Weekly Risk Outlook

Weekly Risk Outlook

South African Minister presents budget. Fed delivers speech. Ireland holds general election. Iran holds parliamentary elections. Dems vote in South Carolina, the GOP in Nevada. All in the Weekly Risk Outlook.

South African Finance Minister presents national budget following contentious State of the Nation and amid market unrest

On Wednesday, South African Finance Minister Pravin Gordhan will present President Jacob Zuma’s national budget for the 2016-2017 period.

This will follow last week’s contentious State of the Nation address delivered by the President, which prompted significant criticism from opposition lawmakers.

Chief among the complaints issued by the parties, and one of the key indicators of economic instability that led to market turmoil, was President Zuma’s surprising firing of market-respected Nhalanhla Nene as finance minister in December.

The decision was shrouded in mystery, but many have indicated that Mr. Nene’s desire to root out corruption and specifically prevent a series of deals between the South African government and several businesses (as well as the Russian government) led to his dismissal.

As of last Friday, the South African FTSE/JSE Africa Banks Index had regained the losses it had sustained following the sudden departure of the finance minister, which was followed by the installation of stalwart Zuma ally David van Rooyen and then two days later with the current finance minister Mr. Gordhan.

The South African economy was already facing significant economic headwinds that have only worsened when this unexpected political turmoil further disrupted market confidence in Africa’s 2nd largest economy.

The 2016-2017 budget will provide the Zuma government (and the ANC Party too) with the opportunity to present itself as a credible and able administrator of public finances in advance of upcoming May-August municipal elections, and hopefully convince investors that the country remains a stable place for private enterprise.

However, opposition groups have grown increasingly confident that they will have a strong position in the municipal elections and have become vocal regarding President Zuma’s administration, and they will likely use the budget proposal as a strong bully pulpit to go after the administration.


Federal Reserve Bankers deliver speech following last week’s shocker from Minneapolis Fed President

On Thursday, Federal Reserve Bank of Atlanta President Dennis Lockhart will deliver opening remarks at the 2016 Banking Outlook Conference in Atlanta.

His San Francisco counterpart, John Williams, will deliver remarks at the Stern Center for Global Economy in New York.

While Williams’ remarks are uncertain, Lockhart’s are likely to display a degree of pessimism regarding economic outlook as the title of his presentation has announced to be “Caution: Winding Road Ahead.”

Although these types of speeches are frequently delivered as subtle signaling devices of the Fed’s thinking without giving too much for markets to gyrate, Minneapolis Federal Reserve Bank President Neel Kashkari’s remarks last week were a large exception and could be a turning point.

Last Tuesday, Kashkari indicated in a speech that efforts to end “too big to fail” banks had not been successful, and that further efforts to reduce the size of major banking institutions would be necessary.

Included among his suggested options were breaking down banks into smaller entities, regulating them like public utilities, and taxing leverage.

Although one may expect language like this on the floor of the Senate or even on the presidential campaign trail, remarks like this coming from a Federal Reserve Bank president Thursday, even from a non-FOMC member (though he will be a member next year), were jarring for markets and fueled speculation that banking regulations will gain greater prominence in the 2016 race.

Lockhart’s and Williams’ comments this week, therefore, will be watched by markets with even greater attention to determine whether the Fed maintains its history of more subtle comments to indicate its view of the direction of the U.S. economy, or if clearer and more market unsettling remarks may be in due course.


Ireland holds its general election as Fine Gael struggles to maintain power

On Friday, voters of the Irish Republic will head to the polls to determine who will run the lower house of the Irish Parliament, the Dail Eireann (the upper house, the Seanad, will not hold elections that day).

Public opinion polls have seen a fall in support for both of the coalition partners, centrist/center-right Fine Gael and the center-left Labour Party, but this appears to be particularly significant for the Labour Party.

Support in the 2011 election for Labour stood at nearly 20%, which, combined with Fine Gael, accounted for nearly 55% of the vote and allowed the two parties to command nearly 100 seats in the 166-member body.

Now, the most recent opinion poll gives support for Fine Gael at 26% and Labour at 9%, implying that either a coalition of additional parties will be necessary to secure a parliamentary majority, or another party may be able to take the mantle.

However, it is difficult to determine which party that might be considering a sizeable portion of the Irish electorate – currently polling at around 19% – have indicated their intention to vote for independent candidates that could make or break a parliamentary majority.

Talk has swirled that a historic Fine Gael and Fianna Fail alliance could be in the offing, although Fine Gael Finance Minister Noonan said the coalition would “never arise” but only because it would not be necessary if the public reelects Fine Gael (what that means if Fine Gael’s poll numbers drop and Fianna Fail’s continue to rise is a different matter).

Unlike the upcoming parliamentary elections in Jamaica, which are slated to return their own ruling party to power, the Dail elections are likely to be messy for both the ruling party and current opposition parties.

In the event that a more conservative coalition emerges victorious, this could set that stage for more contentious battles over abortion, and concerns that Fine Gael may abandon its fiscally responsible behavior to maintain political power has been discussed in several corners.

Any election result that sows uncertainty regarding Ireland’s commitment to fiscal responsibility could place a glare of negative international attention on the country, as other EU partners (Greece in particular) have borne the brunt of recent criticism.


Iran holds parliamentary elections as reformists and conservatives fight for power

On Friday, the people of Iran will vote for representatives in both the Majles (parliament) and the Assembly of Experts, which appoints the Supreme Leader of the Islamic Republic.

Following the successful conclusion of the Joint Comprehensive Plan of Action nuclear deal with the P5+Germany, leader of the reformers President Hassan Rouhani moved to ensure that as many moderates and reformers could compete for parliamentary seats as possible.

Although the reformist forces were able to get through a significant number of their preferred candidates through Iran’s byzantine election qualification tests (by some estimates, 93% of their candidates), this was then blocked by the hardline Guardian Council which severely limited the number of reformist candidates who could run.

Almost just as importantly, the Council blocked 80% of the candidates running for seats on the Assembly of Experts, which will likely end up selecting Supreme Leader Khamenei’s successor and could have significant impact on the direction of the country.

One of the key moderate candidates blocked from running included Hassan Khomeini, grandson of Ayatollah Khomeini, which was a significant loss for President Rouhani.

This does not mean the reformist forces have stood by passively; reformists from across the political spectrum have banded together in an effort to represent a united front against the conservative forces, and may be successful if they remain united (similar to the disparate grouping of opposition forces that led to the defeat of the ruling Socialists in Venezuela in December).

The new majority in parliament will not likely have any decisive impact on Iran’s foreign policy, as President Rouhani and Ayatollah Khamenei will both remain in power and guide policy in the year ahead.

However, Iran will hold presidential elections in 2017, and President Rouhani will have a much more difficult time convincing voters to reelect him if his major legislative reform agenda is stymied by a hostile Parliament.


Republicans and Democrats switch states as Dems vote in South Carolina and the GOP votes in Nevada

On Tuesday, Republican voters in Nevada will vote for their preferred candidate for the Republican nomination for president, followed on Saturday with the South Carolina Democratic primary.

Last Saturday’s respective primary and caucus for the two parties helped to provide a degree of clarity for both camps moving forward.

On the Democratic side, former Secretary of State Hillary Clinton’s 52-47% win over Senator Bernie Sanders has helped to allay concerns from her supporters that her campaign was beginning to flounder following a strong margin of victory by Sanders in New Hampshire.

Some media outlets have even suggested that Nevada may be viewed looking back as the turning point in which Clinton successfully locked down the nomination, particularly given her strong polling advantage in South Carolina and among the Super Tuesday states.

For the Republican Party, last Saturday’s primary provided clarity to a number of candidates who thought the state could be a chance for redemption. After a weak showing, former Governor Jeb Bush dropped out of the race, creating an opportunity for “establishment” forces to coalesce around either Senator Marco Rubio or Governor John Kasich.

Additionally, Senator Cruz’s relatively weak showing among evangelicals in the Palmetto State could spell trouble ahead as Cruz fights with Donald Trump and Senator Rubio for evangelical voters in the Super Tuesday primary.

Quite possibly the biggest clarifying moment, however, was the victory of Donald Trump in the South Carolina primary, with 33% of the vote against roughly 22.4% each for Senators Cruz and Rubio.

The complex way of allocating delegates in the SC primary ensured that Mr. Trump was able to secure nearly all of the delegates, despite 2/3 of the state not voting for him.

This could complicate matters as anti-Trump forces look to staunch his advance heading to the convention.

His showing in Nevada, also likely to be strong, could further propel his candidacy and pressure “establishment” forces to place greater resources in Senator Rubio or Governor Kasich, or panic, or both.


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 was written by GRI analyst Brian Daigle.

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