Weekly Risk Outlook

Weekly Risk Outlook

US Secretary of State sells Iran deal to the GCC. Ukraine granted second tranche of IMF bailout. GOP candidates struggle with Donald Trump in first Republican debate. Stocks to plunge as Athens stock exchange reopens. Bank of England changes monetary policy communication. All in the Weekly Risk Outlook.

John Kerry to convince the GCC of Iran deal benefits

On Monday, U.S. Secretary of State, John Kerry, will meet with leaders of the Gulf Cooperation Council (GCC) in Doha, Qatar to discuss the Iran nuclear deal. Mr. Kerry has one primary goal: try to ease worries over a stronger and more influential Iran. That will be no easy feat.

GCC members have so far expressed mixed reactions to the deal. While Sunni Saudi Arabia largely views influence in the region as zero sum and is a strong opponent of a stronger Shi’ite Iran, comments from Saudi King Salman have been more nuanced since the deal was reached, ostensibly welcoming the diplomatic success.

King Salman’s key worry is over the effectiveness of the ‘snap-back clause’, by which sanctions will come into force again automatically if Iran fails to comply with the agreement, and whether international inspectors can fully verify Iran’s compliance with demands of its nuclear programme. The Kingdom will look for solid and specific assurances from the U.S. Secretary on these issues. Oman helped broker the deal and is more supportive, as is U.A.E. Mr. Kerry might be able to garner some in trying to sell the benefits of the agreement there.

In addition, the influx of frozen assets to Iran may entail greater Iranian support for allies in the region. To many in the GCC, that will mean greater insecurity.

Most GCC members are still engaged in a Saudi-led intervention in Yemen since March 2015 against Houthi fighters backed by Iran. Likewise, Iran reiterated its support for the Syrian regime with a renewal of the credit line and oil supplies agreement in July. GCC members fear that the Iran deal will entail greater Iranian support for the Houthis and Bashar al-Asad and prolong both conflicts even further.

Mr. Kerry has his job cut out for him trying to convince members of the GCC that this is the best deal they could hope for, both in terms of ensuring control with Iran’s nuclear programme and that the U.S. will fully support both implementation and reimposition of sanctions should Iran fail to comply.

At the same time, expect Mr. Kerry to reassure GCC leaders that the U.S. is cognizant of other remaining security issues in the region, reaffirming a U.S. commitment to seek stability and that existing economic ties will not diminish in the face of a more open Iranian market.

Iran has been on a regional diplomatic offensive trying to sell the deal as well. It is clear that all parties involved in finalising the agreement are determined to sell it to stakeholders in the region, and it seems Iran’s main GCC rival, Saudi Arabia, is more open to the deal than many expected.

Ukraine receives second tranche of IMF loans

On Friday July 31, the governing board of IMF approved the next loan installment of $1.7 bn to Ukraine, which will be transferred this week. It will be the second tranche of a $17.5 bn bailout agreement from March 2015 to be released over the next four years.

The IMF released the tranche after reviewing Ukraine’s reform programme. In July, Kiev lawmakers agreed to reforms of utility prices, improved anti-corruption measures and passed laws on deposit guarantees.

The relative legislative success must be read in the context of an unstable peace agreement (Minsk II) with separatists in Eastern Ukraine as well as growing dissent from Ukrainian nationalist militias seeking to undermine prime minister Petro Poroshenko and his administration’s authority.

First Deputy Managing Director of the IMF, David Lipton, said that Ukraine had a “strong start” and that “encouraging signs are emerging,” even though the economy is still fragile. The key now is to sustain reform momentum, keeping monetary policy tight and building currency reserves to stabilise capital flows and anchor inflation expectations.

The IMF bailout programme is conditional on further reforms of Ukraine’s economy and public sector as well as a sustainable debt agreement with Ukraine’s private creditors. The latter is still some time off. Kiev recently asked its creditors to write off 40% of its debt, while creditors, led by U.S: company Franklin Templeton, would agree only to 5%.

Even if debt relief talks stalled, though, the IMF could still lend to Ukraine. The IMF revised its projection for the Ukrainian economy to 9 percent contraction this year, yet national deb may reach 135 % of GDP this year.

Trump a wild card in first republican primary debate

Fox News will host the first Republican candidate debate on Thursday for 10 of the top GOP candidates, with all 17 candidates debating in an earlier show. For the past weeks, candidates have pushed hard to ensure their polling numbers are high enough to be among the 10 enjoying prime time.

No candidate has been more successful at this particular game than real estate mogul Donald J. Trump, who has risen to the top of several polls despite garnering extensive criticism from the Republican Party and other candidates.

Mr. Trump, who intends not to prepare talking points for the event, has been adamant in his attacks on fellow candidates with provocative language, making him highly unpredictable in any debate. This does not suit the GOP well. Rick Perry, former governor of Texas, recently described Mr. Trump as a ‘cancer on conservatism.’

However, all candidates will be forced to engage with Trump should he make inflammatory statements, for instance on immigration, to avoid looking weak. Expect a big part of the debate to involve other candidates trying to steer the conversation away from Mr. Trump and towards topics where they expect less expertise from him, such as health care, entitlement reform and national security.

“You only attack the king if you can kill him; otherwise you leave him alone, because the king will kill you,” said Frank Luntz, a Republican pollster. “So the candidates better have something good ready if they come after Trump. Or they might try to find a way, in their responses, to remind Trump of something that another candidate said that really bothered him.”

The debate will also provide viewers with a first look at how candidates handle questions on foreign policy, which so far has drawn less attention in the race. Here Mr. Trump may be hard pressed to offer tangible policy plans. While the list of issues to deal with will likely be very similar across candidates, look for differences in their prioritization of threats.

In other words, the key question will be how candidates will prioritize among the threats facing U.S. interests abroad. Expect all candidates to attack the current administration’s deal with Iran. A stronger engagement with Russia will also be high on their list.

More nuances are likely to emerge among candidates when questioned on America’s larger role in the Middle East region and how to handle the upheaval caused by Islamic State as well as conflict-ridden Syria and Yemen.

Athens reopens stock exchange

On Monday, trading at Athens’ Stock Exchange will reopen after five weeks closure and it will not be pretty. Expect Greek shares to plunge by as much as 20% when trading resumes.

While already struggling Greek companies will take another punch, large price drops may also encourage new buyers after the initial sell-off. This is especially likely among export-oriented production companies.

Trading in Greek shares will reflect the high level of uncertainty over the government’s ability to sign the bailout agreement with European and IMF creditors on time as well as the possibility for snap elections this fall.

Lack of recapitalisation of the Greek financial sector means that bank shares will be particularly hard hit. They account for about a fifth of the main index in Athens and individual shares may fall further than 20%. The country’s four largest banks may need anywhere between €10 and €25 bn in capital due to large drops in deposits and a surge in non-performing loans.

Bank recapitalisation is high on the agenda when the Greek finance ministry meets this week with officials from the European Commission, the IMF, ECB and the EU’s bailout fund, the European Stability Mechanism. Pensions reform focused at early retirements and accelerating privatisation are other topics of discussion, as is a roll-back of legislation that violated Greece’s previous bailout.

The exchange was closed just before the Greek government imposed capital controls at the height of the debt crisis. The European Commission expects the Greek economy to contract by 2-4% this year, returning to recession after a year in the black.

Bank of England changes how it communicates monetary policy

On Thursday, the Bank of England will announce the interest rate decision of the Monetary Policy Committee, which is expected to maintain its long-standing rate of 0.50 %.

Changing the way policy is communicated, the decision will for the first time be announced at the same time as the minutes of the meeting and coincide with the quarterly inflation report giving a broad outlook for the U.K. economy. The three pieces of information were previously spread over a two-week period.

While this new system eliminates much of the uncertainty generated by gradually released information, there is now an added risk of information overload. This may lead to knee-jerk reactions from markets as traders react to different pieces of news during governor Carney’s press conference at 12.45 BST.

Contrary to earlier expectations of a rate rise in mid-2016, governor Carney’s language from July’s meeting has fuelled predictions that a rate rise may happen before the end of this year.

Minutes from the July meeting hinted at two or three almost-dissenters in the committee. Further evidence this week of dissenting opinions favouring an earlier rate rise will likely prompt market reactions by adding to that likelihood.

GDP figures from last week showed the economy had bounced back with a expansion of 0.7% in Q2, following a disappointing 0.4% in Q1 from May’s report that prompted a downward revision of the BoE’s growth forecast from 2.9 to 2.5% for the year. Likewise, pay growth has accelerated to 3.2%.

While signs of accelerating growth and wages could prompt the bank to release a more positive inflation outlook – from the current hovering just above zero – supporting an earlier rate rise, the fall in oil prices and a 3.5% appreciation of the effective GBP exchange rate puts downward pressure on the Bank’s inflation projection for the medium term.

This leaves the picture of the inflation report a lot more mixed and the majority of the committee will want to see inflation pick up a lot more before considering a rise.


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. 

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