Obama heads to Cuba, Argentina. Rouseff saga continues. Fed bankers speak following dovish meetings. Canadian PM Trudeau releases first budget. All in the Weekly Risk Outlook.
President Obama travels to Cuba and Argentina on historic trip
Throughout this week, President Obama will be in Cuba and Argentina, meeting with political leaders (including presidents Raul Castro and Mauricio Macri) in both countries and working to engage with civil society.
In Cuba, he will be the first sitting U.S. president since Calvin Coolidge visited the island in 1928 for a Pan-American Conference of the Western Hemisphere. Mr. Obama’s goals in Cuba are threefold:
- to solidify his administration’s desire to achieve normalized relations with Cuba, despite strong resistance from the U.S. Congress and particularly from Congressional Republicans;
- to help strengthen economic ties between the two countries before Cuba transitions away from the Castros (Raul, after all, is 84, and Fidel is 89),
- to show U.S. businesses interested in investing in Cuba (including agricultural exporters) of the U.S. government’s commitment to expanding ties with the Communist country.
The Obama administration has a somewhat similar series of goals with Argentina, though obviously less pronounced than for a country the U.S. has not maintained diplomatic relations with for 50 years.
Despite Argentina’s designation by the Clinton administration as a Major Non-NATO Ally (MNNA), relations became increasingly strained under the two Kirchner administrations, particularly with the holdout crisis that brought the Argentine government to the New York courts.
With the new Macri administration, both countries have expressed an interest in reinvigorating both political and economic ties, particularly as Brazil’s economic situation becomes increasingly dire.
Although these meetings will likely help strengthen America’s position in Latin America, this will all largely hinge on the 2016 presidential election; while a Clinton administration would likely continue these diplomatic overtures, it is extremely unlikely that a Trump or Cruz administration would do so.
Brazil President’s political saga continues
President Rousseff’s seeming political unravelling is likely to continue this week.
The recent appointment of former President Lula da Silva by President Rousseff as her chief of staff (currently in legal limbo) highlights a significant downgrade in President Rousseff’s political position over the past few weeks.
The appointment aims both to salvage Rouseff’s relationship with a fractious Congress using Lula as a conduit as well as to shield Lula from further investigation after his arrest and questioning for his possible connection to the Petrobras scandal.
Allegations against the President include that Ms. Rousseff must have been aware of a shady deal to purchase a refinery in Texas while she was serving as head of Petrobras.
In addition to heightened scrutiny over the popular former president and a cornerstone of the Workers’ Party, protests arose last week across Brazil likely even larger than the ones in 2014 and 2015. Estimates suggest as many as 3 million Brazilians took to the streets to call for President Rousseff’s resignation.
Recent economic data suggesting that Brazil has entered its worst recession in history has combined with political fracturing to destabilize Brazil’s economic forecast for 2016 and in all probability 2017.
Brazil’s outlook is likely to have economic spillover effects across Latin America’s economies that are working to bring themselves out of their own economic mire, particularly Argentina and Venezuela, and to a lesser extent Colombia and Ecuador.
Federal Reserve bankers speak following increasingly dovish meetings
On Tuesday, the Federal Reserve Bank presidents of Chicago and Philadelphia, Charles Evans and Patrick Harker, will deliver remarks following last week’s Fed decision to maintain interest rates at the 0-0.25% level.
This will be followed on Thursday with similar remarks from the St. Louis President James Bullard. Last week’s Fed decision maintaining interest rates and signaling a more dovish guidance for 2016 (reducing the number of likely interest rate hikes for the year from 4 to 2) led to a fall in the value of the dollar against major currencies, which if sustained could help to boost U.S. exports.
The main concern for the central bank has been with discordant economic signals: while overall growth rates are good at a projected 2.2% (particularly when compared with other key developed nations), wage growth has remained fairly weak and inflation low.
Unemployment projections by the Fed, however, improved to a 4.5% rate estimate through 2018. The Fed’s rate decisions, and economic projections, will become increasingly important politically as the year progresses.
Should unemployment levels continue to fall, growth be sustained, and the Fed generally maintain low interest rates, the improved economic environment could secure President Obama’s approval ratings, and could make a Democratic successor to him in November more likely.
Although this particular election cycle has been unique, two of the most important factors in looking at party favorability turning to an election have been unemployment and presidential approval ratings.
As the president, rightly or wrongly, is given disproportionate blame/praise for economic conditions, an improving economy would bode well for the Democrats. Economic skepticism, on the other hand, could fuel Republican gains.
Prime Minister Trudeau Releases First Budget of Administration
On Tuesday, Canadian Prime Minister Justin Trudeau’s Finance Minister Bill Morneau will present the administration’s first budget to Parliament, with expectations that the budget will have a C$30 billion deficit.
Despite arguing that the government would only run deficits of C$10 billion and would return to a budget neutral status by the 4thyear (though acknowledging, unlike the Conservative and New Democratic parties, that the party would indeed run deficits), the Trudeau administration is hoping that a series of more deliberative stimulus projects will help to lift the major oil-producing country from recession.
In contrast to the “shovel-ready” projects that frequently occupy stimulus packages, Mr. Trudeau has indicated his government’s intent to focus instead on projects relating to maintenance of existing infrastructure.
The budget is also slated to include the elimination of a raise in the retirement age from 65 to 67 by 2023 set into place by the previous Harper administration.
In the short term, it appears likely that the government will be able to weather the economic fallout from a larger-than-expected government deficit, which will probably be minimal, given that the country has maintained a sterling AAA credit rating from Moody’s.
But on a larger scale, the Trudeau budget will represent an interesting case study for OECD economies on the viability of delivering stimulus spending to lift a country out of economic doldrums without negatively impacting market credibility.
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.
