Weekly Risk Outlook

Weekly Risk Outlook

African Union leaders summit in Johannesburg. Saudi Arabia opens stock exchange to direct foreign investment. Federal Reserve sets policy rates, though they admit a hike not likely until possibly September. EU to release trade balance report. U.S. Department of Agriculture releases world coffee report. All in this Weekly Risk Outlook. 

African Union Leaders Summit in Johannesburg

Today marks the final day of the two-day African Union Leaders Conference in Johannesburg South Africa, also marking the end of the week-long African Union Summit.

Chief among the political risk concerns in Africa is the precarious position of Burundi’s President, Pierre Nkurunziza, who has vowed to contest this year’s Burundi presidential election (despite concerns that doing so would possibly violate the 2-term limit for Burundian presidents and the opposition has said it would boycott elections).

Discord from Burundian citizens, particularly in the capital of Bujumbura, has led to at least 27 deaths, and thousands have fled to neighboring Uganda and the DRC for fear of a possible revision of ethnic tensions.

Nkurunziza has received diplomatic pressure from a number of key actors including the United States to step down following the conclusion of his current term, and the summit today could mark the best shot for the AU to pressure the President into stepping down.

Other major concerns to be addressed by the Summit leaders include the terrorist groups Boko Haram in Nigeria and al-Shabaab in Kenya, recent discussions to form an economic union, and the establishment of a free trade zone, both AU priorities.

Saudi Arabia Opens Stock Exchange to Direct Foreign Investment

For the first time, the Saudi Arabia will open its Stock Exchange, Tadawul, to foreign direct investment Monday.

This move by the Kingdom stems from a variety of factors, notably an interest in diversifying the heavily oil-dependent economy as well as moving into the international investment space.

Draft proposals regarding rules for foreign direct investment reflect a cautious approach to incorporating foreign investment; only qualified foreign investors like banks and brokerages with assets of $5 billion under management will be permitted to vote in the exchange, though they may lower that barrier to $3 billion.

In 2008, the Saudi Capital Market Authority opened the exchange to indirect foreign investment through market swaps.

The Tadawul and the Saudi government has strongly pushed for inclusion into the MSCI Emerging Markets Index, which has adopted a wait-and-see approach to including the Middle East’s largest economy.

The Saudi stock exchange now holds $530 billion in value, and includes the petrochemical company Saudi Basic Industries Corp and the dairy company Almarai. Saudi stocks have provided a 17% return on investment this year, one of the strongest performance in the Middle East/North Africa region.

Federal Reserve Sets Policy Rates, Hike Not Likely Until Possibly September

On Tuesday, the Federal Reserve’s Federal Open Market Committee (FOMC) will meet for a two-day meeting to discuss U.S. macroeconomic developments and the timing of the U.S. rate hike.

The U.S. interest rate currently rests near zero and the Fed has not raised interest rates since 2006.

There has been enormous pressure from developing countries to hold off on raising interest rates, with a recent survey of interest rate futures markets predicting a hike in September at 53% likelihood.

The Fed is under significant domestic pressure to raise interest rates as soon as possible.

Former Philadelphia Fed President Charles Prosser and former Dallas Fed President Richard Fisher have also been aggressively active in publicly pressuring the Fed to raise rates.

The rosy May jobs report has reignited analysts’ predictions of a likely September rate hike.

There may be reason to cast some doubt on such predictions.  Current Chicago Fed President Charles Evans has been one of the most vocal voices within the Fed to hold off raising rates until 2016.

Other insiders, privy to the internal workings of the FOMC, note that the Fed is extremely reluctant to raise rates because of its dual-mandate on employment and inflation.

An uptick in employment may not be enough to assuage Fed fears of weak inflation.

Joining the fray are the World Bank and the International Monetary Fund, both urging the Fed to wait until 2016 to consider a rate hike.

However, recent reports show the inflation rate making progress toward the Fed’s 2% goal which may convince the FOMC to take action in September.

EU to Release Trade Balance Report

Next week, the European Monetary Union (EMU) will release a report on the Eurozone’s balance between exports and imports for the month of April.

The report will be especially interesting in light of Europe’s increasing diversification of imports.

In its annual Medium-Term Gas Market Report, the International Energy Agency (IEA) indicated that Europe would become a major importer of Liquified Natural Gas (LNG).

The report predicts a rise of over 40% in global LNG export by 2020, with 90% coming from the United States and Australia.

Europe saw a major rise in imports over the winter, with LNG imports now twice as high as they were in 2014, and demand will only go up as the move away from coal-fired electricity becomes more popular.

According to the report, European gas import requirements will increase by almost one-third by 2020, with LNG as the most likely filler of those requirements.

U.S. Department of Agriculture Releases World Coffee Report

On Friday, the U.S. Department of Agriculture (USDA) will release its report on world coffee supply and demand trends for 2015-2016.

In its last report in December 2014, the USDA noted a fall in production for 2 of the world’s 3 largest arabica producers-Brazil and Vietnam-as well as a rise in consumption in the United States and the European Union, would lead to upward pressure on the price of coffee throughout 2014 and the beginning of 2015.

In early 2014 there was a huge upsurge in the price of coffee, from $120 per coffee future to over $200 in the span of two months, following significant droughts in Brazil.

A second spike in October 2014, up to $220, was caused by similar Brazilian weather problems.

The price has since fallen dramatically to near its pre-2014 spikes at $132, and the falling value of the Brazilian real will likely support this trend in falling coffee prices, lest another significant weather catastrophe hit the coffee powerhouse.

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 is written by GRI analyst Brian Daigle.


Categories: International, Politics

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