penalties. South Africa’s credit rating sinks to dangerous lows. All in this week’s GRI Weekly Risk Outlook.

Putin visits India for diplomatic reciprocity?

From 10-11 December, President Putin will visit India as part of an annual bilateral summit. Expect discussions to center around energy and defense ties as well as Russia’s alliances with other major players in the region.

Weakened by the fall in oil prices and the imposed sanctions – engendering an estimated cost of about $160 billion on the Russian economy – we expect Putin to approach President Modi in an appeal to secure India’s commitment in continuing to recur to Russian oil and gas for its energy imports.

Moreover, in the wake of changes in India’s defence procurement policy – prioritizing self-reliance and indigenization – expect Putin to reach out to Modi in an attempt to sustain the historically robust sales of Russian weapon systems to the Indian market. Expect the Indian premier to reciprocate by ensuring that Russia maintains its strategic ties with Delhi and not to lean too much towards Pakistan and China.

US unlikely to repeat last year’s shutdown

December 11 marks the deadline for the US Congress to approve the bill on government funding. Remembering last year’s notorious 16-day shutdown, there is a risk of this scenario repeating but the likelihood of a partial shutdown remains low given the positions that the Republicans are expected to adopt.

Some risks arise from the expectation that certain members of the GOP want to attach language on spending legislation that would block the President from implementing his executive orders on immigration, something that Democrats are likely to oppose.

With the Democrats officially in control of the Senate until January and Republicans already expressing their aversion towards repeating last year’s shutdown, we deem it likely to see a successful passage of the bill ahead of the deadline, particularly as Republicans want to start 2015 fresh – without lingering issues – to pass pro-Republican legislation.

Eurozone budgetary quarrels

On 8 December, Eurozone finance ministers will meet in Brussels to discuss 2015 draft budgets, the conference coming in the wake of heated debates over the extent to which the EU should sanction member states for not abiding by the targets of the infamous Stability and Growth pact.

Countries that are found not to be abiding by the stipulations of the Stability and Growth Pact (3% budget deficit, 60% debt), are faced with risks of fines for non-compliance. History however tells us that the EU’s threats for sanctioning member states lack credibility and the likelihood of imposing sanctions for non-compliance is rather low.

At high risk of missing their budget targets are France, Italy and Belgium – all of which could face multi-billion euro fines and be put on disciplinary programs. In recently reported comments, Commission President Jean-Claude Juncker assured that no final decisions on sanctions would be taken until EU governments are given sufficient time to provide concrete measures to curtail their budgetary problems.

With March 2015 penciled as the date at which the Commission will undergo an exhaustive review of member states’ progress in addressing their budgetary shortfalls, this delay will provide some breathing space for those burdened by large public debts and fiscal deficits.

South Africa rating downgrades looming

On 12 December, rating agencies Fitch and Standard & Poor’s will issue their ratings update for South Africa. In the wake of the rating downgrade issued by Moody’s in early November, expect the other two to follow suit in a similar rating decision.

Citing the South African government’s inability to rein in public debt (nearly 50% of GDP), weak public revenues and sluggish export growth rates have sustained the country’s twin deficits, with the rand becoming vulnerable to portfolio outflows in the wake of rising risk aversion as global financial conditions tighten.

With GDP growth languishing below 2% in recent years, growth projections have been lowered from 2.7% to 1.4% this year. While revenue collection has continued to be undermined by current circumstances, the government has been forced to borrow $13 billion a year to meet expenditure demands.

With Moody’s downgrading South Africa to Baa2 (stable outlook) – two notches above junk status – Fitch’s rating is currently on par but with a negative outlook while Standard & Poor’s is at BBB-, just one step away from junk status. With an ailing economy and potentially lengthy public sector strikes next year coupled with rising levels of debt, do not discard the possibility of further downgrades by the other two main rating agencies, with a high likelihood of at least S&P changing its outlook to negative.

This will not bode well for investor confidence – expect the rand and the Johannesburg Stock Exchange to continue to under-perform in relation to other emerging market peers, with the rating downgrade symbolizing a lack of confidence in the government’s management of the economy.

Oily repercussions in global economy

Crude prices reached a new cyclical low this week ($69), in the wake of a short-lived rebound. We expect cheaper oil to provide a boost to global GDP in the months to come, with major oil-importing countries like Japan, India and Turkey, as well as the Eurozone, benefitting in the form of large windfalls. Following the OPEC’s decision not to cut oil production, expect the price of oil to hover below $80 into 2015.

However, many economies will however suffer from the drop in crude prices. The combination of the fall in the value of oil and enduring sanctions have already taken a toll on the Russian economy. With a tumbling rouble that fell to an all-time low against the dollar this week (48.65/$), the IMF has estimated that sustained levels of capital flight and sanctions will shave 1% off Russian GDP this year.

While other oil-exporting countries like Nigeria and Venezuela have been hard-hit, with the latter edging closer to defaulting on its debt, the overall projection is that the fall in oil prices will be positive for the global economy.

Against this backdrop, with the expectation that the US economy will continue on a robust recovery path and in spite of the ongoing risks of a Chinese growth slowdown and sluggish Eurozone growth, outlook for GDP growth edging close to 3% next year.

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 impact economic outcomes.

The GRI Weekly Risk Outlook is put together by GRI analyst Jose Luengo-Cabrera. Infographic by Jack Detsch.

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